1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or the quarterly period ended September 30, 2000 or ------------------ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange 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) MASSACHUSETTS 04-3024165 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 MAIN STREET, PEABODY, MASSACHUSETTS 01960 (Address of principal executive offices) (Zip Code) (978) 531-7400 (Registrant's telephone number, including area code) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 6, 2000 - --------------------------------------- ----------------------------------- Common Stock, par value $.10 per share 7,337,611 2 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, DECEMBER 31, 2000 1999 --------- --------- ASSETS Cash and due from banks (non-interest bearing) $ 15,035 $ 9,251 Money market funds and overnight investments 7,332 12,205 --------- --------- Cash and cash equivalents 22,367 21,456 Investment and mortgage-backed securities available for sale (amortized cost of $62,627 at September 30, 2000 and $75,367 at December 31, 1999) 62,484 75,363 Other investments (fair value of $7,284 at September 30, 2000 and $7,034 at December 31, 1999) 7,044 6,794 Loans held for sale 1,358 1,816 Loans 331,517 291,014 Allowance for loan losses (4,641) (4,271) --------- --------- Net loans 326,876 286,743 Banking premises and equipment, net 5,097 5,051 Accrued interest receivable 2,365 2,613 Other assets 2,657 2,411 --------- --------- Total assets $ 430,248 $ 402,247 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 377,208 $ 355,534 Borrowed funds 11,439 7,510 Escrow deposits of borrowers 1,376 1,132 Accrued interest payable 488 512 Accrued expenses and other liabilities 2,930 1,915 --------- --------- Total liabilities 393,441 366,603 --------- --------- 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 September 30, 2000 and December 31, 1999 Outstanding - 7,327,171 shares at September 30, 2000, and 7,333,211 shares at December 31, 1999 809 809 Additional paid-in capital 35,759 35,841 Retained earnings 6,668 5,305 Treasury stock, at cost, 767,243 shares at September 30, 2000 and 761,203 shares at December 31, 1999 (6,330) (6,304) --------- --------- 36,906 35,651 Unrealized loss on securities available for sale, net of income taxes (99) (7) --------- --------- Total stockholders' equity 36,807 35,644 --------- --------- Total liabilities and stockholders' equity $ 430,248 $ 402,247 ========= ========= See accompanying notes to consolidated financial statements. 3 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (Dollars in thousands, except per-share data) Interest and dividend income: Interest on loans $ 7,019 $ 5,713 $ 20,066 $ 16,825 Interest and dividends on investments 1,145 1,213 3,618 3,764 Interest on mortgage-backed securities 235 271 705 885 -------- -------- -------- -------- Total interest and dividend income 8,399 7,197 24,389 21,474 -------- -------- -------- -------- Interest expense: Interest on deposits 3,246 2,865 9,287 8,542 Interest on borrowed funds 107 84 274 235 -------- -------- -------- -------- Total interest expense 3,353 2,949 9,561 8,777 -------- -------- -------- -------- Net interest income 5,046 4,248 14,828 12,697 Provision for loan losses 114 36 342 69 -------- -------- -------- -------- Net interest income after provision for loan losses 4,932 4,212 14,486 12,628 Non-interest income: Customer service fees 367 240 943 700 Gains on sales of investment securities 208 17 208 17 Gain on sale of fixed assets to a related party 376 -- 376 -- Gains on sales of mortgage loans 39 43 125 196 Other 1 1 4 (16) -------- -------- -------- -------- Total non-interest income 991 301 1,656 897 -------- -------- -------- -------- Income before non-interest expense and income taxes 5,923 4,513 16,142 13,525 -------- -------- -------- -------- Non-interest expense: Salaries and employee benefits 1,756 1,702 5,266 4,793 Office occupancy and equipment 288 262 878 796 Professional services 45 56 125 169 Marketing 79 35 276 140 Real estate operations (income) 0 (68) -- (78) Outside data processing 133 120 436 354 Other 500 464 1,415 1,320 -------- -------- -------- -------- Subtotal operating expenses 2,801 2,571 8,396 7,494 Expenses for formation of Warren Real Estate Investment Corporation -- 87 -- 87 -------- -------- -------- -------- Total non-interest expenses 2,801 2,658 8,396 7,581 -------- -------- -------- -------- Income before income taxes 3,122 1,855 7,746 5,944 Income tax expense 1,081 593 2,578 2,028 -------- -------- -------- -------- Net income $ 2,041 $ 1,262 $ 5,168 $ 3,916 ======== ======== ======== ======== Basic earnings per share $ 0.28 $ 0.17 $ 0.71 $ 0.53 ======== ======== ======== ======== Diluted earnings per share $ 0.27 $ 0.17 $ 0.70 $ 0.51 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 4 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2000 1999 -------- -------- (In thousands) Cash flows from operating activities: Net Income $ 5,168 $ 3,916 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 342 69 Depreciation and amortization 377 369 Deferred income tax expense -- 69 Amortization of premiums and discounts 27 487 (Gains) on sales of investment securities (208) (17) (Gains) on sales of mortgage loans (125) (196) (Gains) on sale of fixed assets (376) -- (Gains) on sale of real estate acquired by foreclosure -- (30) Decrease in loans held for sale 458 203 Decrease in accrued interest receivable 248 393 (Increase) decrease in other assets (199) 209 (Decrease) in accrued interest payable (24) (95) Increase in other liabilities and escrow deposits 1,261 690 -------- -------- Net cash provided by operating activities 6,949 6,067 -------- -------- Cash flows from investing activities: Purchase of investment securities (22,925) (11,560) Proceeds from sales of investment securities available for sale 2,204 17 Proceeds from maturities of investment securities 31,840 28,663 Proceeds from payments of mortgage-backed securities 1,552 4,864 Proceeds from sales of real estate acquired by foreclosure -- 91 Proceeds from sales of fixed assets 669 -- Net (increase) in loans (40,350) (11,971) Purchases of premises and equipment (716) (448) -------- -------- Net cash provided by (used in) investing activities (27,726) 9,656 -------- -------- Cash flows from financing activities: Net increase in deposits 21,674 1,015 Net increase in other borrowed funds 3,929 180 Dividends paid (3,805) (3,942) Purchase of treasury stock (183) (4,634) Stock options exercised 73 91 -------- -------- Net cash provided by (used in) financing activities 21,688 (7,290) -------- -------- Net increase in cash and cash equivalents 911 8,433 Cash and cash equivalents at beginning of period 21,456 12,039 -------- -------- Cash and cash equivalents at end of period $ 22,367 $ 20,472 ======== ======== Cash paid during the period for: Interest $ 9,585 $ 8,872 Income taxes $ 1,644 $ 1,580 See accompanying notes to consolidated financial statements. 5 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (DOLLARS IN THOUSANDS) ACCUMULATED ADDITIONAL OTHER COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY INCOME STOCK CAPITAL EARNINGS INCOME STOCK TOTAL ------------- ------ ---------- -------- ------------- -------- ------- Balance at December 31, 1998 $809 $35,710 $4,516 $799 ($1,913) $39,921 Comprehensive income: Net income $3,916 -- -- 3,916 -- -- 3,916 Other comprehensive income (loss): Unrealized loss on securities available for sale, net of taxes (498) (498) (498) ------ Comprehensive income $3,418 ====== Tax benefit of stock options exercised -- 13 -- -- -- 13 Dividends paid -- -- (3,942) -- -- (3,942) Purchase of treasury stock (523,400 shares) -- -- -- -- (4,634) (4,634) Issuance of 23,520 shares for exercise of options -- (99) -- -- 190 91 ---- ------- ------ ---- ------- -------- Balance at September 30, 1999 $809 $35,624 $4,490 $301 ($6,357) $34,867 Comprehensive income: Net income $1,548 -- -- 1,548 -- -- 1,548 Other comprehensive income (loss): Unrealized (loss) on securities available for sale, net of taxes (308) (308) (308) ------- Comprehensive income $1,240 ======= Tax benefit of stock options exercised -- 233 -- -- -- 233 Dividends paid -- -- (733) -- -- (733) Issuance of 6,400 shares for exercise of options -- (16) -- -- 53 37 ---- ------- ------ ---- ------- -------- Balance at December 31, 1999 $809 $35,841 $5,305 ($7) ($6,304) $35,644 Comprehensive income: Net income $5,168 -- -- 5,168 -- -- 5,168 Other comprehensive income (loss): Unrealized gain on securities available for sale, net of taxes 43 Less: Reclassification adjustment for securities gains, net of tax expense of $73, included in net income (135) ------ Total other comprehensive (loss) (92) -- -- -- (92) -- (92) ------ Comprehensive income $5,076 ====== Tax benefit of stock options exercised -- 2 -- -- -- 2 Dividends paid -- -- (3,805) -- -- (3,805) Purchase of treasury stock (25,000 shares) -- -- -- -- (183) (183) Issuance of 18,960 shares for exercise of options -- (84) -- -- 157 73 ---- ------- ------ ---- ------- -------- Balance at September 30, 2000 $809 $35,759 $6,668 ($99) ($6,330) $36,807 ==== ======= ====== ==== ======= ======== See accompanying notes to consolidated financial statements. 6 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The consolidated financial statements of Warren Bancorp, Inc. (the "Corporation") presented herein should be read in conjunction with the consolidated financial statements of the Corporation as of and for the year ended December 31, 1999. The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, but the Corporation believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the consolidated financial statements reflect all adjustments necessary for a fair presentation of the results for the interim periods presented. EARNINGS PER SHARE The components of basic and diluted EPS for the quarters and nine months ended September 30, 2000 and 1999 are as follows: QUARTER ENDED SEPTEMBER 30, ------------------------------------------------------------------------------ NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE ------------------------------------------------------------------------------ 2000 1999 2000 1999 2000 1999 ------------------------------------------------------------------------------ (In thousands, except per-share data) Basic EPS $2,041 $1,262 7,324 7,324 $0.28 $0.17 Effect of dilutive stock options -- -- 123 214 (0.01) -- ------ ------ ------ ------ ----- ----- Dilutive EPS $2,041 $1,262 7,447 7,538 $0.27 $0.17 ====== ====== ====== ====== ===== ===== NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------ NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE ------------------------------------------------------------------------------ 2000 1999 2000 1999 2000 1999 ------------------------------------------------------------------------------ (In thousands, except per-share data) Basic EPS $5,168 $3,916 7,318 7,449 $0.71 $0.53 Effect of dilutive stock options -- -- 109 199 (0.01) (0.02) ------ ------ ------ ------ ----- ----- Dilutive EPS $5,168 $3,916 7,427 7,648 $0.70 $0.51 ====== ====== ====== ====== ===== ===== 1 7 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. For purposes of this disclosure, operating segments are defined as components of an enterprise that 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. This disclosure has no effect on the Corporation's primary financial statements. 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 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. 2 8 Specific reportable segment information as of and for the quarters and nine-month periods ended September 30, 2000 and 1999 is as follows (in thousands): QUARTER ENDED SEPTEMBER 30, 2000 CORPORATE PERSONAL WARREN BANCORP BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------- Interest income-external $ 5,384 $ 2,914 $ 101 -- $ 8,399 Interest income-internal -- 2,514 17 $(2,531) -- Fee and other income 144 224 623 -- 991 Net income 1,195 724 122 -- 2,041 QUARTER ENDED SEPTEMBER 30, 1999 CORPORATE PERSONAL WARREN BANCORP BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------- Interest income-external $ 4,832 $ 2,341 $ 24 -- $ 7,197 Interest income-internal -- 2,310 7 $(2,317) -- Fee and other income 24 218 59 -- 301 Net income 1,011 629 (378) -- 1,262 NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 CORPORATE PERSONAL WARREN BANCORP BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------- Interest income-external $15,864 $ 8,308 $ 217 -- $24,389 Interest income-internal -- 7,345 63 $(7,408) -- Fee and other income 287 661 708 -- 1,656 Net income 3,415 2,188 (435) -- 5,168 NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 CORPORATE PERSONAL WARREN BANCORP BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------- Interest income-external $14,066 $ 7,262 $ 146 -- $21,474 Interest income-internal -- 6,629 27 $(6,656) -- Fee and other income 123 590 184 -- 897 Net income 3,051 1,904 (1,039) -- 3,916 3 9 RELATED-PARTY TRANSACTION During the 2000 quarter, the Corporation sold a parcel of land and building, which was the former location of the Bank's South Peabody branch office, to a director of the Corporation. The cash sale for $675,000 resulted in a gain of $376,000. The transaction was completed and transfer of title occurred within the 2000 quarter. See "Non-Interest Income" under "Results of Operations - - For the Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999" and "Results of Operations - For the Nine Months Ended September 30, 2000 compared to Nine Months Ended September 30, 1999" below. 4 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Form 10-Q 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. These and other factors that might cause differences between actual and anticipated results, performance and achievements are discussed in greater detail in this Form 10-Q. GENERAL Warren Bancorp, Inc.'s operating results for the three and nine months ended September 30, 2000 (the "2000 quarter" and "2000 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 an increased profit for the 2000 period as compared to the nine months ended September 30, 1999 (the "1999 period") primarily due to increased interest-rate spreads, due to generally higher interest rates than in the 1999 period, increased asset levels, a gain on sale of a parcel of land and building of the former location of the Bank's South Peabody branch office, and a gain on sale of a preferred equity security, which was called. When general interest rates increase, the yield on the Bank's total assets will typically increase more than its cost of 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 interest rates may not have their rates increased at the same rate as the Bank's assets. Reductions in general interest rates may reduce the Bank's interest-rate spread and net yield on average earning assets. Nonperforming loans decreased by $1,421,000 to $126,000 during the 2000 period. 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, the Corporation may acquire real estate through foreclosure, which may give rise to additional charge-offs and writedowns and higher expenses for property taxes and other carrying costs. ASSET/LIABILITY MANAGEMENT A primary objective of the Corporation's asset/liability management policy is to manage 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 5 11 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 interest rates were to shift immediately up or down 100 basis points, estimated net interest income for the next 12 months should decline by less than 17%. This policy remained in effect during the period, and in management's opinion there were no material changes in interest rate risk since December 31, 1999, the date as of which the simulation analysis was performed. 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. The following table summarizes the Corporation's interest-rate sensitivity position as of September 30, 2000. 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. 6 12 INTEREST-RATE SENSITIVITY POSITION SEPTEMBER 30, 2000 ------------------ 0-3 3-6 6-12 1-5 OVER 5 MONTHS MONTHS MONTHS YEARS YEARS -------- -------- -------- -------- -------- (Dollars in Thousands) INTEREST SENSITIVE ASSETS: Investment securities .................... $ 28,365 $ 5,561 $ 4,990 $ 23,966 $ -- Loans held for sale ...................... 1,358 -- -- -- -- Adjustable-rate loans .................... 87,990 10,287 31,796 145,856 -- Fixed-rate loans ......................... 1,758 886 3,808 36,155 12,982 Mortgage-backed securities ............... 1,935 1,743 4,804 3,225 727 -------- -------- -------- -------- -------- Total interest sensitive assets ....... 121,406 18,477 45,398 209,202 13,709 -------- -------- -------- -------- -------- INTEREST SENSITIVE LIABILITIES: Cash manager and passbook plus accounts ................................ 22,735 22,735 -- -- -- Time deposits ............................ 44,010 45,771 26,226 46,254 -- Other deposits(a)......................... 12,145 11,688 23,792 86,561 9,848 Borrowings ............................... 8,768 -- 14 2,019 638 -------- -------- -------- -------- -------- Total interest sensitive liabilities .. 87,658 80,194 50,032 134,834 10,486 -------- -------- -------- -------- -------- Excess (deficiency) of interest sensitive assets over interest sensitive liabilities ............................. $ 33,748 $(61,717) $ (4,634) $ 74,368 $ 3,223 ======== ======== ======== ======== ======== Excess of cumulative interest sensitive assets over cumulative interest sensitive liabilities .......... $ 33,748 $(27,969) $(32,603) $ 41,765 $ 44,988 ======== ======== ======== ======== ======== Cumulative interest sensitive assets as a percentage of cumulative interest sensitive liabilities .......... 138.5% 83.3% 85.0% 111.8% 112.4% ======== ======== ======== ======== ======== Cumulative excess as a percentage of total assets .............. 7.8% (6.5)% (7.6)% 9.7% 10.5% ======== ======== ======== ======== ======== - ---------- (a) Other deposits consist of regular savings 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 rates changes over time. LIQUIDITY The Bank seeks to ensure 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 the 2000 period, the Bank did not use the Federal Reserve Bank discount window and did not borrow from the Depositors Insurance Fund Liquidity Fund. 7 13 The Bank also uses the longer term borrowings facilities within its total available credit line with the FHLBB. Advances from the FHLBB, none of which were from the overnight facility, were $2,671,000 at September 30, 2000. During 2000, the primary sources of liquidity for the Bank were $21.7 million increase in deposits, loan paydowns and amortization of $80.6 million, proceeds from maturities of investment securities of $31.8 million and proceeds from paydowns of mortgage-backed securities of $1.6 million. Primary uses of funds were $130.3 million in residential, commercial real estate and commercial loan originations and $22.9 million to purchase investment securities. At September 30, 2000, the Bank had $7.3 million in overnight investments. 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 September 30, 2000: Within One Year (IN THOUSANDS) --------------- Less than 3 months......................... $ 7,128 3 to 6 months.............................. 9,766 6 to 12 months............................. 2,834 -------- 19,728 More than 12 months........................ 8,946 -------- $ 28,674 ======== The primary source of liquidity for Warren Bancorp, Inc. (the bank holding company) is dividends from the Bank. The primary uses of this liquidity are dividends paid and stock repurchases. CAPITAL ADEQUACY Total stockholders' equity at September 30, 2000 was $36.8 million, an increase of $1.2 million from $35.6 million at December 31, 1999. This change was primarily due to earnings offset by $3.8 million of dividends paid to shareholders and a $183,000 increase in treasury stock due to the Corporation's stock repurchase program. Included in stockholders' equity at September 30, 2000 is an unrealized loss on securities available for sale, which decreased stockholders' equity, of $99,000 as compared to an unrealized loss at December 31, 1999 of $7,000. Future interest-rate increases could reduce the fair value of these securities and reduce stockholders' equity. As a percentage of total assets, stockholders' equity was 8.55% at September 30, 2000 compared to 8.86% at December 31, 1999. At September 30, 2000, neither the Federal Reserve Board ("FRB") nor the FDIC permitted the unrealized loss to be used in their calculation of Tier I capital. 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 September 30, 2000, the FRB leverage capital ratio was 8.70% compared to 8.94% at December 31, 1999. The FDIC's leverage capital-to-assets ratio guidelines are substantially similar to those adopted by the FRB and described above. At September 30, 2000, the Bank's leverage capital ratio, under FDIC guidelines, was 8.38% compared to 8.58% at December 31, 1999. 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% risk-based capital ratio. The Corporation's and the Bank's risk-based capital ratios were 11.56% and 11.17%, respectively, at September 30, 2000 compared to 11.80% and 11.28% at December 31, 1999, thus exceeding their risk-based capital requirements. 8 14 As of September 30, 2000, the Bank's total risk-based capital ratio, Tier I risk-based capital ratio and leverage capital ratio were 11.17%, 9.92%, and 8.38%, respectively. Based on these capital ratios, the Bank is considered to be "well capitalized." FINANCIAL CONDITION The Corporation's total assets increased to $430.2 million at September 30, 2000 from $402.2 million at December 31, 1999. Increases occurred in residential mortgages, commercial real estate and commercial loans and were partially offset by decreases in commercial construction loans and investments 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 $69.5 million at September 30, 2000 from $82.2 million at December 31, 1999. A majority of this decrease was from the maturity of corporate notes, as well as a call of a $2.0 million preferred equity security. Mortgage-backed securities decreased to $12.4 million at September 30, 2000 from $14.0 million at December 31, 1999 due to principal paydowns. Future increases in interest rates could reduce the value of these investments. INVESTMENTS AT SEPTEMBER 30, 2000 ARE AS FOLLOWS: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------- -------- -------- -------- (IN THOUSANDS) AVAILABLE-FOR-SALE Fixed income mutual funds .......... $ 28,706 $ 69 $ (113) $ 28,662 FNMA mortgage-backed securities .... 8,765 258 -- 9,023 GNMA mortgage-backed securities .... 3,669 -- (96) 3,573 U.S. Government and related obligations ....................... 7,614 15 -- 7,629 Corporate notes .................... 8,559 1 (6) 8,554 Preferred stock .................... 5,314 16 (287) 5,043 -------- -------- -------- -------- 62,627 359 (502) 62,484 -------- -------- -------- -------- OTHER Foreign government bonds and notes ............................ 1,250 -- -- 1,250 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 -------- -------- -------- -------- 7,044 240 -- 7,284 -------- -------- -------- -------- $ 69,671 $ 599 $ (502) $ 69,768 ======== ======== ======== ======== LOANS AND LOANS HELD FOR SALE Loans and loans held for sale increased by $40.0 million during the 2000 period to $332.9 million at September 30, 2000. This increase is the result of increases in residential, commercial real estate and commercial loans. Commercial real estate, commercial construction and commercial loans typically earn higher yields than residential mortgage loans, but usually carry higher risk due to loan size. 9 15 The following table sets forth the classification of the Corporation's loans as of September 30, 2000 and December 31, 1999 (in thousands): SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Residential mortgages ............................... $ 83,142 $ 52,209 Commercial real estate .............................. 174,656 167,221 Commercial construction ............................. 12,887 19,590 Commercial loans .................................... 37,088 29,446 Consumer loans ...................................... 23,744 22,548 -------- -------- $331,517 $291,014 ======== ======== Residential mortgage loan originations during the 2000 period were $52.1 million compared to $30.8 million in the 1999 period. The Corporation originated $10.6 million in fixed-rate loans during the 2000 period compared to $19.4 million during the 1999 period. Adjustable-rate loans totaling $41.5 million were originated during the 2000 period compared to $11.4 million during the 1999 period. The Corporation sold loans totaling $10.6 million during the 2000 period compared to $18.3 million sold in the 1999 period. At September 30, 2000, the Corporation held $1.4 million of fixed-rate residential mortgage loans for sale compared to $1.8 million at December 31, 1999. 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 ninety 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 September 30, 2000 there were two loans considered impaired and performing totaling $1,003,000 compared to none considered impaired and performing at December 31, 1999. Loans past due 90 days or more, or past due less than 90 days but in nonaccrual status were $126,000 at September 30, 2000 compared to $1.5 million at December 31, 1999. There are no loans considered impaired and nonperforming at September 30, 2000. There was one loan considered impaired and nonperforming at December 31, 1999 in the amount of $329,000. Accrual of interest on loans is discontinued either when a reasonable doubt exists as to that 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. Following collection procedures, the Corporation generally institutes appropriate action to foreclose the property or acquire it by deed in lieu of foreclosure. The table below details nonperforming loans at: SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- (DOLLARS IN THOUSANDS) Accruing loans 90 days or more in arrears $ 126 $ 633 Nonaccrual loans .................................... 0 914 ------ ------ Total nonperforming loans ........................... $ 126 $1,547 ====== ====== Percentage of nonperforming loans to: Total loans ......................................... 0.04% 0.53% ====== ====== Total assets ........................................ 0.03% 0.38% ====== ====== 10 16 ALLOWANCE FOR LOAN LOSSES The following table presents the activity in the allowance for loan losses for the nine months ended September 30, 2000 and September 30, 1999 (dollars in thousands): 2000 1999 ------- ------- Balance at beginning of period .......................... $ 4,271 $ 4,023 ------- ------- Losses charged to the allowance: Residential mortgage ................................ -- 12 Commercial mortgage and construction ................ -- -- Commercial loans .................................... 14 -- Consumer loans ...................................... 8 44 ------- ------- 22 56 ------- ------- Loan recoveries: Residential mortgage ................................ 17 23 Commercial mortgage and construction ................ 1 80 Commercial loans .................................... 17 42 Consumer loans ...................................... 15 23 ------- ------- 50 168 ------- ------- Net recoveries .......................................... (28) (112) ------- ------- Provision for loan losses charged to income ............ 342 69 ------- ------- Balance at end of period ................................ $ 4,641 $ 4,204 ======= ======= Allowance to total loans at end of period ............... 1.40% 1.50% ======= ======= Allowance to nonperforming loans at end of period ....... 3683.3% 334.4% ======= ======= Allocation of ending balance: Residential mortgage ................................ $ 781 $ 423 Commercial mortgage and construction ................ 3,066 3,118 Commercial loans .................................... 562 455 Consumer loans ...................................... 232 208 ------- ------- $ 4,641 $ 4,204 ======= ======= 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. 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 non-performing, 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 condition 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 $1.0 million of impaired loans, all of which is measured using the fair value method, is $108,000. 11 17 The required allowance for loan losses could increase in future periods if the condition of the loan portfolio deteriorates or if the balance of the portfolio increases. Such an increase in the allowance could require additional provisions for loan losses to be charged to income. 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 September 30, 2000, there were no legal claims against the Corporation or its subsidiaries. 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. OTHER ASSETS Included in other assets at September 30, 2000 and December 31, 1999 are $1.7 million and $1.6 million, respectively, of deferred income taxes receivable. LIABILITIES Deposits increased to $377.2 million at September 30, 2000 from $355.5 million at December 31, 1999. The following table sets forth the classification of the Corporation's deposits as of September 30, 2000 and December 31, 1999 (in thousands): SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Noninterest bearing ....................... $ 25,443 $ 19,019 NOW ....................................... 45,099 36,784 Money market .............................. 45,470 37,235 Savings ................................... 98,935 99,909 Time ...................................... 162,261 162,587 -------- -------- $377,208 $355,534 ======== ======== Federal Home Loan Bank of Boston advances were $2.7 million at September 30, 2000 and December 31, 1999. Securities sold under agreement to repurchase were $8.8 million at September 30, 2000 and $4.8 million at December 31, 1999. 12 18 RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 GENERAL The Corporation recorded a profit for the 2000 quarter of $2.0 million compared to a profit for the 1999 quarter of $1.3 million. The increase in the 2000 quarter profit is primarily due to increased spreads, due to generally higher interest rates as compared to the 1999 quarter, increased asset levels, a gain on sale of a parcel of land and building of the former location of the Bank's South Peabody branch office, and a gain on sale of a preferred equity security, which was called. Net interest income for the 2000 and 1999 quarters was $5.0 million and $4.2 million, respectively. The weighted average interest rate spread for the 2000 quarter was 4.78% compared to 4.34% for the 1999 quarter. The net yield on average earning assets was 4.98% for the 2000 quarter and 4.51% for the 1999 quarter. The return on average assets and the return on average stockholders' equity were 1.93% and 22.80%, respectively, for the 2000 quarter compared to 1.28% and 14.66%, respectively, for the 1999 quarter. INTEREST AND DIVIDEND INCOME Total interest and dividend income increased to $8.4 million for the 2000 quarter from $7.2 million for the 1999 quarter. Interest on loans increased to $7.0 million for the 2000 quarter from $5.7 million for the 1999 quarter. The average loan yield increased to 8.65% for the 2000 quarter from 8.33% for the 1999 quarter and average loans outstanding increased during the 2000 quarter as compared to the 1999 quarter. Interest and dividends on investments was $1.1 million for the 2000 quarter and $1.2 million in the 1999 quarter. The average amount of investments held decreased while the average yield on investments increased to 6.60% for the 2000 quarter from 5.54% for the 1999 quarter. Mortgage-backed securities income decreased to $235,000 in the 2000 quarter from $271,000 in the 1999 quarter primarily due to a decrease in the average amount of mortgage-backed securities held due to paydowns. INTEREST EXPENSE Interest on deposits increased to $3.2 million for the 2000 quarter from $2.9 million for the 1999 quarter. The average balance of deposits increased in the 2000 quarter and the average cost of deposits increased to 3.47% for the 2000 quarter from 3.26% for the 1999 quarter. Interest on borrowed funds and escrow deposits of borrowers increased to $107,000 from $84,000 for the 2000 and 1999 quarters, respectively. The average cost decreased to 3.46% for the 2000 quarter from 3.66% in the 1999 quarter. NON-INTEREST INCOME Total non-interest income for the 2000 quarter was $991,000 compared to $301,000 for the 1999 quarter. Customer service fees increased to $367,000 in the 2000 quarter from $240,000 in the 1999 quarter due to commercial real estate loan prepayment fees. The gain from the sale of mortgage loans was $39,000 in the 2000 quarter compared to $43,000 in the 1999 quarter. Non-interest income also included two aforementioned items in the 2000 quarter. One was a gain of $208,000 resulting from a call of a preferred equity security. The other was a gain of $376,000 from the sale of a parcel of land and building of the former location of the Bank's South Peabody branch office (see "Related-Party Transaction" above). NON-INTEREST EXPENSE Total non-interest expense increased to $2.8 million in the 2000 quarter from $2.7 million in the 1999 quarter. The 1999 quarter included expenses incurred in the formation of a real estate investment trust ("REIT") of $87,000. Salaries and benefits increased due to salaries and benefit increases for existing staff and increases in staff. Occupancy and equipment increased in the 2000 quarter to $288,000 from $262,000 in the 1999 quarter due to expenses associated with the new location of the South Peabody branch. Marketing costs increased with additional emphasis being given to the Corporation's marketing and sales efforts. Other expenses contained $50,000 of nonrecurring expense for the 2000 quarter while salaries and employee benefits contained $50,000 of nonrecurring expense in the 1999 quarter. 13 19 INCOME TAX EXPENSE The Corporation's tax rate increased to 34.6% in the 2000 quarter from 32.0% in the 1999 quarter mainly due to a higher percentage of income taxed at a higher state tax rate. RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 GENERAL The Corporation recorded a profit for the 2000 period of $5.2 million compared to a profit for the 1999 period of $3.9 million. The increase in the 2000 period is primarily due to increased spreads, due to generally higher interest rates as compared to the 1999 period, increased asset levels, a gain on sale of a parcel of land and building of the former location of the Bank's South Peabody branch office, and a gain on sale of a preferred equity security, which was called. Net interest income for the 2000 and 1999 periods were $14.8 million and $12.7 million, respectively. The weighted average interest rate spread for the 2000 period was 4.75% compared to 4.30% for the 1999 period. The net yield on average earning assets was 4.97% for the 2000 period and 4.54% for the 1999 period. The return on average assets and the return on average stockholders' equity were 1.67% and 19.46%, respectively, for the 2000 period compared to 1.34% and 14.48%, respectively, for the 1999 period. INTEREST AND DIVIDEND INCOME Total interest and dividend income increased to $24.4 million for the 2000 period from $21.5 million for the 1999 period. Interest on loans increased to $20.1 million for the 2000 period from $16.8 million for the 1999 period. Average loans outstanding increased during the 2000 period and the average loan yield increased to 8.63% for the 2000 period compared to 8.34% for the 1999 period. Interest and dividends on investments was $3.6 and $3.8 million for the 2000 and 1999 periods, respectively. The average amount of investments held decreased while the average yield on investments increased to 6.40% for the 2000 period from 5.62% for the 1999 period. Mortgage-backed securities income decreased to $705,000 in the 2000 period from $885,000 in the 1999 period primarily due to a decrease in the average amount of mortgage-backed securities held due to paydowns. INTEREST EXPENSE Interest on deposits increased to $9.3 million for the 2000 period from $8.5 million for the 1999 period. This increase was related to an increase in the average cost of deposits to 3.40% for the 2000 period from 3.31% for the 1999 period as well as an increase in average total deposits outstanding. Interest on borrowed funds and escrow deposits of borrowers increased to $274,000 in the 2000 period from $235,000 for the 1999 period. The average cost decreased to 3.57% in the 2000 period from 3.62% in the 1999 period while the average balances increased. NON-INTEREST INCOME Total non-interest income for the 2000 period was $1.7 million compared to $897,000 for the 1999 period. Customer service fees increased to $943,000 in the 2000 period from $700,000 in the 1999 period due to commercial real estate loan prepayment fees and increased letters-of-credit fees. The gain from the sale of mortgage loans was $125,000 in the 2000 period compared to $196,000 in the 1999 period. Because the Corporation sells fixed-rate loans that it originates, and because fewer fixed-rate loans were originated in the 2000 period, gains on sale of mortgage loans decreased. Non-interest income also included two aforementioned items in the 2000 period. One was a gain of $208,000 resulting from a call of a preferred equity security. The other was a gain of $376,000 from the sale of a parcel of land and building of the former location of the Bank's South Peabody branch office (see "Related-Party Transaction" above). 14 20 NON-INTEREST EXPENSE Total non-interest expense was $8.4 million in the 2000 period and $7.6 million in the 1999 period. The 1999 period included expenses incurred in the formation of a REIT of $87,000. Salary and employee benefits were $5.3 million in the 2000 period and $4.8 million for the 1999 period, respectively. Salaries and benefits increased in compensation and benefits for existing staff as well as additions to staff. Occupancy and equipment increased in the 2000 period to $878,000 from $796,000 in the 1999 period due to expenses associated with the new location of the South Peabody branch. Marketing costs increased with additional emphasis being given for the Corporation's marketing and sales efforts. Nonrecurring expenses in the 2000 period occurred in outside data processing expense in the amount of $43,000 and other expense in the amount of $50,000. Salaries and benefits expense in the 1999 period included a nonrecurring expense of $50,000. INCOME TAX EXPENSE The Corporation's tax rate decreased in the 2000 period to 33.3% from 34.1% in the 1999 period mainly because the tax benefit of forming the REIT is realized for entire 2000 period and only realized in the third quarter in the 1999 period. The tax benefit of the REIT in the 2000 period is partially offset by a higher percentage of income subject to a higher state tax rate. 15 21 WARREN BANCORP, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS 27.1 Financial Data Schedule - 2000 16 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WARREN BANCORP, INC. DATE: November 6, 2000 By: /s/ John R. Putney ----------------------------------------- John R. Putney President and Chief Executive Officer DATE: November 6, 2000 By: /s/ Paul M. Peduto ----------------------------------------- Paul M. Peduto Treasurer (Principal Financial Officer and Principal Accounting Officer) 17