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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-17222
WARREN BANCORP, INC.
(Exact Name of registrant as specified in the charter)
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MASSACHUSETTS 04-3024165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 MAIN STREET 01960
PEABODY, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(978) 531-7400
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock par value $0.10 per share
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirement for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant based on the closing sale price for the
registrant's common stock on March 1, 2000, as reported by NASDAQ was
$41,139,300.
The number of shares of the registrant's common stock outstanding as of
March 1, 2000 was 7,312,051.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 3, 2000 are incorporated by reference into the Annual Report as
portions of Part III of Form 10-K.
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SELECTED FINANCIAL DATA
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DECEMBER 31,
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1999 1998 1997 1996 1995
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(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Total assets $402,247 $ 397,065 $ 370,993 $358,954 $ 355,854
Investment securities 80,314 93,950 83,701 75,618 69,427
Mortgage-backed securities 13,048 20,430 30,579 42,730 49,414
Net loans 286,743 262,452 236,697 218,313 212,159
Real estate acquired by foreclosure -- 1,450 2,010 2,230 3,092
Deposits 355,534 347,012 325,293 316,366 314,850
Borrowed funds 7,510 7,674 2,926 4,927 7,368
Stockholders' equity 35,644 39,921 40,028 34,445 31,238
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YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996 1995
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(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Interest and dividend income $ 28,987 $ 29,253 $ 28,539 $ 27,781 $ 27,750
Interest expense 11,803 12,060 11,404 11,469 11,608
-------- --------- --------- -------- ---------
Net interest income 17,184 17,193 17,135 16,312 16,142
Provision for (recovery of) loan losses 120 (91) (316) 116 (154)
Non-interest income 1,297 1,443 3,339 2,149 2,049
Non-interest expenses 10,070 10,099 9,857 9,768 11,003
-------- --------- --------- -------- ---------
Income before income taxes 8,291 8,628 10,933 8,577 7,342
Income tax expense 2,827 2,724 3,648 1,968 1,960
-------- --------- --------- -------- ---------
Net income $ 5,464 $ 5,904 $ 7,285 $ 6,609 $ 5,382
======== ========= ========= ======== =========
Basic earnings per share $ 0.74 $ 0.75 $ 0.96 $ 0.90 $ 0.75
======== ========= ========= ======== =========
Diluted earnings per share $ 0.72 $ 0.72 $ 0.91 $ 0.84 $ 0.70
======== ========= ========= ======== =========
Cash dividends paid $ 0.63 $ 0.72 $ 0.44 $ 0.27 $ 0.15
======== ========= ========= ======== =========
OTHER DATA:
Return on average assets 1.39% 1.57% 2.02% 1.87% 1.54%
Return on average stockholders' equity 15.26 14.79 19.50 20.47 19.30
Stockholders' equity to assets at year end 8.86 10.05 10.79 9.60 8.78
Dividend payout ratio 85.56 96.04 44.79 29.47 20.09
Weighted average interest rate spread 4.35 4.53 4.80 4.69 4.71
Net yield on average earning assets 4.57% 4.79% 5.03% 4.88% 4.84%
Number of banking offices 6 6 6 6 6
The consolidated financial data for the Corporation and its subsidiaries
presented above are expanded and explained in more detail by the financial
information contained elsewhere herein. The consolidated financial data were
derived from audited consolidated financial statements of the Corporation and
the Bank at and for the periods shown.
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CROSS REFERENCE SHEET OF INFORMATION REQUIRED BY ITEMS IN
FORM 10-K
Page
----
Item 1. Business................................................................................................. 22-26
Item 2. Properties............................................................................................... 14
Item 3. Legal Proceedings........................................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 27
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 70
Item 6. Selected Financial Data.................................................................................. 2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................... 4-22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................................... 6-7
Item 8. Financial Statements and Supplementary Data.............................................................. 30-67
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures........................................................................................ 27
Item 10. Directors and Executive Officers of the Corporation...................................................... 27
Item 11. Executive Compensation................................................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 27
Item 13. Certain Relationships and Related Transactions........................................................... 27
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 68
STATISTICAL DISCLOSURE FOR BANK HOLDING COMPANIES
(2) Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential.............................................................................. 16-17
(3) Investment Portfolio...................................................................................... 9
(4) Loan Portfolio............................................................................................ 10-11
(5) Summary of Loan Loss Experience........................................................................... 13
(6) Deposits.................................................................................................. 15
(7) Return on Equity and Assets............................................................................... 2
(8) Short-Term Borrowings .................................................................................... 46-47
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995. The words "believe," "expect," "anticipate," "intend,"
"estimate," "plan," "assume" and other similar expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which are in some cases beyond the control of
the Corporation and may cause the actual results, performance or achievements of
the Corporation to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include, but are not
limited to, the following: interest rates may increase, adversely affecting the
ability of borrowers to repay adjustable-rate loans and the Corporation's
earnings and income which derive in significant part from loans to borrowers;
unemployment in the Corporation's market area may increase, adversely affecting
the ability of individual borrowers to repay loans; property values may decline,
adversely affecting the ability of borrowers to repay loans and the value of
real estate securing repayment of loans; and general economic and market
conditions in the Corporation's market area may decline, adversely affecting the
ability of borrowers to repay loans, the value of real estate securing repayment
of loans and the Corporation's ability to make profitable loans. Any of the
above may also result in lower interest income, increased loan losses,
additional charge-offs and writedowns and higher operating expenses. Other
factors that might cause such differences include the failure to realize the
expected tax benefit of the newly formed Warren Real Estate Investment
Corporation (see "General" below). The section entitled "Year 2000" also
contains forward-looking statements. Anticipated expenses or delays in dealing
with year-2000 issues by the Corporation, its suppliers and borrowers could
result in material differences between the forward-looking statements and actual
results. These and other factors that might cause differences between actual and
anticipated results, performance and achievements are discussed in greater
detail in this Annual Report, including Form 10-K, under "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business," and the section entitled "Year 2000."
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the audited financial statements
and notes thereto appearing elsewhere in this report.
GENERAL
Warren Bancorp, Inc.'s (the "Corporation") operating results for the year
ending December 31, 1999 (the "1999 period") reflect the operations of its only
subsidiary, Warren Five Cents Savings Bank (the "Bank"). The Bank, which is
wholly owned by the Corporation, operates as a community bank and is in the
business of making individual and commercial loans to customers in its market
area.
The Corporation recorded a decreased profit for the 1999 period as compared
to the year ended December 31, 1998 (the "1998 period") primarily due to lower
gains on sales of investment securities, a higher provision for loan loss and a
$200,000 tax benefit recorded in 1998 as a result of a settlement with the IRS
on certain matters. Despite the increase in average earnings assets in 1999, net
interest income for the 1999 period remained at approximately the same level as
for the 1998 period due to a lower net yield on those assets. This lower net
yield is primarily due to a highly competitive commercial lending environment,
an increase in residential mortgage loans, which typically have lower yields
than commercial loans, lower levels of stockholders' equity, which carries no
interest expense, and generally lower yields on assets in the 1999 period
compared to the 1998 period (general interest rates fell during 1998 and
increased during 1999, but only toward the end of 1999 did those rates reach the
level prevalent at the beginning of 1998). When general interest rates decrease,
the yield on the Bank's total assets will typically decrease more than the cost
of its funds. This is mainly because certain sources of funds, namely demand
deposits and stockholders' equity, do not bear interest, and other sources of
funds at already low rates of interest may not have their rates reduced at the
same rate as the Bank's
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assets. Reductions in general interest rates may reduce the Bank's rate spread
and net yield on average earnings assets which would have an adverse effect on
the net interest margin and net income.
Stockholders' equity decreased in 1999 due to a decrease in the unrealized
gain on securities available for sale net of income taxes, the payment of
dividends equal to over 85% of net income and the purchase of $4.6 million of
treasury stock. Future increases in interest rates could reduce the value of the
securities portfolio and stockholders' equity.
Real estate acquired by foreclosure decreased to zero at December 31, 1999
from $1.5 million at December 31, 1998, and nonperforming loans increased to
$1.5 million during the 1999 period from $638,000 at December 31, 1998. The net
gain on sales of real estate acquired by foreclosure amounted to $514,000 and is
included in real estate operations expense (income). Management continues to
monitor the nonperforming loan portfolio closely. If conditions in the
Massachusetts real estate market become unstable and values deteriorate, the
amount of nonaccrual loans and real estate acquired by foreclosure would be
expected to increase, resulting in lower interest income and increased loan
losses, which could require additional loan loss provisions to be charged to
operating income. Moreover, an increase in real estate acquired by foreclosure
may give rise to additional charge-offs and writedowns and higher expenses for
property taxes and other carrying costs.
During the 1999 period the Corporation formed Warren Real Estate Investment
Corporation ("WREIC"), a real estate investment trust, and incurred $196,000 of
pre-tax expense ($118,000 after tax). Total tax savings in 1999 attributable to
WREIC was approximately $110,000 in 1999. The Corporation anticipates tax
savings of over $200,000 per year in subsequent years from the operation of
WREIC, subject to the Corporation's level of pre-tax earnings.
During 1999 and into 2000 the Corporation enhanced its residential mortgage
lending operation by increasing to five from one the number of residential loan
originators on its staff.
In 1999, the Corporation paid regular quarterly dividends totaling $.39 per
share and paid a special dividend of $.24 per share.
Under various stock repurchase programs authorized by the Board of
Directors in 1998 and 1999, the Corporation repurchased in 1999 523,400 shares
at a total cost of $4.6 million.
YEAR 2000
The statements in the following section are "Year-2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
The year-2000 issue is the result of systems run by computer (personal
computers, telephone systems, electric utilities, etc.) being date sensitive.
Older computer hardware and associated software applications were based on
two-digit years which either recognized the year 2000 as 1900 or not at all. To
remedy this situation these date-sensitive systems had to be reprogrammed or
replaced to recognize the year 2000.
The Corporation developed comprehensive plans to ensure that its computer
systems and key service providers were year-2000 compliant. The following is a
summary and a result of those efforts.
During 1998 the Corporation renewed its contract with its outside data
processing service provider. As part of that contract, the data service provider
ensured year-2000 compliance of the core banking systems that it provides to the
Corporation. All costs related to this aspect of the year-2000 effort were the
responsibility of the provider. The results of those efforts were positive.
There were no negative effects on the operations of the Bank caused by the
year-2000 issue.
As part of its 1998 business plan, the Corporation upgraded all of its
personal computers and associated software, all of which were year-2000
certified upon purchase. The Corporation contacted its commercial borrowers by
personal contact and questionnaires and monitored their preparedness, notified
deposit customers by mail of the Corporation's year-2000 efforts and provided a
web page and a dedicated
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telephone line specifically for year-2000 issues. Third party vendors (telephone
systems, electric utilities, security systems, etc.) were monitored for their
year-2000 preparedness. To date there have been no negative effects on the
operations or financial condition of the Bank caused by year-2000 issues
relating to the Bank's personal computers and related software, its third party
vendors or its borrowers, and there was no significant unusual customer activity
relating to year 2000 publicity.
The fact that there have been no negative effects caused by the year-2000
issue to date does not guarantee that an unforeseen problem could not occur in
the future. Due to this uncertainty year-2000 issues could still cause material
adverse effects on the Corporation's financial condition and results of
operations. These adverse effects could be the result of but not limited to
borrowers failing to repay loans, loss of business opportunities due to a
failure to properly transact business and loss of customers to competition due
to customer-service failure. This uncertainty cannot be quantified at this time.
The Corporation has updated hardware and its associated software as part of
its normal ongoing operations, and the hardware and software upgrades were a
necessary result of that plan and were not accelerated due to the year-2000
issue. The use of internal resources for the year-2000 effort did not delay
normal workflow or other projects from being completed. Total out-of-pocket
costs related to year-2000 issues were less than $50,000 in 1999. This cost was
in line with previously published estimates.
ASSET/LIABILITY MANAGEMENT
A primary objective of the Corporation's asset/liability management policy
is to manage the interest-rate risk over time to achieve a prudent level of net
interest income in changing interest-rate environments. Management's strategies
are intended to be responsive to changes in interest rates and to recognize
market demands for particular types of deposit and loan products. These
strategies are overseen by an internal Asset/Liability Management Committee and
by the Bank's Board of Directors, and the risks are managed with techniques such
as simulation analysis, which measures the effect on net interest income of
possible changes in interest rates, and "gap" analysis, using models similar to
the one shown on the following page.
The Corporation uses simulation analysis to measure exposure of net
interest income to changes in interest rates over a one-year period. This period
is measured because the Corporation is most vulnerable to changes in short-term
(one year and under) rates. Simulation analysis involves projecting future
interest income and expense under various rate scenarios. The Corporation's
policy on interest-rate risk specifies that if short-term money market interest
rates were to shift immediately up or down 200 basis points, estimated net
interest income for the next 12 months should decline by less than 17%. The
Corporation was in compliance with this policy at December 31, 1999 and 1998.
The following table reflects the Corporation's estimated exposure as a
percentage of estimated net interest income for the next 12 months, assuming an
immediate shift in short-term interest rates:
Estimated increase (decrease) in
Rate change (basis points) net interest income
-------------------------- December 31, 1999
-----------------
+200 3.9%
-200 (0.4)%
In 1998 the Corporation preformed this analysis using a rate increase and
decrease of 100 basis points. The estimated increase in net interest income if
rates increased 100 basis points was 1.3%; the estimated decrease in net
interest income if rates decreased 100 basis points was 0.8%. Both were within
the Corporation's policy guidelines.
Certain shortcomings are inherent in a simulation analysis. Estimates of
customer behavior to changing interest rates may differ significantly from
actual. Areas of these estimates include loan prepayment speeds, shifting
between adjustable-rate and fixed-rate loans, and activity within different
categories of deposit products. Also, the ability of some borrowers to repay
their adjustable-rate loans may decrease in the event of interest-rate
increases.
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The following table summarizes the Corporation's interest-rate sensitivity
position as of December 31, 1999. Assets and liabilities are classified as
interest-rate sensitive if they have a remaining term to maturity of 0-12 months
or are subject to interest-rate adjustments within those time periods.
Adjustable-rate loans and mortgage-backed securities are shown as if the entire
balance came due on the repricing date. Nonaccruing loans are not included in
this analysis due to their status as non-earning assets. Estimates of fixed-rate
loan and fixed-rate mortgage-backed security amortization and prepayments are
included with rate sensitive assets. The following types of deposit accounts are
assumed to have effective maturities as follows based on their past retention
characteristics: NOW accounts-up to five years; cash manager and passbook plus
accounts-up to six months; and regular savings accounts-up to greater than five
years. None of these assets is considered a trading asset.
INTEREST-RATE SENSITIVITY POSITION
DECEMBER 31, 1999
-----------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
------ ------ ------ ----- ------
(Dollars in Thousands)
INTEREST SENSITIVE ASSETS:
Investment securities, including
overnight investments ......................... $ 33,257 $ 8,175 $ 7,994 $ 29,257 $ --
Loans held for sale ............................ 1,816 -- -- -- --
Adjustable-rate loans .......................... 81,001 12,207 37,718 111,893 2,750
Fixed-rate loans ............................... 2,795 2,067 1,478 26,907 11,284
Mortgage-backed securities ..................... 1,317 2,395 5,860 3,372 1,052
-------- -------- -------- -------- --------
Total interest sensitive assets ............. 120,186 24,844 53,050 171,429 15,086
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts ...................................... 18,617 18,618 -- -- --
Time deposits .................................. 29,209 30,444 65,438 37,496 --
Other deposits(a) .............................. 10,507 10,508 22,427 83,270 9,981
Borrowings ..................................... 4,839 -- -- 33 2,638
-------- -------- -------- -------- --------
Total interest sensitive liabilities......... 63,172 59,570 87,865 120,799 12,619
-------- -------- -------- -------- --------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ......................... $ 57,014 $(34,726) $(34,815) $ 50,630 $ 2,467
======== ======== ======== ======== ========
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities ......... $ 57,014 $(22,288) $(12,527) $ 38,103 $ 40,570
======== ======== ======== ======== ========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ................ 190.3% 118.2% 94.1% 111.5% 111.8%
======== ======== ======== ======== ========
Cumulative excess (deficiency) as a
percentage of total assets .................... 14.2% (5.5)% (3.1)% 9.5% 10.1%
======== ======== ======== ======== ========
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(a) Other deposits consist of regular savings, club and N.O.W. accounts.
Interest-rate sensitivity statistics are static measures that do not
necessarily take into consideration external factors which might affect the
sensitivity of assets and liabilities and consequently cannot be used alone to
predict the operating results of a financial institution in a changing
environment. However, these measurements do reflect major trends and thus the
Corporation's sensitivity to interest rate changes over time.
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LIQUIDITY
The Bank seeks to ensure that sufficient liquidity is available to meet
cash requirements while earning a return on liquid assets. The Bank uses its
liquidity primarily to fund loan and investment commitments, to supplement
deposit flows and to meet operating expenses. The primary sources of liquidity
are interest and amortization from loans, mortgage-backed securities and
investments, sales and maturities of investments, loan sales, deposits and
Federal Home Loan Bank of Boston ("FHLBB") advances, which include a $15 million
overnight line of credit. The Bank also has access to the Federal Reserve Bank's
discount window and may borrow from the Depositors Insurance Fund Liquidity
Fund. During 1999, the Bank did not use the Federal Reserve Bank discount window
and did not borrow from the Depositors Insurance Fund Liquidity Fund.
The Bank also uses the longer term borrowing facilities within its total
available credit line with the FHLBB. Advances from the FHLBB, other than the
overnight facility, were $2,671,000 at December 31, 1999 and 1998.
During 1999, the primary sources of liquidity were $23.1 million in loan
sales and proceeds from maturities of investments of $38.0 million. Primary uses
of funds were $142.1 million in residential, commercial real estate and
commercial loan originations, $18.1 million to purchase investment securities
and $9.3 million to pay dividends to shareholders and repurchase stock. At
December 31, 1999, the Bank had $12.2 million in money market funds and
overnight investments.
The primary source of liquidity for the Corporation is dividends from the
Bank. Dividends paid and stock repurchases by the Corporation are the primary
uses of this liquidity.
From time to time, the Bank has obtained time deposits in denominations of
$100,000 and over. The following table summarizes maturities of time deposits of
$100,000 or more outstanding at December 31, 1999:
Within one year: (In thousands)
Less than 3 months...................... $ 5,631
3 to 6 months .......................... 5,454
6 to 12 months ......................... 11,613
-------
22,678
More than one year ......................... 5,588
-------
$28,286
=======
CAPITAL ADEQUACY
Total stockholders' equity at December 31, 1999 was $35.6 million, a
decrease of $4.3 million from $39.9 million at the end of 1998. Included in
stockholders' equity is an unrealized loss on securities available for sale,
which decreased stockholders' equity, of $7,000 as compared to an unrealized
gain at December 31, 1998 of $799,000. Future interest-rate increases could
reduce the fair value of these securities and reduce stockholders' equity. Also
decreasing stockholders' equity in 1999 were dividends of $4.7 million and
purchases of treasury shares of $4.6 million. As a percentage of total assets,
stockholders' equity was 8.86% at December 31, 1999 compared to 10.05% at
December 31, 1998.
At December 31, 1999, neither the Federal Reserve Board ("FRB") nor the
FDIC permitted the unrealized gain or loss to be used in their calculations of
Tier I capital. At December 31, 1999, net of applicable taxes, the unrealized
loss on securities available for sale was $7,000.
The FRB's leverage capital-to-assets guidelines require the strongest and
most highly rated bank holding companies to maintain at least a 3.00% ratio of
Tier I capital to average consolidated assets. All other bank holding companies
are required to maintain at least 4.00% to 5.00%, depending on how the FRB
evaluates their condition. The FRB may require a higher capital ratio. At
December 31, 1999, the FRB leverage capital ratio was 8.94% compared to 10.10%
at December 31, 1998.
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The FDIC's leverage capital-to-assets ratio guidelines are substantially
similar to those adopted by the FRB and described above. At December 31, 1999,
the Bank's leverage capital ratio, under FDIC guidelines, was 8.58% compared to
9.20% at December 31, 1998.
The FRB and the FDIC have also imposed risk-based capital requirements on
the Corporation and the Bank, respectively, which give different risk weightings
to assets and to off-balance sheet assets such as loan commitments and loans
sold with recourse. Both the FRB and FDIC guidelines require the Corporation and
the Bank to have an 8.00% total risk-based capital ratio. The Corporation's and
the Bank's total risk-based capital ratios were 11.80% and 11.28%, respectively,
at December 31, 1999 compared to 12.71% and 11.68%, respectively, at December
31, 1998 for both the Corporation and the Bank, thus exceeding their risk-based
capital requirements.
As of December 31, 1999, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 11.28%, 10.03%, and
8.58%, respectively. Based on these capital ratios, the Bank is considered to be
"well capitalized." (For further discussion on capital adequacy see note 9 in
the Notes to Consolidated Financial Statements.)
FINANCIAL CONDITION
The Corporation's total assets increased to $402.2 million at December 31,
1999 from $397.1 million at December 31, 1998. Increases occurred in loans and
money market funds and overnight investments and were partially offset by
decreases investment and mortgage-backed securities available for sale.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of investment securities and mortgage-backed
securities available for sale and other investments, decreased to $82.2 million
at December 31, 1999 from $109.8 million at December 31, 1998. This was caused
by decreases in corporate notes and mortgage-backed securities. Future increases
in interest rates could reduce the value of these investments. Mortgage-backed
securities decreased to $14.0 million at December 31, 1999 from $20.0 million at
December 31, 1998 due to principal paydowns.
INVESTMENTS. Certain information regarding the Corporation's investments as
of December 31 is presented below (in thousands):
1999 1998
---- ----
Amortized Cost:
U.S. Treasury and U.S. Government Agency
obligations available for sale................................... $ 3,006 $ 2,510
Foreign government bonds held to maturity........................... 1,000 750
Fixed-income mutual funds available for sale........................ 28,706 28,706
Mortgage-backed securities available for sale....................... 13,996 19,988
Corporate notes available for sale.................................. 22,349 43,541
Preferred stock available for sale.................................. 7,310 7,310
Other investments................................................... 5,794 5,794
-------- --------
Total amortized cost................................................... 82,161 108,599
Unrealized gain on investment securities
available for sale.................................................. (4) 1,239
-------- --------
Total carrying value................................................... $ 82,157 $109,838
======== ========
Total fair value of investment securities.............................. $ 82,397 $110,078
======== ========
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The following table presents the maturity distribution of the investment
securities portfolio and the weighted average yield for each type and range of
maturity as of December 31, 1999. Adjustable-rate mortgage-backed securities are
shown as if the entire balance came due on the repricing date. Estimates are
made of fixed-rate mortgage-backed security amortization and prepayments
(dollars in thousands):
WITHIN ONE TO FIVE TO OVER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- --------- --------- -----
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
U.S. Treasury and agency
obligations available
for sale .................... $ 3,006 5.27% $ -- --% $ -- --% $ -- --% $ 3,006 5.27%
Mortgage-backed securities
available for sale ........... 9,572 7.08 3,372 6.31 1,052 5.95 -- -- 13,996 6.81
Corporate notes
available for sale ........... 16,808 5.50 5,541 6.69 -- -- -- -- 22,349 5.80
Foreign government bonds
held to maturity ............. -- -- 500 7.78 250 6.00 250 6.75 1,000 7.08
------- ------- ------- ------- -------
$29,386 5.99% $ 9,413 6.61% $ 1,302 5.96% $ 250 6.75% $40,351 6.14%
======= ======= ======= ======= =======
At December 31, 1999, the Corporation did not hold securities of any single
issuer, excluding FHLB of Boston stock, that exceeded ten percent of
stockholders' equity.
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $25.2 million during the 1999
period to $292.8 million at December 31, 1999. This increase is primarily the
result of increased commercial, commercial construction and commercial real
estate loans partially offset by loan paydowns and payoffs in residential
mortgage loans. Commercial, commercial construction and commercial loans
typically earn higher yields than residential mortgage loans, but usually carry
higher risk due to loan size.
The following table sets forth the classification of the Corporation's
loans as of December 31 (in thousands):
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Residential mortgages.................. $52,209 $45,658 $52,707 $66,654 $ 85,276
Commercial real estate................. 167,221 163,154 125,832 107,428 94,341
Commercial construction ............... 19,590 13,620 19,739 10,742 6,254
Commercial loans....................... 29,446 23,726 22,259 16,458 8,490
Consumer loans......................... 22,548 20,317 20,226 21,564 22,331
-------- -------- -------- -------- --------
$291,014 $266,475 $240,763 $222,846 $216,692
======== ======== ======== ======== ========
Balances in residential mortgage loans are increasing mainly as a result of
increases in interest rates and an increased mortgage origination staff. The
Bank typically sells all fixed-rate residential mortgage loans that it
originates to the secondary mortgage market and retains the adjustable-rate
loans in its residential mortgage portfolio. Due to an increase in interest
rates during the 1999 period, this adjustable-rate portfolio has increased as
adjustable-rate loans become more favorable to the borrower than fixed-rate
loans. Balances in commercial real estate, commercial construction, and
commercial loans are increasing mainly due to the Corporation's increasing
emphasis on corporate lending.
Residential mortgage loan originations increased during 1999 to $48.5
million from $46.1 million in 1998. The Corporation originated $24.4 million in
fixed-rate loans during 1999 compared to $36.1 million during 1998.
Adjustable-rate loans totaling $24.1 million were originated during 1999
compared to $10.0 million during 1998. The Corporation sold loans totaling $23.1
million during 1999 compared to $34.3
10
11
million in 1998. At year-end 1999, the Corporation held $1.8 million of
fixed-rate residential mortgage loans for sale compared to $1.2 million at
year-end 1998.
The following table sets forth a maturity distribution of the Corporation's
commercial real estate, commercial construction, and commercial loans as of
December 31, 1999. For purposes of compiling this table, fixed rate loans are
treated as if the entire balance were due on the last contractual payment date.
Adjustable-rate loans are shown at the adjustment period date. Based on
experience with such loans, partial or full repayment of a portion of the
Corporation's commercial real estate loans prior to contractual maturity can be
expected.
WITHIN ONE TO OVER TOTAL
ONE YEAR FIVE YEARS FIVE YEARS GROSS LOANS
-------- ---------- ---------- -----------
(IN THOUSANDS)
Commercial real estate............................... $54,077 $106,248 $ 6,896 $167,221
Commercial construction.............................. 17,348 471 1,771 19,590
Commercial loans..................................... 17,949 9,506 1,991 29,446
------- -------- ------- --------
Total........................................... $89,374 $116,225 $10,658 $216,257
======= ======== ======= ========
Loans with adjustable rate........................... $91,067 $2,750
Loans with fixed rate................................ 25,158 7,908
-------- -------
$116,225 $10,658
======== =======
CREDIT QUALITY
IMPAIRED AND NONPERFORMING LOANS
Loans are deemed by the Corporation to be impaired when, based on current
information and events, it is probable that the Corporation will be unable to
collect all amounts due according to the contractual terms of the original loan
agreement. Generally, nonaccruing loans are deemed impaired. Large groups of
homogeneous loans, such as smaller balance residential mortgage and consumer
installment loans, are collectively evaluated for impairment. Typically, the
minimum delay in receiving payments according to the contractual terms of the
loan that can occur before a loan is considered impaired is 90 days. Impaired
loans are analyzed and categorized by level of credit risk and collectibility in
order to determine their related allowance for loan losses. At December 31,
1999, no loans were considered impaired and accruing interest.
Loans past due 90 days or more, or past due less than 90 days but in a
nonaccrual status, increased to $1.5 million at December 31, 1999 compared to
$638,000 at December 31, 1998. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full, timely collection of
principal or interest or when the loans become contractually past due by 90 days
or more, unless they are adequately secured and are in the process of
collection.
When a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income. Income on
such loans is recognized to the extent that cash is received and where the
ultimate collection of principal and interest is probable. Following collection
procedures, the Corporation generally institutes appropriate action to foreclose
the property or acquire it by deed in lieu of foreclosure.
11
12
The table below details nonperforming loans at December 31 (dollars in
thousands):
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Accruing loans 90 days or more
past due............................. $ 633 $ 163 $ -- $ -- $ 155
Nonaccrual loans....................... 914 475 347 2,712 4,084
------ ----- ----- ------ ------
Total nonperforming loans.............. $1,547 $ 638 $ 347 $2,712 $4,239
====== ===== ===== ====== ======
Percentage of nonperforming loans to:
Total loans............................ 0.53% 0.24% 0.14% 1.22% 1.96%
====== ===== ===== ====== ======
Total assets........................... 0.38% 0.16% 0.09% 0.76% 1.19%
====== ===== ===== ====== ======
In addition, at December 31, 1999 and 1998, the Corporation had $278,000
and $491,000, respectively, of loans past due 60 to 89 days and still accruing
interest not included above. These loans are closely monitored by management and
they are considered in reviews of the adequacy of the loan loss reserve.
The Corporation's lending activities are conducted throughout eastern
Massachusetts with emphasis in Essex County, Massachusetts and contiguous
counties, including those in southern New Hampshire, although from time to time
loans will be made outside of this area. The Bank makes single family,
residential construction, condominium and multi-family residential loans;
commercial real estate, commercial construction and commercial loans; and a
variety of consumer loans. Most loans granted by the Bank are collateralized by
real estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity and real estate values within the
borrower's geographic area. The ability and willingness of commercial real
estate, commercial construction and commercial loan borrowers to honor their
repayment commitments is generally dependent on the health of the real estate
economic sector, the borrower's business/industrial sector and the general
economy in the borrower's geographic area.
REAL ESTATE ACQUIRED BY FORECLOSURE
There was no real estate acquired by foreclosure at December 31, 1999
compared to $1.5 million at December 31, 1998. Real estate acquired by
foreclosure is reflected at the lower of the carrying value of the loan or the
net carrying value of the property less estimated cost of disposition.
The Corporation had a net gain of $514,000 on the sale of real estate
acquired by foreclosure in the 1999 period compared to a net gain of $2,000 on
real estate acquired by foreclosure in the 1998 period.
In summary, nonperforming assets are as follows at December 31, (in
thousands):
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Nonperforming loans.................... $1,547 $ 638 $ 347 $2,712 $4,239
Real estate acquired by
foreclosure........................... -- 1,450 2,010 2,230 3,092
------ ------ ------ ------ ------
Total nonperforming assets............. $1,547 $2,088 $2,357 $4,942 $7,331
====== ====== ====== ====== ======
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ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses
for the years ended December 31 (dollars in thousands):
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance at beginning of period ..................... $ 4,023 $ 4,066 $ 4,533 $ 4,533 $ 4,789
------- ------- ------- ------- -------
Losses charged to the allowance:
Commercial ..................................... (4) -- -- -- --
Commercial mortgage and
construction ................................ (49) -- (344) (143) (113)
Residential mortgage ........................... -- -- (241) (280) (472)
Consumer loans ................................. (7) (98) (23) (33) (31)
------- ------- ------- ------- -------
(60) (98) (608) (456) (616)
------- ------- ------- ------- -------
Loan recoveries:
Commercial ..................................... 100 24 116 61 79
Commercial mortgage
and construction ............................... 34 79 248 233 255
Residential mortgage ........................... 36 23 75 30 161
Consumer loans ................................. 18 20 18 16 19
------- ------- ------- ------- -------
188 146 457 340 514
------- ------- ------- ------- -------
Net (charge-offs) recoveries ................... 128 48 (151) (116) (102)
Provision for (recovery of) loan
losses charged (credited)
to expense ..................................... 120 (91) (316) 116 (154)
------- ------- ------- ------- -------
Balance at end of period ........................... $ 4,271 $ 4,023 $ 4,066 $ 4,533 $ 4,533
======= ======= ======= ======= =======
Allowance to total loans
at end of period ............................... 1.47% 1.50% 1.69% 2.03% 2.09%
======= ======= ======= ======= =======
Allowance to nonperforming
loans at end of period ......................... 276.1% 630.6% 1171.18% 167.1% 106.9%
======= ======= ======= ======= =======
Net (charge-offs) recoveries to
Average loans outstanding ...................... .04% .02% (.07)% (.05)% (.27)%
======= ======= ======= ======= =======
Allocation of ending balance:
Commercial ..................................... $ 435 $ 298 $ 295 $ 218 $ 116
Commercial mortgage and
construction ................................ 3,110 2,917 2,752 3,099 2,940
Residential mortgage ........................... 512 619 727 936 1,237
Consumer loans ................................. 214 189 292 280 240
------- ------- ------- ------- -------
$ 4,271 $ 4,023 $ 4,066 $ 4,533 $ 4,533
======= ======= ======= ======= =======
Percentage of loans in each category to total loans:
Commercial ..................................... 10.1% 8.9% 9.2% 7.4% 3.9%
Commercial mortgage and
construction ................................. 64.2 66.3 60.5 53.0 46.4
Residential mortgage ........................... 17.9 17.1 21.9 29.9 39.4
Consumer loans ................................. 7.8 7.7 8.4 9.7 10.3
------- ------- ------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
Notwithstanding the foregoing allocations, the entire allowance for loan
losses is available to absorb charge-offs in any category of loans. Loan losses
are charged against the allowance when management believes that the
collectibility of the loan principal is doubtful.
13
14
Balances in the allowance for loan losses are determined on a periodic
basis by management and the Loan Committee of the Board of Directors with
assistance from an independent credit review consulting firm. Loan loss
allocations are based on the conditions of each loan, whether performing or
nonperforming, including collectibility, collateral adequacy and the general
condition of the borrowers, economic conditions, delinquency statistics, market
area activity, the risk factors associated with each of the various loan
categories and the borrower's adherence to the original terms of the loan.
Individual loans, including loans considered impaired, are analyzed and
categorized by level of credit risk and collectibility. In determining the
allowance, management uses specific estimated losses on certain problem loans,
loss factors determined for each category of credit risk using historical
charge-off statistics and factors that consider economic conditions and trends.
The associated provision for loan losses is the amount required to bring the
allowance for loan losses to the balance considered necessary by management at
the end of the period after accounting for the effect of loan charge-offs (which
decrease the allowance) and loan-loss recoveries (which increase the allowance).
The allowance for loan losses included above attributable to $914,000 of
impaired loans, all of which is measured using the fair value method, is
$112,000.
LEGAL AND OFF-BALANCE SHEET RISKS
Various legal claims arise from time to time in the course of business of
the Corporation and its subsidiaries. At December 31, 1999 there were no legal
claims against the Corporation.
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations of interest rates.
These financial instruments include commitments to originate loans, unused lines
of credit, standby letters of credit, recourse arrangements on sold assets and
forward commitments to sell loans. The financial instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets. (See "Asset/Liability Management"
in this section and note 11 in the Notes to Consolidated Financial Statements.)
PROPERTIES
The Bank operates a main office and three additional banking offices in
Peabody and two banking offices in Beverly. At December 31, 1999, management
believes that the Bank's existing properties are adequate for the conduct of its
business.
The following table sets forth certain information relating to the Bank's
offices as of December 31, 1999:
OWNED LEASE LEASE
YEAR OR EXPIRATION RENEWAL
OFFICE LOCATION OPENED LEASED DATE OPTION
--------------- ------ ------ ---------- -------
Peabody Square
10 Main Street................................ 1854 Owned -- --
Northshore Shopping Center...................... 1958 Leased 2000 Yes
West Peabody
Russell and Lowell Street..................... 1971 Leased 2003 No*
South Peabody**
Lynn Street................................... 1979 Owned -- --
Lynnfield Street.............................. 2000 Leased 2009 Yes
Beverly
175 Cabot Street.............................. 1867 Owned -- --
North Beverly
55 Dodge Street............................... 1968 Leased 2006 No
* Bank has option to purchase.
** The Lynn Street office is expected to close and the Lynnfield Street office
is expected to open in March 2000.
14
15
OTHER ASSETS
Included in other assets at December 31, 1999 and December 31, 1998 are
$1,605,000 and $1,388,000, respectively, of deferred income tax asset.
LIABILITIES
Year-end deposit levels increased to $355.5 million at December 31, 1999
from $347.0 million at December 31, 1998. This increase took place primarily in
time and money market deposits and was partially offset by a decrease in NOW
account deposits.
AVERAGE DEPOSITS. The following table presents the average balance and
average cost of the Corporation's deposits for the years ended December 31
(dollars in thousands):
1999 1998 1997
-------------------- ------------------- -------------------
AMOUNT COST AMOUNT COST AMOUNT COST
------ ---- ------ ---- ------ ----
Non-interest bearing.......... $ 17,485 --% $ 15,508 --% $ 15,977 --%
NOW accounts ................. 36,692 0.53 35,496 0.70 32,242 0.76
Savings ...................... 137,497 2.46 130,370 2.66 129,585 2.60
Time ......................... 155,621 5.08 148,437 5.47 139,507 5.48
-------- -------- --------
Total deposits.......... $347,295 3.31% $329,811 3.59% $317,311 3.54%
======== ======== ========
Federal Home Loan Bank of Boston advances were $2.7 million at December 31,
1999 and 1998. Securities sold under agreement to repurchase were $4.8 million
at December 31, 1999 and $5.0 million at December 31, 1998.
Accrued expenses and other liabilities includes a current income tax
payable of $436,000 at December 31, 1999 and zero at December 31, 1998. It also
includes accrued salaries and benefits payable of $600,000 at December 31, 1999
and $117,000 at December 31, 1998.
15
16
INCOME YIELD AND COST OF FUNDS ANALYSIS. The table below sets forth
information concerning the Corporation's average balances, interest income and
expense, and yield information for the three years shown. Average loan balances
include nonaccruing loans. The yields on investments are calculated on a fully
taxable-equivalent basis using a federal tax rate of 34%.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
Loans ................. $273,376 $ 22,891 8.37% $250,992 $ 22,434 8.94% $229,889 $ 21,248 9.24%
Investments, including
overnight investments. 89,115 4,969 5.64 86,417 5,048 6.02 76,476 4,499 6.13
Mortgage-backed
securities ........... 16,579 1,127 6.80 24,781 1,771 7.15 38,159 3,233 7.13
-------- -------- -------- -------- -------- --------
Total interest-
earning assets ... 379,070 28,987 7.66% 362,190 29,253 8.12% 344,524 28,539 8.34%
Non-interest earning
assets ................ 13,692 14,777 15,130
-------- -------- --------
Total assets ............ $392,762 $376,967 $359,654
======== ======== ========
Interest-bearing
liabilities:
Deposits .............. $329,810 11,488 3.48% $314,303 11,833 3.76% $301,334 11,258 3.74%
Borrowings ............ 8,659 315 3.64 6,203 227 3.66 4,525 146 3.23
-------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities . 338,469 11,803 3.49 320,506 12,060 3.76 305,589 11,404 3.73
Non-interest bearing
deposits .............. 17,485 15,508 15,977
-------- -------- --------
Total deposits and
borrowed funds ........ 355,954 3.31 336,014 3.59 321,836 3.54
Non-interest bearing
liabilities ........... 918 1,029 463
Stockholders' equity .... 35,890 39,924 37,355
-------- -------- --------
Total liabilities
and stockholders'
equity ............ $392,762 $376,967 $359,654
======== ======== ========
Net interest income ..... $ 17,184 $ 17,193 $ 17,135
======== ======== ========
Weighted average
rate spread ........... 4.35% 4.53% 4.80%
Net yield on average
earning assets ........ 4.57% 4.79% 5.03%
16
17
RATE/VOLUME ANALYSIS. The following table sets forth information concerning
the Bank's interest and dividend income, interest expense and net interest
income changes for the years listed.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
------------------------------------------ ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
------------------------------------------ ------------------------------------------
DUE TO DUE TO
------------------------------------------ ------------------------------------------
AVERAGE AVERAGE
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------ ---- ------- ----- ------ ---- ------- -----
(IN THOUSANDS)
Interest and dividend income:
Investments, including overnight
investments ................... $ 162 $ (328) $ 87 $ (79) $ 609 $ (81) $ 21 $ 549
Mortgage-backed securities ....... (586) (86) 28 (644) (978) (65) 22 (1,021)
Loans ............................ 2001 (1,418) (126) 457 1,950 (700) (64) 1,186
------- ------- ------- ------- ------- ------- ------- -------
Total interest and dividend
income ..................... 1,577 (11) (266) 1,581 (846) (21) 714
Interest expense:
Deposits:
N.O.W ........................... 8 (60) (2) (54) 25 (18) (2) 5
Savings ......................... 190 (14) (79) 20 81 (2) 102
Time ............................ 393 (577) (28) (212) 489 (20) (1) 468
Borrowings ....................... 90 (1) (1) 88 54 20 7 81
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense ....... 681 (45) (257) 588 (63) 5 656
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ................ $ 896 $ (939) $ 34 $ (9) $ 993 $ (909) $ (26) $ 58
======= ======= ======= ======= ======= ======= ======= =======
BUSINESS SEGMENTS
For internal reporting, planning and business purposes, the Corporation
segments its operations into distinct business groups. An individual business
group's profit contribution to the Corporation as a whole is determined based
upon the Corporation's profitability reporting system which assigns capital and
other balance sheet items and income statement items to each of the business
groups. This segmentation mirrors the Corporation's organizational structure.
Management accounting policies are in place for assigning revenues and expenses
that are not directly incurred by the business groups, such as overhead, the
results of asset allocations, and transfer revenues and expenses. Accordingly,
the Corporation's business-segment operating results will differ with other
similar information published by other financial institutions. In addition,
management accounting concepts are periodically refined and results may change
to reflect these refinements.
On January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
operating segments of a business enterprise. The rules establish standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. Operating
segments are components of an enterprise which are evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and assess
performance. The Corporation's chief operating decision maker is the President
and Chief Executive Officer of the Corporation. The adoption of SFAS No. 131 had
no effect on the Corporation's primary financial statements, but did result in
the disclosure of segment information contained herein.
17
18
The Corporation has identified its reportable operating business segments
as the Corporate Banking Business and the Personal Banking Business. A
description of each reportable business segment is discussed below:
CORPORATE BANKING
The Corporate Banking Business provides services to business customers in
the Corporation's market area. These services include, but are not limited to,
commercial real estate and construction loans, asset-based financing and cash
management/deposit services. It services all loans in its business.
PERSONAL BANKING
The Personal Banking Business provides services to consumers in the
Corporation's market area through its branch and ATM network. These services
include, but are not limited to, home equity loans, installment loans, safe
deposit boxes and an array of deposit services. This business purchases
adjustable-rate mortgage loans, home equity loans and installment loans from
another business group and services all loans in its business.
Non-reportable operating segments of the Corporation's operations that do
not meet the qualitative and quantitative thresholds requiring disclosure are
included in the Other category in the disclosure of business segments below.
Revenues in these segments consist mainly of interest income on investments and
gains on sales of mortgage loans and securities.
Specific reportable segment information as of and for the years ended
December 31, 1999, 1998 and 1997 is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1999
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
Interest income-external $ 19,076 $ 9,682 $ 229 $ 28,987
Interest income-internal -- 8,963 45 $ (9,008) --
Interest expense-external 1,338 10,367 98 11,803
Interest expense-internal 8,963 -- 45 (9,008) --
Fee and other income 168 807 322 1,297
Income tax expense
(benefit) 2,973 1,233 (1,379) 2,827
Net income (loss) 4,459 2,512 (1,507) 5,464
Total assets 237,600 156,600 8,000 402,200
Total loans 216,200 74,800 -- 291,000
Total deposits 39,700 313,700 2,100 355,500
18
19
YEAR ENDED DECEMBER 31, 1998
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
Interest income-external $ 18,029 $ 10,756 $ 468 $ 29,253
Interest income-internal -- 8,746 12 $ (8,758) --
Interest expense-external 1,037 10,923 100 12,060
Interest expense-internal 8,454 761 (457) (8,758) --
Fee and other income 171 763 509 1,443
Income tax expense
(benefit) 2,569 787 (632) 2,724
Net income 3,848 1,939 117 5,904
Total assets 221,900 162,500 12,700 397,100
Total loans 200,400 66,100 1,200 267,700
Total deposits 37,300 307,700 2,000 347,000
YEAR ENDED DECEMBER 31, 1997
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
Interest income-external $ 15,101 $ 12,913 $ 525 $ 28,539
Interest income-internal -- 7,248 25 $ (7,273) --
Interest expense-external 665 10,595 144 11,404
Interest expense-internal 7,128 300 (155) (7,273) --
Fee and other income 134 2,354* 851 3,339
Income tax expense
(benefit) 2,377 2,067 (796) 3,648
Net income (loss) 3,476 3,832 (23) 7,285
Total assets 186,100 169,700 15,200 371,000
Total loans 167,900 73,100 1,000 242,000
Total deposits 28,600 294,700 2,000 325,300
* Includes a gain on sale of mortgage servicing rights of $1,436,000.
19
20
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
GENERAL
The Corporation recorded a profit for the 1999 period of $5.5 million
compared to a profit for the 1998 period of $5.9 million.
Net interest income for both the 1999 and 1998 periods was $17.2 million.
The weighted average interest-rate spread for the 1999 period was 4.35% compared
to 4.53% for the 1998 period. The net yield on average earning assets was 4.57%
for the 1999 period and 4.79% for the 1998 period. The return on average assets
and the return on average stockholders' equity were 1.39% and 15.26%,
respectively, for the 1999 period compared to 1.57% and 14.79%, respectively,
for the 1998 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income decreased to $29.0 million for the 1999
period from $29.3 million for the 1998 period. Interest on loans increased to
$22.9 million for the 1999 period from $22.4 million for the 1998 period due to
average loans outstanding increasing in the 1999 period despite a decrease in
the average loan yield to 8.37% for the 1999 period compared to 8.94% for the
1998 period. Interest and dividends on investments was $5.0 for both the 1999
and 1998 periods. This is attributable to an increase in the average amount of
investments held offset by a decrease in the average yield on investments to
5.64% for the 1999 period from 6.02% for the 1998 period. Mortgage-backed
securities income decreased to $1.1 million in the 1999 period from $1.8 million
in the 1998 period primarily due to a decrease in the average amount of
mortgage-backed securities held due to paydowns and a decrease in the average
yield to 6.80% for the 1999 period compared to 7.15% in the 1998 period.
INTEREST EXPENSE
Interest on deposits decreased to $11.5 million for the 1999 period from
$11.8 million for the 1998 period. This decrease was related to a decrease in
the average cost of total deposits to 3.31% for the 1999 period from 3.59% for
the 1998 period despite an increase in average total deposits outstanding.
Interest on borrowed funds and escrow deposits of borrowers increased to
$315,000 in the 1999 period from $227,000 for the 1998 period. This increase is
primarily related to an increase in borrowed funds and the average cost of
borrowings decreasing only slightly to 3.64% for the 1999 period from 3.66% for
the 1998 period.
NON-INTEREST INCOME
Total non-interest income for the 1999 period was $1.3 million compared to
$1.4 million for the 1998 period. The gain from the sale of mortgage loans was
$232,000 in the 1999 period compared to $343,000 in the 1998 period. The gain
from the sale of investment securities was $17,000 for the 1999 period compared
to $188,000 in the 1998 period.
NON-INTEREST EXPENSE
Total non-interest expense was $10.1 million in the 1999 and 1998 periods.
Salaries and employee benefits were $6.6 million in the 1999 period and $6.0
million for the 1998 period. Included in salaries and employee benefits are
incremental expenses associated with the expansion of the mortgage origination
business (see "General" under "Management's Discussion and Analysis of Financial
Condition and and Results of Operations"). Real estate operations income was
$510,000 in 1999 compared to an expense of $65,000 in the 1998 period. This can
be attributed mainly to a gain on the sale of a parcel of real estate acquired
by foreclosure in the amount of $439,000. Expenses were also incurred to
complete the formation of Warren Real Estate Investment Corporation ("WREIC"), a
wholly owned subsidiary of the Bank. WREIC provided tax savings in 1999 and is
expected to provide
20
21
future tax savings (see "General" under "Management's Discussion and Analysis of
Financial Condition and and Results of Operations").
INCOME TAX EXPENSE
Income tax expense for the 1999 period was $2.8 million, or 34.1% of income
before income taxes, compared to $2.7 million, or 31.6% of income before income
taxes, for the 1998 period. During the 1998 period the Corporation recorded a
benefit of $200,000 as a result of a settlement with the IRS in certain tax
matters.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
GENERAL
The Corporation recorded a profit for the 1998 period of $5.9 million
compared to a profit for the 1997 period of $7.3 million. The 1997 period profit
included after-tax gains of $1.1 million from the sale of rights to service
residential mortgage loans and $109,000 from the termination of the Bank's
defined-benefit pension plan.
Net interest income for the 1998 and 1997 periods was $17.2 million and
$17.1 million, respectively. The weighted average interest-rate spread for the
1998 period was 4.53% compared to 4.80% for the 1997 period. The net yield on
average earning assets was 4.79% for the 1998 period and 5.03% for the 1997
period. The return on average assets and the return on average stockholders'
equity were 1.57% and 14.79%, respectively, for the 1998 period compared to
2.02% and 19.50%, respectively, for the 1997 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $29.3 million for the 1998
period from $28.5 million for the 1997 period. Interest on loans increased to
$22.4 million for the 1998 period from $21.2 million for the 1997 period due to
average loans outstanding increasing in the 1998 period despite a decrease in
the average loan yield to 8.94% for the 1998 period compared to 9.24% for the
1997 period. Interest and dividends on investments was $5.0 and $4.5 million for
the 1998 and 1997 periods, respectively. This increase is attributable to an
increase in the average amount of investments held partially offset by a
decrease in the average yield on investments to 6.02% for the 1998 period from
6.13% for the 1997 period. Mortgage-backed securities income decreased to $1.8
million in the 1998 period from $2.8 million in the 1997 period primarily due to
a decrease in the average amount of mortgage-backed securities held due to
paydowns and a decrease in the average yield to 7.15% for the 1998 period
compared to 7.32% in the 1997 period.
INTEREST EXPENSE
Interest on deposits increased to $11.8 million for the 1998 period from
$11.3 million for the 1997 period. This increase was related to an increase in
the average cost of total deposits to 3.59% for the 1998 period from 3.55% for
the 1997 period and an increase in average total deposits outstanding. Interest
on borrowed funds and escrow deposits of borrowers increased to $227,000 in the
1998 period from $146,000 for the 1997 period. This increase is primarily
related to an increase in borrowed funds and the average cost of borrowings
increasing to 3.66% for the 1998 period from 3.23% for the 1997 period.
NON-INTEREST INCOME
Total non-interest income for the 1998 period was $1.4 million compared to
$3.3 million for the 1997 period. The 1997 period included a pre-tax gain from
the sale of $209 million of mortgage servicing rights of $1.4 million and a
$538,000 gain from the Bank's termination of its defined-benefit pension plan.
The gain from the sale of mortgage loans was $343,000 in the 1998 period
compared to $181,000 in the 1997 period. Loan servicing fees were $20,000 for
the 1998 period compared to
21
22
$129,000 in the 1997 period. This decrease is mainly due to a reduction in the
amount of loans serviced for others as the result of the sale of the
above-mentioned mortgage servicing rights. The gain from the sale of investment
securities was $188,000 for the 1998 period compared to $140,000 in the 1997
period.
NON-INTEREST EXPENSE
Total non-interest expense was $10.1 million in the 1998 period and $9.9
million in the 1997 period. Salary and employee benefits was $6.0 million in the
1998 period and $5.8 million for the 1997 period. Real estate operations expense
decreased to $65,000 in the 1998 period compared to $409,000 in the 1997 period
mainly due to a writedown in the value of real estate owned through foreclosure
occurring in the 1997 period. Increases in marketing expense to $287,000 in the
1998 period from $241,000 in the 1997 period were incurred. Other expenses
increased to $1.9 million in the 1998 period from $1.6 million in the 1997
period.
INCOME TAX EXPENSE
Income tax expense for the 1998 period was $2.7 million compared to $3.6
million for the 1997 period. During the 1998 period the Corporation recorded a
benefit of $200,000 as a result of a settlement with the IRS in certain tax
matters. As a result of certain capital gains in the 1997 period, the
Corporation was able to recognize a tax benefit in the amount of $279,000 from
capital losses of prior periods during that period.
BUSINESS
GENERAL
THE CORPORATION. Warren Bancorp, Inc. is a business corporation organized
under the General Laws of the Commonwealth of Massachusetts. The only office of
the Corporation, and its principal place of business, is located at 10 Main
Street, Peabody, Massachusetts 01960. The Corporation's telephone number is
(978) 531-7400.
The Corporation is a bank holding company which owns all of the outstanding
common stock of its only subsidiary, Warren Five Cents Savings Bank. The
Corporation charges fees to the Bank for providing certain administrative
services for the Bank. Such fees are charged on a cost basis.
THE BANK. The Bank, a wholly owned subsidiary of the Corporation, is a
Massachusetts-chartered savings bank incorporated in 1854. The Bank conducts its
business from four banking offices in Peabody and two banking offices in
Beverly.
The Bank is engaged principally in the business of attracting retail and
wholesale deposits from the general public and investing those deposits in
various types of residential and commercial mortgages, consumer and commercial
loans, and various securities. The Bank offers a wide variety of deposit, loan
and investment products and services to individuals and commercial customers.
The Bank has been a member of the FDIC since 1983. The Bank's deposits are
insured by the FDIC up to FDIC limits (generally $100,000 per depositor) and by
the Depositors Insurance Fund (the "DIF") for the portion of deposits in excess
of that insured by the FDIC. The Bank is also a member of the Federal Home Loan
Bank ("FHLB") system.
MARKET AREA
The Corporation's primary business and market area are the same as the
Bank's business and market area. The Bank's primary market area is centered in
Peabody (where its main office is located) and Beverly, Massachusetts, both
approximately 18 miles north of Boston, and includes
22
23
the other cities and towns of Essex County, Massachusetts. However, the Bank
will make loans and provide services to customers throughout eastern
Massachusetts and parts of southern New Hampshire. The population of Essex
County increased to 695,000 in 1998 from 670,000 in 1990, and median family
income in 1998 was $60,600. In addition, the unemployment rate in December 1999
in the Boston labor market was 2.5% compared to 3.2% in Massachusetts and 4.1%
in the United States. This compares to 2.6%, 2.9% and 4.7% in December 1998 for
the Boston labor market, Massachusetts and the United States, respectively.
COMPETITION
The primary business of the Corporation is currently the ongoing business
of the Bank. Therefore, the competitive conditions faced by the Corporation are
the same as those faced by the Bank.
The Bank faces competition in its market area both in originating loans and
attracting deposits. Competition in originating loans comes primarily from
thrift institutions, commercial banks, mortgage companies and consumer finance
companies. Within the Bank's market area and surrounding communities, there are
many competing commercial banks and thrift institutions. Further, there are
numerous mortgage companies from Essex County and metropolitan Boston with
offices in the area or calling officers soliciting in the area. The Bank
competes for loans principally on the basis of interest rates and repricing
terms, loan fees, the types of loans originated and the quality of service
provided to borrowers. Management believes that through the Bank's various loan
programs, it can compete for most types of loans in this market area.
In attracting deposits, the Bank's primary competitors are thrift
institutions, commercial banks, money market funds, credit unions and the
capital markets. Competition for deposits comes not only from local
institutions, but from those located in the Boston metropolitan market, through
branching networks, proximity to the work place and the general reach of the
mass media (particularly newspapers and the internet). The Bank competes for
deposits primarily on the basis of interest rate paid, scope of services
provided, convenience and quality of customer service. In order to appeal to
customers and attract depositors, the Bank plans to continue to offer a wide
range of high quality customer services, professional staff, and convenient
offices and hours, in addition to paying competitive rates on deposits.
Moreover, under the Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley
Act"), effective March 11, 2000, securities firms, insurance companies and other
financial services providers that elect to become financial holding companies
may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act
may significantly change the competitive environment in which the Corporation
and its subsidiaries conduct business. See "The Financial Services Modernization
Legislation" below. The financial services industry is also likely to become
more competitive as further technological advances enable more companies to
provide financial services. These technological advances may diminish the
importance of depository institutions and other financial intermediaries in the
transfer of funds between parties.
REGULATION
Both the Corporation and the Bank are regulated under federal and state
statutes and regulations. The following summaries of the statutes and
regulations affecting banks and bank holding companies do not purport to be
complete. Such summaries are qualified in their entirety by reference to such
statutes and regulations.
23
24
WARREN BANCORP, INC.
FEDERAL LAW
FEDERAL RESERVE BOARD. The Corporation is registered as a bank holding
company under the Federal Bank Holding Company Act of 1956, as amended ("BHCA"),
and is required to file with the Federal Reserve Board ("FRB") annual and
periodic reports and such other information as the FRB may require. The
Corporation is subject to limitations on the scope of its activities and to
continuing regulation, supervision and examination by the FRB under the BHCA and
related federal statutes.
The FRB has adopted risk-based and leverage capital guidelines for bank
holding companies. A discussion of these guidelines and the Corporation's
capital requirements and capital position is given in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the heading
"Capital Adequacy."
THE FINANCIAL SERVICES MODERNIZATION LEGISLATION. On November 12, 1999,
President Clinton signed into law the Gramm-Leach-Bliley Act. The
Gramm-Leach-Bliley Act repeals provisions of the Glass-Steagall Act: Section 20,
which restricted the affiliation of Federal Reserve member banks with firms
"engaged principally" in specified securities activities; and Section 32, which
restricts officer, director, or employee interlocks between a member bank and
any company or person "primarily engaged" in specified securities activities. In
addition, the Gramm-Leach-Bliley Act also contains provisions that expressly
preempt any state law restricting the establishment of financial affiliations,
primarily related to insurance. The general effect of the law is to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising
and expanding the Bank Holding Company Act framework to permit a holding company
system, such as the Corporation, to engage in a full range of financial
activities through a new entity known as a Financial Holding Company. "Financial
activities" is broadly defined to include not only banking, insurance, and
securities activities, but also merchant banking and additional activities that
the Federal Reserve Board, in consultation with the Secretary of the Treasury,
determines to be financial in nature, incidental to such financial activities,
or complementary activities that do not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally.
Generally, the Gramm-Leach-Bliley Act:
- repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
- provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding
companies;
- broadens the activities that may be conducted by national banks (and
derivatively state banks), banking subsidiaries of bank holding
companies, and their financial subsidiaries;
- provides an enhanced framework for protecting the privacy of consumer
information;
- adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
- modifies the laws governing the implementation of the Community
Reinvestment Act of 1977; and
24
25
- addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
In order to engage in the new activities, a bank holding company, such as
the Corporation, must meet certain tests. Specifically, a bank holding company's
bank subsidiary must be well-capitalized and well-managed, as measured by
regulatory guidelines, and all of the bank holding company's banks must have
been rated "satisfactory" or better in the most recent Community Reinvestment
Act evaluation of each bank. At this time, the Corporation has not determined
whether it will become a financial holding company.
MASSACHUSETTS LAW
As a Massachusetts corporation, the Corporation must comply with the
General Laws of the Commonwealth of Massachusetts and is subject to corporate
regulation by the Massachusetts Secretary of State.
WARREN FIVE CENTS SAVINGS BANK
As a Massachusetts-chartered, FDIC-insured savings bank, the Bank is
subject to regulation, examination and supervision by the FDIC and the
Commissioner of Banks of the Commonwealth of Massachusetts.
FEDERAL LAW
FEDERAL RESERVE BOARD. The FRB has established regulations that require
FDIC-insured savings banks to maintain non-earning reserves against certain
deposit accounts.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC insures the Bank's deposit
accounts up to a maximum of $100,000 per separately insured account; therefore,
the Bank is subject to regulation, supervision and reporting requirements of the
FDIC. The FDIC has adopted a regulation that defines and sets the minimum
requirements for capital adequacy. Under this regulation, insured state banks,
such as the Bank, are required to maintain a "leverage" ratio of total capital
to total assets and a risk-based capital-to-assets ratio that are substantially
the same as the Federal Reserve guidelines noted above. A discussion of these
guidelines and the Bank's capital requirements and capital position is given in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Capital Adequacy."
The Gramm-Leach-Bliley Act includes a new section of the Federal Deposit
Insurance Act governing subsidiaries of state banks that engage in "activities
as principal that would only be permissible" for a national bank to conduct in a
financial subsidiary. This provision will permit state banks, to the extent
permitted under state law, to engage in certain new activities which are
permissible for subsidiaries of a financial holding company. See "Regulation,
Warren Bancorp, Inc., Federal Law." Further, it expressly preserves the ability
of a state bank to retain all existing subsidiaries. Massachusetts permits banks
chartered by that state to engage in activities which are permissible for a
national bank and that are approved by the Massachusetts Commissioner of Banks.
Thus, the Bank would only be permitted to engage in the activities authorized by
the Gramm-Leach-Bliley Act that are also approved by the Massachusetts
Commissioner of Banks or otherwise authorized by Massachusetts law. In order to
form a financial subsidiary, a state bank must be well-capitalized, and the
state bank would be subject to certain capital deduction, risk management and
affiliate transaction rules which are applicable to national banks.
STATE LAW
MASSACHUSETTS COMMISSIONER OF BANKS. The Bank is subject to regulation and
examination by the Commissioner. Massachusetts statutes and regulations govern,
among other things, investment powers, lending powers, deposit activities,
borrowings, maintenance of surplus reserve accounts, distribution of earnings
and payment of dividends. The Bank is also subject to
25
26
regulatory provisions covering such matters as issuance of capital stock,
branching, and mergers and consolidations.
DEPOSITORS INSURANCE FUND. Deposit accounts that are not covered by federal
insurance are insured by the DIF, a corporation created by the Massachusetts
Legislature for the purpose of insuring the deposits of savings banks not
covered by federal deposit insurance. All Massachusetts-chartered savings banks,
including the Bank, are required to be members of the DIF.
EMPLOYEES
At the present time, the Corporation does not have any employees other than
its officers, who are compensated by the Bank. The Corporation may utilize the
support staff of the Bank from time to time without the payment of any fees to
the Bank. If the Corporation expands the scope or size of its financial services
business, or acquires or pursues other lines of business, it may hire additional
employees.
At December 31, 1999, the Bank had 166 employees, 42 of whom were
part-time. None of the employees of the Bank are represented by a collective
bargaining group, and management considers its relations and communications with
employees to be satisfactory.
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BANK SUBSIDIARIES AND OTHER ACTIVITIES
The Bank has six wholly owned subsidiaries. Those with significant activity
include:
Northbank Realty, Inc., a Massachusetts corporation incorporated in 1976,
owns the Bank's South Peabody branch office and land which it leases to the
Bank.
Warren Securities Corporation II, a Massachusetts corporation incorporated
in 1997, owns investment securities which it received as an equity contribution
from the Bank.
Warren Real Estate Investment Corporation, a Massachusetts corporation
incorporated in 1999, owns real estate loans which it received as an equity
contribution from the Bank.
SAVINGS BANK LIFE INSURANCE
The Bank acts as an issuing agent for Savings Bank Life Insurance Company
of Massachusetts and earns commissions for selling life insurance and annuities.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
There were no changes in or disagreements with accountants regarding
accounting principles or financial disclosure.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
Information pertaining to directors and executive officers is set forth
under "Election of a Class of Directors" and "Executive Officers" in the Proxy
Statement for the Annual Meeting of the Corporation to be held on May 3, 2000
and is incorporated herein by reference.
EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under
"Executive Compensation" in the Proxy Statement for the Annual Meeting of the
Corporation to be held on May 3, 2000 and is incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of management and beneficial
owners of more than five percent of the Corporation's common stock is set forth
under "Beneficial Ownership of Common Stock" in the Proxy Statement for the
Annual Meeting of the Corporation to be held on May 3, 2000 and is incorporated
herein by reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transactions is
set forth under "Certain Relationships and Related Transactions" in the Proxy
Statement for the Annual Meeting of the Corporation to be held on May 3, 2000
and is incorporated herein by reference.
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28
INDEX TO FINANCIAL STATEMENTS OF
WARREN BANCORP, INC. AND SUBSIDIARIES
PAGES
-----
Report of Independent Public Accountants............................................................. 29
Consolidated Balance Sheets at December 31, 1999 and December 31, 1998............................... 30
Consolidated Statements of Operations for the year ended
December 31, 1999, 1998 and 1997................................................................... 31
Consolidated Statements of Changes in Stockholders' Equity for the year ended
December 31, 1999, 1998 and 1997................................................................... 32
Consolidated Statements of Cash Flows for the year ended
December 31, 1999, 1998 and 1997................................................................... 33
Notes to Consolidated Financial Statements........................................................... 34-67
28
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Warren Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Warren Bancorp,
Inc. and subsidiaries (collectively, the Corporation) as of December 31, 1999
and 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
and opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Warren Bancorp, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 18, 2000
29
30
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Cash and due from banks (non-interest bearing) (note 11) $ 9,251 $ 7,497
Money market funds and overnight investments (note 2) 12,205 4,542
--------- ---------
Cash and cash equivalents 21,456 12,039
Investment and mortgage-backed securities available for sale (amortized cost of
$75,367 at December 31, 1999 and $102,055 at December 31, 1998) (notes 2 and 7) 75,363 103,294
Other investments (fair value of $7,034 at December 31, 1999 and $6,784 at
December 31, 1998) (note 2) 6,794 6,544
Leans held for sale 1,816 1,192
Loans (notes 3 and 11) 291,014 266,475
Allowance for loan losses (note 3) (4,271) (4,023)
--------- ---------
Net loans 286,743 262,452
Baring premises and equipment, net (note 4) 5,051 5,004
Accrued interest receivable 2,613 2,803
Real estate acquired by foreclosure -- 1,450
Other assets (notes 3 and 8) 2,411 2,287
--------- ---------
Total assets $ 402,247 $ 397,065
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6) $ 355,534 $ 347,012
Borrowed funds (note 7) 7,510 7,674
Escrow deposits of borrowers 1,132 1,065
Accrued interest payable 512 589
Accrued expenses and other liabilities (note 8) 1,915 804
--------- ---------
Total liabilities 366,603 357,144
========= =========
Commitments and contingencies (notes 4 and 11)
Stockholders' equity:
Preferred stock. $10 par value; Authorized - 10,000,000 shares;
Issued and outstanding - none -- --
Common stock, $.10 par value; Authorized - 20,000,000 shares;
Issued - 8,094,414 shares at December 31, 1999 and December 31, 1998;
Outstanding - 7,333,211 shares at December 31.1999, 7,826,691 shares at
December 31, 1998 809 809
Additional paid-in capital 35,841 35,710
Retained earnings 5,305 4,516
Treasury stock, at cost, 761,203 shares at December 31, 1999 and 267,723 shares
at December 31, 1998 (6,304) (1,913)
--------- ---------
35,651 39,122
Unrealized gain (loss) on marketable securities available for sale, net of
income taxes (note 2) (7) 799
--------- ---------
Total stockholders' equity 35,644 39,921
--------- ---------
Total liabilities and stockholders' equity $ 402,247 $ 397,065
========= =========
See accompanying notes to consolidated financial statements.
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31
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
(In thousands, except per-share data)
Interest and dividend income:
Interest on loans $ 22,891 $ 22,434 $ 21,246
Interest and dividends on investments 4,969 5,048 4,499
Interest on mortgage-backed securities 1,127 1,771 2,792
-------- -------- --------
Total interest and dividend income 28,987 29,253 28,539
-------- -------- --------
Interest expense:
Interest on deposits 11,488 11,833 11,258
Interest on borrowed funds 315 227 146
-------- -------- --------
Total interest expense 11,803 12,060 11,404
-------- -------- --------
Net interest income 17,184 17,193 17,135
Provision for (recovery of) loan losses (note 3) 120 (91) (316)
-------- -------- --------
Net interest income after provision for (recovery of)
loan losses 17,064 17,284 17,451
-------- -------- --------
Non-interest income:
Loan servicing fees 16 20 129
Customer service fees 948 879 906
Gains on sales of investment securities, net (note 2) 17 188 140
Gains on sales of mortgage servicing rights -- -- 1,436
Gains on sales of mortgage loans 232 343 181
Gain from termination of pension plan (note 10) -- -- 538
Other 84 13 9
-------- -------- --------
Total non-interest income 1,297 1,443 3,339
-------- -------- --------
Income before non-interest expense and income taxes 18,361 18,727 20,790
-------- -------- --------
Non-interest expenses:
Salaries and employee benefits (note 10) 6,580 5,999 5,753
Office occupancy and equipment (note 4) 1,054 1,178 1,147
Professional services 273 219 234
Marketing 214 287 241
Real estate operations expense (income) (510) 65 409
Outside data processing expense (note 4) 480 491 488
Other 1,783 1,860 1,585
-------- -------- --------
Subtotal 9,874 10,099 9,857
Expenses for formation of Warren Real Estate Investment
Corporation 196 -- --
-------- -------- --------
Total noninterest expenses 10,070 10,099 9,857
-------- -------- --------
Income before income taxes 8,291 8,628 10,933
Income tax expense (note 8) 2,827 2,724 3,648
-------- -------- --------
Net income $ 5,464 $ 5,904 $ 7,285
======== ======== ========
Basic earnings per share (note 5) $ 0.74 $ 0.75 $ 0.96
======== ======== ========
Diluted earnings per share (note 5) $ 0.72 $ 0.72 $ 0.91
======== ======== ========
See accompanying notes to consolidated financial statements.
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32
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON SECURITIES
COMPREHENSIVE COMMON PAID-IN RETAINED AVAILABLE FOR TREASURY
INCOME STOCK CAPITAL EARNINGS SALE, NET STOCK TOTAL
------------- ------ ---------- -------- ------------- -------- -----
(Dollars in thousands)
Balance at December 31, 1996 $ 752 $ 33,869 $ 260 $ 738 $ (1,174) $ 34,445
Comprehensive income:
Net income $ 7,285 -- -- 7,285 -- -- 7,285
--------
Other comprehensive income:
Unrealized gain on securities
for sale, net of taxes 587
Less: Reclassification adjustment for
securities gains, net of tax expense $49,
included in net income 91
--------
Total other comprehensive income 678 -- -- 678 -- 678
--------
Comprehensive income $ 7,963
========
Dividends paid -- -- (3,263) -- -- (3,263)
Tax benefit of stock options exercised -- 144 -- -- -- 144
Issuance of 289,060 shares for exercise
of options 28 711 -- -- -- 739
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 780 34,724 4,282 1,416 (1,174) 40,028
Comprehensive income:
Net income $ 5,904 -- -- 5,904 -- -- 5,904
--------
Other comprehensive income:
Unrealized loss on securities
available for sale, net of taxes (739)
Less: Reclassification adjustment for
securities gains, net of tax expense of $66,
included in net income 122
--------
Total other comprehensive income (617) -- -- -- (617) -- (617)
--------
Comprehensive income $ 5,287
========
Purchase of treasury stock (102,523 shares) -- -- -- -- (928) (928)
Dividends paid -- -- (5,670) -- -- (5,670)
Tax benefit of stock options exercised -- 106 -- -- -- 106
Issuance of 286,220 common shares
for exercise options 29 880 -- -- 189 1,098
-------- -------- -------- -------- -------- --------
Balance at December 31, 1998 809 35,710 4,516 799 (1,913) 39,921
Comprehensive income:
Net income $ 5,464 -- -- 5,464 -- -- 5,464
--------
Other comprehensive income:
Unrealized loss on securities
available for sale, net of taxes (806)
Less: Reclassification adjustment for
securities gains, net of tax expense of $66,
included in net income 0
--------
Total other comprehensive income (806) -- -- -- (806) -- (806)
--------
Comprehensive income $ 4,658
========
Purchase of treasury stock (523,400 shares) -- -- -- -- (4,634) (4,634)
Dividends paid -- -- (4,675) -- -- (4,675)
Tax benefit of stock options exercised -- 246 -- -- -- 246
Issuance of 29,920 common shares
for exercise of options -- (115) -- -- 243 128
-------- -------- -------- -------- -------- --------
Balance at December 31, 1999 $ 809 $ 35,841 $ 5,305 $ (7) $ (6,304) $ 35,644
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In thousands)
Net Income $ 5,464 $ 5,904 $ 7,285
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) loan losses 120 (91) (316)
Depreciation and amortization 488 594 592
Deferred income taxes (benefit) 229 (291) (210)
Amortization of premiums, fees and discounts 604 680 420
(Gains) on sale of investment securities (17) (188) (140)
(Gains) on sales of mortgage loans (232) (343) (181)
Write-down of real estate acquired by foreclosure -- 210
(Gains) on sale of real estate acquired by foreclosure (514) (18) (2)
(Increase) decrease in loans held for sale (624) (161) 1,972
(Increase) decrease in accrued interest receivable 190 (13) (130)
Decrease in other assets 83 560 1,697
Increase (decrease) in accrued interest payable (77) (223) 180
Increase (decrease) in other liabilities and escrow deposits 1,424 (65) (650)
-------- -------- --------
Net cash provided by operating activities 7,138 6,345 10,727
-------- -------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale (18,100) (52,957) (55,112)
Proceeds from sales of investment securities available for sale 17 2,796 8,987
Proceeds from maturities of investment securities available for sale 37,953 37,127 38,274
Proceeds from sales of mortgage-backed securities available for sale -- -- 5,721
Proceeds from payments of mortgage-backed securities available for sale 5,982 9,732 8,443
Proceeds from sales of real estate acquired by foreclosure 163 735 574
Net (increase) in loans (22,378) (25,432) (20,352)
Purchases of premises and equipment (535) (813) (773)
-------- -------- --------
Net cash provided by (used in) investing activities 3,102 (28,812) (14,238)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 8,522 21,719 8,927
Proceeds from Federal Home Loan Bank advances -- 2,000 630
Principal payments on Federal Home Loan Bank advances -- -- (2,674)
Net increase (decrease) in other borrowed funds (164) 2,808 43
Dividends paid (4,675) (5,670) (3,263)
Purchases of treasury stock (4,634) (928) --
Stock options exercised 128 1,098 739
-------- -------- --------
Net cash provided by (used in) financing activities (823) 21,027 4,402
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 9,417 (1,440) 891
Cash and cash equivalents at beginning of year 12,039 13,479 12,588
-------- -------- --------
Cash and cash equivalents at end of year $ 21,456 $ 12,039 $ 13,479
======== ======== ========
Cash paid during the year for:
Interest $ 11,880 $ 12,283 $ 11,224
Income taxes $ 2,245 $ 2,733 $ 3,924
Supplemental noncash investing and financing activities:
Foreclosures on real estate $ 101 $ 158 $ 602
Securitization of loans to mortgage-backed securities -- -- $ 1,9O3
See accompanying notes to consolidated financial statements.
33
34
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The accounting and reporting policies of Warren Bancorp, Inc. (the
"Corporation") conform to generally accepted accounting principles and to
general practices within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the balance
sheets and income and expense for the periods. Actual results could differ from
those estimates.
Material estimates that are susceptible to change relate to the
determination of the allowance for loan losses, the valuation of real estate
acquired by foreclosure and the realizability of the deferred tax asset. In
connection with the determination of the allowance for loan losses and the
carrying value of real estate acquired by foreclosure, management obtains
independent appraisals for significant properties as deemed necessary.
A substantial portion of the Corporation's loans are secured by real estate
in markets primarily in Massachusetts. Accordingly, the ultimate collectibility
of a substantial portion of the Corporation's loan portfolio is susceptible to
changing conditions in these markets.
The following is a summary of the more significant accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, Warren Five Cents Savings Bank (the
"Bank"), and the Bank's wholly owned subsidiaries, Warren Real Estate Investment
Corporation, Northbank Realty, Inc., Northbank Financial Corporation, Hannah
Investments, Inc., Warren Securities Corporation II and Peabody Development
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts for 1998 and 1997 have been
reclassified to conform with the 1999 presentation.
LOANS HELD FOR SALE AND SALES OF LOANS
Loans held for sale are stated at the lower of aggregate cost or fair
value. The fair value of loans held for sale is estimated based on outstanding
investor commitments or, in the absence of such commitments, current investor
yield requirements. Net unrealized losses, if any, are provided for in a
valuation allowance by charges to operations.
34
35
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Debt securities that the Corporation has the positive intent and ability to
hold to maturity and non-marketable equity securities are classified as other
investments and reported at amortized cost; debt and equity securities that are
bought and held principally for the purpose of selling in the near term are
classified as trading and reported at fair value, with unrealized gains and
losses included in earnings; and debt and equity securities not classified as
either other or trading are classified as available for sale and reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity, net of income taxes. After
mortgage loans are converted to mortgage-backed securities, they are subject to
these same classification provisions. The Corporation classifies its investment
and mortgage-backed securities into two categories: available for sale and
other; the Corporation has no securities held for trading.
Premium and discounts on investment and mortgage-backed securities are
amortized or accreted into income by use of the effective interest method. If a
decline in fair value below the amortized cost basis of an investment or
mortgage-backed security is judged to be other than temporary, the cost basis of
the investment is written down to fair value as a new cost basis and the amount
of the write-down is included as a charge against earnings. Gains and losses on
the sale of investment and mortgage-backed securities are recognized at the time
of sale on a specific identification basis.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is available for future credit losses
inherent in the loan portfolio. Additions to the allowance are charged to
earnings. Loan losses are charged against the allowance when management believes
that the collectibility of the loan principal is doubtful. Recoveries on loans
previously charged off are credited to the allowance.
The allowance is an amount management believes will be adequate to absorb
loan losses based on evaluations of known and inherent risks in the portfolio,
changes in the nature of the loan portfolio, overall portfolio quality, specific
problem loans, prior loss experience and economic trends that may affect the
borrowers' ability to pay. Impaired loans are analyzed and categorized by level
of credit risk and collectibility in order to determine their related allowance
for loan losses.
Management believes that the allowance for loan losses is adequate, and it
is assisted by an independent credit review consulting firm in making that
determination. Balances in the allowance for loan losses are determined on a
periodic basis by management and the Loan Committee of the Board of Directors
with assistance from the independent credit review consulting firm. Loan loss
allocations are based on the conditions of each loan, whether performing or
nonperforming, including collectibility, collateral adequacy and the general
condition of the borrowers, economic conditions, delinquency statistics, market
area activity, the risk factors associated with each of the various loan
categories and the borrower's adherence to the original terms of the loan.
The associated provision for loan losses is the amount required to bring
the allowance for loan losses to the balance considered necessary by management
at the end of the period after accounting
35
36
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
for the effect of loan charge-offs (which decrease the allowance) and loan-loss
recoveries (which increase the allowance) during the period. In addition,
various regulatory agencies, as part of their examination process, periodically
review the Corporation's allowance for loan losses. Such agencies may require
the Corporation to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
IMPAIRED AND NONACCRUAL LOANS
The Corporation accounts for impaired loans at the present value of the
expected future cash flows discounted at the loans' effective interest rates or
the fair value of collateral for collateral-dependent loans. When the measure of
the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through the allowance for loan losses. Loans are deemed
by the Corporation to be impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect all amounts due
according to the contractual terms of the original loan agreement. Generally,
nonaccruing loans are deemed impaired. Large groups of homogeneous loans, such
as smaller balance residential mortgage and consumer installment loans, are
collectively evaluated for impairment. Typically, the minimum delay in receiving
payments according to the contractual terms of the loan that can occur before a
loan is considered impaired is ninety days.
Nonaccrual loans, which may include impaired loans, are loans on which the
accrual of interest has been discontinued. Accrual of interest income on loans
is discontinued either when a reasonable doubt exists as to the full, timely
collection of principal or interest or when the loans become contractually past
due by ninety days or more, unless they are adequately secured and are in the
process of collection. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period interest
income. Income on such loans is recognized to the extent that cash is received
and where the ultimate collection of principal and interest is probable. Loans
are removed from nonaccrual when they become less than ninety days past due and
when concern no longer exists as to the collectibility of principal or interest
or when they are adequately secured and are in the process of collection.
36
37
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
LOAN FEES AND COSTS
Loan origination fees and certain direct incremental loan origination costs
are deferred and amortized over the life of the related loans as yield
adjustments using primarily the effective interest method. When the loans are
sold or paid off, the unamortized fees and costs are recognized as income or
expense.
BANKING PREMISES AND EQUIPMENT
Banking premises, equipment and leasehold improvements are stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are computed principally on the straight-line method over the estimated useful
lives of the assets or the terms of leases, if shorter. The Corporation
periodically assesses the realizability of its long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Based on its review, the Corporation does not believe that any material
impairment of its long-lived assets has occurred.
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure is comprised of properties acquired
through foreclosure proceedings, acceptance of a deed in lieu of foreclosure or
by taking possession of collateral and is recorded and subsequently carried at
the lower of the carrying value of the loan or the fair value of the property
received, less estimated costs of disposition. Loan losses arising from the
acquisition of such properties are charged against the allowance for loan
losses. Operating expenses and any subsequent write-downs are charged to real
estate operations.
PENSION BENEFITS
The Corporation's policy is to record net periodic pension cost on an
actuarially determined basis.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
37
38
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings.
COMPREHENSIVE INCOME
In accordance with the provisions of SFAS No. 130, Reporting Comprehensive
Income, the "Consolidated Statements of Changes in Stockholders' Equity"
includes a measure called "Comprehensive Income", which includes net income as
well as certain items that are reported separately as other comprehensive
income. Currently, the Corporation's only component of Other Comprehensive
Income is its unrealized gains (losses) on securities available for sale.
FINANCIAL INFORMATION BY BUSINESS SEGMENT
Because the Corporation is managed under distinct operating segments, SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information,
requires disclosure of financial and descriptive information about the
Corporation's operating segments. The Statement defines an operating segment as
a component of an enterprise that engages in business activities that generate
revenue and expense. A segment is further defined as a business component for
which separate financial information is available and whose operating results
are reviewed by the chief operating decision-maker in performance assessment and
resource allocation.
NEW PRONOUNCEMENTS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued and was amended to be effective for the
Corporation January 1, 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value.
38
39
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The statement requires that changes in the derivative's fair value be recognized
unless specific hedge accounting criteria are met. This statement as amended is
effective for fiscal years beginning after June 15, 2000, and earlier adoption
is permitted. Management does not expect adoption of this statement to have a
material effect on the Corporation's financial position, results of operations
or liquidity.
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities at December 31, 1999 and 1998 are
as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(IN THOUSANDS)
1999
- ----
AVAILABLE FOR SALE
Fixed income mutual funds ......................... $ 28,706 $ 42 $ (253) $ 28,495
FNMA mortgage-backed securities ................... 9,738 228 (1) 9,965
GNMA mortgage-backed securities ................... 4,258 -- (175) 4,083
U.S. Government and related
obligations ...................................... 3,006 -- (10) 2,996
Corporate notes ................................... 22,349 -- (48) 22,301
Preferred stock ................................... 7,310 265 (52) 7,523
-------- -------- -------- --------
75,367 535 (539) 75,363
-------- -------- -------- --------
OTHER
Foreign government bonds
held to maturity ................................. 1,000 -- -- 1,000
Stock in Federal Home Loan Bank
of Boston ....................................... 4,110 -- -- 4,110
Stock in Depositors Insurance Fund
Liquidity Fund .................................. 108 -- -- 108
Stock in Savings Bank Life Insurance
Company of Massachusetts ........................ 1,576 240 -- 1,816
-------- -------- -------- --------
6,794 240 -- 7,034
-------- -------- -------- --------
$ 82,161 $ 775 $ (539) $ 82,397
======== ======== ======== ========
39
40
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(IN THOUSANDS)
1998
- ----
AVAILABLE FOR SALE
Fixed income mutual funds .......... $ 28,706 $ 590 $ -- $ 29,296
FNMA mortgage-backed securities .... 14,454 418 (1) 14,871
GNMA mortgage-backed securities .... 5,534 28 (3) 5,559
U.S. Government and related
obligations ....................... 2,510 13 -- 2,523
Corporate notes .................... 43,541 39 (41) 43,539
Preferred stock .................... 7,310 248 (52) 7,506
--------- --------- --------- ---------
102,055 1,336 (97) 103,294
--------- --------- --------- ---------
OTHER
Foreign government bonds
held to maturity .................. 750 -- -- 750
Stock in Federal Home Loan Bank
of Boston ........................ 4,110 -- -- 4,110
Stock in Depositors Insurance Fund
Liquidity Fund ................... 108 -- -- 108
Stock in Savings Bank Life Insurance
Company of Massachusetts ......... 1,576 240 -- 1,816
--------- --------- --------- ---------
6,544 240 -- 6,784
--------- --------- --------- ---------
$ 108,599 $ 1,576 $ (97) $ 110,078
========= ========= ========= =========
In 1997, proceeds from sales of mortgage-backed securities amounted to
$5,721,000 and realized losses on such sales were $98,000. There were no sales
of mortgage-backed securities in 1999 and 1998 and there were no sales of other
types of debt securities in 1999, 1998 and 1997.
Proceeds from the sales of equity securities were zero, $2,796,000 and
$8,987,000 in 1999, 1998 and 1997, respectively. Realized gains on sales of
equity securities were zero, $188,000 and $217,000 in 1999, 1998 and 1997,
respectively. However in 1999, the Corporation received a settlement in the
amount of $17,000 for an investment which was sold in 1994.
There were no realized losses on sales of equity securities in 1999, 1998 or
1997.
40
41
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED)
U.S. Government and related obligations and mortgage-backed securities with
an amortized cost and fair value of $5,946,000 and $6,004,000, respectively, at
December 31, 1999 and $4,256,000 and $4,372,000, respectively, at December 31,
1998 were pledged to secure securities sold under agreements to repurchase.
The following table presents a maturity distribution of the amortized cost
and fair value of the debt securities portfolio as of December 31, 1999.
Adjustable-rate mortgage-backed securities are shown as if the entire balance
came due on the repricing date. Estimates are made of fixed-rate,
mortgage-backed security amortization and prepayments.
AFTER AFTER
ONE FIVE
BUT BUT
WITHIN WITHIN WITHIN AFTER
ONE FIVE TEN TEN
YEAR YEARS YEARS YEARS TOTAL
------ ------ ------ ----- -----
(IN THOUSANDS)
AVAILABLE FOR SALE
- ------------------
Amortized cost ......... $29,386 $ 8,913 $ 1,052 $ -- $39,351
======= ======= ======= ========= =======
Fair value ............. $29,505 $ 8,831 $ 1,009 $ -- $39,345
======= ======= ======= ========= =======
OTHER (HELD TO MATURITY)
- ------------------------
Amortized cost ......... $ -- $ 500 $ 250 $ 250 $ 1,000
======= ======= ======= ========= =======
Fair value ............. $ -- $ 500 $ 250 $ 250 $ 1,000
======= ======= ======= ========= =======
The Bank, as a member of the Federal Home Loan Bank of Boston ("FHLBB"), is
required to invest in $100 par value stock in the amount of one percent of its
outstanding home loans or 1/20th of its outstanding advances from the FHLBB,
whichever is higher. As and when such stock is redeemed, the Bank would receive
from the FHLBB an amount equal to the par value of the stock.
41
42
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(3) LOANS
Loans at December 31 are summarized as follows:
1999 1998
---- ----
(IN THOUSANDS)
Residential mortgage:
Adjustable-rate .......................... $ 48,369 $ 40,895
Fixed-rate ............................... 3,840 4,763
--------- ---------
52,209 45,658
--------- ---------
Commercial mortgage:
Adjustable-rate .......................... 145,516 136,637
Fixed-rate ............................... 21,705 26,517
Construction ............................. 19,590 13,620
--------- ---------
186,811 176,774
--------- ---------
Commercial loans ............................. 29,446 23,726
--------- ---------
Consumer loans:
Home equity .............................. 20,152 17,064
Other .................................... 2,396 3,253
--------- ---------
22,548 20,317
--------- ---------
Total loans .............................. 291,014 266,475
Allowance for loan losses..................... (4,271) (4,023)
--------- ---------
Net loans .......................... $ 286,743 $ 262,452
========= =========
Changes in the allowance for loan losses for the years ended December 31
are as follows:
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Balance at beginning of year........................................... $4,023 $4,066 $4,533
Provision for (recovery of) loan losses charged
(credited) to expense................................................. 120 (91) (316)
Loans charged off...................................................... (60) (98) (608)
Loan recoveries........................................................ 188 146 457
------ ------ ------
Balance at end of year................................................. $4,271 $4,023 $4,066
====== ====== ======
42
43
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(3) LOANS - (CONTINUED)
The allowance for loan losses at December 31, 1999 attributable to $914,000
of impaired loans, all of which is measured using the fair value of collateral
method, is $112,000. The allowance for loan losses at December 31, 1998
attributable to $710,000 of impaired loans, of which $454,000 was measured using
the present value method and $256,000 using the fair value of collateral method,
was $118,000.
At December 31, 1999 the Corporation had net deferred origination costs of
$118,000, reflected as an addition to the appropriate loan categories, and at
December 31, 1998 had $120,000 net deferred loan fees, reflected as a reduction
of the appropriate loan categories.
On January 31, 1997, the Corporation sold its rights to service
approximately $209 million of residential mortgage loans representing over 95%
of the portfolio of loans serviced for others. At December 31, 1999, 1998 and
1997 the Corporation serviced residential loans for investors of approximately
$3,737,000, $3,580,000 and $3,983,000, respectively, which are not reflected in
the accompanying consolidated financial statements because they are not assets
of the Corporation. At December 31, 1999 no formal recourse provisions exist in
connection with such servicing.
Nonaccruing loans amounted to $914,000, $475,000 and $347,000 at December
31, 1999, 1998 and 1997, respectively. Interest income of approximately $47,000,
$48,000 and $21,000 would have been recorded in 1999, 1998 and 1997,
respectively, on these nonaccrual loans if these loans had been on a current
basis in accordance with their original terms. Interest income actually recorded
on these nonaccrual loans amounted to $26,000, $22,000 and $1,000 in 1999, 1998
and 1997, respectively. Of those nonaccruing loans at December 31, 1999, all
were considered impaired compared to none considered impaired at December 31,
1998.
At December 31, 1998, there was $710,000 of additional loans considered
impaired and performing. The Corporation would have recorded additional interest
income of approximately $21,000 had these loans performed under their original
terms. Interest income actually recorded on these loans amounted to $59,000 in
1998. There were no additional loans considered impaired and performing at
December 31, 1999.
During 1999 and 1998, the average recorded investment in impaired loans was
$1,174,000 and $905,000, respectively.
Gains on sales of mortgage loans of $232,000 and $343,000 were realized
during the 1999 and 1998 periods, respectively, from the sale of $23.1 million
and $34.3 million of residential mortgage loans.
The Corporation's lending activities are conducted throughout eastern
Massachusetts with emphasis in Essex County, Massachusetts and contiguous
counties, including those in southern New Hampshire. From time to time loans
will be made outside of this area. The Bank makes single family, condominium and
multi-family residential loans; commercial real estate, commercial construction
and commercial loans; and a variety of consumer loans. Most loans made by the
Bank are collateralized by
43
44
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(3) LOANS - (CONTINUED)
real estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity and real estate values within the
borrower's geographic area. The ability and willingness of commercial real
estate and commercial borrowers to honor their repayment commitments is
generally dependent on the health of the real estate economic sector and the
general economy in the borrower's geographic area.
In the ordinary course of business, the Bank has made loans to executive
officers and directors of the Corporation and its subsidiaries and to affiliates
of the executive officers and directors at substantially the same terms,
including interest and collateral, as those prevailing at the time for
comparable transactions with unrelated borrowers. The aggregate amount of these
loans at December 31, 1999 was $9,181,000. Activity in these loans during the
year ended December 31, 1999 included loan additions of $3,212,000 and loan
repayments of $564,000. The balance of these loans at December 31, 1998 was
$6,533,000.
(4) BANKING PREMISES AND EQUIPMENT
Banking premises and equipment at December 31 are as follows:
1999 1998
---- ----
(IN THOUSANDS)
Land........................................................................... $ 1,186 $ 1,186
Buildings...................................................................... 4,836 4,627
Equipment...................................................................... 4,112 4,543
Leasehold improvements......................................................... 1,261 1,261
------- -------
11,395 11,617
Accumulated depreciation and amortization...................................... (6,344) (6,613)
------- -------
$ 5,051 $ 5,004
======= =======
Depreciation and amortization expense related to the Corporation's premises
and equipment were $488,000, $594,000, and $592,000 in 1999, 1998 and 1997,
respectively.
At December 31, 1999, the Bank is obligated under noncancelable operating
leases for premises and outside data processing for minimum payments in future
periods as follows:
YEAR ENDED DECEMBER 31, MINIMUM PAYMENTS
- ----------------------- ----------------
(IN THOUSANDS)
2000........................................................................... $ 649
2001........................................................................... 649
2002........................................................................... 659
2003........................................................................... 572
2004........................................................................... 196
Thereafter..................................................................... 623
------
$3,348
======
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted
to approximately $125,000, $137,000 and $138,000, respectively. Outside data
processing expense for the years ended December 31, 1999, 1998 and 1997 amounted
to $480,000, $491,000 and $488,000, respectively.
44
45
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(5) EARNINGS PER SHARE
The Corporation follows the provisions of SFAS No. 128, "Earnings Per
Share." The components of basic and diluted EPS for the years ended 1999, 1998
and 1997 are as follows:
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Basic EPS ........ $5,464 $5,904 $7,285 7,419 7,823 7,570 $ 0.74 $ 0.75 $ 0.96
Effect of dilutive
stock options . -- -- -- 195 329 404 0.02 0.03 0.05
------ ------ ------ ------ ------ ------ ------ ------ ------
Diluted EPS ...... $5,464 $5,904 $7,285 7,614 8,152 7,974 $ 0.72 $ 0.72 $ 0.91
====== ====== ====== ====== ====== ====== ====== ====== ======
(6) DEPOSITS
Deposits at December 31 are summarized as follows:
1999 1998
---- ----
(IN THOUSANDS)
Non-interest bearing........................................................... $ 19,019 $ 17,472
--------- --------
Savings deposits:
Regular savings and club accounts.......................................... 99,909 100,918
NOW accounts............................................................... 36,784 40,791
Cash Manager and Passbook Plus accounts.................................... 37,235 34,127
--------- --------
Total savings deposits.................................................. 173,928 175,836
Time deposits................................................................ 162,587 153,704
------- --------
Total deposits.......................................................... $ 355,534 $347,012
========= ========
Contractual maturities of time deposits at December 31, 1999 are as
follows:
(IN THOUSANDS)
Within one year................................................................ $ 125,091
From one to two years.......................................................... 36,031
From two to five years......................................................... 1,465
After five years............................................................... 0
---------
$ 162,587
=========
45
46
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(6) DEPOSITS - (CONTINUED)
The aggregate amount of individual time deposits with a minimum
denomination of $100,000 or more was $28,286,000 and $24,335,000 at December 31,
1999 and 1998, respectively. Interest expense related to such deposits was
approximately $1,392,000 in 1999 and $1,166,000 in 1998 and $1,010,000 in 1997.
(7) BORROWED FUNDS
Borrowed funds at December 31 are summarized as follows:
1999 1998
-------------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Securities sold under agreements
to repurchase maturing in January,
2000 and January, 1999, at December
31, 1999 and 1998, respectively................... $ 4,839 3.00% $ 5,003 3.00%
Advances from the Federal Home Loan
Bank, 3.07% to 6.03% at December 31,
1999 and 1998 maturing through 2011............... 2,671 5.96 2,671 5.96
------- -------
Total borrowed funds.......................... $ 7,510 4.05% $ 7,674 4.03%
======= =======
Mortgage-backed securities, with a total amortized cost of $5,946,000 and
$4,256,000 were pledged as collateral to secure agreements to repurchase at
December 31, 1999 and 1998, respectively. The fair value of the collateral was
$6,004,000 and $4,372,000 at December 31, 1999 and 1998, respectively.
The following table sets forth information for securities sold under
agreement to repurchase for the years ended December 31, 1999, 1998 and 1997
(dollars in thousands):
1999 1998 1997
---- ---- ----
Highest month end balance..................................... $5,567 $5,003 $3,652
Average balance outstanding
during the year............................................ 4,972 3,405 2,282
Average interest rate during the year......................... 3.00% 3.00% 3.00%
46
47
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(7) BORROWED FUNDS - (CONTINUED)
A summary of Federal Home Loan Bank of Boston advances at December 31 by
year of maturity follows (dollars in thousands):
1999 1998
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY IN: AMOUNT RATE AMOUNT RATE
------ -------- ------ --------
2001 $ 14 3.78% $ 14 3.78%
2003 19 3.07 19 3.07
2005 2,000 6.03 2,000 6.03
2009 450 6.00 450 6.00
2011 188 5.54 188 5.54
------ -----
$2,671 5.96% $2,671 5.96%
====== ======
The following table sets forth information for Federal Home Loan Bank
advances for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Highest month end balance......................................... $2,671 $2,671 $2,715
Average balance outstanding during
the year...................................................... 2,692 2,019 989
Average interest rate during the year............................. 6.04% 6.02% 7.01%
In addition to the Federal Home Loan Bank of Boston advances above, the
Corporation has an overnight line of credit with the Federal Home Loan Bank of
Boston in the amount of $15 million, none of which was used at December 31,
1999.
47
48
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(8) INCOME TAXES
The components of income tax expense for the years ended December 31 were
as follows:
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Current:
Federal............................................................ $2,349 $2,584 $3,198
State.............................................................. 249 431 660
------ ------ ------
2,598 3,015 3,858
------ ------ ------
Deferred (prepaid):
Federal............................................................ 167 (215) 133
State.............................................................. 69 (66) (58)
(Decrease) in beginning-of-the-year balance
of valuation allowance for deferred tax assets................. (7) (10) (285)
------ ------- -------
229 (291) (210)
------ ------- ------
$2,827 $2,724 $3,648
====== ====== ======
A reconciliation of income tax expense attributable to operations with
Federal income taxes at the statutory rate of 34% for the years ended December
31, 1999, 1998 and 1997 follows:
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Computed "expected" tax expense at
statutory rate...................................................... $2,819 $2,933 $3,716
Items affecting income tax expense:
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated to
income tax expense............................................... (7) (10) (285)
Dividends received deduction....................................... (107) (116) (134)
State income taxes, net of Federal income
tax benefit, before change in valuation
allowance......................................................... 204 241 384
Other.............................................................. (82) (124) (33)
Tax audit settlement................................................ -- (200) --
------ ------ ------
Income tax expense............................................. $2,827 $2,724 $3,648
====== ====== ======
48
49
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(8) INCOME TAXES - (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below:
1999 1998
---- ----
(IN THOUSANDS)
Deferred tax assets:
Net operating loss and other carryforwards.......................... $ -- $ 11
Allowance for loan losses........................................... 1,874 1,949
Valuation adjustments on real estate owned.......................... -- 131
Valuation adjustments on securities................................. 365 360
Deferred loan fees.................................................. -- 61
Deferred compensation............................................... 147 181
Cash versus accrual adjustments..................................... 158 235
Depreciation of banking premises and equipment...................... 261 107
Other............................................................... 91 88
------ ------
Total gross deferred tax assets.................................. 2,896 3,123
Less valuation allowance...................................... (45) (52)
------ ------
Net deferred tax assets...................................... 2,851 3,071
------ ------
Deferred tax liabilities:
Deferred loan costs................................................. 16 --
Purchase accounting adjustments..................................... 650 668
Accounting for partnership interests................................ 509 509
Unrealized gains on debt and equity securities
available for sale............................................... 3 439
Other............................................................... 68 67
------ ------
Total gross deferred tax liabilities......................... 1,246 1,683
------ ------
Net deferred tax asset....................................... $1,605 $1,388
====== ======
A valuation allowance is provided when it is more likely than not that some
portion of the gross deferred tax asset will not be realized. Management has
established a valuation allowance principally for the state tax effects of the
valuation adjustments on securities.
The Corporation has certain tax bad debt reserves which will not be subject
to recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the tax bad debt reserves continues to be
subject to a provision of the current law that requires recapture
49
50
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(8) INCOME TAXES - (CONTINUED)
in the case of certain excess distributions to shareholders. The tax effect of
the tax bad debt reserves subject to recapture in the case of certain excess
distributions is approximately $885,000.
(9) STOCKHOLDERS' EQUITY
CAPITAL ADEQUACY
The Corporation is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The Federal Reserve Board's ("FRB") leverage capital-to-assets guidelines
require the strongest and most highly rated bank holding companies to maintain a
3.00% ratio of Tier I capital to average consolidated assets. All other bank
holding companies are required to maintain at least 4.00% to 5.00% depending on
how the FRB evaluates their condition. The FRB may require a higher capital
ratio. The FDIC's leverage capital-to-assets ratio guidelines on the Bank are
substantively similar to those adopted by the FRB described above.
The FRB and the FDIC have also imposed risk-based capital requirements on
the Corporation and the Bank, respectively, which give different risk weightings
to assets and to off-balance sheet assets such as loan commitments and loans
sold with recourse. Both the FRB and FDIC guidelines require the Corporation and
the Bank to have a 4.00% Tier I risk-based capital ratio and an 8.00% total
risk-based capital ratio. At December 31, 1999, neither the FRB nor the FDIC
permitted the unrealized gain or loss on marketable securities available for
sale (except net unrealized losses on marketable equity securities) to be used
in their calculations of regulatory capital.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes would cause a change in the Bank's
categorization.
50
51
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(9) STOCKHOLDERS' EQUITY - (CONTINUED)
The Corporation's and the Bank's actual regulatory capital amounts (for
purposes of computing the ratios) and ratios at December 31, 1999 and 1998 are
presented in the following table (dollars in thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY ACTION PROVISIONS
------------------------ ---------------------- -----------------------
REGULATORY CAPITAL REGULATORY CAPITAL REGULATORY CAPITAL
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
- -------------------------------------------------------------------------------------------------------------------
1999
- ------
WARREN BANCORP, INC
Leverage capital $35,651 8.94% $11,960 3.0% N/A N/A
Tier I risk-based capital 35,651 10.54% 13,533 4.0% N/A N/A
Total risk-based capital 39,922 11.80% 27,066 8.0% N/A N/A
WARREN FIVE CENTS SAVINGS BANK
Leverage capital 34,220 8.58% 11,960 3.0% $19,934 5.0%
Tier I risk-based capital 34,220 10.03% 13,643 4.0% 20,464 6.0%
Total risk-based capital 38,483 11.28% 27,285 8.0% 34,107 10.0%
- ------------------------------------------------------------------------------------------------------------------
1998
- ------
WARREN BANCORP, INC
Leverage capital $39,122 10.10% $11,615 3.0% N/A N/A
Tier I risk-based capital 39,122 11.52% 13,579 4.0% N/A N/A
Total risk-based capital 43,145 12.71% 30,974 8.0% N/A N/A
WARREN FIVE CENTS SAVINGS BANK
Leverage capital 35,635 9.20% 11,615 3.0% $19,359 5.0%
Tier I risk-based capital 35,635 10.50% 13,579 4.0% 20,368 6.0%
Total risk-based capital 39,658 11.68% 27,157 8.0% 33,947 10.0%
51
52
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(9) STOCKHOLDERS' EQUITY - (CONTINUED)
PREFERRED STOCK PURCHASE RIGHTS
In April 1999, the Board of Directors declared a dividend distribution of
one Preferred Stock Purchase Right for each outstanding share of the
Corporation's common stock. These rights, which expire in 2009, entitle their
holders to purchase from the Corporation one one-thousandth of a share (a
"unit") of Series B Junior Participating Cumulative Preferred Stock, par value
$0.10 per share, ("preferred stock") at a cash exercise price of $35 per unit,
subject to adjustment. The rights will trade separately from the common stock
and will become exercisable only when a person or group has acquired 15% or more
of the outstanding common stock, upon the commencement by a person or group of a
tender offer that would result in such person or group acquiring 15% or more of
the outstanding common stock, or upon the declaration by the Board of Directors
that any person holding 10% or more of the outstanding stock is an "adverse
person."
In the event a person or group acquires 15% or more of the outstanding
common stock or the Board of Directors declares a person to be an "adverse
person," each holder of a right (except for any such person or group) would be
entitled to receive upon exercise sufficient units of preferred stock to equal a
value of two times the exercise price of the purchase right. In the event the
Corporation is acquired in a merger or other business combination transaction or
if 50% or more of the Corporation's assets or earning power is sold, each holder
of a right (except for any such person or group described above) would receive
upon exercise common stock of the acquiring company with a value equal to two
times the exercise price of the right.
The rights are redeemable by the Board of Directors at a price of $.01 per
right any time before a person or group acquires 15% or more of the outstanding
common stock or the Board of Directors declares a person holding 10% or more of
the outstanding common stock to be an "adverse person."
RETAINED EARNINGS
At the time of the Bank's conversion from mutual to stock form of ownership
in 1986, the Bank established a liquidation account for the benefit of eligible
account holders who continue to maintain their accounts in the Bank after the
Conversion. Liquidation subaccounts totaling $12,340,000 were established for
each such eligible account holder equal to such holder's proportionate share of
total qualifying deposits on February 28, 1986. After the acquisition of Beverly
Savings Bank ("Beverly"), the Bank established a separate liquidation account
for the benefit of eligible account holders of Beverly who continue to maintain
their account after Beverly's conversion from mutual to stock form of ownership
and the subsequent Beverly acquisition, and subaccounts for each such holder
based on such holder's proportionate share of Beverly's total qualifying assets
on April 30, 1986. The balance in the two liquidation accounts at December 31,
1999, the latest measurement date, was $1,496,000 (unaudited). Both liquidation
accounts will be reduced to the extent that eligible account holders have
52
53
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(9) STOCKHOLDERS' EQUITY - (CONTINUED)
reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in his liquidation subaccount. In the event
of a complete liquidation of the Bank, and in only such event, each eligible
account holder will be entitled to receive a distribution from the liquidation
accounts equal to the current adjusted qualifying balance of his or her
subaccount, to the extent of the Bank's assets remaining after payment of all
prior claims.
The Bank may not declare or pay a dividend to the holding company if the
effect thereof would reduce capital below regulatory minimums or otherwise
violate banking regulations.
(10) EMPLOYEE BENEFITS
401(k) SAVINGS PLAN
The Bank provides a 401(k) Savings Plan for the benefit of its employees.
Under this defined-contribution plan, the Corporation contributes 3% of each
eligible employee's W-2 compensation to his or her 401(k) account. In addition,
the Corporation matches employee contributions, up to 8% of the employee's
compensation, at a rate of 25%. The Corporation may also make a profit-sharing
distribution to employees' 401(k) accounts. The plan is administered by a third
party. Contribution rates are subject to change.
The Corporation's contributions to the plan charged to operations were as
follows (in thousands):
1999 1998 1997
---- ---- ----
Employer contribution................................ $128 $138 $136
Employer match....................................... 59 46 58
Profit sharing distribution.......................... 55 -- --
---- ---- ----
$242 $184 $194
==== ==== ====
One of the investment alternatives for the plan's participants is Warren
Bancorp, Inc. common stock. In that regard, the Corporation reserved 270,000
shares of authorized but unissued shares for issuance thereunder.
TERMINATION OF PENSION PLAN
As of October 1, 1997, the Bank terminated its defined-benefit,
non-contributory pension plan administered by the Savings Bank Employees
Retirement Association ("SBERA") . In conjunction with the 401(k) Savings Plan,
the Corporation restructured the pension plan and, effective September 30, 1993,
stopped providing new pension benefits for employee services after that date.
53
54
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(10) EMPLOYEE BENEFITS - (CONTINUED)
Net pension expense for the plan year ended December 31, 1997* includes the
following:
(IN THOUSANDS)
Current period service costs....................................... $ --
Interest costs on projected benefit obligations.................... 154
Return on plan assets.............................................. (366)
Net amortization and deferral...................................... (77)
Provision for Federal excise tax................................... 43
------
Net periodic pension (income) .................................. $ (246)
======
* Through October 1, 1997, the date the plan was terminated.
The key assumptions used in the development of the actuarially determined
pension data for 1997 was a discount rate of 7.50% and an expected long-term
rate of return on plan assets of 8.75%.
To terminate the plan, SBERA made distributions to participants computed
using interest-rate and actuarial assumptions prescribed by the Pension Benefit
Guarantee Corporation. Net proceeds to the Corporation after distributions to
participants were $2,547,000. The Corporation set aside 25% of these proceeds,
or $637,000, into the 401(k) plan for the benefit of current employees to be
distributed into employees' individual 401(k) accounts on January of 1998, 1999
and 2000 as a special profit-sharing distribution. The Corporation also paid a
federal excise tax of $382,000 in conjunction with the termination of the plan.
The gain on termination of pension plan of $538,000 is computed as follows
(in thousands):
Total pension asset after distribution to participants.......................... $2,547
25% setaside for current employees.............................................. (637)
------
Net.................................................................... $1,910
20% federal excise tax.......................................................... (382)
------
Net.................................................................... $1,528
Prepaid pension cost at date of termination..................................... $1,153
Accrued federal excise tax liability at date of termination..................... (173)
------
Net prepaid pension asset.............................................. (980)
Costs associated with termination............................................... (10)
------
Net gain on termination of pension plan................................ $ 538
======
SUPPLEMENTAL RETIREMENT ARRANGEMENT
Effective July 1, 1995, the Bank established a supplemental retirement
benefit arrangement for the former Chief Executive Officer, who currently serves
as a director of the Corporation and has entered into a consulting agreement
with the Corporation. The expense to maintain that arrangement amounted to
$121,000 in 1999, $176,000 in 1998, and $168,000 in 1997. The cost of this
arrangement is being expensed over the term of the consulting agreement, which
ends in May 2000. Included in the accompanying balance sheets are accrued
expenses payable of $199,000, and $241,000 at December 31, 1999 and 1998,
respectively. The arrangement is being partially funded by a life insurance
policy.
54
55
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(10) EMPLOYEE BENEFITS - (CONTINUED)
DIRECTORS' DEFERRED COMPENSATION PLAN
The Corporation has established an unfunded deferred compensation plan for
its directors who are considered non-employees of the Corporation. Any
non-employee director may elect to defer earned fees to future years and earn
interest on the unfunded balance which is based on a comparable investment term
and rate of interest. This election may be terminated at the written request of
the director at any time. The deferred compensation expense attributed to the
directors for the years ended December 31, 1999, 1998 and 1997 totaled $32,000,
$44,000 and $40,000, respectively, and the accrued expense payable included in
the accompanying balance sheets for December 31, 1999 and 1998 were $158,000 and
$196,000, respectively.
STOCK OPTION PLANS
The Corporation instituted four stock option plans, one each in 1986, 1991,
1995 and 1998 (the "Option Plans"), for the benefit of officers and directors
and reserved 600,000 shares (adjusted for two-for-one common stock split) of
authorized but unissued common stock for each plan for issuance thereunder. The
terms of the Option Plans are similar and provide for options to be granted at
the fair market value of the common stock on the date of grant. Options granted
expire from seven to ten years after the date of grant.
As permitted under SFAS No. 123, the Corporation continues to apply APB
Opinion No. 25 and related interpretations in accounting for the Option Plans;
therefore, no compensation cost has been recognized.
Under SFAS No. 123, the Corporation's net income and earnings per share
would have been reduced to the pro-forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net income:
As reported........ $5,464,000 $5,904,000 $7,285,000
Pro-forma.......... $5,106,000 $5,272,000 $7,013,000
Basic earnings per share:
As reported......... $0.74 $0.75 $0.96
Pro-forma........... $0.69 $0.67 $0.93
Diluted earnings per share:
As reported......... $0.72 $0.72 $0.91
Pro-forma........... $0.67 $0.65 $0.88
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
of 4.88%, 2.80% and 3.72%; expected volatility of 59%, 44% and 34%; risk-free
interest rates of 5.7%, 5.6% and 6.6%; and expected lives of five years for 1999
and six years for 1998 and 1997. The weighted average grant-date fair value per
share of stock options issued in 1999, 1998 and 1997 were $3.39, $5.47 and
$2.27, respectively.
55
56
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(10) EMPLOYEE BENEFITS - (CONTINUED)
Changes in options outstanding during 1999, 1998 and 1997 were as follows:
AVERAGE
EXERCISE
EXERCISE PRICE PRICE PER
SHARES RANGE PER SHARE SHARE
------ --------------- ---------
Outstanding December 31, 1996 1,033,350 $0.50 to $7.5625 $ 3.75
(564,350 shares exercisable)
Granted during 1997 205,000 $7.5625 to $7.875 $ 7.87
Exercised during 1997 (289,060) $0.50 to $6.1875 $ 2.55
Canceled during 1997 (11,080) $4.00 to $7.875 $ 5.47
---------
Outstanding, December 31, 1997 938,210 $0.50 to $7.875 $ 5.00
(564,350 shares exercisable)
Granted during 1998 202,500 $11.875 to $14.375 $ 12.81
Exercised during 1998 (317,020) $0.50 to $7.875 $ 3.46
Canceled during 1998 (35,440) $4.00 to $12.375 $ 6.48
---------
Outstanding, December 31, 1998 788,250 $3.3125 to $14.375 $ 7.50
(427,670 shares exercisable)
Granted during 1999 179,000 $8.000 to $9.000 $ 8.21
Exercised during 1999 (29,920) $3.3125 to $7.875 $ 4.25
Canceled during 1999 (28,560) $4.00 to $12.375 $ 9.00
---------
Outstanding, December 31, 1999 908,770 $3.3125 to $14.375 $ 7.70
=========
The following table summarizes information about the options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
------- ------ ----------- -------- ------ --------
$ 0 - $ 5 218,210 4.50 years $3.90 218,210 $3.90
5 - 10 508,460 6.99 7.49 267,360 7.15
10 - 15 182,100 5.64 12.84 72,840 12.84
------- -------
Total 908,770 6.12 7.70 558,410 6.62
======= =======
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations of interest rates.
These financial instruments include commitments to originate loans, unused lines
of credit, standby letters of credit, recourse arrangements on sold assets and
forward
56
57
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES - (CONTINUED)
commitments to sell loans. The financial instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional amounts
of these instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments, standby
letters of credit and recourse arrangements is represented by the contractual
amount of these instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. For forward commitments to sell loans, the contract or notional
amounts do not represent exposure to credit loss. The Corporation controls the
credit risk on its forward commitments through credit approvals, limits and
monitoring procedures.
Financial instruments with off-balance sheet risk at December 31 are as
follows:
CONTRACT
AMOUNT
--------
(IN THOUSANDS)
1999 1998
---- ----
Financial Instruments Whose Contract Amounts Represent
Credit Risk:
Commitments to originate loans....................................................... $16,573 $21,682
Unused lines of credit............................................................... 36,551 32,992
Standby letters of credit............................................................ 1,695 1,809
Unadvanced portions of construction loans............................................ 17,625 12,958
Loans sold with recourse............................................................. 962 1,439
Financial Instruments Whose Contract Amounts
Exceed the Amount of Credit Risk:
Forward commitments to sell loans.................................................... $ 3,294 $3,352
Commitments to originate loans, unused lines of credit, and unadvanced
portions of construction loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower. Collateral held varies but may include single family houses,
inventory, property, plant and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. These guarantees are
primarily issued to support public and private borrowing arrangements, bond
financing, and similar transactions. The credit risk
57
58
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES - (CONTINUED)
involved in issuing letters of credit is essentially the same as that in
extending loan facilities to customers.
Forward commitments to sell loans are contracts which the Corporation
enters into for the purpose of reducing the interest rate risk associated with
originating loans for sale. In order to fulfill a forward commitment, the
Corporation typically receives cash to be exchanged for the loans at a specified
price at a future date agreed to by both parties. Risk may arise from the
possible inability of the Corporation to deliver the loans specified on the
commitment. Unrealized gains and losses on contracts used to hedge the
Corporation's closed loans and pipeline of loans expected to close are
considered in determining the lower of cost or market value of loans held for
sale.
A portion of the Bank's loans were sold with recourse in the event of
default by the borrower. These transactions were recorded as a sale of assets
for financial reporting purposes.
As a nonmember of the Federal Reserve System, the Corporation is required
to maintain certain reserves of vault cash and/or deposits with the Federal
Reserve Bank of Boston. The amount of this reserve requirement included in cash
and due from banks was $2.6 million at December 31, 1999.
There are no legal claims against the Corporation arising in the normal
course of business at December 31, 1999.
(12) WARREN BANCORP, INC. (PARENT COMPANY ONLY)
The condensed information of Warren Bancorp, Inc. is as follows:
BALANCE SHEETS: AT DECEMBER 31,
---------------
1999 1998
---- ----
(IN THOUSANDS)
ASSETS
Cash ....................................................... $ 1,475 $ 3,599
Investment in subsidiary ................................... 34,219 36,434
Other assets ............................................... -- --
------- -------
Total assets .......................................... $35,694 $40,033
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses ........................................ $ 50 $ 112
------- -------
Total liabilities ................................... 50 112
Stockholders' equity ....................................... 35,644 39,921
------- -------
Total liabilities and stockholders' equity........... $35,694 $40,033
======= =======
58
59
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(12) WARREN BANCORP, INC. (PARENT COMPANY ONLY) - (CONTINUED)
STATEMENTS OF OPERATIONS: YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Income:
Dividend income from subsidiary ......................... $ 7,066 $ 3,900 $ 6,296
Interest ................................................ 105 210 13
Management fees ......................................... 111 196 81
------- ------- -------
Total operating income ........................... 7,282 4,306 6,390
Expenses:
Other expenses ......................................... (111) (196) (81)
Income tax expense ..................................... (52) (81) (21)
Equity in undistributed net income of subsidiary............ (1,655) 1,875 997
------- ------- -------
Net income ................................................. $ 5,464 $ 5,904 $ 7,285
======= ======= =======
The parent-company-only statements of changes in stockholders' equity are
identical to the consolidated statement of changes in stockholders' equity for
the three-year period ended December 31, 1999 and therefore are not reprinted
here.
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income ................................................ $ 5,464 $ 5,904 $ 7,285
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Bank
subsidiary .......................................... 1,655 (1,875) (997)
Decrease in other assets ............................... -- 101 14
Increase (decrease) in liabilities ..................... (62) (44) 4
------- ------- -------
Net cash provided by operating activities............ 7,057 4,086 6,306
------- ------- -------
Cash flows from financing activities:
Dividends paid ............................................ (4,675) (5,670) (3,263)
Purchase of treasury stock ................................ (4,634) (928) --
Stock options exercised ................................... 128 1,098 739
------- ------- -------
Net cash (used in) financing activities ............ (9,181) (5,500) (2,524)
------- ------- -------
(Decrease) increase in cash and cash equivalents ............. (2,124) (1,414) 3,782
Cash and cash equivalents at beginning of year ............... 3,599 5,013 1,231
------- ------- -------
Cash and cash equivalents at end of year ..................... $ 1,475 $ 3,599 $ 5,013
======= ======= =======
59
60
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED 1999
-----------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
-------- --------- ---- -----
(TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA)
Interest and dividend income .................... $ 7,513 $ 7,197 $ 7,168 $ 7,109
Interest expense ................................ 3,026 2,949 2,874 2,954
------- ------- ------- -------
Net interest income .......................... 4,487 4,248 4,294 4,155
Provision for (recovery of) loan losses.......... 51 36 36 (3)
------- ------- ------- -------
Net interest income after provision
for loan losses ............................ 4,436 4,212 4,258 4,158
Non-interest income ............................. 400 301 311 285
Non-interest expense (1) ....................... 2,489 2,658 2,521 2,402
------- ------- ------- -------
Income before income taxes ................... 2,347 1,855 2,048 2,041
Income tax expense .............................. 799 593 715 720
------- ------- ------- -------
Net income ............................ $ 1,548 $ 1,262 $ 1,333 $ 1,321
======= ======= ======= =======
Basic earnings per share: ....................... $ 0.21 $ 0.17 $ 0.18 $ 0.17
======= ======= ======= =======
Diluted earnings per share: ..................... $ 0.21 $ 0.17 $ 0.18 $ 0.17
======= ======= ======= =======
(1) Includes expenses for formation of Warren Real Estate Investment
Corporation of $87,000 and $109,000 in the three months ended September 30,
1999 and December 31, 1999, respectively, and gain on sale of real estate
acquired by foreclosure of $439,000 in the three months ended December 31,
1999.
60
61
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - (CONTINUED)
THREE MONTHS ENDED 1998
-----------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
-------- --------- ---- -----
(TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA)
Interest and dividend income .................... $ 7,329 $ 7,344 $ 7,338 $ 7,242
Interest expense ................................ 3,117 3,093 2,941 2,909
------- ------- ------- -------
Net interest income .......................... 4,212 4,251 4,397 4,333
(Recovery of) loan losses ....................... (1) (22) (50) (18)
------- ------- ------- -------
Net interest income after provision
for loan losses ............................ 4,213 4,273 4,447 4,351
Non-interest income ............................. 365 330 493 255
Non-interest expense ............................ 2,769 2,483 2,484 2,363
------- ------- ------- -------
Income before income taxes ................... 1,809 2,120 2,456 2,243
Income tax expense (2) .......................... 397 725 837 765
------- ------- ------- -------
Net income ............................ $ 1,412 $ 1,395 $ 1,619 $ 1,478
======= ======= ======= =======
Basic earnings per share: ....................... $ 0.18 $ 0.18 $ 0.21 $ 0.19
======= ======= ======= =======
Diluted earnings per share: ..................... $ 0.17 $ 0.17 $ 0.20 $ 0.18
======= ======= ======= =======
(2) Includes income tax benefit of $200,000 for the three months ended December
31, 1998.
Basic and diluted earnings per share may not aggregate to annual amounts due to
changes in average common shares and common-equivalent shares outstanding during
the year and rounding.
61
62
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation estimates the fair value of its financial instruments at a
discrete point in time based on relevant market information and information
about the financial instruments. Because no active market exists for a portion
of those financial instruments, fair value estimates are based on judgment
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
CASH AND DUE FROM BANKS, ACCRUED INTEREST RECEIVABLE, ACCRUED INTEREST PAYABLE
AND OTHER BORROWED FUNDS
Cash and due from banks, accrued interest receivable, accrued interest
payable, and other borrowed funds are short-term in nature and are not subject
to material interest rate changes which would result in a material difference
between fair value and book value. In addition, an adjustment to fair value for
credit risk is not considered necessary because of the current financial status
of the various counterparties. The book value of these financial instruments is
representative of their fair value.
INVESTMENT SECURITIES
U.S. Treasury and Government Agency securities, mortgage-backed securities,
money market funds and overnight investments, fixed income mutual funds and
common and preferred stock are actively traded in a secondary market. Published
investment securities market values are used as fair value for most of these
securities. Refer to Note 2 for the fair value of these securities. Stock in the
Federal Home Loan Bank and the Depositors Insurance Fund Liquidity Fund are not
traded in a secondary market. Based upon the characteristics of these
securities, however, book value is a reasonable estimate of fair value. The fair
value of stock in SBLI is based upon its most recent appraisal.
LOANS
Fair value of loans is estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as residential
mortgage, commercial real estate, commercial, and consumer.
The fair value of fixed-rate residential mortgage loans is primarily based
upon secondary market rates for mortgage-backed securities consisting of
mortgages similar in nature to the loans included in the Bank's residential
mortgage loan portfolio. The fair value of all other types of loans is estimated
by discounting contractual cash flows using estimated market discount rates
which reflect the interest rate and credit risk inherent in the loans. The
discount rate used in the fair value estimation reflects rates that are
available to customers who meet the Bank's underwriting standards.
62
63
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
Management has made estimates of fair value of loans that it believes are
reasonable. However, because there is no market for many of the types of loans,
management has no basis to determine whether the fair value presented would be
indicative of the value negotiated in an actual sale.
DEPOSIT LIABILITIES AND ESCROW DEPOSITS OF BORROWERS
The fair value of deposits with no stated maturity such as savings
deposits, non-interest deposits and escrow deposits of borrowers is equal to the
book value of these accounts. The fair value of time deposits (including
retirement time deposits) is based upon the discounted value of contractual cash
flows. The discount rate has been estimated using the rates offered for deposits
of a similar remaining maturity as of December 31, 1999 and 1998. Early
withdrawal assumptions, based on the Bank's experience, do not materially affect
the estimation of fair value.
FEDERAL HOME LOAN BANK ADVANCES
The fair value of Federal Home Loan Bank advances is based upon the
discounted value of contractual cash flows. The discount rate is estimated using
the rates for advances of a similar remaining maturity as of December 31, 1999
and 1998.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the Corporation's commitments to extend credit is
estimated using fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties'
credit standing. The fair value of the Corporation's commitments to sell loans
is based on current market prices. At December 31, 1999 and 1998, management has
estimated the fair values of these financial instruments to be immaterial.
63
64
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows (in thousands):
1999 1998
---- ----
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
Financial assets:
Cash and due from banks ........ $ 9,251 $ 9,251 $ 7,497 $ 7,497
Money market funds and overnight
investments ................. 12,205 12,205 4,542 4,542
Investment securities .......... 75,363 75,363 103,294 103,294
Loans held for sale ............ 1,816 1,829 1,192 1,192
Loans, net ..................... 286,743 281,782 262,452 263,527
Other investments .............. 6,794 7,034 6,544 6,784
Financial liabilities:
Non-time deposits .............. 192,947 192,947 193,308 193,308
Time deposits .................. 162,587 161,725 153,704 154,770
FHLB borrowings ................ 2,671 2,564 2,671 2,698
Repurchase agreements .......... 4,839 4,839 5,003 5,003
(15) BUSINESS SEGMENTS
For internal reporting, planning and business purposes, the Corporation
segments its operations into distinct business groups. An individual business
group's profit contribution to the Corporation as a whole is determined based
upon the Corporation's profitability reporting system which assigns capital and
other balance sheet items and income statement items to each of the business
groups. This segmentation mirrors the Corporation's organizational structure.
Management accounting policies are in place for assigning revenues and expenses
that are not directly incurred by the business groups, such as overhead, the
results of asset allocations, and transfer revenues and expenses. Accordingly,
the Corporation's business-segment operating results will differ with other
similar information published by other financial institutions. In addition,
management accounting concepts are periodically refined and results may change
to reflect these refinements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting operating segments of a
business enterprise. The rules establish standards for public companies relating
to the reporting of financial and descriptive information about their operating
segments in financial statements. Operating segments are components of an
enterprise which are evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance. The
Corporation's chief operating decision maker is the President and Chief
Executive Officer of the Corporation. SFAS No. 131 has no effect on the
Corporation's primary financial statements, but does result in the disclosure of
segment information contained herein.
64
65
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(15) BUSINESS SEGMENTS - (CONTINUED)
The Corporation has identified its reportable operating business segments
as the Corporate Banking Business and the Personal Banking Business. A
description of each reportable business segment is discussed below:
CORPORATE BANKING
The Corporate Banking Business provides services to business customers in
the Corporation's market area. These services include, but are not limited to,
commercial real estate and construction loans, asset-based financing and cash
management/deposit services. It services all loans in its business.
PERSONAL BANKING
The Personal Banking Business provides services to consumers in the
Corporation's market area through its branch and ATM network. These services
include, but are not limited to, home equity loans, installment loans, safe
deposit boxes and an array of deposit services. This business purchases
adjustable-rate mortgage loans, home equity loans and installment loans from
another business group and services all loans in its business.
Non-reportable operating segments of the Corporation's operations that do
not meet the qualitative and quantitative thresholds requiring disclosure are
included in the Other category in the disclosure of business segments below.
Revenues in these segments consist mainly of interest income on investments and
gains on sales of mortgage loans and securities.
65
66
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(15) BUSINESS SEGMENTS - (CONTINUED)
Specific reportable segment information as of and for the years ended
December 31, 1999 and 1998 is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1999
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
Interest income-external $ 19,076 $ 9,682 $ 229 $ 28,987
Interest income-internal -- 8,963 45 $ (9,008) --
Interest expense-external 1,338 10,367 98 11,803
Interest expense-internal 8,963 -- 45 (9,008) --
Fee and other income 168 807 322 1,297
Income tax expense
(benefit) 2,973 1,233 (1,379) 2,827
Net income (loss) 4,459 2,512 (1,507) 5,464
Total assets 237,600 156,600 8,000 402,200
Total loans 216,200 74,800 -- 291,000
Total deposits 39,700 313,700 2,100 355,500
66
67
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
(15) BUSINESS SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
Interest income-external $ 18,029 $ 10,756 $ 468 $ 29,253
Interest income-internal -- 8,746 12 $ (8,758) --
Interest expense-external 1,037 10,923 100 12,060
Interest expense-internal 8,454 761 (457) (8,758) --
Fee and other income 171 763 509 1,443
Income tax expense
(benefit) 2,569 787 (632) 2,724
Net income 3,848 1,939 117 5,904
Total assets 221,900 162,500 12,700 397,100
Total loans 200,400 66,100 1,200 267,700
Total deposits 37,300 307,700 2,000 347,000
67
68
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. Included in Item 8.
(a) (2) Exhibits
3.(i) (A) -- Articles of Organization of Warren Bancorp, Inc. (5)
3.(i) (B) -- Certificate of Vote of Directors Establishing a Class of Stock of Warren Bancorp, Inc. classifying
and designating the Series B Junior Participating Cumulative Preferred Stock. (9)
3.(ii) -- By-laws of Warren Bancorp, Inc., (5)
4.1 -- Form of Stock Certificate of Warren Bancorp, Inc. (6)
4.2 -- Shareholder Rights Agreement, dated as of April 21, 1999, between Warren Bancorp, Inc. and
Registrar and Transfer Company, as Rights Agent (9)
10.1 -- Warren Bancorp, Inc. 1986 Incentive and Nonqualified Stock Option Plan, as amended. (3) *
10.2 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings
Bank and Paul M. Peduto. (2) *
10.3 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings
Bank and Leo C. Donahue. (2) *
10.4 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Paul M. Peduto. (10) *
10.5 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Leo C. Donahue, Jr. (10) *
10.6 -- Beverly Savings Bank 1986 Incentive and Nonqualified Stock Option Plan, as amended. (1) *
10.7 -- Beverly Savings Bank 1986 Nonemployees Nonqualified Stock Option Plan, as amended (1) *
10.8 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings
Bank and John R. Putney. (2) *
10.9 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and John R. Putney. (10) *
10.10 -- Warren Bancorp, Inc. 1991 Incentive and Nonqualified Stock Option Plan, as amended. (1) *
10.11 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Mark J. Terry (10) *
10.12 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings
Bank and Mark J. Terry. (7) *
10.13 -- Warren Bancorp, Inc. 1995 Incentive and Nonqualified Stock Option Plan (4) *
10.14 -- Executive Supplemental Retirement Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and George W. Phillips. (6) *
10.15 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and George W. Phillips (6) *
10.16 -- Employment Agreement between Warren Five Cents Savings Bank and John R. Putney (7) *
10.17 -- Consulting Agreement between Warren Bancorp, Inc. and George W. Phillips (7) *
10.18 -- Warren Bancorp, Inc. 1998 Incentive and Nonqualified Stock Option Plan (8) *
21.1 -- List of Subsidiaries of Warren Bancorp, Inc. (10)
23.1 -- Consent of Independent Public Accountants. (10)
27.1 -- Financial Data Schedule - 1999 (10)
(b) Reports on Form 8-K. None.
- -----------------
(1) Previously filed as an exhibit to the Corporation's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on June 13,
1995 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K with the Securities and Exchange Commission on March 31, 1990 and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1991
and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registration Statement on Form S-8
filed with the Securities and Exchange Commission on May 3, 1995 and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Corporation's Current Report on Form
8-K filed with the Securities and Exchange Commission on May 9, 1995 and
incorporated herein by reference.
(6) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1996
and incorporated herein by reference.
(7) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1998
and incorporated herein by reference.
(8) Previously filed as an exhibit to the Corporation's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on June 11,
1998 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Corporation's Current Report on Form
8-K filed with the Securities and Exchange Commission on April 26, 1999 and
incorporated herein by reference.
(10) Filed herewith.
* Management contract or compensatory plan or arrangement required to
be filed or incorporated by reference as an exhibit to this Form 10-K
pursuant to Item 14(c) of Form 10-K.
68
69
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly created this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Peabody, Commonwealth of Massachusetts, on March 15, 2000.
WARREN BANCORP, INC.
By: /s/ Stephen G. Kasnet
---------------------------
Stephen G. Kasnet
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ John R. Putney President and Chief Executive Officer; March 15, 2000
- ------------------------------- Director (Principal Executive Officer)
JOHN R. PUTNEY
/s/ Paul M. Peduto Treasurer; Director (Principal Financial Officer March 15, 2000
- ------------------------------- and Principal Accounting Officer)
PAUL M. PEDUTO
/s/ Peter V. Bent Director March 15, 2000
- -------------------------------
PETER V. BENT
/s/ Stephen J. Connolly Director March 15, 2000
- -------------------------------
STEPHEN J. CONNOLLY, IV
Director March , 2000
- -------------------------------
FRANCIS L. CONWAY
Director March , 2000
- -------------------------------
PAUL J. CURTIN
/s/ Robert R. Fanning, Jr. Director March 15, 2000
- -------------------------------
ROBERT R. FANNING, JR.
/s/ Arthur E. Holden Director March 15, 2000
- -------------------------------
ARTHUR E. HOLDEN
/s/ Stephen R. Howe Director March 15, 2000
- -------------------------------
STEPHEN R. HOWE
/s/ John C. Jeffers Director March 15, 2000
- -------------------------------
JOHN C. JEFFERS
/s/ Stephen G. Kasnet Director March 15, 2000
- -------------------------------
STEPHEN G. KASNET
/s/ Linda Lerner Director March 15, 2000
- -------------------------------
LINDA LERNER
/s/ Arthur E. McCarthy Director March 15, 2000
- -------------------------------
ARTHUR E. MCCARTHY
/s/ Arthur J. Pappathanasi Director March 15, 2000
- -------------------------------
ARTHUR J. PAPPATHANASI
/s/ George W. Phillips Director March 15, 2000
- -------------------------------
GEORGE W. PHILLIPS
/s/ John D. Smidt Director March 15, 2000
- -------------------------------
JOHN D. SMIDT
/s/ John H. Womack Director March 15, 2000
- -------------------------------
JOHN H. WOMACK
69
70
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders of Warren Bancorp, Inc. will be held at the
King's Grant Inn, Route 128, Danvers, Massachusetts, on Wednesday, May 3, 2000,
at 10:00 a.m. A formal notice of the meeting, together with a proxy statement
and proxy form, is being mailed to shareholders with this annual report.
- --------------------------------------------------------------------------------
FORM 10-K AND OTHER REPORTS
Additional copies of this Annual Report to Shareholders, which contains the
Corporation's annual report to the Securities and Exchange Commission on Form
10-K (without exhibits), a copy of the exhibits to the Annual Report on Form
10-K and copies of the quarterly reports may be obtained without charge by
writing: Warren Bancorp, Inc., Shareholder Relations, 10 Main Street, Post
Office Box 6159, Peabody, Massachusetts 01960.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
INDEPENDENT PUBLIC
SHAREHOLDER RELATIONS TRANSFER AGENT & REGISTRAR ACCOUNTANTS
Paul M. Peduto, Treasurer Registrar and Transfer Company Arthur Andersen LLP
Warren Bancorp, Inc. 10 Commerce Drive 225 Franklin Street
10 Main Street Cranford, NJ 07016-3572 Boston, MA
Post Office Box 6159 02110-2812
Peabody, Massachusetts
01960
(978) 531-7400
- --------------------------------------------------------------------------------
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded over the counter and is quoted by the
Nasdaq National Market under the symbol WRNB. The following table sets forth
the high and low closing prices for the common stock of the Corporation during
the two-year period ended December 31, 1999. All prices set forth below are
based upon information provided by Nasdaq Stock Market.
COMMON STOCK
------------
HIGH LOW
---- ---
1999 4th Quarter.............. $ 9.50 $ 7.00
3rd Quarter.............. 9.81 8.25
2nd Quarter.............. 9.38 7.00
1st Quarter.............. 9.00 7.00
1998 4th Quarter.............. $10.00 $ 8.75
3rd Quarter.............. 13.38 8.75
2nd Quarter.............. 14.38 12.00
1st Quarter.............. 12.63 10.50
As of March 1, 2000, the Corporation had approximately 650 stockholders of
record who held 7.312,051 shares of common stock. The number of shareholders
does not reflect the number of persons or entities who hold their common stock
in nominee names through various brokerage firms or other entities.
70
71
SHAREHOLDER INFORMATION - (CONTINUED)
- --------------------------------------------------------------------------------
Dividends were paid by the Corporation during 1999 and 1998 as follows and
those prior to the third quarter of 1998 have been retroactively restated to
reflect the 2-for-1 stock split which occurred on May 12, 1998:
PAYMENT DIVIDEND
DATE PER SHARE
---- ---------
1999 4th Quarter............ November 15, 1999 $.100
3rd Quarter............ August 16, 1999 .100
2nd Quarter*........... May 17, 1999 .340
1st Quarter............ February 4, 1999 .090
* Includes special dividend of $.24 per share.
1998 4th Quarter............ November 16, 1998 $.090
3rd Quarter............ August 10, 1998 .090
2nd Quarter**.......... May 11, 1998 .475
1st Quarter............ February 17, 1998 .065
** Includes special dividend of $.385 per share.
71
72
CORPORATE INFORMATION
WARREN BANCORP, INC. AND WARREN FIVE CENTS SAVINGS BANK
AS OF MARCH 9, 2000
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DIRECTORS PRINCIPAL OFFICERS
PETER V. BENT (2)(6) LINDA LERNER (2)(4)(6) WARREN BANCORP, INC.
Owner/Manager, Retired
Brown's Yacht Yard STEPHEN G. KASNET
ARTHUR E. MCCARTHY (1)(3) Chairman of the Board
STEPHEN J. CONNOLLY, IV (3)(4) Vice President &
President, Managing Director, JOHN R. PUTNEY
Connolly Brothers, Inc. Tucker Anthony, Inc. President and
Construction Company Chief Executive Officer
ARTHUR J. PAPPATHANASI (2)(6)
FRANCIS CONWAY (2) President & PAUL M. PEDUTO
President & Treasurer, Chief Executive Officer, Treasurer
F.L. Conway & Sons, Inc. West Lynn Creamery, Inc. and
Richdale Dairy Stores, Inc. SUSAN G. OUELLETTE
PAUL J. CURTIN (1)(4) Clerk
Certified Public Accountant PAUL M. PEDUTO
Treasurer, WARREN FIVE CENTS SAVINGS BANK
ROBERT R. FANNING, JR. (1)(2)(6) Warren Bancorp, Inc., and
President & Executive Vice President, STEPHEN G. KASNET
Chief Executive Officer, Chief Financial Officer and Treasurer, Chairman of the Board
Northeast Health Warren Five Cents Savings Bank
Systems, Inc. and JOHN R. PUTNEY
Beverly Hospital Corporation GEORGE W. PHILLIPS (5)(6) President and
Retired Chief Executive Officer
ARTHUR E. HOLDEN (1)(3)
President, JOHN R. PUTNEY PAUL M. PEDUTO
Holden Oil, Inc. President & Executive Vice President,
Chief Executive Officer, Chief Financial Officer and Treasurer
STEPHEN R. HOWE (2)(4)(6) Warren Bancorp, Inc. and
Certified Public Accountant Warren Five Cents Savings Bank LEO C. DONAHUE
Senior Vice President for
JOHN C. JEFFERS (2)(4) JOHN D. SMIDT (4) Personal Banking
Vice President, Jeffers Millwork President & Treasurer,
John Smidt Co., Inc. MARK J. TERRY
STEPHEN G. KASNET (1)(3)(4) Senior Vice President for
President, JOHN H. WOMACK (4) Corporate Banking and
Pioneer Global Investments President, Senior Lending Officer
Chairman of the Board, TJM Enterprise, Inc.
Warren Bancorp, Inc. and SUSAN G. OUELLETTE
Warren Five Cents Savings Bank Clerk
(1) Executive Committee
(2) Finance, Audit and Compliance Committee
(3) Nominating Committee
(4) Loan Committee (Warren Five Cents Savings Bank)
(5) Director of Warren Bancorp, Inc. only
(6) Strategic Planning Committee
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WARREN FIVE CENTS SAVINGS BANK
AS OF MARCH 9, 2000
VICE PRESIDENTS OTHER OFFICERS
PATRICIA A. ACQUAVIVA WILLIAM H. ANDERSON
FELIX AMSLER PATRICIA M. F. BATES
JEFFREY O. BREWER DIANE M. CORDARO
MEGAN T. CARLTON STEPHEN E. FERULLO
DAVID S. COLLINS DIANE M. GOKAS
KEVIN M. DEAN JANIS M. HASERLAT
KERIN E. DEEDY LINDA A. PALMER
KENNETH R. DILLON STEVEN C. PETTINGILL
KAREN A. GRINDROD ELAINE M. WALKER
NICHOLAS P. HELIDES
CYNTHIA J. HICKEY
BARBARA L. KELLY
SUZANNA R. LEVINE
WILLIAM F. LINDQUIST, III
DONALD R. LONNBERG
MITCHELL MARCUS
ARTHUR T. McCARTHY
MARK S. PANALL
FRANK P. ROMANO
ASSISTANT VICE PRESIDENTS
CAROL M. BRUNTON
RUTH M. DAY
LAURA J. GAITO
CYNTHIA J. GOLDSMITH
WILLIAM J. KELL
MARIA C. LIMA
ELEANOR M. MANNING
SHERRY M. O'CONNELL
MARGARET M. PEDRO
JOAN C. WILLIAMS
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