1
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, 2000
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, 2001, as reported by the Nasdaq National
Market was $48,893,896.
The number of shares of the registrant's common stock outstanding as of
March 1, 2001 was 7,337,611.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 2, 2001 are incorporated by reference into this 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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2000 1999 1998 1997 1996
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(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Total assets $ 438,122 $ 402,247 $ 397,065 $ 370,993 $ 358,954
Investment securities 54,001 80,314 93,950 83,701 75,618
Mortgage-backed securities 11,813 14,048 20,430 30,579 42,730
Net loans 343,551 286,743 262,452 236,697 218,313
Real estate acquired by foreclosure - - 1,450 2,010 2,230
Deposits 387,047 355,534 347,012 325,293 316,366
Borrowed funds 8,654 7,510 7,674 2,926 4,927
Stockholders' equity 37,682 35,644 39,921 40,028 34,445
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YEAR ENDED DECEMBER 31,
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2000 1999 1998 1997 1996
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(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Interest and dividend income $ 33,064 $ 28,987 $ 29,253 $ 28,539 $ 27,781
Interest expense 13,120 11,803 12,060 11,404 11,469
---------- ---------- ---------- ---------- ----------
Net interest income 19,944 17,184 17,193 17,135 16,312
Provision for (recovery of) loan losses 456 120 (91) (316) 116
Non-interest income 2,027 1,297 1,443 3,339 2,149
Non-interest expenses 11,414 10,070 10,099 9,857 9,768
---------- ---------- ---------- ---------- ----------
Income before income taxes 10,101 8,291 8,628 10,933 8,577
Income tax expense 3,368 2,827 2,724 3,648 1,968
---------- ---------- ---------- ---------- ----------
Net income $ 6,733 $ 5,464 $ 5,904 $ 7,285 $ 6,609
========== ========== ========== ========== ==========
Basic earnings per share $ 0.92 0.74 $ 0.75 $ 0.96 0.90
========== ========== ========== ========== ==========
Diluted earnings per share $ 0.91 0.72 $ 0.72 $ 0.91 0.84
========== ========== ========== ========== ==========
Cash dividends paid $ 0.625 0.630 $ 0.720 $ 0.435 0.265
========== ========== ========== ========== ==========
OTHER DATA:
Return on average assets 1.61% 1.39% 1.57% 2.02% 1.87%
Return on average stockholders' equity 18.81 15.26 14.79 19.50 20.47
Stockholders' equity to assets at year end 8.60 8.86 10.05 10.79 9.60
Dividend payout ratio 67.96 85.56 96.04 44.79 29.47
Weighted average interest rate spread 4.74 4.35 4.53 4.80 4.69
Net yield on average earning assets 4.96% 4.57% 4.79% 5.03% 4.88%
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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3
Letter to Shareholders omitted from this Annual Report on Form 10-K.
3
4
Letter to Shareholders omitted from this Annual Report on Form 10-K.
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5
Letter to Shareholders omitted from this Annual Report on Form 10-K.
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CROSS REFERENCE SHEET OF INFORMATION REQUIRED BY ITEMS IN
FORM 10-K
Page
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Item 1. Business................................................................................................. 24-28
Item 2. Properties............................................................................................... 16-17
Item 3. Legal Proceedings........................................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 28
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 71
Item 6. Selected Financial Data.................................................................................. 2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................... 7-24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................................... 8-9
Item 8. Financial Statements and Supplementary Data.............................................................. 32-68
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures........................................................................................ 28
Item 10. Directors and Executive Officers of the Corporation...................................................... 28
Item 11. Executive Compensation................................................................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 29
Item 13. Certain Relationships and Related Transactions........................................................... 29
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 69
STATISTICAL DISCLOSURE FOR BANK HOLDING COMPANIES
(2) Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential.............................................................................. 18-19
(3) Investment Portfolio...................................................................................... 11
(4) Loan Portfolio............................................................................................ 12-13
(5) Summary of Loan Loss Experience........................................................................... 15
(6) Deposits.................................................................................................. 17
(7) Return on Equity and Assets............................................................................... 2
(8) Short-Term Borrowings .................................................................................... 48
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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 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
Annual Report, including the Annual Report on Form 10-K, under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the section entitled "Business."
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, 2000 (the "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 year ended December 31, 1999 (the "1999 period") primarily due
to increased interest-rate spreads generated by higher interest rates in the
2000 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 security, which was called. An increase in general interest
rates will generally provide increased spreads because the yield on the Bank's
earning 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 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 spread and net yield on average
earning assets, which would have an adverse effect on the net interest margin
and net income.
Stockholders' equity increased in 2000 due to increased earnings. This
was partially offset by the payment of dividends equal to almost 68% of net
income as well as an increase in the unrealized loss on securities available for
sale net of income taxes. Future increases in interest rates could reduce the
value of the securities portfolio and stockholders' equity.
Real estate acquired by foreclosure was zero at December 31, 2000 and
December 31, 1999, and nonperforming loans decreased to zero during the 2000
period from $1.5 million at December 31, 1999. Management continues to monitor
the loan portfolio closely. If conditions in the Massachusetts real estate
market become unstable and values deteriorate, the amount of nonaccrual loans
and real estate
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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.
In 2000, the Corporation paid regular quarterly dividends totaling
$.415 per share and paid a special dividend of $.21 per share.
Under various stock repurchase programs authorized by the Board of
Directors in 1998 and 1999, the Corporation repurchased 25,000 shares at a total
cost of $183,000 during the 2000 period.
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 15%. The
Corporation was in compliance with this policy at December 31, 2000 and 1999.
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
net interest income
December 31,
Rate change (basis points) 2000 1999
-------------------------- ---- ----
+200 5.9% 3.9%
-200 (3.4)% (0.4)%
The result is within the Corporation's policy guidelines.
Simulation analysis depends to a significant extent on a variety of
assumptions and estimates, which may not reflect actual future events. Estimates
of customer behavior to changing interest rates may differ significantly from
actual behavior. Areas of these estimates include loan prepayment speeds, shifts
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 December 31, 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.
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INTEREST-RATE SENSITIVITY POSITION
DECEMBER 31, 2000
------------------------------------------------------------------------------
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 ...................... $ 15,062 $ 4,997 $ 8,631 $ 23,965 $ --
Loans held for sale ......................... 5,180 -- -- -- --
Adjustable-rate loans ....................... 87,972 11,726 39,056 157,778 --
Fixed-rate loans ............................ 2,030 2,662 2,433 35,204 9,471
Mortgage-backed securities .................. 1,018 2,404 4,750 2,769 611
-------- -------- -------- -------- --------
Total interest sensitive assets .......... 111,262 21,789 54,870 219,716 10,082
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts ................................... 28,693 28,692 -- -- --
Time deposits ............................... 46,091 15,886 39,975 55,302 --
Other deposits(a) ........................... 12,033 12,032 24,323 87,561 9,818
Borrowings .................................. 5,983 14 -- 2,019 638
-------- -------- -------- -------- --------
Total interest sensitive liabilities ..... 92,800 56,624 64,298 144,882 10,456
-------- -------- -------- -------- --------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ...................... $ 18,462 $(34,835) $ (9,428) $ 74,834 $ (374)
======== ======== ======== ======== ========
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities ...... $ 18,462 $(16,373) $(25,801) $ 49,033 $ 48,659
======== ======== ======== ======== ========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ............. 119.9% 89.0% 87.9% 113.7% 113.2%
======== ======== ======== ======== ========
Cumulative excess (deficiency) as a
percentage of total assets ................. 4.2% (3.7)% (5.9)% 11.2% 11.1%
======== ======== ======== ======== ========
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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.
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 2000, the Bank did not use the Federal Reserve Bank discount window
and did not borrow from the Depositors Insurance Fund Liquidity Fund.
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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, 2000 and 1999.
During 2000, the primary sources of liquidity were $19.0 million in
loan sales, loan paydowns and amortization of $109.4 million, $31.5 million in
growth of deposits, and proceeds from maturities of investments of $34.8
million. Primary uses of funds were $185.4 million in residential, commercial
real estate and commercial loan originations, $22.9 million to purchase
investment securities and $4.8 million to pay dividends to shareholders and
repurchase stock. At December 31, 2000, the Bank had $74,000 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 obtains 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, 2000:
Within one year: (In thousands)
Less than 3 months ............................... $10,518
3 to 6 months .................................... 2,155
6 to 12 months ................................... 5,775
-------
18,448
More than one year ............................... 10,318
--------
$28,766
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CAPITAL ADEQUACY
Total stockholders' equity at December 31, 2000 was $37.7 million, an
increase of $2.1 million from $35.6 million at the end of 1999. Included in
stockholders' equity is an unrealized loss on securities available for sale,
which decreased stockholders' equity, of $60,000 as compared to an unrealized
loss at December 31, 1999 of $7,000. Future interest-rate increases could
further reduce the fair value of these securities, which would further reduce
stockholders' equity. As a percentage of total assets, stockholders' equity was
8.60% at December 31, 2000 compared to 8.86% at December 31, 1999.
At December 31, 2000, neither the FRB nor the FDIC permitted an
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.
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, 2000, the FRB leverage capital ratio was 8.68% 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
December 31, 2000, the Bank's leverage capital ratio, under FDIC guidelines, was
8.35% 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% total risk-based capital ratio. The
Corporation's and the Bank's total risk-based capital ratios were 11.44% and
11.06%, respectively, at December 31, 2000 compared to 11.80% and 11.28%,
respectively, at December 31, 1999 for both the Corporation and the Bank, thus
exceeding their risk-based capital requirements.
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As of December 31, 2000, the Bank's total risk-based capital ratio,
Tier I risk-based capital ratio and leverage capital ratio were 11.06%, 9.81%,
and 8.35%, 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 $438.1 million at December
31, 2000 from $402.2 million at December 31, 1999. Increases occurred in loans
and were partially offset by decreases in investments and mortgage-backed
securities available for sale, and cash and cash equivalents.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of investment securities and mortgage-backed
securities available for sale and other investments, decreased to $65.7 million
at December 31, 2000 from $82.2 million at December 31, 1999. This was caused by
maturities of corporate notes and paydowns and amortization of mortgage-backed
securities as well as a call of a $2.0 million preferred stock available for
sale. Mortgage-backed securities decreased to $11.6 million at December 31, 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. Certain information regarding the Corporation's
investments as of December 31 is presented below (in thousands):
2000 1999
-------- --------
Amortized Cost:
U.S. Treasury and U.S. Government Agency
obligations available for sale............................................ $ 7,645 $ 3,006
Foreign government bonds held to maturity.................................... 1,250 1,000
Fixed-income mutual funds available for sale................................. 28,698 28,706
Mortgage-backed securities available for sale................................ 11,552 13,996
Corporate notes available for sale........................................... 5,567 22,349
Preferred stock available for sale........................................... 5,314 7,310
Other investments............................................................ 5,794 5,794
-------- --------
Total amortized cost............................................................ 65,820 82,161
Unrealized loss on investment securities
available for sale........................................................... (80) (4)
-------- --------
Total carrying value............................................................ $ 65,740 $ 82,157
======== ========
Total fair value of investment securities....................................... $ 65,980 $ 82,397
======== ========
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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, 2000. 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 ............... $ 7,645 6.88% $ -- -- % $ -- -- % $ -- -- % $ 7,645 6.88%
Mortgage-backed securities
available for sale ...... 8,172 8.06 2,769 6.69 611 6.22 -- -- 11,552 7.63
Corporate notes
available for sale ...... 5,567 6.69 -- -- -- -- -- -- 5,567 6.69
Foreign government bonds
held to maturity ........ -- -- 750 7.93 250 7.75 250 6.75 1,250 7.66
------- ------- ------- ------- -------
$21,384 7.28% $ 3,519 6.95% $ 861 6.66% 250 6.75% $26,014 7.21%
======= ======= ======= ======= =======
At December 31, 2000, the Corporation did not hold securities of any
single issuer, excluding Federal Home Loan Bank of Boston stock, that exceeded
ten percent of stockholders' equity.
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $60.7 million during the
2000 period to $353.5 million at December 31, 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.
The following table sets forth the classification of the Corporation's
loans as of December 31 (in thousands):
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Residential mortgages ... $ 88,517 $ 52,209 $ 45,658 $ 52,707 $ 66,654
Commercial real estate .. 178,666 167,221 163,154 125,832 107,428
Commercial construction . 14,812 19,590 13,620 19,739 10,742
Commercial loans ........ 41,512 29,446 23,726 22,259 16,458
Consumer loans .......... 24,825 22,548 20,317 20,226 21,564
-------- -------- -------- -------- --------
$348,332 $291,014 $266,475 $240,763 $222,846
======== ======== ======== ======== ========
Balances in residential mortgage loans increased mainly as a result of
increases in interest rates during the 2000 period 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 this
increase in interest rates during the 2000 period, this adjustable-rate
portfolio has increased as borrowers currently prefer adjustable-rate loans to
fixed-rate loans. Balances in commercial real estate and commercial loans are
increasing mainly due to the Corporation's continued emphasis on corporate
lending.
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Residential mortgage loan originations increased during 2000 to $74.6
million from $48.5 million in 1999. The Corporation originated $22.2 million in
fixed-rate loans during 2000 compared to $24.4 million during 1999.
Adjustable-rate loans totaling $52.4 million were originated during 2000
compared to $24.1 million during 1999. The Corporation sold loans totaling $19.0
million during 2000 compared to $23.1 million in 1999. At year-end 2000, the
Corporation held $5.2 million of fixed-rate residential mortgage loans for sale
compared to $1.8 million at year-end 1999.
The following table sets forth a maturity distribution of the
Corporation's commercial real estate, commercial construction, and commercial
loans as of December 31, 2000. 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 ....... $ 53,143 $120,495 $ 5,028 $178,666
Commercial construction ...... 14,072 740 -- 14,812
Commercial loans ............. 26,121 13,722 1,669 41,512
-------- -------- -------- --------
Total ................... $ 93,336 $134,957 $ 6,697 $234,990
======== ======== ======== ========
Loans with adjustable rate ... $101,034 $ --
Loans with fixed rate ........ 33,923 6,697
-------- --------
$134,957 $ 6,697
======== ========
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, 2000, two loans were considered impaired and accruing interest
totaling $991,000 compared to none considered impaired and accruing interest at
December 31, 1999.
Loans past due 90 days or more, or past due less than 90 days but in a
nonaccrual status, decreased to zero at December 31, 2000 compared to $1.5
million at December 31, 1999. 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 for loans secured by real estate, the Corporation
generally institutes appropriate action to foreclose the property or acquire it
by deed in lieu of foreclosure.
13
14
The table below details nonperforming loans at December 31 (dollars in
thousands):
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Accruing loans 90 days or more
past due ......................... $ -- $ 633 $ 163 $ -- $ --
Nonaccrual loans ................... -- 914 475 347 2,712
------ ------ ------ ------ ------
Total nonperforming loans .......... $ -- $1,547 $ 638 $ 347 $2,712
====== ====== ====== ====== ======
Percentage of nonperforming
loans to:
Total loans ........................ N/A 0.53% 0.24% 0.14% 1.22%
====== ====== ====== ====== ======
Total assets ....................... N/A 0.38% 0.16% 0.09% 0.76%
====== ====== ====== ====== ======
In addition, at December 31, 2000 and 1999, the Corporation had $9,000
and $278,000, 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, 2000
and December 31, 1999. 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 zero on the sale of real estate
acquired by foreclosure in the 2000 period compared to $514,000 in the 1999
period and $2,000 in the 1998 period.
In summary, nonperforming assets are as follows at December 31, (in
thousands):
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Nonperforming loans .......... $ -- $1,547 $ 638 $ 347 $2,712
Real estate acquired by
foreclosure ................. -- -- 1,450 2,010 2,230
------ ------ ------ ------ ------
Total nonperforming assets ... $ -- $1,547 $2,088 $2,357 $4,942
====== ====== ====== ====== ======
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15
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):
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance at beginning of period ............................. $ 4,271 $ 4,023 $ 4,066 $ 4,533 $ 4,533
-------- -------- -------- -------- --------
Losses charged to the allowance:
Commercial ............................................. -- (4) -- -- --
Commercial mortgage and
construction ........................................ -- (49) -- (344) (143)
Residential mortgage ................................... (14) -- -- (241) (280)
Consumer loans ......................................... (8) (7) (98) (23) (33)
-------- -------- -------- -------- --------
(22) (60) (98) (608) (456)
-------- -------- -------- -------- --------
Loan recoveries:
Commercial ............................................. 34 100 24 116 61
Commercial mortgage
and construction .................................... 1 34 79 248 233
Residential mortgage ................................... 24 36 23 75 30
Consumer loans ......................................... 17 18 20 18 16
-------- -------- -------- -------- --------
76 188 146 457 340
-------- -------- -------- -------- --------
Net (charge-offs) recoveries ........................... 54 128 48 (151) (116)
Provision for (recovery of) loan
losses charged (credited)
to expense ............................................. 456 120 (91) (316) 116
-------- -------- -------- -------- --------
Balance at end of period ................................... $ 4,781 $ 4,271 $ 4,023 $ 4,066 $ 4,533
======== ======== ======== ======== ========
Allowance to total loans
at end of period ....................................... 1.37% 1.47% 1.50% 1.69% 2.03%
======== ======== ======== ======== ========
Allowance to nonperforming
loans at end of period ................................. N/A 276.1% 630.6% 1171.18% 167.1%
======== ======== ======== ======== ========
Net (charge-offs) recoveries to
Average loans outstanding .............................. .02% .04% .02% (.07)% (.05)%
======== ======== ======== ======== ========
Allocation of ending balance:
Commercial ............................................. $ 629 $ 435 $ 298 $ 295 $ 218
Commercial mortgage and
construction ........................................ 3,094 3,110 2,917 2,752 3,099
Residential mortgage ................................... 818 512 619 727 936
Consumer loans ......................................... 240 214 189 292 280
-------- -------- -------- -------- --------
$ 4,781 $ 4,271 $ 4,023 $ 4,066 $ 4,533
======== ======== ======== ======== ========
Percentage of loans in each category to total loans:
Commercial ............................................. 11.9% 10.1% 8.9% 9.2% 7.4%
Commercial mortgage and
construction ......................................... 55.6 64.2 66.3 60.5 53.0
Residential mortgage ................................... 25.4 17.9 17.1 21.9 29.9
Consumer loans ......................................... 7.1 7.8 7.7 8.4 9.7
-------- -------- -------- -------- --------
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.
15
16
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 a third-party credit-review consulting firm. Management uses a
process that takes into consideration specific and general portfolio risk,
economic conditions and the current regulatory environment. For identified
problem loans, whether performing or non-performing and including impaired
loans, management quantifies potential losses. For all other loans a grading
system is used based on assessed credit risk, and loss percentages are applied
to these loans. The loss percentages are determined by reviewing historic loss
trends in each grade category and taking into consideration industry and
regulatory norms and current economic conditions.
In addition to the above components, management applies both a general
allowance and an unallocated allowance. The general allowance is a percentage of
the above calculations and is applied to compensate for a margin of error. An
unallocated allowance that is not attributable to any specific loan or loan
grade is also applied. This allowance is based on various factors. Among the
factors are: the risk characteristics of the loan portfolio generally; general
economic trends; assessment of the current business cycle; credit quality trends
in relation to current economic conditions; trends in the outlook of banking
regulators with respect to allowance for loan losses and supervisory concerns in
general; and industry trends with respect to levels of allowance for loan
losses. The amounts of the general and unallocated allowance for the years ended
December 31, 2000, 1999 and 1998 are as follows: 2000 - $1,538,000, or 32% of
the total allowance at year end 2000; 1999 - $1,115,000 or 26% of the total
allowance at year end 1999; 1998 - $816,000, or 20% of the total allowance at
year end 1998. For purposes of the table on the preceding page, the general and
unallocated allowance is reallocated to specific categories on a "pro-rata"
basis.
Assessing the adequacy of the allowance for loan losses involves
substantial uncertainties and is based upon management's evaluation of the
amounts required to meet estimated charge-offs in the loan portfolio after
weighting the above factors. Because the allowance for loan losses is based on
various estimates and includes a high degree of judgment, subsequent changes in
general economic conditions and the economic prospects of the borrowers may
require changes in those estimates.
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 $991,000 of impaired loans, all of which is measured using the
fair value method, is $56,000.
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, 2000 there were no
material 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 12 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, 2000, management
believes that the Bank's existing properties are adequate for the conduct of its
business.
16
17
The following table sets forth certain information relating to the
Bank's offices as of December 31, 2000:
OWNED
SOLD LEASE LEASE
YEAR OR EXPIRATION RENEWAL
OFFICE LOCATION OPENED LEASED DATE OPTION
--------------- ------ ------ ---- ------
Peabody Square
10 Main Street................................ 1854 Owned - -
Northshore Shopping Center...................... 1958 Leased 2005 No
West Peabody
Russell and Lowell Street..................... 1971 Leased 2003 No*
South Peabody**
Lynn Street***................................ 1979 Sold 9/2000 - -
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 closed in March 2000 and the Lynnfield Street office
opened in March 2000.
*** The Lynn Street branch sold in September 2000 (see Note 11 "Related-Party
Transaction" in the notes to consolidated financial statements.)
OTHER ASSETS
Included in other assets at December 31, 2000 and December 31, 1999 are
$1.3 million and $1.6 million, respectively, of deferred income tax asset.
LIABILITIES
Year-end deposit levels increased to $387.0 million at December 31,
2000 from $355.5 million at December 31, 1999. This increase took place
primarily in demand deposits, NOW deposits, and money market deposits and was
partially offset by a decrease in time 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):
2000 1999 1998
-------------- -------------- --------------
AMOUNT COST AMOUNT COST AMOUNT COST
-------- ---- -------- ---- -------- ----
Non-interest bearing .... $ 22,715 - % $ 17,485 - % $ 15,508 - %
NOW accounts ............ 40,251 0.52 36,692 0.53 35,496 0.70
Savings ................. 146,573 2.86 137,497 2.46 130,370 2.66
Time .................... 159,808 5.23 155,621 5.08 148,437 5.47
-------- -------- --------
Total deposits .... $369,347 3.45 $347,295 3.31% $329,811 3.59%
======== ======== ========
Federal Home Loan Bank of Boston advances were $2.7 million at December
31, 2000 and 1999. Securities sold under agreement to repurchase were $6.0
million at December 31, 2000 and $4.8 million at December 31, 1999.
Accrued expenses and other liabilities includes a current income tax
payable of $1.1 million at December 31, 2000 and $436,000 at December 31, 1999.
It also includes accrued salaries and benefits payable of $886,000 at December
31, 2000 and $600,000 at December 31, 1999.
17
18
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,
--------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans ...................... $317,937 $ 27,452 8.63% $273,376 $22,891 8.37% $250,992 $22,434 8.94%
Investments, including
overnight investments ...... 74,429 4,682 6.46 89,115 4,969 5.64 86,417 5,048 6.02
Mortgage-backed
securities ................ 12,795 930 7.27 16,579 1,127 6.80 24,781 1,771 7.15
-------- ------ -------- ------- -------- ------
Total interest-
earning assets ........ 405,161 33,064 8.19% 379,070 28,987 7.66% 362,190 29,253 8.12%
Non-interest earning
assets ..................... 12,674 13,692 14,777
-------- -------- --------
Total assets ................. $417,835 $392,762 $376,967
======== ======== ========
Interest-bearing
liabilities:
Deposits ................... $346,632 12,744 3.68% $329,810 11,488 3.48% $314,303 11,833 3.76%
Borrowings ................. 10,591 376 3.55 8,659 315 3.64 6,203 227 3.66
-------- ------ -------- ------- -------- ------
Total interest-
bearing liabilities ...... 357,223 13,120 3.67 338,469 11,803 3.49 320,506 12,060 3.76
Non-interest bearing
deposits ................... 22,715 17,485 15,508
-------- -------- --------
Total deposits and
borrowed funds ............. 379,938 3.45 355,954 3.31 336,014 3.59
Non-interest bearing
liabilities ................ 2,095 918 1,029
Stockholders' equity ......... 35,802 35,890 39,924
-------- -------- --------
Total liabilities
and stockholders'
equity ................. $417,835 $392,762 $376,967
======== ======== ========
Net interest income .......... $ 19,944 $ 17,184 $ 17,193
======== ======== ========
Weighted average
rate spread ................ 4.74% 4.35% 4.53%
Net yield on average
earning assets ............. 4.96% 4.57% 4.79%
18
19
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,
-----------------------------------------------------------------------------------
2000 COMPARED TO 1999 1999 COMPARED TO 1998
--------------------------------------- ---------------------------------------
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 ..................... $ (828) $ 736 $ (195) $ (287) $ 162 $ (328) $ 87 $ (79)
Mortgage-backed securities ......... (257) 78 (18) (197) (586) (86) 28 (644)
Loans .............................. 3,731 714 116 4,561 2,001 (1,418) (126) 457
------ ------ ------ ------ ------ ------- ------ -----
Total interest and dividend
income ....................... 2,646 1,528 (97) 4,077 1,577 (1,832) (11) (266)
Interest expense:
Deposits:
N.O.W ............................. 19 (5) (1) 13 8 (60) (2) (54)
Savings ........................... 224 537 35 796 190 (255) (14) (79)
Time .............................. 213 228 6 447 393 (577) (28) (212)
Borrowings ......................... 70 (8) (1) 61 90 (1) (1) 88
------ ------ ------ ------ ------ ------- ------ -----
Total interest expense ......... 526 752 39 1,317 681 (893) (45) (257)
------ ------ ------ ------ ------ ------- ------ -----
Net interest income .................. $2,120 $ 776 $ (136) $2,760 896 $ (939) $ 34 $ (9)
====== ====== ====== ====== ====== ======= ====== =====
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.
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.
19
20
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, 2000, 1999 and 1998 is as follows (in thousands):
YEAR ENDED DECEMBER 31, 2000
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income - external $ 21,362 $ 11,412 $ 290 $ 33,064
Interest income - internal -- 9,800 111 $ (9,911) --
Interest expense - external 2,221 10,805 94 13,120
Interest expense - internal 9,800 -- 111 (9,911) --
Fee and other income 326 904 797 2,027
Income tax expense (benefit) 2,929 1,655 (1,216) 3,368
Net income (loss) 4,435 2,985 (687) 6,733
Total assets 262,500 167,500 8,100 438,100
Total loans 235,000 113,300 -- 348,300
Total deposits 67,400 317,500 2,100 387,000
20
21
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
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
21
22
RESULTS OF OPERATIONS - 2000 COMPARED TO 1999
GENERAL
The Corporation recorded a profit for the 2000 period of $6.7 million
compared to a profit for the 1999 period of $5.5 million.
Net interest income for the 2000 period was $19.9 million and $17.2
million for the 1999 period. The weighted average interest-rate spread for the
2000 period was 4.74% compared to 4.35% for the 1999 period. The net yield on
average earning assets was 4.96% for the 2000 period and 4.57% for the 1999
period. The return on average assets and the return on average stockholders'
equity were 1.61% and 18.81%, respectively, for the 2000 period compared to
1.39% and 15.26%, respectively, for the 1999 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $33.1 million for the
2000 period from $29.0 million for the 1999 period. Interest on loans increased
to $27.5 million for the 2000 period from $22.9 million for the 1999 period due
to average loans outstanding increasing in the 2000 period as well as an
increase in the average loan yield to 8.63% for the 2000 period compared to
8.37% for the 1999 period. Interest and dividends on investments was $4.7
million for the 2000 period compared to $5.0 million for the 1999 period. This
is attributable to a decrease in the average amount of investments held offset
by an increase in the average yield on investments to 6.46% for the 2000 period
from 5.64% for the 1999 period. Mortgage-backed securities income decreased to
$930,000 in the 2000 period from $1.1 million in the 1999 period primarily due
to a decrease in the average amount of mortgage-backed securities held due to
paydowns offset by an increase in the average yield from 7.27% for the 2000
period compared to 6.80% in the 1999 period.
INTEREST EXPENSE
Interest on deposits increased to $12.7 million for the 2000 period
from $11.5 million for the 1999 period. This increase was related to an increase
in the average cost of total deposits to 3.45% for the 2000 period from 3.31%
for the 1999 period and an increase in average total deposits outstanding.
Interest on borrowed funds and escrow deposits of borrowers increased to
$376,000 in the 2000 period from $315,000 for the 1999 period. This increase is
primarily related to an increase in borrowed funds partially offset by the
average cost of borrowings decreasing to 3.55% for the 2000 period from 3.64%
for the 1999 period.
NON-INTEREST INCOME
Total non-interest income for the 2000 period was $2.0 million compared
to $1.3 million for the 1999 period. The gain from the sale of mortgage loans
was $214,000 in the 2000 period compared to $232,000 in the 1999 period. The
gain from the sale of investment securities was $208,000 for the 2000 period
compared to $17,000 in the 1999 period. The gain on sale of securities in the
2000 period was due to a call of a preferred stock. The other gain included in
the 2000 period is a gain on sale of fixed assets of $376,000 from the sale of
the land and building that was the former location of the Bank's South Peabody
branch office (see Note 11 "Related-Party Transaction" in the notes to
consolidated financial statements.)
NON-INTEREST EXPENSE
Total non-interest expense was $11.4 million in the 2000 period
compared to $10.1 million in the 1999 period. The 1999 period included expenses
incurred in the formation of a real estate investment trust ("REIT") subsidiary
for $196,000. Salaries and employee benefits were $7.1 million in the 2000
period and $6.6 million for the 1999 period. Salaries and benefits increased due
to salaries and benefits increases for existing staff and increases in staff.
Occupancy and equipment
22
23
increased in the 2000 period to $1.2 million in the 2000 period from $1.1
million 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 to the Corporation's marketing and sales efforts.
INCOME TAX EXPENSE
Income tax expense for the 2000 period was $3.4 million, or 33.3% of
income before income taxes, compared to $2.8 million, or 34.1% of income before
income taxes, for the 1999 period. The 2000 period reflects a full year of
operation of Warren Real Estate Investment Corporation, a REIT subsidiary.
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.
23
24
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. 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.
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.
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
and over the internet.
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 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 704,000 in 1999 from
695,000 in 1998, and median family income in 1998 was $65,200. In addition, the
unemployment rate in December 2000 in the Boston labor market was 2.1% compared
to 2.6% in Massachusetts and 4.0% in the
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United States. This compares to 2.5%, 2.6% and 4.1% in December 1999 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 nationally with competition created by
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.
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
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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, such as the Corporation, to engage directly or indirectly 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
- 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
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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
summary 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 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
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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, 2000, the Bank had 155 employees, 38 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.
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, owned the Bank's South Peabody branch office and land, which it sold in
2000 (see Note 11 "Related-Party Transaction" in the notes to consolidated
financial statements.)
Warren Securities Corporation II, a Massachusetts corporation
incorporated in 1997, owns investment securities that it receives as equity
contributions from the Bank.
Warren Real Estate Investment Corporation, a Massachusetts corporation
incorporated in 1999, owns real estate loans that it receives as equity
contributions 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 2000.
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 2, 2001
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 2, 2001 and is incorporated herein by reference.
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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 2, 2001 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 2, 2001 and is incorporated herein by reference.
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INDEX TO FINANCIAL STATEMENTS OF
WARREN BANCORP, INC. AND SUBSIDIARIES
PAGES
-----
Report of Independent Public Accountants............................................................. 31
Consolidated Balance Sheets at December 31, 2000 and December 31, 1999............................... 32
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998................................................................... 33
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998................................................................... 34
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998................................................................... 35
Notes to Consolidated Financial Statements........................................................... 36-68
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Warren Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Warren Bancorp,
Inc. and subsidiaries (collectively, the Corporation) as of December 31, 2000
and 1999 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, 2000. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 17, 2001
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WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
ASSETS
Cash and due from banks (non-interest bearing) (note 12) $ 13,669 $ 9,251
Money market funds and overnight investments 74 12,205
-------------- --------------
Cash and cash equivalents 13,743 21,456
Investment and mortgage-backed securities available for sale (amortized cost of
$58,776 at December 31, 2000, and $75,367 at December 31, 1999) (notes 2 and 7) 58,696 75,363
Other investments (fair value of $7,284 at December 31, 2000 and $7,034 at
December 31, 1999) (note 2) 7,044 6,794
Loans held for sale (note 3) 5,180 1,816
Loans (notes 3 and 12) 348,332 291,014
Allowance for loan losses (note 3) (4,781) (4,271)
-------------- --------------
Net loans 343,551 286,743
Banking premises and equipment, net (note 4) 5,056 5,051
Accrued interest receivable 2,573 2,613
Other assets (note 8) 2,279 2,411
-------------- --------------
Total assets $ 438,122 $ 402,247
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6) $ 387,047 $ 355,534
Borrowed funds (note 7) 8,654 7,510
Escrow deposits of borrowers 1,329 1,132
Accrued interest payable 550 512
Accrued expenses and other liabilities (note 8) 2,860 1,915
-------------- --------------
Total liabilities 400,440 366,603
-------------- --------------
Commitments and contingencies (notes 4 and 12)
Stockholders' equity (notes 9 and 10):
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, 2000 and December 31, 1999
Outstanding - 7,337,611 shares at December 31, 2000, 7,333,211 shares at
December 31, 1999 809 809
Additional paid-in capital 35,715 35,841
Retained earnings 7,462 5,305
Treasury stock, at cost, 756,803 shares at December 31, 2000, 761,203 shares at
December 31, 1999 (6,244) (6,304)
-------------- --------------
37,742 35,651
Unrealized (loss) on marketable securities available for sale, net (note 2) (60) (7)
-------------- --------------
Total stockholders' equity 37,682 35,644
-------------- --------------
Total liabilities and stockholders' equity $ 438,122 $ 402,247
============== ==============
See accompanying notes to consolidated financial statements.
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WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- --------
Interest and dividend income:
Interest on loans $ 27,452 $ 22,891 $ 22,434
Interest and dividends on investments 4,682 4,969 5,048
Interest on mortgage-backed securities 930 1,127 1,771
-------- -------- --------
Total interest and dividend income 33,064 28,987 29,253
-------- -------- --------
Interest expense:
Interest on deposits 12,744 11,488 11,833
Interest on borrowed funds 376 315 227
-------- -------- --------
Total interest expense 13,120 11,803 12,060
-------- -------- --------
Net interest income 19,944 17,184 17,193
Provision for (recovery of) loan losses (note 3) 456 120 (91)
-------- -------- --------
Net interest income after provision for (recovery of)
loan losses 19,488 17,064 17,284
-------- -------- --------
Non-interest income:
Customer service fees 1,223 964 899
Gains on sales of investment securities, net (note 2) 208 17 188
Gain on sale of fixed assets (note 11) 376 -- --
Gains on sales of mortgage loans 214 232 343
Other 6 84 13
-------- -------- --------
Total non-interest income 2,027 1,297 1,443
-------- -------- --------
Income before non-interest expense and income taxes 21,515 18,361 18,727
-------- -------- --------
Non-interest expenses:
Salaries and employee benefits (note 10) 7,127 6,580 5,999
Office occupancy and equipment (note 4) 1,168 1,054 1,178
Professional services 186 273 219
Marketing 382 214 287
Real estate operations expense (income) -- (510) 65
Outside data processing expense (note 4) 561 480 491
Other 1,990 1,783 1,860
-------- -------- --------
Subtotal 11,414 9,874 10,099
Expenses for formation of Warren Real Estate Investment
Corporation -- 196 --
-------- -------- --------
Total noninterest expenses 11,414 10,070 10,099
-------- -------- --------
Income before income taxes 10,101 8,291 8,628
Income tax expense (note 8) 3,368 2,827 2,724
-------- -------- --------
Net income $ 6,733 $ 5,464 $ 5,904
======== ======== ========
Basic earnings per share (note 5) $ 0.92 $ 0.74 $ 0.75
======== ======== ========
Diluted earnings per share (note 5) $ 0.91 $ 0.72 $ 0.72
======== ======== ========
See accompanying notes to consolidated financial statements.
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34
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS)
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON SECURITIES
COMPREHENSIVE COMMON PAID-IN RETAINED AVAILABLE FOR TREASURY
INCOME STOCK CAPITAL EARNINGS SALE, NET STOCK TOTAL
------------- -------- ---------- -------- ------------- --------- --------
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 (495)
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 of 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
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
Comprehensive income:
Net income $ 6,733 -- -- 6,733 -- -- 6,733
--------
Other comprehensive income:
Unrealized gain on securities
available for sale, net of taxes 82
Less: Reclassification adjustment for
securities gains, net of tax
expense of $73, included in
net income (135)
--------
Total other comprehensive income (53) -- -- -- (53) -- (53)
--------
Comprehensive income $ 6,680
========
Purchase of treasury stock (25,000 shares) -- -- -- -- (183) (183)
Dividends paid -- -- (4,576) -- -- (4,576)
Tax benefit of stock options exercised -- 2 -- -- -- 2
Issuance of 29,400 common shares
for exercise of options -- (128) -- -- 243 115
-------- -------- -------- -------- -------- --------
Balance at December 31, 2000 $ 809 $ 35,715 $ 7,462 ($ 60) ($ 6,244) $ 37,682
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
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35
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Net income $ 6,733 $ 5,464 $ 5,904
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for (recovery of) loan losses 456 120 (91)
Depreciation and amortization 511 488 594
Deferred income taxes (benefit) 373 229 (291)
(Accretion) amortization of premiums, fees and discounts (12) 604 680
(Gains) on sale of investment securities (208) (17) (188)
(Gains) on sales of mortgage loans (214) (232) (343)
(Gains) on sales of fixed assets (376) -- --
(Gains) on sale of real estate acquired by foreclosure -- (514) (18)
(Increase) decrease in loans held for sale (3,364) (624) (161)
(Increase) decrease in accrued interest receivable 40 190 (13)
(Increase) decrease in other assets (218) 83 560
Increase (decrease) in accrued interest payable 38 (77) (223)
Increase (decrease) in other liabilities and escrow deposits 1,144 1,424 (65)
Proceeds from sales of fixed assets 669 -- --
-------- -------- --------
Net cash provided by operating activities 5,572 7,138 6,345
-------- -------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale (22,925) (18,100) (52,957)
Proceeds from sales of investment securities available for sale 2,204 17 2,796
Proceeds from maturities of investment securities available for sale 34,848 37,953 37,127
Proceeds from payments of mortgage-backed securities available for sale 2,434 5,982 9,732
Proceeds from sales of real estate acquired by foreclosure -- 163 735
Net (increase) in loans (57,050) (22,378) (25,432)
Purchases of premises and equipment (809) (535) (813)
-------- -------- --------
Net cash provided by (used in) investing activities (41,298) 3,102 (28,812)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 31,513 8,522 21,719
Proceeds from Federal Home Loan Bank advances -- -- 2,000
Net increase (decrease) in other borrowed funds 1,144 (164) 2,808
Dividends paid (4,576) (4,675) (5,670)
Purchases of treasury stock (183) (4,634) (928)
Stock options exercised 115 128 1,098
-------- -------- --------
Net cash provided by (used in) financing activities 28,013 (823) 21,027
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (7,713) 9,417 (1,440)
Cash and cash equivalents at beginning of year 21,456 12,039 13,479
-------- -------- --------
Cash and cash equivalents at end of year $ 13,743 $ 21,456 $ 12,039
======== ======== ========
Cash paid during the year for:
Interest $ 13,082 $ 11,880 $ 12,283
Income taxes $ 2,535 $ 2,245 $ 2,733
Supplemental noncash investing and financing activities:
Foreclosures on real estate $ -- $ 101 $ 158
See accompanying notes to consolidated financial statements.
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36
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Warren Bancorp, Inc. (the "Corporation") is a bank-holding company that
wholly owns Warren Five Cents Savings Bank (the "Bank"). The Bank operates a
main office and three additional banking offices in Peabody and two banking
offices in Beverly and also operates a website with online banking capabilities.
The Bank operates as a community bank with a primary service area centered in
the cities of Peabody and Beverly. This service area also encompasses other
cities and towns in eastern Massachusetts as well as southern New Hampshire. It
is in the business of making individual and commercial loans as well as offering
an array of deposit products to customers in its market area.
The consolidated financial statements include the accounts of the
Corporation, 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
have been reclassified to conform with the 1999 and 2000 presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The accounting and reporting policies of 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 and the realizability of the
deferred tax asset. In connection with the determination of the allowance for
loan losses 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.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Corporation's business is with customers in Massachusetts
and southern New Hampshire. The types of securities in which the Corporation
invests is disclosed in Note 2. Note 3 discloses the types of lending in which
the Corporation is engaged. The Corporation does not have any significant
concentrations in any one industry or customer.
36
37
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The following is a summary of the more significant accounting policies.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, cash and cash
equivalents include cash and balances due from banks and overnight deposits and
investments.
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.
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
37
38
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 a third-party credit-review consulting firm in making that
determination. 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 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.
38
39
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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.
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.
39
40
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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.
RECENT ACCOUNTING DEVELOPMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded on the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recorded currently in income unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains or losses to offset related results of the hedged item in the
statement of income and requires that a company formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133, as amended by SFAS No. 137, Deferral of the Effective Date of FASB
Statement No. 133, and FASB No. 138, An Amendment of Statement 133, is effective
for the first fiscal quarter for fiscal years beginning after June 15, 2000.
As of December 31, 2000, the Corporation had commitments outstanding to
fund mortgage loans, which will be sold to third parties subsequent to
origination as required under contracts. These commitments to fund mortgage
loans and the agreements to subsequently sell such loans to third parties
qualify as derivative instruments under SFAS No. 133. However, recognition of
these derivative instruments upon the adoption of SFAS No. 133 did not have a
material impact on the Corporation's financial position or results of
operations.
FASB has issued SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement replaces
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and rescinds SFAS Statement No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No.
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure provisions
are effective for fiscal years ending after December 15, 2000. The Corporation
has not yet quantified the remaining provisions effective in 2001; however, the
Corporation does not expect that the adoption of this statement will have a
material impact on its financial position or results of operations.
40
41
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities at December 31, 2000 and 1999
are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
2000
AVAILABLE FOR SALE
Fixed income mutual funds ........................ $ 28,698 $ 252 $ (38) $ 28,912
FNMA mortgage-backed securities .................. 8,044 289 -- 8,333
GNMA mortgage-backed securities .................. 3,508 -- (28) 3,480
U.S. Government and related
obligations ..................................... 7,645 28 -- 7,673
Corporate notes .................................. 5,567 2 (4) 5,565
Preferred stock .................................. 5,314 -- (581) 4,733
--------- ---------- ---------- --------
58,776 571 (651) 58,696
--------- ---------- ---------- --------
OTHER
Foreign government bonds
held to maturity ................................ 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
--------- ---------- ---------- --------
$ 65,820 $ 811 $ (651) $ 65,980
========= ========== ========== ========
41
42
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED)
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
========== ========== ========== ==========
There were no sales of mortgage-backed securities in 2000 and 1999 and
there were no sales of other types of debt securities in 2000, 1999 and 1998.
Proceeds from the sales of equity securities were $2,204,000, zero and
$2,796,000 in 2000, 1999 and 1998, respectively. Realized gains on sales of
equity securities were $208,000, zero, and $188,000 in 2000, 1999 and 1998,
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 2000,
1999 or 1998.
42
43
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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 $10,272,000 and $10,394,000,
respectively, at December 31, 2000 were pledged to secure securities sold under
agreements to repurchase. These securities were classified as available for
sale.
The following table presents a maturity distribution of the amortized
cost and fair value of the debt securities portfolio as of December 31, 2000.
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 ......... $ 21,384 $ 2,769 $ 611 $ -- $ 24,764
======== ======== ======== ======== ========
Fair value ............. $ 21,661 $ 2,784 $ 606 $ -- $ 25,051
======== ======== ======== ======== ========
OTHER (HELD TO MATURITY)
Amortized cost ......... $ -- $ 750 $ 250 $ 250 $ 1,250
======== ======== ======== ======== ========
Fair value ............. $ -- $ 750 $ 250 $ 250 $ 1,250
======== ======== ======== ======== ========
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.
43
44
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(3) LOANS
Loans at December 31 are summarized as follows:
2000 1999
---------- ----------
Residential mortgage: (IN THOUSANDS)
Adjustable-rate .................... $ 85,391 $ 48,369
Fixed-rate ......................... 3,126 3,840
---------- ----------
88,517 52,209
---------- ----------
Commercial mortgage:
Adjustable-rate .................... 150,295 145,516
Fixed-rate ......................... 28,371 21,705
Construction ....................... 14,812 19,590
---------- ----------
193,478 186,811
---------- ----------
Commercial loans ....................... 41,512 29,446
---------- ----------
Consumer loans:
Home equity ........................ 22,442 20,152
Other .............................. 2,383 2,396
---------- ----------
24,825 22,548
---------- ----------
Total loans ........................ 348,332 291,014
Allowance for loan losses .............. (4,781) (4,271)
---------- ----------
Net loans .................... $ 343,551 $ 286,743
========== ==========
Changes in the allowance for loan losses for the years ended December
31 are as follows:
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
Balance at beginning of year........................ $4,271 $4,023 $4,066
Provision for (recovery of) loan losses charged
(credited) to expense.............................. 456 120 (91)
Loans charged off................................... (22) (60) (98)
Loan recoveries..................................... 76 188 146
------ ------ ------
Balance at end of year.............................. $4,781 $4,271 $4,023
====== ====== ======
44
45
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(3) LOANS - (CONTINUED)
The allowance for loan losses at December 31, 2000 attributable to
$991,000 of impaired loans, all of which is measured using the fair value of
collateral method, is $56,000. 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, was $112,000.
At December 31, 2000 the Corporation had net deferred origination costs
of $514,000, reflected as an addition to the appropriate loan categories, and at
December 31, 1999 had $118,000 net deferred origination costs, reflected as an
addition to the appropriate loan categories.
At December 31, 2000, 1999 and 1998 the Corporation serviced
residential loans for investors of approximately $3,770,000, $3,737,000 and
$3,580,000, respectively, which are not reflected in the accompanying
consolidated financial statements because they are not assets of the
Corporation. At December 31, 2000 no formal recourse provisions exist in
connection with such servicing. At December 31, 2000 and 1999, the Corporation
did not have servicing assets.
Nonaccruing loans amounted to zero, $914,000 and $475,000 at December
31, 2000, 1999 and 1998, respectively. Interest income of approximately $47,000
and $48,000 would have been recorded in 1999 and 1998, 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 and $22,000 in 1999 and 1998, respectively.
There were no additional loans considered impaired and performing at
December 31, 1999. At December 31, 2000, there were $991,000 of loans considered
impaired and performing. The Corporation would have recorded no additional
interest income had these loans performed under their original terms. Interest
income on these loans amounted to $112,000 in 2000.
During 2000 and 1999, the average recorded investment in impaired loans
was $887,000 and $1,174,000, respectively.
Gains on sales of mortgage loans of $214,000 and $232,000 were realized
during the 2000 and 1999 periods, respectively, from the sale of $19.0 million
and $23.1 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 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.
45
46
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(3) LOANS - (CONTINUED)
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, 2000 was $8,850,000. In addition to this balance, the Bank
has commitments to extend an additional $828,000. Activity in these loans during
the year ended December 31, 2000 included loan additions of $400,000 and loan
repayments of $486,000 and two directors retired with outstanding balances as of
December 31, 1999 of $245,000. The balance of these loans at December 31, 1999
was $9,181,000.
(4) BANKING PREMISES AND EQUIPMENT
Banking premises and equipment at December 31 are as follows:
ESTIMATED
USEFUL LIVES 2000 1999
------------ ------- -------
(IN THOUSANDS)
Land......................................... $ 969 $ 1,186
Buildings.................................... 3-40 Years 4,681 4,836
Furniture, fixtures and equipment............ 3-30 Years 4,490 4,112
Leasehold improvements....................... 5-20 Years 1,552 1,261
------- -------
11,692 11,395
Accumulated depreciation and amortization.... (6,636) (6,344)
------- -------
$ 5,056 $ 5,051
======= =======
Depreciation and amortization expense related to the Corporation's
premises and equipment were $511,000, $488,000, and $594,000 in 2000, 1999 and
1998, respectively.
At December 31, 2000, 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)
2001........................................ $ 652
2002........................................ 659
2003........................................ 572
2004........................................ 196
2005........................................ 162
Thereafter.................................. 380
------
$2,621
======
Rent expense for the years ended December 31, 2000, 1999 and 1998
amounted to approximately $200,000, $125,000 and $137,000, respectively. Outside
data processing expense for the years ended December 31, 2000, 1999 and 1998
amounted to $561,000, $480,000 and $491,000, respectively. In September 2000,
the Corporation sold a parcel of land and building, which was the former
location of the Bank's South Peabody branch office (see Note 11 "Related-Party
Transaction" below).
46
47
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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 2000, 1999
and 1998 are as follows:
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
2000 1999 1998 2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Basic EPS ......................... $6,733 $5,464 $5,904 7,323 7,419 7,823 $ 0.92 $ 0.74 $ 0.75
Effect of dilutive
stock options .................. -- -- -- 108 195 329 0.01 0.02 0.03
------ ------ ------ ------ ------ ------ ------ ------ ------
Diluted EPS ....................... $6,733 $5,464 $5,904 7,431 7,614 8,152 $ 0.91 $ 0.72 $ 0.72
====== ====== ====== ====== ====== ====== ====== ====== ======
(6) DEPOSITS
Deposits at December 31 are summarized as follows:
2000 1999
-------- --------
(IN THOUSANDS)
Non-interest bearing .......................... $ 26,641 $ 19,019
-------- --------
Savings deposits:
Regular savings and club accounts ......... 98,276 99,909
NOW accounts .............................. 47,491 36,784
Cash Manager and Passbook Plus accounts ... 57,385 37,235
-------- --------
Total savings deposits ................. 203,152 173,928
Time deposits ............................... 157,254 162,587
-------- --------
Total deposits ......................... $387,047 $355,534
======== ========
Contractual maturities of time deposits at December 31, 2000 are as follows:
(IN THOUSANDS)
Within one year.................................... $ 101,952
From one to two years.............................. 55,194
From two to five years............................. 108
After five years................................... 0
---------
$ 157,254
=========
The aggregate amount of individual time deposits with a minimum
denomination of $100,000 or more was $28,766,000 and $28,286,000 at December 31,
2000 and 1999, respectively. Interest expense related to such deposits was
approximately $1,572,000 in 2000, $1,392,000 in 1999 and $1,166,000 in 1998.
47
48
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(7) BORROWED FUNDS
Borrowed funds at December 31 are summarized as follows:
2000 1999
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Securities sold under agreements
to repurchase maturing in January,
2001 and January, 2000, at December
31, 2000 and 1999, respectively .... $5,983 3.00% $4,839 3.00%
Advances from the Federal Home Loan
Bank, 3.07% to 6.03% at December 31,
2000 and 1999 maturing through 2011 2,671 5.96 2,671 5.96
------ ------
Total borrowed funds ........... $8,654 3.91% $7,510 4.05%
====== ======
The following table sets forth information for securities sold under
agreement to repurchase for the years ended December 31, 2000, 1999 and 1998
(dollars in thousands):
2000 1999 1998
------ ------ ------
Highest month end balance ........... $8,768 $5,567 $5,003
Average balance outstanding
during the year .................. 6,965 4,972 3,405
Average interest rate during the year 3.00% 3.00% 3.00%
A summary of Federal Home Loan Bank of Boston advances at December 31,
2000, by year of maturity, follows (in thousands):
MATURITY IN: AMOUNT
2001 $ 14
2003 19
2005 2,000
2009 450
2011 188
------
$2,671
======
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, zero of which was used at December 31,
2000.
48
49
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(8) INCOME TAXES
The components of income tax expense for the years ended December 31
were as follows:
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
Current:
Federal............................................................ $2,754 $2,349 $2,584
State.............................................................. 241 249 431
------ ------ ------
2,995 2,598 3,015
------ ------ ------
Deferred (prepaid):
Federal............................................................ 318 167 (215)
State.............................................................. 58 69 (66)
(Decrease) in beginning-of-the-year balance
of valuation allowance for deferred tax assets................. (3) (7) (10)
------ ------ ------
373 229 (291)
------ ------ ------
$3,368 $2,827 $2,724
====== ====== ======
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, 2000, 1999 and 1998 follows:
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
Computed "expected" tax expense at
statutory rate...................................................... $3,434 $2,819 $2,933
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............................................... (3) (7) (10)
Dividends received deduction....................................... (107) (107) (116)
State income taxes, net of Federal income
tax benefit, before change in valuation
allowance......................................................... 195 204 241
Interest on municipal bonds........................................ (45) - -
Other.............................................................. (106) (82) (124)
Tax audit settlement................................................ - - (200)
------ ------ ------
Income tax expense............................................. $3,368 $2,827 $2,724
====== ====== ======
49
50
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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,
2000 and 1999 are presented below:
2000 1999
------ ------
(IN THOUSANDS)
Deferred tax assets:
Allowance for loan losses ............................... $1,906 $1,874
Valuation adjustments on securities ..................... 354 365
Deferred compensation ................................... 132 147
Cash versus accrual adjustments ......................... 187 158
Depreciation of banking premises and equipment .......... 235 261
Unrealized losses on debt and equity securities
available for sale .................................. 21 --
Other ................................................... 29 91
------ ------
Total gross deferred tax assets ...................... 2,864 2,896
Less valuation allowance .......................... (42) (45)
------ ------
Net deferred tax assets .......................... 2,822 2,851
------ ------
Deferred tax liabilities:
Deferred loan costs ..................................... 185 16
Purchase accounting adjustments ......................... 639 650
Accounting for partnership interests .................... 509 509
Deferred transfer of taxable dividends .................. 194 40
Unrealized gains on debt and equity securities
available for sale ................................... -- 3
Other .................................................. 33 28
------ ------
Total gross deferred tax liabilities ............. 1,560 1,246
------ ------
Net deferred tax asset ........................... $1,262 $1,605
====== ======
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
50
51
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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, 2000, neither the FRB nor
the FDIC permitted an 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, 2000, 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.
51
52
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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, 2000 and 1999 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
---------- ------- ---------- ------- ---------- -------
2000
WARREN BANCORP, INC.
Leverage capital $37,503 8.68% $12,966 3.0% N/A N/A
Tier I risk-based capital 37,503 10.19% 14,716 4.0% N/A N/A
Total risk-based capital 42,104 11.44% 29,432 8.0% N/A N/A
WARREN FIVE CENTS SAVINGS BANK
Leverage capital 36,102 8.35% 12,966 3.0% $ 21,611 5.0%
Tier I risk-based capital 36,102 9.81% 14,726 4.0% 22,089 6.0%
Total risk-based capital 40,706 11.06% 29,453 8.0% 36,816 10.0%
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%
52
53
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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, 2000, the latest measurement date, was $1,306,000
(unaudited). Both liquidation accounts will be reduced to the extent that
eligible account holders have
53
54
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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):
2000 1999 1998
---- ---- ----
Employer contribution.................. $142 $128 $138
Employer match......................... 60 59 46
Profit sharing distribution............ 313 55 --
---- ---- ----
$515 $242 $184
==== ==== ====
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") . 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 in January of 1998, 1999 and 2000 (for the years
1997, 1998 and 1999, respectively) as a special profit-sharing distribution.
54
55
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(10) EMPLOYEE BENEFITS - (CONTINUED)
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 had entered into a consulting agreement
with the Corporation. The expense to maintain that arrangement amounted to
$61,000 in 2000, $121,000 in 1999, and $176,000 in 1998. The cost of this
arrangement was being expensed over the term of the consulting agreement, which
ended in May 2000. Included in the accompanying balance sheets are accrued
expenses payable of $156,000, and $199,000 at December 31, 2000 and 1999,
respectively. The arrangement is being partially funded by a life insurance
policy.
DIRECTORS' DEFERRED COMPENSATION PLAN
The Corporation has established an unfunded deferred compensation plan
for its directors who are 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, 2000, 1999 and 1998 totaled $35,000, $32,000 and
$44,000, respectively, and the accrued expense payable included in the
accompanying balance sheets for December 31, 2000 and 1999 were $166,000 and
$158,000, 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.
55
56
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(10) EMPLOYEE BENEFITS - (CONTINUED)
Under SFAS No. 123, the Corporation's net income and earnings per share
would have been reduced to the pro-forma amounts indicated below:
2000 1999 1998
---------- ---------- ----------
Net income:
As reported..... $6,733,000 $5,464,000 $5,904,000
Pro-forma....... $6,509,000 $5,106,000 $5,272,000
Basic earnings per share:
As reported..... $ 0.92 $ 0.74 $ 0.75
Pro-forma....... $ 0.89 $ 0.69 $ 0.67
Diluted earnings per share:
As reported..... $ 0.91 $ 0.72 $ 0.72
Pro-forma....... $ 0.88 $ 0.67 $ 0.65
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 2000, 1999 and 1998, respectively: dividend yield
of 6.18%, 4.88% and 2.80%; expected volatility of 46%, 59% and 44%; risk-free
interest rates of 6.3%, 5.7% and 5.6%; and expected lives of five years for 2000
and five years for 1999 and six years for 1998. The weighted average grant-date
fair value per share of stock options issued in 2000, 1999 and 1998 were $2.11,
$3.39 and $5.47, respectively.
Changes in options outstanding during 2000, 1999 and 1998 were as
follows:
AVERAGE
EXERCISE
EXERCISE PRICE PRICE PER
SHARES RANGE PER SHARE SHARE
--------- ------------------ ---------
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 $1.8125 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 $1.8125 to $14.375 $ 7.70
(558,410 shares exercisable)
Granted during 2000................. 179,500 $7.125 $ 7.13
Exercised during 2000............... (29,400) $1.8125 to $6.1875 $ 4.00
Canceled during 2000................ (28,520) $4.00 to $12.375 $ 8.19
---------
Outstanding, December 31, 2000...... 1,030,350 $1.8125 to $14.375 $ 8.09
(680,230 shares exercisable) =========
56
57
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(10) EMPLOYEE BENEFITS - (CONTINUED)
A total of 229,400 shares of common stock have been reserved and are
available for future grants under the Corporation's various stock option plans.
The following table summarizes information about the options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
$ 0 - $ 5 185,410 3.25 years $ 3.91 185,410 $ 3.91
5 - 10 669,440 5.37 7.40 389,520 7.24
10 - 15 175,500 4.53 12.86 105,300 12.86
--------- -------
Total 1,030,350 4.85 7.70 680,230 7.20
========= =======
(11) RELATED-PARTY TRANSACTION
During the 2000 period, 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 sales price of $675,000
resulted in a gain of $376,000. The transaction was completed and transfer of
title occurred in September 2000. See "Non-Interest Income" under "Results of
Operations - 2000 Compared to 1999" and Note 4 "Banking Premises and Equipment"
above.
(12) 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 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.
57
58
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES - (CONTINUED)
Financial instruments with off-balance sheet risk at December 31 are as follows:
CONTRACT
AMOUNT
------------------
(IN THOUSANDS)
2000 1999
-------- --------
Financial Instruments Whose Contract Amounts Represent
Credit Risk:
Commitments to originate loans .......................... $ 37,701 $ 16,573
Unused lines of credit .................................. 48,417 36,551
Standby letters of credit ............................... 3,375 1,695
Unadvanced portions of construction loans ............... 24,710 17,625
Loans sold with recourse ................................ 899 962
Financial Instruments Whose Contract Amounts
Exceed the Amount of Credit Risk:
Forward commitments to sell loans ....................... $ 6,978 $ 3,294
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 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.
58
59
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES - (CONTINUED)
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 $4.0 million at December 31, 2000.
There were no material legal claims against the Corporation at December
31, 2000.
(13) WARREN BANCORP, INC. (PARENT COMPANY ONLY)
The condensed information of Warren Bancorp, Inc. is as follows:
BALANCE SHEETS: AT DECEMBER 31,
------------------
2000 1999
-------- --------
(IN THOUSANDS)
ASSETS
Cash ....................................................... $ 1,443 $ 1,475
Investment in subsidiary ................................... 36,281 34,219
-------- --------
Total assets .......................................... $ 37,724 $ 35,694
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses ........................................ $ 42 $ 50
-------- --------
Total liabilities ................................... 42 50
Stockholders' equity ....................................... 37,682 35,644
-------- --------
Total liabilities and stockholders' equity .......... $ 37,724 $ 35,694
======== ========
59
60
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(13) WARREN BANCORP, INC. (PARENT COMPANY ONLY) - (CONTINUED)
STATEMENTS OF OPERATIONS: YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
Income:
Dividend income from subsidiary ................. $4,570 $7,066 $3,900
Interest ........................................ 92 105 210
Management fees ................................. 86 111 196
------ ------ ------
Total operating income ................... 4,748 7,282 4,306
Expenses:
Other expenses ................................. (86) (111) (196)
Income tax expense ............................. (42) (52) (81)
Equity in undistributed net income (losses)
of subsidiary ................................. 2,113 (1,655) 1,875
------ ------ ------
Net income ......................................... $6,733 $5,464 $5,904
====== ====== ======
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, 2000 and therefore are not
reprinted here.
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income ................................................. $ 6,733 $ 5,464 $ 5,904
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income (losses) of Bank
subsidiary ........................................... (2,113) 1,655 (1,875)
Decrease in other assets ................................ -- -- 101
(Decrease) in liabilities ............................... (8) (62) (44)
-------- -------- --------
Net cash provided by operating activities ............ 4,612 7,057 4,086
-------- -------- --------
Cash flows from financing activities:
Dividends paid ............................................. (4,576) (4,675) (5,670)
Purchase of treasury stock ................................. (183) (4,634) (928)
Stock options exercised .................................... 115 128 1,098
-------- -------- --------
Net cash (used in) financing activities ............. (4,644) (9,181) (5,500)
-------- -------- --------
(Decrease) in cash and cash equivalents ....................... (32) (2,124) (1,414)
Cash and cash equivalents at beginning of year ................ 1,475 3,599 5,013
-------- -------- --------
Cash and cash equivalents at end of year ...................... $ 1,443 $ 1,475 $ 3,599
======== ======== ========
60
61
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED 2000
-----------------------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
-------- --------- ------ ------
(TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA)
Interest and dividend income ...... $ 8,675 $ 8,399 $8,195 $7,795
Interest expense .................. 3,559 3,353 3,135 3,073
-------- --------- ------ ------
Net interest income ............ 5,116 5,046 5,060 4,722
Provision for loan losses ......... 114 114 114 114
-------- --------- ------ ------
Net interest income after
provision for loan losses .... 5,002 4,932 4,946 4,608
Non-interest income (1) ........... 371 991 367 298
Non-interest expense .............. 3,018 2,801 2,857 2,738
-------- --------- ------ ------
Income before income taxes ..... 2,355 3,122 2,456 2,168
Income tax expense ................ 790 1,081 805 692
-------- --------- ------ ------
Net income .............. $ 1,565 $ 2,041 $1,651 $1,476
======== ========= ====== ======
Basic earnings per share: ......... $ 0.21 $ 0.28 $ 0.23 $ 0.20
======== ========= ====== ======
Diluted earnings per share: ....... $ 0.21 $ 0.27 $ 0.22 $ 0.20
======== ========= ====== ======
(1) Includes gain on sale of investment security of $208,000 and gain on
sale of fixed assets (see Note 11 "Related-Party Transaction") of
$376,000 in the three months ended September 30, 2000.
61
62
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)- (CONTINUED)
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 (2) ........... 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
======== ========= ====== ======
(2) 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.
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.
62
63
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(15) 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.
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.
63
64
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
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.
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, 2000 and 1999. 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, 2000
and 1999.
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, 2000 and 1999, management has
estimated the fair values of these financial instruments to be immaterial.
64
65
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows (in thousands):
2000 1999
---- ----
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
Financial assets:
Cash and due from banks ........ $ 13,669 $ 13,669 $ 9,251 $ 9,251
Money market funds and overnight
investments ................. 74 74 12,205 12,205
Investment securities .......... 58,696 58,696 75,363 75,363
Loans held for sale ............ 5,180 5,219 1,816 1,829
Loans, net ..................... 343,551 342,126 286,743 281,782
Other investments .............. 7,044 7,284 6,794 7,034
Financial liabilities:
Non-time deposits .............. 229,793 229,793 192,947 192,947
Time deposits .................. 157,254 156,880 162,587 161,725
FHLB borrowings ................ 2,671 2,658 2,671 2,564
Repurchase agreements .......... 5,983 5,983 4,839 4,839
(16) 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.
65
66
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(16) 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.
66
67
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(16) BUSINESS SEGMENTS - (CONTINUED)
Specific reportable segment information as of and for the years ended
December 31, 2000, 1999 and 1998 is as follows (in thousands):
YEAR ENDED DECEMBER 31, 2000
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
------- ------- ----- ------------ ------------
Interest income - external $ 21,362 $ 11,412 $ 290 $ 33,064
Interest income - internal -- 9,800 111 $ (9,911) --
Interest expense - external 2,221 10,805 94 13,120
Interest expense - internal 9,800 -- 111 (9,911) --
Fee and other income 326 904 797 2,027
Income tax expense
(benefit) 2,929 1,655 (1,216) 3,368
Net income (loss) 4,435 2,985 (687) 6,733
Total assets 262,500 167,500 8,100 438,100
Total loans 235,000 113,300 -- 348,300
Total deposits 67,400 317,500 2,100 387,000
67
68
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(16) BUSINESS SEGMENTS - (CONTINUED)
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
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
68
69
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.(8)
3.(i)(B) -- Articles of Merger of Warren Bancorp, Inc.(8)
3.(i)(C) -- 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.(6)
3.(ii) -- By-laws of Warren Bancorp, Inc.,(8)
4.1 -- Form of Stock Certificate of Warren Bancorp, Inc.(3)
4.2 -- Shareholder Rights Agreement, dated as of April 21, 1999,
between Warren Bancorp, Inc. and Registrar and Transfer
Company, as Rights Agent(6)
10.1 -- Warren Bancorp, Inc. 1986 Incentive and Nonqualified Stock
Option Plan, as amended.(9)*
10.2 -- Special Termination Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and Paul M. Peduto.(8)*
10.3 -- Special Termination Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and Leo C. Donahue.(8)*
10.4 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and Paul M. Peduto.(7)*
10.5 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and Leo C. Donahue,Jr.(7)*
10.6 -- Special Termination Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and John R. Putney.(8)*
10.7 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and John R. Putney.(7)*
10.8 -- Warren Bancorp, Inc. 1991 Incentive and Nonqualified Stock
Option Plan, as amended.(1)*
10.9 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and Mark J. Terry(7)*
10.10 -- Special Termination Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and Mark J. Terry.(4)*
10.11 -- Warren Bancorp, Inc. 1995 Incentive and Nonqualified Stock
Option Plan(2)*
10.12 -- Executive Supplemental Retirement Agreement among Warren
Bancorp, Inc., Warren Five Cents Savings Bank and George
W. Phillips.(3)*
10.13 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and George W. Phillips (3)*
10.14 -- Employment Agreement between Warren Five Cents Savings
Bank and John R. Putney(4)*
10.15 -- Consulting Agreement between Warren Bancorp, Inc. and
George W. Phillips(4)*
10.16 -- Warren Bancorp, Inc. 1998 Incentive and Nonqualified Stock
Option Plan(5)*
21.1 -- List of Subsidiaries of Warren Bancorp, Inc.(8)
23.1 -- Consent of Independent Public Accountants.(8)
(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 Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on May 3, 1995
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, 1996 and incorporated herein by reference.
(4) 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.
(5) 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.
(6) 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.
(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
29, 2000 and incorporated herein by reference.
(8) Filed herewith.
(9) Previously filed as an exhibit to the Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on May 15, 1988
and incorporated herein by reference.
* 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
69
70
- --------------------------------------------------------------------------------
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 21, 2001.
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 21, 2001
- ------------------------------------------------------- Director (Principal Executive Officer)
JOHN R. PUTNEY
/s/ Paul M. Peduto Treasurer; Director (Principal Financial March 21, 2001
- ------------------------------------------------------- Officer and Principal Accounting Officer)
PAUL M. PEDUTO
/s/ Peter V. Bent Director March 8, 2001
- -------------------------------------------------------
PETER V. BENT
/s/ Stephen J. Connolly Director March 21, 2001
- -------------------------------------------------------
STEPHEN J. CONNOLLY, IV
/s/ Francis L. Conway Director March 8, 2001
- -------------------------------------------------------
FRANCIS L. CONWAY
Director March , 2001
- -------------------------------------------------------
ROBERT R. FANNING, JR.
/s/ Arthur E. Holden Director March 21, 2001
- -------------------------------------------------------
ARTHUR E. HOLDEN
/s/ Stephen R. Howe Director March 21, 2001
- -------------------------------------------------------
STEPHEN R. HOWE
/s/ Stephen G. Kasnet Director March 21, 2001
- -------------------------------------------------------
STEPHEN G. KASNET
/s/ Linda Lerner Director March 21, 2001
- -------------------------------------------------------
LINDA LERNER
/s/ Arthur E. McCarthy Director March 21, 2001
- -------------------------------------------------------
ARTHUR E. MCCARTHY
/s/ Arthur J. Pappathanasi Director March 21, 2001
- -------------------------------------------------------
ARTHUR J. PAPPATHANASI
/s/ George W. Phillips Director March 21, 2001
- -------------------------------------------------------
GEORGE W. PHILLIPS
/s/ John D. Smidt Director March 21, 2001
- -------------------------------------------------------
JOHN D. SMIDT
/s/ John H. Womack Director March 21, 2001
- -------------------------------------------------------
JOHN H. WOMACK
70
71
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders of Warren Bancorp, Inc. will be held at the
Peabody Marriott, 8A Centennial Drive, Peabody, Massachusetts, on Wednesday,
May 2, 2001, 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 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
02110-2812
Post Office Box 6159
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, 2000. All prices set forth below are based
upon information provided by the Nasdaq National Market.
COMMON STOCK
------------
HIGH LOW
---- ---
2000 4th Quarter.......................................... $8.00 $7.00
3rd Quarter.......................................... 8.34 6.75
2nd Quarter.......................................... 7.75 6.44
1st Quarter.......................................... 7.75 6.25
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
As of March 1, 2001, the Corporation had approximately 600 stockholders of
record who held 7,337,611 shares of common stock. The number of shareholders
indicated does not reflect the number of persons or entities who hold their
common stock in nominee names through various brokerage firms or other entities.
71
72
SHAREHOLDER INFORMATION - (CONTINUED)
Dividends were paid by the Corporation during 2000 and 1999 as follows:
PAYMENT DIVIDEND
DATE PER SHARE
---- ---------
2000 4th Quarter........................ November 13, 2000 $.105
3rd Quarter........................ August 14, 2000 .105
2nd Quarter (1).................... May 15, 2000 .315
1st Quarter........................ February 14, 2000 .100
(1) Includes special dividend of $.21 per share.
1999 4th Quarter........................ November 15, 1999 $.100
3rd Quarter........................ August 16, 1999 .100
2nd Quarter (2).................... May 17, 1999 .340
1st Quarter........................ February 4, 1999 .090
(2) Includes special dividend of $.24 per share.
72
73
CORPORATE INFORMATION
WARREN BANCORP, INC. AND WARREN FIVE CENTS SAVINGS BANK
AS OF MARCH 21, 2001
DIRECTORS PRINCIPAL OFFICERS
PETER V. BENT (2)(4) ARTHUR E. MCCARTHY (1)(3) WARREN BANCORP, INC.
Owner/Manager, Vice President &
Brown's Yacht Yard Managing Director, STEPHEN G. KASNET
Tucker Anthony, Inc. Chairman of the Board
STEPHEN J. CONNOLLY, IV (3)(4)
President, ARTHUR J. PAPPATHANASI (1)(2)(6) JOHN R. PUTNEY
Connolly Brothers, Inc. President President and
Construction Company Richdale Dairy Stores, LLC. Chief Executive Officer
FRANCIS L. CONWAY (2) PAUL M. PEDUTO PAUL M. PEDUTO
Chairman Treasurer, Treasurer
Conway, Cahill-Brodeur Warren Bancorp, Inc., and
Funeral Home, LLC Executive Vice President, SUSAN G. OUELLETTE
Chief Financial Officer and Treasurer, Clerk
ROBERT R. FANNING, JR. (1)(2)(3)(6) Warren Five Cents Savings Bank
President Emeritus, WARREN FIVE CENTS SAVINGS BANK
Northeast Health GEORGE W. PHILLIPS (5)(6)
Systems, Inc. Retired STEPHEN G. KASNET
Chairman of the Board
ARTHUR E. HOLDEN (1)(3)(4) JOHN R. PUTNEY
Vice President, President & JOHN R. PUTNEY
Holden Oil, Inc. Chief Executive Officer, President and
Warren Bancorp, Inc. and Chief Executive officer
STEPHEN R. HOWE (2)(4)(6) Warren Five Cents Savings Bank
Certified Public Accountant PAUL M. PEDUTO
JOHN D. SMIDT (4) Executive Vice President,
STEPHEN G. KASNET (1)(3)(4) President & Treasurer, Chief Financial Officer and Treasurer
President & John Smidt Co., Inc.
Chief Executive Officer, LEO C. DONAHUE
Harbor Global Co., Ltd. JOHN H. WOMACK (2)(6) Senior Vice President for
Chairman of the Board, President & Personal Banking
Warren Bancorp, Inc. and Chief Executive Officer,
Warren Five Cents Savings Bank TJM Enterprise, Inc. MARK J. TERRY
Senior Vice President for
LINDA LERNER (2)(4)(6) Corporate Banking and
Retired Senior Lending Officer
SUSAN G. OUELLETTE
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
73