1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
or the quarterly period ended March 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from to
-------------- ---------------------
Commission File No. 0-17222
WARREN BANCORP, INC.
(Exact Name of registrant as specified in the charter)
MASSACHUSETTS 04-3024165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 MAIN STREET, PEABODY, MASSACHUSETTS 01960
(Address of principal executive offices) (Zip Code)
(978) 531-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirement for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 1, 2001
- --------------------------------------- -----------------------------------
Common Stock, par value $.10 per share 7,361,811
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WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
A S S E T S
Cash and due from banks (non-interest bearing) $ 11,282 $ 13,669
Money market funds and overnight investments 875 74
--------- ---------
Cash and cash equivalents 12,157 13,743
Investment and mortgage-backed securities available for sale (amortized cost of
$52,726 at March 31, 2001, $58,776 at December 31, 2000) 53,127 58,696
Other investments (fair value of $7,284 at March 31, 2001 and December 31, 2000) 7,044 7,044
Loans held for sale 9,171 5,180
Loans 349,355 348,332
Allowance for loan losses (4,832) (4,781)
--------- ---------
Net loans 344,523 343,551
Banking premises and equipment, net 5,014 5,056
Accrued interest receivable 2,326 2,573
Due from mortgage investors 8,198 --
Other assets 2,147 2,279
--------- ---------
Total assets $ 443,707 $ 438,122
========= =========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Liabilities:
Deposits $ 380,472 $ 387,047
Borrowed funds 19,974 8,654
Escrow deposits of borrowers 1,319 1,329
Accrued interest payable 540 550
Accrued expenses and other liabilities 2,427 2,860
--------- ---------
Total liabilities 404,732 400,440
--------- ---------
Stockholders' equity:
Preferred stock, $.10 par value; Authorized - 10,000,000 shares;
Issued and outstanding - none -- --
Common stock, $.10 par value; Authorized - 20,000,000 shares;
Issued - 8,094,414 shares at March 31, 2001 and December 31, 2000
Outstanding - 7,339,411 shares at March 31, 2001, 7,337,611
shares at December 31, 2000 809 809
Additional paid-in capital 35,708 35,715
Retained earnings 8,433 7,462
Treasury stock, at cost, 755,003 shares at March 31, 2001 and 756,803 shares at
December 31, 2000 (6,229) (6,244)
--------- ---------
38,721 37,742
Unrealized gain (loss) on securities available for sale, net of income taxes 254 (60)
--------- ---------
Total stockholders' equity 38,975 37,682
--------- ---------
Total liabilities and stockholders' equity $ 443,707 $ 438,122
========= =========
See accompanying notes to consolidated financial statements.
3
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
---- ----
Interest and dividend income:
Interest on loans $7,441 $6,294
Interest and dividends on investments 803 1,264
Interest on mortgage-backed securities 217 237
------ ------
Total interest and dividend income 8,461 7,795
------ ------
Interest expense:
Interest on deposits 3,292 2,994
Interest on borrowed funds 220 79
------ ------
Total interest expense 3,512 3,073
------ ------
Net interest income 4,949 4,722
Provision for loan losses 38 114
------ ------
Net interest income after provision for
loan losses 4,911 4,608
------ ------
Non-interest income:
Customer service fees 288 256
Gains on sales of mortgage loans 188 40
Other 42 2
------ ------
Total non-interest income 518 298
------ ------
Income before non-interest expense and income taxes 5,429 4,906
------ ------
Non-interest expense:
Salaries and employee benefits 1,729 1,736
Office occupancy and equipment 331 299
Professional services 40 40
Marketing 44 77
Outside data processing expense 135 129
Other 491 457
------ ------
Total non-interest expenses 2,770 2,738
------ ------
Income before income taxes 2,659 2,168
Income tax expense 918 692
------ ------
Net income $1,741 $1,476
====== ======
Basic earnings per share $ 0.24 $ 0.20
====== ======
Diluted earnings per share $ 0.23 $ 0.20
====== ======
See accompanying notes to consolidated financial statements.
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WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 1,741 $ 1,476
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 38 114
Depreciation and amortization 134 122
Deferred income taxes -- 1
(Accretion) amortization of premiums, fees and discounts (33) 34
(Gains) on sales of mortgage loans (188) (40)
(Increase) decrease in loans held for sale (3,991) 850
Decrease in accrued interest receivable 247 76
(Increase) in other assets (35) (4)
(Increase) in due from mortgage investors (8,198) --
(Decrease) in accrued interest payable (10) (19)
(Decrease) increase in other liabilities and escrow deposits (443) 67
-------- --------
Net cash provided by (used in) operating activities (10,738) 2,677
-------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale -- (10,273)
Proceeds from maturities of investment securities available for sale 5,570 9,610
Proceeds from payments of mortgage-backed securities
available for sale 513 746
Net (increase) in loans (822) (18,323)
Purchases of premises and equipment (92) (338)
-------- --------
Net cash provided by (used in) investing activities 5,169 (18,578)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (6,575) 14,023
Proceeds from Federal Home Loan Bank advances 10,400 --
Net increase (decrease) in other borrowed funds 920 (293)
Dividends paid (770) (731)
Purchase of treasury stock -- (183)
Stock options exercised 8 16
-------- --------
Net cash provided by financing activities 3,983 12,832
-------- --------
Net (decrease) in cash and cash equivalents (1,586) (3,069)
Cash and cash equivalents at beginning of year 13,743 21,456
-------- --------
Cash and cash equivalents at end of period $ 12,157 $ 18,387
======== ========
Cash paid during the period for:
Interest $ 3,522 $ 3,092
Income taxes $ 726 $ 314
See accompanying notes to consolidated financial statements.
5
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
(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, 1999 $ 809 $ 35,841 $ 5,305 ($ 7) ($ 6,304) $ 35,644
Comprehensive income:
Net income $ 1,476 -- -- 1,476 -- -- 1,476
Other comprehensive income (loss):
Unrealized loss on securities
available for sale, net of taxes (200) -- -- -- (200) -- (200)
--------
Comprehensive income $ 1,276
========
Dividends paid -- -- (731) -- -- (731)
Purchase of treasury stock
(25,000 shares) -- -- -- -- (183) (183)
Issuance of 3,840 shares
for exercise of options -- (16) -- -- 32 16
------- -------- -------- ---- -------- --------
Balance at March 31, 2000 809 35,825 6,050 (207) (6,455) 36,022
Comprehensive income:
Net income 5,257 -- -- 5,257 -- -- 5,257
Other comprehensive income (loss):
Unrealized gain on securities
available for sale, net of taxes 282
Less: Reclassification adjustment
for securities, net of tax expense
of $73, included in net income (135)
--------
Total other comprehensive income 147 -- -- -- 147 -- 147
--------
Comprehensive income $ 5,404
========
Dividends paid -- -- (3,845) -- -- (3,845)
Tax benefit of stock options exercised -- 2 -- -- -- 2
Issuance of 25,560 shares
for exercise of options -- (112) -- -- 211 99
------- -------- -------- ---- -------- --------
Balance at December 31, 2000 809 35,715 7,462 (60) (6,244) 37,682
Comprehensive income:
Net income $ 1,741 -- -- 1,741 -- -- 1,741
Other comprehensive income (loss):
Unrealized gain on securities
available for sale, net of taxes 314 -- -- -- 314 -- 314
---------
Comprehesive income $ 2,055
=========
Dividends paid -- -- (770) -- -- (770)
Issuance of 1,800 shares
for exercise of options -- (7) -- -- 15 8
------- -------- -------- ---- -------- --------
Balance at March 31, 2001 $ 809 $ 35,708 $ 8,433 $254 ($ 6,229) $ 38,975
======= ======== ======== ==== ======== ========
See accompanying notes to consolidated financial statements
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WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated financial statements of Warren Bancorp, Inc. (the
"Corporation") presented herein should be read in conjunction with the
consolidated financial statements of the Corporation as of and for the year
ended December 31, 2000. The accompanying consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to those
rules and regulations, but the Corporation believes that the disclosures are
adequate to make the information presented not misleading. In the opinion of
management, the consolidated financial statements reflect all adjustments
necessary for a fair presentation of the results for the interim periods
presented.
EARNINGS PER SHARE
The components of basic and diluted EPS for the quarters ended March 31,
2001 and 2000 are as follows:
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
------------- ----------------------- --------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(In thousands, except per-share data)
Basic EPS $1,741 $1,476 7,338 7,314 $0.24 $0.20
Effect of dilutive
stock options -- -- 158 101 .01 --
------ ------ ----- ----- ----- -----
Dilutive EPS $1,741 $1,476 7,496 7,415 $0.23 $0.20
====== ====== ===== ===== ===== =====
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 and income statement items to each of the business groups.
This segmentation mirrors the Corporation's organizational structure. Management
accounting policies are in place for assigning revenues and expenses that are
not directly incurred by the business groups, such as overhead, the results of
asset allocations, and transfer revenues and expenses. Accordingly, the
Corporation's business-segment operating results will differ with other similar
information published by other financial institutions. In addition, management
accounting concepts are periodically refined and results may change to reflect
these refinements.
For purposes of this disclosure, operating segments are defined as
components of an enterprise that are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Corporation's chief operating decision maker is the President
and Chief Executive Officer of the Corporation. This disclosure has no effect on
the Corporation's primary financial statements.
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In 2001, the Corporation has identified its reportable operating business
segments as the Corporate Banking Business, the Personal Banking Business and
the Residential Mortgage Business. In 2000, the Corporation had identified its
reportable business segments as the Corporate Banking Business and the Personal
Banking Business. Although the Corporation's business segments included the
Residential Mortgage Business in 2000, it was not considered a reportable
segment. In 2001 the Corporation changed its method of allocating assets,
capital, and funding among the business segments. The major change is that the
residential mortgage loan portfolio became part of the assets of the Residential
Mortgage Business in 2001. In prior periods, the Residential Mortgage Business
sold loans that were to be kept in the Bank's portfolio to the Personal Banking
Business at a specified transfer price. Because of this change in the mix of
assets, capital allocations and funding methods to those two businesses also
changed. Also because of these changes, the Residential Mortgage Business met
certain quantitative thresholds and is now considered a reportable segment. Due
to the complexity of the financial statements, the fact that the Corporation's
new approach encompasses a fundamental change and that change is more than just
a reassignment of profit centers, a restatement of the prior period information
is impracticable. In addition, for the same reasons, it is impracticable to
restate the current reporting period under the old basis. Furthermore,
management has not restated prior or current business-segment financial
information for internal purposes. A description of each reportable business
segment is discussed below:
CORPORATE BANKING BUSINESS
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. This
business' segment reporting approach remained the same in the 2001 and 2000
quarters.
PERSONAL BANKING BUSINESS
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. In the 2000 quarter, this
business purchased adjustable-rate mortgage loans from another business segment
and serviced all loans in its business. In the 2001 quarter, the adjustable-rate
mortgage loans were transferred to the books of the Residential Mortgage
Business along with the expense of servicing those loans.
RESIDENTIAL MORTGAGE BUSINESS
The Residential Mortgage Business provides services to consumers in the
Corporation's market area. These services include making adjustable-rate and
fixed-rate mortgage loans. This group also services all loans kept in its
business and sells fixed-rate loans into the secondary market.
NON-REPORTABLE SEGMENTS
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 securities, and in 2000 also included gains on sales of
mortgage loans.
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8
Specific reportable segment information as of and for the quarters ended
March 31, 2001 and 2000 is as follows (in thousands):
QUARTER ENDED MARCH 31, 2001
CORPORATE PERSONAL RESIDENTIAL WARRENBANCORP
BANKING BANKING MORTGAGE OTHER ELIMINATIONS CONSOLIDATED
--------- -------- ----------- ----- ------------ -------------
Interest income-external $ 5,524 $ 878 $ 1,946 $ 113 $8,461
Interest income-internal -- 3,942 -- -- $(3,942) --
Fee and other income 52 232 194 40 518
Net income 1,016 589 286 (150) 1,741
QUARTER ENDED MARCH 31, 2000
CORPORATE PERSONAL WARRENBANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
--------- ------- ----- ------------ -------------
Interest income-external $ 5,091 $ 2,637 $ 67 $ 7,795
Interest income-internal -- 2,455 18 $(2,473) --
Fee and other income 48 211 39 298
Net income 990 736 (250) 1,476
SUBSEQUENT EVENTS
During the second quarter of 2001, the Corporation received state-tax
refunds plus interest for the resolution of certain income-tax matters of prior
years. The effect of the refunds will be additional other non-interest income
of approximately $200,000 for the interest portion (pre-state and federal tax)
and a reduction of state income tax expense of approximately $267,000 for the
tax refund (pre-federal tax). The total after-tax effect will be approximately
$294,000 and will affect the Corporation's income for the quarter ended June
30, 2001.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995. The words "believe," "expect," "anticipate," "intend,"
"estimate," "plan," "assume" and other similar expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which are in some cases beyond the control of
the Corporation and may cause the actual results, performance or achievements of
the Corporation to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include, but are not
limited to, the following: interest rates may increase, adversely affecting the
ability of borrowers to repay adjustable-rate loans and the Corporation's
earnings and income which derive in significant part from loans to borrowers;
unemployment in the Corporation's market area may increase, adversely affecting
the ability of individual borrowers to repay loans; property values may decline,
adversely affecting the ability of borrowers to repay loans and the value of
real estate securing repayment of loans; and general economic and market
conditions in the Corporation's market area may decline, adversely affecting the
ability of borrowers to repay loans, the value of real estate securing repayment
of loans and the Corporation's ability to make profitable loans. Any of the
above may also result in lower interest income, increased loan losses,
additional charge-offs and writedowns and higher operating expenses. These and
other factors that might cause differences between actual and anticipated
results, performance and achievements are discussed in greater detail in this
Form 10-Q.
GENERAL
Warren Bancorp, Inc.'s operating results for the three months ended March
31, 2001 (the "2001 quarter") 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 2001 quarter as
compared to the three months ended March 31, 2000 (the "2000 quarter") primarily
due to increased levels of earning assets despite decreased spreads, and
increased gains on sales of mortgage loans. When general interest rates
decrease, the Bank's rate spread and net yield on average earnings assets will
usually decrease. This is mainly because certain sources of funds, namely NOW
and regular savings deposits, may not have their rates decreased at the same
rate as the Bank's assets. Also demand deposits and stockholders' equity have no
interest rate attached to them; therefore, their costs as a funding source do
not decrease.
Nonperforming loans remained at zero at March 31, 2001. 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 acquired through 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, real estate acquired through foreclosure may give
rise to additional charge-offs and writedowns and higher expenses for property
taxes and other carrying costs.
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
as amended, on January 1, 2001. This statement requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and to
measure those instruments at fair value. Adoption of this statement had no
material impact on the Corporation's consolidated financials.
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SUBSEQUENT EVENTS
On April 19, 2001, the Corporation declared an increase in its quarterly
dividend to 11 1/2 cents ($.115) per share from 10 1/2 cents ($.105) per share.
It is payable May 14, 2001 to stockholders of record on April 30, 2001.
During the second quarter of 2001, the Corporation received state-tax
refunds plus interest for the resolution of certain income-tax matters of prior
years. The effect of the refunds will be additional other non-interest income of
approximately $200,000 for the interest portion (pre-state and federal tax) and
a reduction of state income tax expense of approximately $267,000 for the tax
refund (pre-federal tax). The total after-tax effect will be approximately
$294,000 and will affect the Corporation's income for the quarter ended June 30,
2001.
ASSET/LIABILITY MANAGEMENT
A primary objective of the Corporation's asset/liability management policy
is to manage interest-rate risk over time to achieve a prudent level of net
interest income in changing interest-rate environments. Management's strategies
are intended to be responsive to changes in interest rates and to recognize
market demands for particular types of deposit and loan products. These
strategies are overseen by an internal Asset/Liability Management Committee and
by the Bank's Board of Directors and the risks are managed with techniques such
as simulation analysis, which measures the effect on net interest income of
possible changes in interest rates, and "gap" analysis, using models similar to
the one shown on the following page.
The Corporation uses simulation analysis to measure exposure of net
interest income to changes in interest rates over a one-year period. This period
is measured because the Corporation is most vulnerable to changes in short-term
(one year and under) rates. Simulation analysis involves projecting future
interest income and expense under various rate scenarios. The Corporation's
policy on interest-rate risk specifies that if short-term interest rates were to
shift immediately up or down 200 basis points, estimated net interest income for
the next 12 months should decline by less than 15%. This policy remained in
effect during the quarter, and in management's opinion there were no material
changes in interest rate risk since December 31, 2000, the date as of which the
simulation analysis was performed. Certain shortcomings are inherent in a
simulation analysis. Estimates of customer behavior to changing interest rates
may differ significantly from actual. Areas of these estimates include loan
prepayment speeds, shifting between adjustable-rate and fixed-rate loans, and
activity within different categories of deposit products. Also, the ability of
some borrowers to repay their adjustable-rate loans may decrease in the event of
interest-rate increases. Note that the yield on the one-year treasury constant
maturity index decreased to 4.09% at March 31, 2001 from 5.32% at December 31,
2000.
The following table summarizes the Corporation's interest-rate sensitivity
position as of March 31, 2001. 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. 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
MARCH 31, 2001
---------------------------------------------------------------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
------ ------ ------ ----- ------
(DOLLARS IN THOUSANDS)
INTEREST SENSITIVE ASSETS:
Investment securities ................. $ 15,295 $ 3,678 $ 4,983 $ 23,965 $ --
Loans held for sale ................... 9,171 -- -- -- --
Adjustable-rate loans ................. 99,119 21,205 24,214 152,780 --
Fixed-rate loans ...................... 3,003 392 6,827 32,806 9,009
Mortgage-backed securities ............ 1,092 2,574 4,250 2,691 430
-------- -------- -------- -------- --------
Total interest sensitive assets .... 127,680 27,849 40,274 212,242 9,439
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts ............................. 25,872 25,870 -- -- --
Time deposits ......................... 19,034 17,308 71,784 43,279 --
Other deposits (a) .................... 12,500 12,498 25,312 90,545 10,113
Borrowings ............................ 14,317 -- -- 5,019 638
-------- -------- -------- -------- --------
Total interest sensitive liabilities 71,723 55,676 97,096 138,843 10,751
-------- -------- -------- -------- --------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ................ $ 55,957 $(27,827) $(56,822) $ 73,399 $ (1,312)
======== ======== ======== ======== ========
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities $ 55,957 $ 28,130 $(28,692) $ 44,707 $ 43,395
======== ======== ======== ======== ========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ....... 178.0% 122.1% 87.2% 112.3% 111.6%
======== ======== ======== ======== ========
Cumulative excess (deficiency) as a
percentage of total assets ........... 12.6% 6.3% (6.5)% 10.1% 9.8%
======== ======== ======== ======== ========
- ------------
(a) Other deposits consist of regular savings and N.O.W. accounts.
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Interest-rate sensitivity statistics are static measures that do not
necessarily take into consideration external factors which might affect the
sensitivity of assets and liabilities and consequently cannot be used alone to
predict the operating results of a financial institution in a changing
environment. However, these measurements do reflect major trends and thus the
Corporation's sensitivity to interest rates changes over time.
LIQUIDITY
The Bank seeks to ensure sufficient liquidity is available to meet cash
requirements while earning a return on liquid assets. The Bank uses its
liquidity primarily to fund loan and investment commitments, to supplement
deposit flows and to meet operating expenses. The primary sources of liquidity
are interest and amortization from loans, mortgage-backed securities and
investments, maturities of investments, loan sales, deposits and Federal Home
Loan Bank of Boston ("FHLBB") advances, which include a $15 million overnight
line of credit as well as other overnight borrowings vehicles. The Bank also has
access to the Federal Reserve Bank's discount window and may borrow from the
Depositors Insurance Fund Liquidity Fund. During the 2001 quarter, the Bank did
not use the Federal Reserve Bank discount window and did not borrow from the
Depositors Insurance Fund Liquidity Fund.
The Bank also uses the longer term borrowings facilities within its total
available credit line with the FHLBB. Advances from the FHLBB, $7.4 million of
which were from an overnight facility, were $13.1 million at March 31, 2001.
During the 2001 quarter, the primary sources of liquidity were a $10.4
million increase in FHLBB advances, loan paydowns and amortization of $32.2
million and proceeds from maturities of investment securities of $5.6 million.
Primary uses of funds were $51.7 million in residential, commercial real estate
and commercial loan originations and a $6.6 million decrease in deposit levels.
At March 31, 2001, the Bank had $800,000 in overnight investments.
The primary source of liquidity for the Corporation is dividends from the
Bank. Dividends paid and, when applicable, stock repurchases by the Corporation
are the primary use of this liquidity.
From time to time, the Bank has obtained time deposits in denominations of
$100,000 and over. The following table summarizes maturities of time deposits of
$100,000 or more outstanding at March 31, 2001:
WITHIN ONE YEAR (IN THOUSANDS)
--------------- --------------
Less than 3 months........................................... $ 5,061
3 to 6 months................................................ 3,459
6 to 12 months............................................... 12,994
--------
21,514
More than 12 months.......................................... 8,069
-------
$29,583
=======
CAPITAL ADEQUACY
Total stockholders' equity at March 31, 2001 was $39.0 million, an increase
of $1.3 million from $37.7 million at December 31, 2000. Included in
stockholders' equity at March 31, 2001 is an unrealized gain on securities
available for sale, which increased stockholders' equity, of $254,000 as
compared to an unrealized loss at December 31, 2000 of $60,000. Future
interest-rate increases could reduce the fair value of these securities and
reduce stockholders' equity. As a percentage of total assets, stockholders'
equity was 8.78% at March 31, 2001 compared to 8.60% at December 31, 2000.
At March 31, 2001, neither the Federal Reserve Board ("FRB") nor the FDIC
permitted the unrealized gain to be used in their calculations of Tier I
capital.
The FRB's leverage capital-to-assets guidelines require the strongest and
most highly rated bank holding companies to maintain at least a 3.00% ratio of
Tier I capital to average consolidated assets. All other bank holding companies
are required to maintain at least 4.00% to 5.00%, depending on how the FRB
7
13
evaluates their condition. The FRB may require a higher capital ratio. At March
31, 2001, the FRB leverage capital ratio was 8.95% compared to 8.68% at December
31, 2000.
The FDIC's leverage capital-to-assets ratio guidelines are substantially
similar to those adopted by the FRB and described above. At March 31, 2001, the
Bank's leverage capital ratio, under FDIC guidelines, was 8.63% compared to
8.35% at December 31, 2000.
The FRB and the FDIC have also imposed risk-based capital requirements on
the Corporation and the Bank, respectively, which give different risk weightings
to assets and to off-balance sheet assets such as loan commitments and loans
sold with recourse. Both the FRB and FDIC guidelines require the Corporation and
the Bank to have an 8.00% risk-based capital ratio. The Corporation's and the
Bank's risk-based capital ratios were 11.51% and 11.13%, respectively, at March
31, 2001 compared to 11.44% and 11.06% at December 31, 2000, thus exceeding
their risk-based capital requirements.
As of March 31, 2001, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 11.13%, 9.87%, and
8.63%, respectively. Based on these capital ratios, the Bank is considered to be
"well capitalized."
FINANCIAL CONDITION
The Corporation's total assets increased to $443.7 million at March 31,
2001 from $438.1 million at December 31, 2000. Increases occurred in consumer,
commercial real estate, commercial construction and commercial loans with
decreases in cash and cash equivalents, investments and mortgage-backed
securities available for sale.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of investment securities and mortgage-backed
securities available for sale, and other investments, decreased to $60.2 million
at March 31, 2001 from $65.7 million at December 31, 2000. A majority of this
decrease was from the maturity of corporate notes. Mortgage-backed securities
decreased to $11.0 million at March 31, 2001 from $11.6 million at December 31,
2000 due to principal paydowns. Future increases in interest rates could reduce
the value of these investments.
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14
INVESTMENTS AT MARCH 31, 2001 ARE AS FOLLOWS:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(IN THOUSANDS)
AVAILABLE-FOR-SALE
Fixed income mutual funds .......... $ 28,698 $ 572 $ (1) $ 29,269
FNMA mortgage-backed securities .... 7,721 266 0 7,987
GNMA mortgage-backed securities .... 3,316 13 0 3,329
U.S. Government and related
obligations ...................... 7,677 38 0 7,715
Corporate notes .................... 0 -- -- 0
Preferred stock .................... 5,314 -- (487) 4,827
-------- -------- -------- --------
52,726 889 (488) 53,127
-------- -------- -------- --------
OTHER
Foreign government bonds and
notes ............................ 1,250 -- -- 1,250
Stock in Federal Home Loan Bank
of Boston ........................ 4,110 -- -- 4,110
Stock in Depositors Insurance Fund
Liquidity Fund ................... 108 -- -- 108
Stock in Savings Bank Life
Insurance Company of
Massachusetts .................... 1,576 240 -- 1,816
-------- -------- -------- --------
7,044 240 -- 7,284
-------- -------- -------- --------
$ 59,770 $ 1,129 $ (488) $ 60,411
======== ======== ======== ========
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $5.0 million during the 2001
quarter to $358.5 million at March 31, 2001. 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 March 31, 2001 and December 31, 2000 (in thousands):
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
Residential mortgages................................ $ 78,713 $ 88,517
Commercial real estate............................... 179,031 178,666
Commercial construction ............................. 20,939 14,812
Commercial loans..................................... 45,080 41,512
Consumer loans....................................... 25,592 24,825
-------- --------
$349,355 $348,332
======== ========
Residential mortgage loan originations during the 2001 quarter were $22.1
million compared to $13.6 million in the 2000 quarter. The Corporation
originated $19.6 million in fixed-rate loans during the 2001 quarter compared to
$3.1 million during the 2000 quarter. Adjustable-rate loans totaling $2.5
million were originated during the 2001 quarter compared to $10.5 million during
the 2000 quarter. The Corporation sold loans totaling $18.7 million during the
2001 quarter compared to $3.1 million sold in the 2000 quarter. At March 31,
2001, the Corporation held $9.2 million of fixed-rate residential mortgage loans
for sale compared to $5.2 million at December 31, 2000. The increase in
fixed-rate loan originations and decrease in adjustable-rate loan originations
is a result of consumer preferences for fixed-rate loans in a lower
interest-rate environment.
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15
CREDIT QUALITY
IMPAIRED AND NONPERFORMING LOANS
Loans are deemed by the Corporation to be impaired when, based on current
information and events, it is probable that the Corporation will be unable to
collect all amounts due according to the contractual terms of the original loan
agreement. Generally, nonaccruing loans are deemed impaired. Large groups of
homogeneous loans, such as smaller balance residential mortgage and consumer
installment loans are collectively evaluated for impairment. Typically, the
minimum delay in receiving payments according to the contractual terms of the
loan that can occur before a loan is considered impaired is ninety days.
Impaired loans are analyzed and categorized by level of credit risk and
collectibility in order to determine their related allowance for loan losses. At
March 31, 2001 there were two loans considered impaired and performing totaling
$979,000 compared to two loans considered impaired and performing totaling
$991,000 at December 31, 2000.
Loans past due 90 days or more, or past due less than 90 days but in
nonaccrual status were zero at March 31, 2001 and December 31, 2000. Accrual of
interest on loans is discontinued either when a reasonable doubt exists as to
that the full, timely collection of principal or interest or when the loans
become contractually past due by ninety days or more, unless they are adequately
secured and are in the process of collection.
When a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income. Income on
such loans is recognized to the extent that cash is received and where the
ultimate collection of principal and interest is probable. Following collection
procedures, the Corporation generally institutes appropriate action to foreclose
the property or acquire it by deed in lieu of foreclosure.
The table below details nonperforming loans at:
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
(DOLLARS IN THOUSANDS)
Accruing loans 90 days or more in arrears.... $-- $--
Nonaccrual loans ............................ -- --
--- ---
Total nonperforming loans ................... $-- $--
=== ===
Percentage of nonperforming loans to:
Total loans ................................. N/A N/A
=== ===
Total assets ................................ N/A N/A
=== ===
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ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses
for the three months ended March 31, 2001 and March 31, 2000 (dollars in
thousands):
2001 2000
---- ----
Balance at beginning of period................................................... $4,781 $ 4,271
------ - -----
Losses charged to the allowance:
Residential mortgage......................................................... -- --
Commercial mortgage and construction......................................... -- --
Commercial loans............................................................. -- --
Consumer loans............................................................... -- 5
------ ------
-- 5
------ ------
Loan recoveries:
Residential mortgage......................................................... 5 --
Commercial mortgage and construction......................................... -- --
Commercial loans............................................................. 1 3
Consumer loans............................................................... 7 13
------ ------
13 16
------ ------
Net charge-offs.................................................................. (13) (11)
------ ------
Provision for (recovery of) loan losses (credited) to income..................... 38 114
------ ------
Balance at end of period......................................................... $4,832 $4,396
====== ======
Allowance to total loans at end of period........................................ 1.38% 1.42%
====== ======
Allowance to nonperforming loans at end of period................................ N/A 657.1%
====== ======
Allocation of ending balance:
Residential mortgage......................................................... $ 738 $ 564
Commercial mortgage and construction......................................... 3,185 3,118
Commercial loans............................................................. 680 503
Consumer loans............................................................... 229 211
------ ------
$4,832 $4,396
====== ======
Notwithstanding the foregoing allocations, the entire allowance for loan
losses is available to absorb charge-offs in any category of loans. Loan losses
are charged against the allowance when management believes that the
collectibility of the loan principal is doubtful.
Balances in the allowance for loan losses are determined on a periodic
basis by management and the Loan Committee of the Board of Directors with
assistance from 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 percentage 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
11
17
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 at March 31, 2001 and 2000 are as follows: 2001 - $1,556,000, or 32%
of the total allowance at March 31, 2001; 2000 - $1,163,000 or 26% of the total
allowance at March 31, 2000. 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
$979,000 of impaired loans, all of which is measured using the fair value
method, is $56,000.
The required allowance for loan losses could increase in future periods if
the condition of the loan portfolio deteriorates or if the balance of the
portfolio increases. Such an increase in the allowance could require additional
provisions for loan losses to be charged to income.
LEGAL AND OFF-BALANCE SHEET RISKS
Various legal claims arise from time to time in the course of business of
the Corporation and its subsidiaries. At March 31, 2001, there were no material
legal claims against the Corporation or its subsidiaries.
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations of interest rates.
These financial instruments include commitments to originate loans, unused lines
of credit, standby letters of credit, recourse arrangements on sold assets and
forward commitments to sell loans. The financial instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
DUE FROM MORTGAGE INVESTORS
Due from mortgage investors was $8.2 million at March 31, 2001 compared to
zero at December 31, 2000. This represents the amount owed to the Corporation by
mortgage investors for loans sold. During the 2001 quarter there have been
significant delays by mortgage investors in making payments due to the backlog
caused by the volume of mortgage loans sold into the secondary market
nationwide.
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18
OTHER ASSETS
Included in other assets at March 31, 2001 and December 31, 2000 are $1.1
million and $1.3 million, respectively, of deferred income taxes receivable.
LIABILITIES
Deposits decreased to $380.5 million at March 31, 2001 from $387.0 million
at December 31, 2000.
The following table sets forth the classification of the Corporation's
deposits as of March 31, 2001 and December 31, 2000 (in thousands):
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
Noninterest bearing.................................. $ 26,357 $ 26,641
NOW.................................................. 49,624 47,491
Money market......................................... 51,742 57,385
Savings.............................................. 101,344 98,276
Time................................................. 151,405 157,254
-------- --------
$380,472 $387,047
======== ========
Federal Home Loan Bank of Boston advances were $13.1 million at March 31,
2001 and $2.7 million at December 31, 2000. Securities sold under agreement to
repurchase were $6.9 million at March 31, 2001 and $6.0 million at December 31,
2000.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 2000
GENERAL
The Corporation recorded a profit for the 2001 quarter of $1.7 million
compared to a profit for the 2000 quarter of $1.5 million. The increase in the
2001 quarter profit is primarily due to increased levels of earning assets and
gains on sales of mortgage loans.
Net interest income for the 2001 and 2000 quarters was $4.9 million and
$4.7 million, respectively. The weighted average interest rate spread for the
2001 quarter was 4.55% compared to 4.61% for the 2000 quarter. The net yield on
average earning assets was 4.79% for the 2001 quarter and 4.84% for the 2000
quarter. The return on average assets and the return on average stockholders'
equity were 1.61% and 18.25%, respectively, for the 2001 quarter compared to
1.46% and 16.62%, respectively, for the 2000 quarter.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $8.5 million for the 2001
quarter from $7.8 million for the 2000 quarter. Interest on loans increased to
$7.4 million for the 2001 quarter from $6.3 million for the 2000 quarter. The
average loan yield decreased to 8.36% for the 2001 quarter from 8.59% for the
2000 quarter and average loans outstanding increased during the 2001 quarter as
compared to the 2000 quarter. Interest and dividends on investments was $800,000
for the 2001 quarter and $1.3 million for the 2000 quarter. The average amount
of investments held decreased while the average yield on investments increased
to 6.54% for the 2001 quarter from 6.02% for the 2000 quarter. Mortgage-backed
securities income decreased to $217,000 in the 2001 quarter from $237,000 in the
2000 quarter primarily due to a decrease in the average amount of
mortgage-backed securities held due to paydowns.
INTEREST EXPENSE
Interest on deposits increased to $3.3 million for the 2001 quarter from
$3.0 million for the 2000 quarter. The average balance of deposits increased in
the 2001 quarter, and the average cost of deposits increased to 3.57% for the
2001 quarter from 3.35% for the 2000 quarter. Interest on borrowed funds and
escrow deposits of borrowers increased to $220,000 from $79,000 for the 2001 and
2000 quarters, respectively. The average borrowings increased as the Corporation
utilized its borrowing capability with the
13
19
FHLBB. The average cost of borrowings increased to 4.58% in the 2001 quarter
compared to 3.64% in the 2000 quarter.
NON-INTEREST INCOME
Total non-interest income for the 2001 quarter was $518,000 compared to
$298,000 for the 2000 quarter. The gain from the sale of mortgage loans was
$188,000 in the 2001 quarter compared to $40,000 in the 2000 quarter. Because
the Corporation typically sells fixed-rate loans it originates and keeps
adjustable-rate loans in portfolio, and because more fixed-rate loans were
originated in the 2001 quarter, gains on sale of mortgage loans increased. Also
included in non-interest income in the 2001 quarter is a pre-tax recovery of an
investment written off several years ago in the amount of $40,000.
NON-INTEREST EXPENSE
Total non-interest expense increased to $2.8 million in the 2001 quarter
from $2.7 million in the 2000 quarter. Office occupancy and equipment expense
increased to $331,000 in the 2001 quarter compared to $299,000 in the 2000
quarter due to expenses associated with the new location of the South Peabody
branch.
INCOME TAX EXPENSE
The Corporation's tax rate increased to 34.5% in the 2001 quarter from
31.9% in the 2000 quarter mainly due to a higher percentage of income taxed at a
higher state tax rate.
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WARREN BANCORP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARREN BANCORP, INC.
DATE: May 11, 2001 By: /s/ John R. Putney
----------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: May 11, 2001 By: /s/ Paul M. Peduto
----------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
16