SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
or the quarterly period ended September 30, 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 November 7, 2001
- -------------------------------------- -------------------------------
Common Stock, par value $.10 per share 7,380,731
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31
2001 2000
------------- -----------
ASSETS
Cash and due from banks (non-interest bearing) $ 17,575 $ 13,669
Money market funds and overnight investments 1,276 74
-------- --------
Cash and cash equivalents 18,851 13,743
Due from mortgage investors 15,412 --
Investment and mortgage-backed securities available for sale (amortized
cost of $56,842 at September 30, 2001 and $58,776 at December 31, 2000) 58,002 58,696
Other investments (fair value of $7,409 at September 30, 2001 and
December 31, 2000) 7,169 7,044
Loans held for sale 13,630 5,180
Loans 365,979 348,332
Allowance for loan losses (4,928) (4,781)
-------- --------
Net loans 361,051 343,551
Banking premises and equipment, net 4,844 5,056
Accrued interest receivable 2,562 2,573
Other assets 1,951 2,279
-------- --------
Total assets $483,472 $438,122
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $399,073 $387,047
Borrowed funds 38,730 8,654
Escrow deposits of borrowers 1,117 1,329
Accrued interest payable 532 550
Accrued expenses and other liabilities 2,352 2,860
-------- --------
Total liabilities 441,804 400,440
-------- --------
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 September 30, 2001 and December 31, 2000
Outstanding - 7,365,731 shares at September 30, 2001 and 7,337,611
at December 31, 2000 809 809
Additional paid-in capital 35,659 35,715
Retained earnings 10,463 7,462
Treasury stock, at cost, 728,683 shares at September 30, 2001 and
756,803 shares at December 31, 2000 (6,012) (6,244)
-------- --------
40,919 37,742
Unrealized gain (loss) on securities available for sale, net of income taxes 749 (60)
-------- --------
Total stockholders' equity 41,668 37,682
-------- --------
Total liabilities and stockholders' equity $483,472 $438,122
======== ========
See accompanying notes to consolidated financial statements.
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
------- ------- ------- -------
Interest and dividend income:
Interest on loans $ 7,585 $ 7,019 $22,643 $20,066
Interest and dividends on investments 656 1,145 2,165 3,618
Interest on mortgage-backed securities 183 235 599 705
------- ------- ------- -------
Total interest and dividend income 8,424 8,399 25,407 24,389
------- ------- ------- -------
Interest expense:
Interest on deposits 3,175 3,246 9,661 9,287
Interest on borrowed funds 317 107 840 274
------- ------- ------- -------
Total interest expense 3,492 3,353 10,501 9,561
------- ------- ------- -------
Net interest income 4,932 5,046 14,906 14,828
Provision for loan losses 38 114 47 342
------- ------- ------- -------
Net interest income after provision for loan losses 4,894 4,932 14,859 14,486
Non-interest income:
Customer service fees 332 367 942 943
Gains on sales of investment securities, net -- 208 -- 208
Gains on sales of fixed assets, net -- 376 -- 376
Gains on sales of mortgage loans 292 39 660 125
Other 4 1 247 4
------- ------- ------- -------
Total non-interest income 628 991 1,849 1,656
------- ------- ------- -------
Income before non-interest expense and income taxes 5,522 5,923 16,708 16,142
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 1,890 1,756 5,393 5,266
Office occupancy and equipment 311 288 962 878
Professional services 41 45 139 125
Marketing 70 79 248 276
Outside data processing 145 133 432 436
Other 535 500 1,545 1,415
------- ------- ------- -------
Total non-interest expenses 2,992 2,801 8,719 8,396
------- ------- ------- -------
Income before income taxes 2,530 3,122 7,989 7,746
Income tax expense 844 1,081 2,524 2,578
------- ------- ------- -------
Net income $ 1,686 $ 2,041 $ 5,465 $ 5,168
======= ======= ======= =======
Basic earnings per share $ 0.23 $ 0.28 $ 0.74 $ 0.71
======= ======= ======= =======
Diluted earnings per share $ 0.22 $ 0.27 $ 0.72 $ 0.70
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended September 30,
-------------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 5,465 $ 5,168
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 47 342
Depreciation and amortization 403 377
(Accretion) amortization of premiums, fees and discounts (106) 27
(Gains) on sales of investment securities -- (208)
(Gains) on sales of mortgage loans (660) (125)
(Gains) on sales of fixed assets -- (376)
(Increase) decrease in loans held for sale (8,450) 458
Decrease in accrued interest receivable 11 248
(Increase) in other assets (104) (199)
(Increase) in due from mortgage investors (15,412) --
(Decrease) in accrued interest payable (18) (24)
(Decrease) increase in other liabilities and escrow deposits (699) 1,261
-------- --------
Net cash provided by (used in) operating activities (19,523) 6,949
-------- --------
Cash flows from investing activities:
Purchase of investment securities (11,981) (22,925)
Purchase of mortgage-backed securities (2,049) --
Proceeds from sales of investment securities available for sale -- 2,204
Proceeds from maturities of investment securities 13,295 31,840
Proceeds from payments of mortgage-backed securities 2,651 1,552
Proceeds from sales of fixed assets -- 669
Net (increase) in loans (16,887) (40,350)
Purchases of premises and equipment (191) (716)
-------- --------
Net cash (used in) investing activities (15,162) (27,726)
-------- --------
Cash flows from financing activities:
Net increase in deposits 12,026 21,674
Proceeds from Federal Home Loan Bank advances 24,166 --
Net increase in other borrowed funds 5,910 3,929
Dividends paid (2,464) (3,805)
Purchase of treasury stock -- (183)
Stock options exercised 155 73
-------- --------
Net cash provided by financing activities 39,793 21,688
-------- --------
Net increase in cash and cash equivalents 5,108 911
Cash and cash equivalents at beginning of period 13,743 21,456
-------- --------
Cash and cash equivalents at end of period $ 18,851 $ 22,367
======== ========
Cash paid during the period for:
Interest $ 10,519 $ 9,585
Income taxes $ 3,061 $ 1,644
See accompanying notes to consolidated financial statements.
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
------------- ------ ---------- -------- ------------- -------- -------
Balance at December 31, 2000 $809 $ 35,715 $ 7,462 $ (60) $ (6,244) $37,682
Comprehensive income:
Net income $5,465 -- -- 5,465 -- -- 5,465
Other comprehensive income:
Unrealized gain on securities available
for sale, net of taxes 809 -- -- -- 809 -- 809
------
Comprehensive income $6,274
======
Dividends paid -- -- (2,464) -- -- (2,464)
Tax benefit of options exercised -- 21 -- -- -- 21
Issuance of 28,120 shares for exercise
of options -- (77) -- -- 232 155
---- -------- -------- -------- -------- -------
Balance at September 30, 2001 $809 $ 35,659 $ 10,463 $ 749 $ (6,012) $41,668
==== ======== ======== ======== ======== =======
See accompanying notes to consolidated financial statements
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. The condensed
consolidated balance sheet as of September 30, 2001, the condensed consolidated
statement of stockholders' equity for the nine months ended September 30, 2001,
the condensed consolidated statements of cash flows for the nine months ended
September 30, 2001 and September 30, 2000, and the related condensed
consolidated statements of operations for the three months ended and nine months
ended September 30, 2001 and September 30, 2000 are unaudited. 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. Interim results are not necessarily indicative of results for the
full year.
EARNINGS PER SHARE
The components of basic and diluted EPS for the quarters and nine months
ended September 30, 2001 and 2000 are as follows:
QUARTER ENDED SEPTEMBER 30,
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
-----------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000
-----------------------------------------------------------------------------------
(In thousands, except per-share data)
Basic EPS $1,686 $2,041 7,366 7,324 $0.23 $0.28
Effect of dilutive
stock options -- -- 211 123 (.01) (.01)
------ ------ ------ ------ ----- -----
Dilutive EPS $1,686 $2,041 7,577 7,447 $0.22 $0.27
====== ====== ====== ====== ===== =====
NINE MONTHS ENDED SEPTEMBER 30,
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
-----------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000
-----------------------------------------------------------------------------------
(In thousands, except per-share data)
Basic EPS $5,465 $5,168 7,354 7,318 $0.74 $0.71
Effect of dilutive
stock options -- -- 187 109 (.02) (.01)
------ ------ ------ ------ ----- -----
Dilutive EPS $5,465 $5,168 7,541 7,427 $0.72 $0.70
====== ====== ====== ====== ===== =====
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
1
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 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.
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 and periods.
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 and period,
this business purchased adjustable-rate mortgage loans from another business
segment and serviced all loans in its business. In the 2001 quarter and period,
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 held 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.
2
Specific reportable segment information as of and for the quarters and
nine-month periods ended September 30, 2001 and 2000 is as follows (in
thousands):
QUARTER ENDED SEPTEMBER 30, 2001
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income-external $ 5,753 $ 1,820 $ 735 $ 116 -- $ 8,424
Interest income-internal -- -- 3,629 -- $(3,629) --
Fee and other income 49 310 266 3 -- 628
Net income 1,293 356 201 (164) -- 1,686
QUARTER ENDED SEPTEMBER 30, 2000
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------
Interest income-external $ 5,384 $ 2,914 $ 101 -- $ 8,399
Interest income-internal -- 2,514 17 $(2,531) --
Fee and other income 144 224 623 -- 991
Net income 1,195 724 122 -- 2,041
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income-external $ 16,919 $ 5,799 $ 2,372 $ 317 -- $ 25,407
Interest income-internal -- -- 11,416 -- $(11,416) --
Fee and other income 165 690 751 243 -- 1,849
Net income 3,394 951 1,180 (60) -- 5,465
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------
Interest income-external $15,864 $ 8,308 $ 217 -- $24,389
Interest income-internal -- 7,345 63 $(7,408) --
Fee and other income 287 661 708 -- 1,656
Net income 3,415 2,188 (435) -- 5,168
3
ACCOUNTING PRONOUNCEMENTS
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 financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 addresses the accounting for
acquisitions of businesses and is effective for acquisitions occurring on or
after July 1, 2001. SFAS 142 addresses the method of identifying and measuring
goodwill and other intangible assets acquired in a business combination,
eliminates further amortization of goodwill, and requires periodic evaluations
of impairment of goodwill balances. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Based on the Corporation's balance sheet at
September 30, 2001, there would be no impact from the adoption of SFAS 141 and
SFAS 142 because the Corporation does not have goodwill on its balance sheet.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121 and
portions of APB Opinion No. 30. This statement addresses the recognition of an
impairment loss for long-lived assets to be held and used, or disposed of by
sale or otherwise. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. Management does not believe that the adoption of this
statement will have a material effect on the Corporation's financial condition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995. The words "believe," "expect," "anticipate," "intend,"
"estimate," "plan," "assume" and other similar expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which are in some cases beyond the control of
the Corporation and may cause the actual results, performance or achievements of
the Corporation to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include, but are not
limited to, the following: interest rates may increase, adversely affecting the
ability of borrowers to repay adjustable-rate loans and the Corporation's
earnings and income which derive in significant part from loans to borrowers;
unemployment in the Corporation's market area may increase, adversely affecting
the ability of individual borrowers to repay loans; property values may decline,
adversely affecting the ability of borrowers to repay loans and the value of
real estate securing repayment of loans; and general economic and market
conditions in the Corporation's market area may decline, adversely affecting the
ability of borrowers to repay loans, the value of real estate securing repayment
of loans and the Corporation's ability to make profitable loans. Any of the
above may also result in lower interest income, increased loan losses,
additional charge-offs and writedowns and higher operating expenses. These and
other factors that might cause differences between actual and anticipated
results, performance and achievements are discussed in greater detail in this
Form 10-Q.
GENERAL
Warren Bancorp, Inc.'s operating results for the three and nine months
ended September 30, 2001 (the "2001 quarter" and "2001 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.
4
The Corporation recorded an increased profit for the 2001 period as
compared to the nine months ended September 30, 2000 (the "2000 period")
primarily due to increased asset levels, increased gains on sales of mortgage
loans, and receipt of state-tax refunds plus interest for the resolution of
certain tax matters of prior years. When general interest rates decrease, the
Bank's weighted average interest-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.
Included in the 2000 period is a gain of $208,000 on a security that was
called and a gain of $376,000 on a sale of a parcel of land that had been used
for the Bank's South Peabody branch office before the office moved.
Nonperforming loans increased to $350,000 in the 2001 period from zero at
December 31, 2000. Management continues to monitor the nonperforming loan
portfolio closely. If conditions in the Massachusetts' real estate market become
unstable and values deteriorate, the amount of nonaccrual loans and real estate
acquired 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.
ACCOUNTING PRONOUNCEMENTS
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 financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 addresses the accounting for
acquisitions of businesses and is effective for acquisitions occurring on or
after July 1, 2001. SFAS 142 addresses the method of identifying and measuring
goodwill and other intangible assets acquired in a business combination,
eliminates further amortization of goodwill, and requires periodic evaluations
of impairment of goodwill balances. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Based on the Corporation's balance sheet at
September 30, 2001, there would be no impact from the adoption of SFAS 141 and
SFAS 142 because the Corporation does not have goodwill on its balance sheet.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121 and
portions of APB Opinion No. 30. This statement addresses the recognition of an
impairment loss for long-lived assets to be held and used, or disposed of by
sale or otherwise. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. Management does not believe that the adoption of this
statement will have a material effect on the Corporation's financial condition.
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
5
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.
During the 2001 fiscal year, short-term interest rates have declined
significantly. The yield on the one-year treasury constant maturity decreased to
2.49% at September 30, 2001 from 5.32% at December 31, 2000, and prime rate
decreased to 5.50% at September 30, 2001 from 9.50% at December 31, 2000. This
decrease in interest rates is beyond the parameters of the Corporation's
simulation analysis; however, this analysis assumes that rates IMMEDIATELY shift
up or down 200 basis points. The actual change in rates has been a gradual
decrease throughout the 2001 fiscal year. Comparatively, the change in the
actual net yield on average earning assets through September is an
11-basis-point, or 2.3%, decrease from the original projection. The simulation
analysis resulted in a 16-basis-point, or 3.4%, decrease from the original
projection. Both the actual results and the result from the simulation analysis
are within policy guidelines.
The following table summarizes the Corporation's interest-rate sensitivity
position as of September 30, 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. Nonaccruing loans are not included in
this analysis due to their status as non-earning assets. Estimates of fixed-rate
loan and fixed-rate mortgage-backed security amortization and prepayments are
included with rate sensitive assets. The following types of deposit accounts are
assumed to have effective maturities as follows based on their past retention
characteristics: NOW accounts -up to five years; cash manager and passbook plus
accounts -up to six months; and regular savings accounts -up to greater than
five years. None of these assets is considered a trading asset.
6
INTEREST-RATE SENSITIVITY POSITION
SEPTEMBER 30, 2001
------------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
------ ------ ------ ----- ------
(Dollars in Thousands)
INTEREST SENSITIVE ASSETS:
Investment securities ...................... $ 17,083 $ 2,584 $ 8,896 $ 24,090 $ --
Loans held for sale ........................ 13,630 -- -- -- --
Adjustable-rate loans ...................... 104,031 9,674 37,105 158,745 --
Fixed-rate loans ........................... 3,398 4,938 3,155 36,879 7,854
Due from mortgage investors ................ 15,412 -- -- -- --
Mortgage-backed securities ................. 1,476 1,484 3,842 3,921 224
-------- -------- -------- -------- --------
Total interest sensitive assets ......... 155,030 18,680 52,998 223,635 8,078
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts .................................. 29,045 29,045 -- -- --
Time deposits .............................. 33,306 50,435 54,430 19,352 --
Other deposits (a) ......................... 13,007 12,547 25,521 92,815 10,549
Borrowings ................................. 33,073 -- 3,000 2,019 638
-------- -------- -------- -------- --------
Total interest sensitive liabilities .... 108,431 92,027 82,951 114,186 11,187
-------- -------- -------- -------- --------
Excess (deficiency) of interest sensitive
assets over interest sensitive
liabilities ............................... $ 46,599 $(73,347) $(29,953) $109,449 $ (3,109)
======== ======== ======== ======== ========
Excess of cumulative
interest sensitive assets over
cumulative interest sensitive
liabilities ............................... $ 46,599 $(26,748) $(56,701) $ 52,748 $ 49,639
======== ======== ======== ======== ========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ............ 143.0% 86.7% 80.0% 113.3% 112.1%
======== ======== ======== ======== ========
Cumulative excess as a
percentage of total assets ................ 9.6% (5.5)% (11.7)% 10.9% 10.3%
======== ======== ======== ======== ========
- ----------
(a) Other deposits consist of regular savings and N.O.W. accounts.
Interest-rate sensitivity statistics are static measures that do not
necessarily take into consideration external factors which might affect the
sensitivity of assets and liabilities and consequently cannot be used alone to
predict the operating results of a financial institution in a changing
environment. However, these measurements do reflect major trends and thus the
Corporation's sensitivity to interest rates changes over time.
LIQUIDITY
The Bank seeks to ensure sufficient liquidity is available to meet cash
requirements while earning a return on liquid assets. The Bank uses its
liquidity primarily to fund loan and investment commitments, to supplement
deposit flows and to meet operating expenses. The primary sources of liquidity
are interest and amortization from loans, mortgage-backed securities and
investments, 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 period, the Bank did
not use the Federal Reserve Bank discount window and did not borrow from the
Depositors Insurance Fund Liquidity Fund.
7
The Bank also uses the longer term borrowings facilities within its total
available credit line with the FHLBB. Advances from the FHLBB were $26.8 million
at September 30, 2001, $21.2 million of which were from an overnight facility.
During the 2001 period, the primary sources of liquidity were a $24.2
million increase in FHLBB advances, loan paydowns and amortization of $129.7
million and proceeds from maturities of investment securities of $13.3 million,
a $12.0 million increase in deposit levels, and a $5.9 million increase in other
borrowings. Primary uses of funds were $207.4 million in residential, commercial
real estate, commercial and consumer loan originations, a $12.0 million purchase
of investment securities and a $2.0 million purchase of mortgage-backed
securities. At September 30, 2001, the Bank had $1.2 million 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 September 30, 2001:
Within One Year (IN THOUSANDS)
---------------
Less than 3 months ........ $ 8,378
3 to 6 months ............. 10,801
6 to 12 months ............ 9,450
-------
28,629
More than 12 months........ 3,791
-------
$32,420
=======
CAPITAL ADEQUACY
Total stockholders' equity at September 30, 2001 was $41.7 million, an
increase of $4.0 million from $37.7 million at December 31, 2000. Included in
stockholders' equity at September 30, 2001 is an unrealized gain on securities
available for sale of $749,000 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 8.62% at September 30, 2001 compared to 8.60%
at December 31, 2000.
The FRB's leverage capital-to-assets guidelines require the strongest and
most highly rated bank holding companies to maintain at least a 3.00% ratio of
Tier I capital to average consolidated assets. All other bank holding companies
are required to maintain at least 4.00% to 5.00%, depending on how the FRB
evaluates their condition. The FRB may require a higher capital ratio. At
September 30, 2001, the FRB leverage capital ratio was 8.78% 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 September 30, 2001,
the Bank's leverage capital ratio, under FDIC guidelines, was 8.44% 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 11.73% and 11.32%, respectively, at
September 30, 2001 compared to 11.44% and 11.06%, respectively, at December 31,
2000, thus exceeding their risk-based capital requirements.
As of September 30, 2001, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 11.32%, 10.07%, and
8.44%, respectively. Based on these capital ratios, the Bank is considered to be
"well capitalized."
8
FINANCIAL CONDITION
The Corporation's total assets increased to $483.5 million at September 30,
2001 from $438.1 million at December 31, 2000. Increases occurred in consumer,
commercial real estate, commercial construction, commercial loans, loans held
for sale, and due from mortgage investors, with decreases in residential
mortgage loans and 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 $65.2 million
at September 30, 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 $10.9 million at September 30, 2001 from $11.6 million
at December 31, 2000. Future increases in interest rates could reduce the value
of these investments.
INVESTMENTS AT SEPTEMBER 30, 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 $ 1,066 $ -- $ 29,764
FNMA mortgage-backed securities ....... 8,215 225 -- 8,440
GNMA mortgage-backed securities ....... 2,732 64 -- 2,796
U.S. Government and related
obligations ......................... 11,883 33 -- 11,916
Preferred stock ....................... 5,314 25 (253) 5,086
-------- -------- -------- --------
56,842 1,413 (253) 58,002
-------- -------- -------- --------
OTHER
Foreign government bonds and
notes ............................... 1,375 -- -- 1,375
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
-------- -------- -------- --------
7,169 240 -- 7,409
-------- -------- -------- --------
$ 64,011 $ 1,653 $ (253) $ 65,411
======== ======== ======== ========
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $26.1 million during the 2001
period to $379.6 million at September 30, 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.
9
The following table sets forth the classification of the Corporation's
loans as of September 30, 2001 and December 31, 2000 (in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
Residential mortgages ...... $ 64,545 $ 88,517
Commercial real estate ..... 205,632 178,666
Commercial construction..... 19,402 14,812
Commercial loans ........... 48,265 41,512
Consumer loans ............. 28,135 24,825
-------- --------
$365,979 $348,332
======== ========
Residential mortgage loan originations during the 2001 period were $87.0
million compared to $52.1 million in the 2000 period. The Corporation originated
$72.1 million in fixed-rate loans during the 2001 period compared to $10.6
million during the 2000 period. Adjustable-rate loans totaling $14.9 million
were originated during the 2001 period compared to $41.5 million during the 2000
period. The Corporation sold loans totaling $76.0 million during the 2001 period
compared to $10.6 million sold in the 2000 period. At September 30, 2001, the
Corporation held $13.6 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.
CREDIT QUALITY
IMPAIRED AND NONPERFORMING LOANS
Loans are deemed by the Corporation to be impaired when, based on current
information and events, it is probable that the Corporation will be unable to
collect all amounts due according to the contractual terms of the original loan
agreement. Generally, nonaccruing loans are deemed impaired. Large groups of
homogeneous loans, such as smaller balance residential mortgage and consumer
installment loans are collectively evaluated for impairment. Typically, the
minimum delay in receiving payments according to the contractual terms of the
loan that can occur before a loan is considered impaired is ninety days.
Impaired loans are analyzed and categorized by level of credit risk and
collectibility in order to determine their related allowance for loan losses. At
September 30, 2001 there were two loans considered impaired and performing
totaling $717,000 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 $350,000 at September 30, 2001 and zero at December 31,
2000. This consists of one loan 90 days in arrears and accruing and one loan
considered impaired and nonaccruing. 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.
10
The table below details nonperforming loans at:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
(DOLLARS IN THOUSANDS)
Accruing loans 90 days or more in arrears..... $150 $ --
Nonaccrual loans ............................. 200 --
---- -----
Total nonperforming loans .................... $350 $ --
==== =====
Percentage of nonperforming loans to:
Total loans .................................. .10% N/A
==== =====
Total assets ................................. .07% N/A
==== =====
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses
for the nine months ended September 30, 2001 and September 30, 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 ................................ -- 14
Consumer loans .................................. 1 8
--------- --------
1 22
--------- --------
Loan recoveries:
Residential mortgage ............................ 21 17
Commercial mortgage and construction ............ 66 1
Commercial loans ................................ 5 17
Consumer loans .................................. 9 15
--------- --------
101 50
--------- --------
Net recoveries ...................................... (100) (28)
--------- --------
Provision for loan losses charged to income ........ 47 342
--------- --------
Balance at end of period ............................ $ 4,928 $ 4,641
========= ========
Allowance to total loans at end of period ........... 1.35% 1.40%
========= ========
Allowance to nonperforming loans at end of period.... 1,408.00% 3,683.3%
========= ========
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 impaired loans,
whether performing or non-performing, 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
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.
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
$917,000 of impaired loans, all of which is measured using the fair value
method, is $103,000.
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.
DUE FROM MORTGAGE INVESTORS
Due from mortgage investors was $15.4 million at September 30, 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 period 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.
OTHER ASSETS
Included in other assets at September 30, 2001 and December 31, 2000 are
$830,000 and $1.3 million, respectively, of deferred income taxes receivable.
DEPOSITS
Deposits increased to $399.1 million at September 30, 2001 from $387.0
million at December 31, 2000.
The following table sets forth the classification of the Corporation's
deposits as of September 30, 2001 and December 31, 2000 (in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
Noninterest bearing..... $ 29,111 $ 26,641
NOW .................... 48,484 47,491
Money market ........... 58,090 57,385
Savings ................ 105,955 98,276
Time ................... 157,433 157,254
-------- --------
$399,073 $387,047
======== ========
BORROWINGS
Federal Home Loan Bank of Boston advances were $26.8 million at September
30, 2001 and $2.7 million at December 31, 2000. Securities sold under agreement
to repurchase were $11.9 million at September 30, 2001 and $6.0 million at
December 31, 2000.
12
LEGAL AND OFF-BALANCE SHEET RISKS
Various legal claims arise from time to time in the course of business of
the Corporation and its subsidiaries. At September 30, 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.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000
GENERAL
The Corporation recorded a profit for the 2001 quarter of $1.7 million
compared to a profit for the 2000 quarter of $2.0 million. The decrease in the
2001 quarter profit is due to decreased spreads, due to generally lower interest
rates as compared to the 2000 quarter inspite of increased asset levels. In
addition, included in the 2000 quarter is a gain on sale of a parcel of land and
building of the former location of the Bank's South Peabody branch office, and a
gain on sale of a preferred equity security, which was called.
Net interest income for the 2001 and 2000 quarters was $4.9 million and
$5.0 million, respectively. The weighted average interest rate spread for the
2001 quarter was 4.24% compared to 4.78% for the 2000 quarter. The net yield on
average earning assets was 4.45% for the 2001 quarter and 4.98% for the 2000
quarter. The return on average assets and the return on average stockholders'
equity were 1.45% and 16.53%, respectively, for the 2001 quarter compared to
1.93% and 22.80%, respectively, for the 2000 quarter.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income was $8.4 million for the 2001 and 2000
quarters. Interest on loans increased to $7.6 million for the 2001 quarter from
$7.0 million for the 2000 quarter. The average loan yield decreased to 7.79% for
the 2001 quarter from 8.65% 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 $656,000 for the 2001 quarter and $1.1 million in
the 2000 quarter. The average amount of investments held decreased and the
average yield on investments decreased to 5.32% for the 2001 quarter from 6.60%
for the 2000 quarter. Mortgage-backed securities income decreased to $183,000 in
the 2001 quarter from $235,000 in the 2000 quarter due to a decrease in the
average amount of mortgage-backed securities held and a decreased yield of 6.69%
in the 2001 quarter from 7.44% in the 2000 quarter.
INTEREST EXPENSE
Interest on deposits was $3.2 million for the 2001 and 2000 quarters. The
average balance of deposits increased in the 2001 quarter and the average cost
of deposits decreased to 3.23% for the 2001 quarter from 3.47% for the 2000
quarter. Interest on borrowed funds and escrow deposits of borrowers increased
to $317,000 from $107,000 for the 2001 and 2000 quarters, respectively. The
average cost increased to 3.63% for the 2001 quarter from 3.46% in the 2000
quarter.
NON-INTEREST INCOME
Total non-interest income for the 2001 quarter was $628,000 compared to
$991,000 for the 2000 quarter. Customer service fees decreased to $332,000 in
the 2001 quarter from $367,000 in the 2000 quarter. The 2000 quarter included
commercial real estate loan prepayment fees. The gain from the sale of mortgage
loans was $292,000 in the 2001 quarter compared to $39,000 in the 2000 quarter.
Because the Corporation sells fixed-rate loans that it originates, and because
more fixed-rate loans were originated in the 2001 quarter, gains on sale of
mortgage loans increased. Non-interest income in the 2000 quarter also
13
included two aforementioned items. One was a gain of $208,000 resulting from a
call of a preferred equity security. The other was a gain of $376,000 from the
sale of a parcel of land and building of the former location of the Bank's South
Peabody branch office.
NON-INTEREST EXPENSE
Total non-interest expense increased to $3.0 million in the 2001 quarter
from $2.8 million in the 2000 quarter. Salaries and employee benefits were $1.9
million in the 2001 quarter and $1.8 million in the 2000 quarter. These expenses
increased due to increases in salaries and associated benefits for existing
staff. Other expenses increased to $535,000 in the 2001 quarter from $500,000 in
the 2000 quarter due to training costs and costs associated with the increased
volume in the residential mortgage business. Included in the 2000 quarter are
$50,000 of nonrecurring expenses.
INCOME TAX EXPENSE
The Corporation's tax rate decreased to 33.4% in the 2001 quarter from
34.6% in the 2000 quarter mainly due to a lower percentage of income taxed at a
lower state tax rate.
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2000
GENERAL
The Corporation recorded a profit for the 2001 period of $5.5 million
compared to a profit for the 2000 period of $5.2 million. The increase in the
2001 period is primarily due to increased asset levels despite decreased
spreads, an increase in the gains on sales of mortgage loans, and receipt of
state tax refunds plus interest for the resolution of certain tax matters of
prior years. The 2000 period includes a gain on sale of a parcel of land and
building of the former location of the Bank's South Peabody branch office, and a
gain on sale of a preferred equity security, which was called.
Net interest income for the 2001 and 2000 periods were $14.9 million and
$14.8 million, respectively. The weighted average interest rate spread for the
2001 period was 4.42% compared to 4.75% for the 2000 period. The net yield on
average earning assets was 4.63% for the 2001 period and 4.97% for the 2000
period. The return on average assets and the return on average stockholders'
equity were 1.62% and 18.48%, respectively, for the 2001 period compared to
1.67% and 19.46%, respectively, for the 2000 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $25.4 million for the 2001
period from $24.4 million for the 2000 period. Interest on loans increased to
$22.6 million for the 2001 period from $20.1 million for the 2000 period.
Average loans outstanding increased during the 2001 period and the average loan
yield decreased to 8.09% for the 2001 period compared to 8.63% for the 2000
period. Interest and dividends on investments was $2.2 and $3.6 million for the
2001 and 2000 periods, respectively. The average amount of investments held
decreased, and the average yield on investments decreased to 6.07% for the 2001
period from 6.40% for the 2000 period. Mortgage-backed securities income
decreased to $599,000 in the 2001 period from $705,000 in the 2000 period
primarily due to a decrease in the average amount of mortgage-backed securities
held in spite of an increased yield to 7.25% in the 2001 period from 7.18% in
the 2000 period.
INTEREST EXPENSE
Interest on deposits increased to $9.7 million for the 2001 period from
$9.3 million for the 2000 period. This increase was related to an increase in
average total deposits outstanding despite a decrease in the average cost of
deposits to 3.38% for the 2001 period from 3.40% for the 2000 period. Interest
on borrowed funds and escrow deposits of borrowers increased to $840,000 in the
2001 period from $274,000 for the 2000 period. The average balances increased,
and the average cost increased to 4.04% in the 2001 period from 3.57% in the
2000 period.
14
NON-INTEREST INCOME
Total non-interest income for the 2001 period was $1.8 million compared to
$1.7 million for the 2000 period. The gain from the sale of mortgage loans was
$660,000 in the 2001 period compared to $125,000 in the 2000 period. Because the
Corporation sells fixed-rate loans that it originates, and because more
fixed-rate loans were originated in the 2001 period, gains on sale of mortgage
loans increased. Also included in non-interest income in the 2001 period is
$200,000 of pre-tax interest for the resolution of certain tax matters of prior
years. In the 2000 period, non-interest income also included two aforementioned
items. One was a gain of $208,000 resulting from a call of a preferred equity
security. The other was a gain of $376,000 from the sale of a parcel of land and
building of the former location of the Bank's South Peabody branch office.
NON-INTEREST EXPENSE
Total non-interest expense was $8.7 million in the 2001 period and $8.4
million in the 2000 period. Salaries and employee benefits were $5.4 million in
the 2001 period and $5.3 million for the 2000 period, respectively. These
expenses increased due to increases in salaries and associated benefits for
existing staff. Occupancy and equipment increased in the 2001 period to $962,000
from $878,000 in the 2000 period due to costs associated with the new location
of the South Peabody branch and other general buildings-related expenses. Other
expenses increased to $1.5 million in the 2001 period from $1.4 million in the
2000 period. This increase is due to increased training costs and costs
associated with the increased volume in the residential mortgage business.
INCOME TAX EXPENSE
The Corporation's tax rate decreased in the 2001 period to 31.6% from 33.3%
in the 2000 period. Included in income tax expense is $176,000 reduction of
state tax expense, net of federal tax, due to resolution of certain tax matters
of prior years. The Corporation's tax rate without this reduction is 33.8%.
15
WARREN BANCORP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARREN BANCORP, INC.
DATE: November 7, 2001 By: /s/ John R. Putney
-------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: November 7, 2001 By: /s/ Paul M. Peduto
-------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
17