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, 2002 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, 2002
- --------------------------------------- ---------------------------
Common Stock, par value $.10 per share 7,423,551
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
A S S E T S
Cash and due from banks (non-interest bearing) $ 14,708 $ 16,834
Money market funds and overnight investments 27,076 10,166
----------- -----------
Cash and cash equivalents 41,784 27,000
Due from mortgage investors 3,919 13,003
Investment and mortgage-backed securities available for sale (amortized cost of
$54,515 at March 31, 2002 and $56,236 at December 31, 2001) 55,206 57,260
Investment securities held to maturity (fair value of $1,375 at March 31, 2002 and
December 31, 2001) 1,375 1,375
Cost-basis investments (fair value of $6,034 at March 31, 2002 and
December 31, 2001) 5,794 5,794
Loans held for sale 9,247 13,510
Loans 339,557 341,639
Allowance for loan losses (4,983) (4,973)
----------- -----------
Net loans 334,574 336,666
Banking premises and equipment, net 4,687 4,805
Accrued interest receivable 1,964 2,067
Other assets 2,242 2,150
----------- -----------
Total assets $ 460,792 $ 463,630
=========== ===========
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 $ 397,594 $ 398,347
Borrowed funds 16,571 19,082
Escrow deposits of borrowers 1,032 1,056
Accrued interest payable 340 435
Accrued expenses and other liabilities 2,241 2,265
----------- -----------
Total liabilities 417,778 421,185
----------- -----------
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, 2002 and December 31, 2001;
Outstanding - 7,398,311 shares at March 31, 2002 and 7,382,731
shares at December 31, 2001 809 809
Additional paid-in capital 35,561 35,595
Retained earnings 11,942 11,253
Treasury stock, at cost, 696,103 shares at March 31, 2002 and 711,683 shares at
December 31, 2001 (5,743) (5,872)
----------- -----------
42,569 41,785
Accumulated other comprehensive income 445 660
----------- -----------
Total stockholders' equity 43,014 42,445
----------- -----------
Total liabilities and stockholders' equity $ 460,792 $ 463,630
=========== ===========
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
MARCH 31,
-------------------------
2002 2001
------- -------
Interest and dividend income:
Interest on loans $ 6,408 $ 7,441
Interest and dividends on investments 537 803
Interest on mortgage-backed securities 137 217
------- -------
Total interest and dividend income 7,082 8,461
------- -------
Interest expense:
Interest on deposits 2,207 3,292
Interest on borrowed funds 109 220
------- -------
Total interest expense 2,316 3,512
------- -------
Net interest income 4,766 4,949
(Recovery of) provision for loan losses (38) 38
------- -------
Net interest income after provision for
loan losses 4,804 4,911
------- -------
Non-interest income:
Customer service fees 344 288
Gains on sales of mortgage loans 127 188
Other 5 42
------- -------
Total non-interest income 476 518
------- -------
Income before non-interest expense and income taxes 5,280 5,429
------- -------
Non-interest expense:
Salaries and employee benefits 1,907 1,729
Office occupancy and equipment 333 331
Professional services 42 40
Marketing 48 44
Outside data processing expense 145 135
Other 589 491
------- -------
Total non-interest expenses 3,064 2,770
------- -------
Income before income taxes 2,216 2,659
Income tax expense 677 918
------- -------
Net income $ 1,539 $ 1,741
======= =======
Basic earnings per share $ 0.21 $ 0.24
======= =======
Diluted earnings per share $ 0.20 $ 0.23
======= =======
See accompanying notes to consolidated financial statements.
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED MARCH 31,
---------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 1,539 $ 1,741
Adjustments to reconcile net income to net cash provided by operating
activities:
(Recovery of) provision for loan losses (38) 38
Depreciation and amortization 140 134
Deferred income taxes 9 --
(Accretion) of premiums, fees and discounts (13) (33)
(Gains) on sales of mortgage loans (127) (188)
Loans originated for sale (19,928) (19,087)
Proceeds from sales of loans 30,131 12,620
Decrease in accrued interest receivable 103 247
Decrease (increase) in other assets 17 (35)
(Decrease) in accrued interest payable (95) (10)
(Decrease) in other liabilities and escrow deposits (42) (443)
-------- --------
Net cash provided by (used in) operating activities 11,696 (5,016)
-------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale (1,971) --
Proceeds from maturities of investment securities available for sale 2,600 5,570
Proceeds from payments of mortgage-backed securities
available for sale 1,105 513
Net decrease (increase) in loans 5,401 (6,544)
Purchases of premises and equipment (23) (92)
-------- --------
Net cash provided by (used in) investing activities 7,112 (553)
-------- --------
Cash flows from financing activities:
Net (decrease) in deposits (753) (6,575)
Proceeds from Federal Home Loan Bank advances -- 10,400
Net increase (decrease) in other borrowed funds (2,511) 920
Dividends paid (850) (770)
Stock options exercised 90 8
-------- --------
Net cash (used in) provided by financing activities (4,024) 3,983
-------- --------
Net increase (decrease) in cash and cash equivalents 14,784 (1,586)
Cash and cash equivalents at beginning of year 27,000 13,743
-------- --------
Cash and cash equivalents at end of period $ 41,784 $ 12,157
======== ========
Cash paid during the period for:
Interest $ 2,411 $ 3,522
Income taxes $ 35 $ 726
Supplemental noncash activities:
Mortgage loans converted from adjustable-rate
loans to fixed-rate loans for sale or loans sold $ 1,331 $ 6,189
See accompanying notes to consolidated financial statements.
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002
(Dollars in thousands)
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
------------- ------ ---------- -------- ------------- -------- -----
Balance at December 31, 2001 $ 809 $ 35,595 $ 11,253 $ 660 ($ 5,872) $ 42,445
Comprehensive income:
Net income $ 1,539 -- -- 1,539 -- -- 1,539
Other comprehensive income (loss):
Unrealized loss on securities
available for sale, net of taxes (215) -- -- -- (215) -- (215)
--------
Comprehensive income $ 1,324
========
Dividends paid -- -- (850) -- -- (850)
Tax benefit of options exercised -- 5 -- -- -- 5
Issuance of 15,580 shares
for exercise of options -- (39) -- -- 129 90
-------- -------- -------- -------- -------- --------
Balance at March 31, 2002 $ 809 $ 35,561 $ 11,942 $ 445 ($ 5,743) $ 43,014
======== ======== ======== ======== ======== ========
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, 2001. 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 ("EPS")
The components of basic and diluted EPS for the quarters ended March 31,
2002 and 2001 are as follows:
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
----------------------- ----------------------- ------------------------
2002 2001 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
(In thousands, except per-share data)
Basic EPS $1,539 $1,741 7,391 7,338 $0.21 $0.24
Effect of dilutive
stock options - - 276 158 .01 .01
------ ------ ----- ----- ----- -----
Dilutive EPS $1,539 $1,741 7,667 7,496 $0.20 $0.23
===== ===== ===== ===== ===== =====
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.
1
The Corporation has identified its reportable operating business segments
as the Corporate Banking Business, the Personal Banking Business and the
Residential Mortgage Business. 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.
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.
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 typically 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.
Specific reportable segment information as of and for the quarters ended
March 31, 2002 and 2001 is as follows (in thousands):
QUARTER ENDED MARCH 31, 2002
CORPORATE PERSONAL RESIDENTIAL WARRENBANCORP
BANKING BANKING MORTGAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
Interest income-external $5,170 $ 653 $1,187 $ 72 $7,082
Interest income-internal - 2,642 - - $(2,642) -
Fee and other income 75 257 140 4 476
Net income 1,374 41 196 (72) 1,539
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
2
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, 2002 (the "2002 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 a decreased profit for the 2002 quarter as
compared to the three months ended March 31, 2001 (the "2001 quarter") primarily
due to decreased spreads. Rates during the 2002 quarter were significantly lower
than the 2001 quarter. The yield on the one-year treasury constant maturity
index decreased to 2.70% at March 31, 2002 from 4.09% at March 31, 2001, and
prime rate decreased to 4.75% at March 31, 2002 from 8.00% at March 31, 2001.
When general interest rates decrease, the Corporation's weighted average
interest-rate spread and net yield on average earning assets will usually
decrease. This is mainly because certain sources of funds, namely NOW and
regular savings deposits, may not have their rates decrease at the same rate as
the Corporation'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. As a result, despite increased asset levels, net interest income
decreased in the 2002 quarter.
Nonperforming loans were $143,000 at March 31, 2002 compared to zero at
December 31, 2001. Management continues to monitor the loan portfolio closely.
If conditions in the Massachusetts' real estate market become unstable and
values deteriorate, the amount of nonaccrual loans and real estate acquired
through foreclosure would be expected to increase, resulting in lower interest
income and increased loan losses, which could require additional loan loss
provisions to be charged to operating income. Moreover, real estate acquired
through foreclosure may give rise to additional charge-offs and writedowns and
higher expenses for property taxes and other carrying costs.
3
SUBSEQUENT EVENTS
On April 17, 2002, the Corporation declared an increase in its quarterly
dividend to 12 cents ($.12) per share from 11 1/2 cents ($.115) per share. The
dividend is payable May 13, 2002 to stockholders of record on April 29, 2002.
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, 2001, the date as of which the
simulation analysis was performed. Certain shortcomings are inherent in a
simulation analysis. Estimates of customer behavior to changing interest rates
may differ significantly from actual. Areas of these estimates include loan
prepayment speeds, shifting between adjustable-rate and fixed-rate loans, and
activity within different categories of deposit products. Also, the ability of
some borrowers to repay their adjustable-rate loans may decrease in the event of
interest-rate increases.
The following table summarizes the Corporation's interest-rate sensitivity
position as of March 31, 2002. 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.
4
INTEREST-RATE SENSITIVITY POSITION
MARCH 31, 2002
----------------------------------------------------------------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
-------- -------- -------- -------- --------
(Dollars in Thousands)
INTEREST SENSITIVE ASSETS:
Investment securities ................. $ 44,470 $ 3,053 $ 6,945 $ 23,891 $ --
Loans held for sale ................... 9,247 -- -- -- --
Adjustable-rate loans ................. 113,992 14,359 25,243 133,222 --
Fixed-rate loans ...................... 3,980 1,036 7,085 29,838 10,659
Due from mortgage investors ........... 3,919 -- -- -- --
Mortgage-backed securities ............ 1,119 1,601 3,999 1,777 218
-------- -------- -------- -------- --------
Total interest sensitive assets .... 176,727 20,049 43,272 188,728 10,877
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts ............................. 29,552 29,552 -- -- --
Time deposits ......................... 46,786 23,315 37,376 32,055 --
Other deposits (A) .................... 13,450 13,449 27,426 98,492 11,102
Borrowings ............................ 10,914 3,000 19 2,000 638
-------- -------- -------- -------- --------
Total interest sensitive liabilities 100,702 69,316 64,821 132,547 11,740
-------- -------- -------- -------- --------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ................ $ 76,025 $(49,267) $(21,549) $ 56,181 $ (863)
======== ======== ======== ======== ========
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities $ 76,025 $ 26,758 $ 5,209 $ 61,390 $ 60,527
======== ======== ======== ======== ========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ....... 175.5% 115.7% 102.2% 116.7% 116.0%
======== ======== ======== ======== ========
Cumulative excess (deficiency) as a
percentage of total assets ........... 16.5% 5.8% 1.1% 13.3% 13.1%
======== ======== ======== ======== ========
- ---------------
(a) Other deposits consist of regular savings and N.O.W. accounts.
5
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 ("FRB") discount window and may borrow from
the Depositors Insurance Fund Liquidity Fund. During the 2002 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, other than the
overnight facility, were $5.7 million at March 31, 2002.
During the 2002 quarter, the primary sources of liquidity were $30.1
million in loan sales, loan paydowns and amortization of $13.7 million, proceeds
from maturities of investment securities of $2.6 million, and proceeds from
payments of mortgage-backed securities of $1.1 million. Primary uses of funds
were $43.8 million in residential, commercial real estate and commercial loan
originations, a $2.5 million decrease in borrowed funds, and $2.0 million
purchase of investment securities. At March 31, 2002, the Bank had $27.0 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 March 31, 2002:
WITHIN ONE YEAR (IN THOUSANDS)
---------------
Less than 3 months.................................................... $ 9,968
3 to 6 months......................................................... 5,325
6 to 12 months........................................................ 6,114
-------
21,407
More than 12 months................................................... 7,996
-------
$29,403
=======
CAPITAL ADEQUACY
Total stockholders' equity at March 31, 2002 was $43.0 million, an increase
of $569,000 from $42.4 million at December 31, 2001. Included in stockholders'
equity at March 31, 2002 is an unrealized gain on securities available for sale,
which increased stockholders' equity, of $445,000 as compared to $660,000 at
December 31, 2001. 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 9.33% at March 31, 2002 compared to 9.15% at
December 31, 2001.
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 March
31, 2002, the FRB leverage capital ratio was 9.39% compared to 9.02% at December
31, 2001.
6
The FDIC's leverage capital-to-assets ratio guidelines are substantially
similar to those adopted by the FRB and described above. At March 31, 2002, the
Bank's leverage capital ratio, under FDIC guidelines, was 9.00% compared to
8.66% at December 31, 2001.
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 12.97% and 12.48%, respectively, at March
31, 2002 compared to 12.43% and 11.98%, respectively at December 31, 2001, thus
exceeding their risk-based capital requirements.
As of March 31, 2002, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 12.48%, 11.23%, and
9.00%, respectively. Based on these capital ratios, the Bank is considered to be
"well capitalized."
FINANCIAL CONDITION
The Corporation's total assets decreased to $460.8 million at March 31,
2002 from $463.6 million at December 31, 2001. Decreases occurred in investments
and mortgage-backed securities, residential mortgage loans and receivables due
from mortgage investors, while increases occurred in cash and cash equivalents,
consumer loans, and commercial real estate and commercial loans.
DUE FROM MORTGAGE INVESTORS
Due from mortgage investors was $3.9 million at March 31, 2002 compared to
$13.0 million at December 31, 2001. This represents the amount owed to the
Corporation by mortgage investors for loans sold.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investment securities and mortgage-backed securities consisting of
available-for-sale, held-to-maturity and cost-basis investments, decreased to
$62.4 million at March 31, 2002 from $64.4 million at December 31, 2001. The
decrease was the result of a maturity of a U.S. Government Agency note,
principal paydowns on mortgage-backed securities in the amount of $1.1 million,
and a decrease in the market value of investment securities available for sale.
Mortgage-backed securities decreased to $8.7 million at March 31, 2002 from $9.8
million at December 31, 2001 due to principal paydowns. Future increases in
interest rates could reduce the value of these investments.
7
INVESTMENTS AT MARCH 31, 2002 ARE AS FOLLOWS:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
AVAILABLE FOR SALE
Fixed income mutual funds................... $ 28,490 $ 647 $ - $29,137
FNMA mortgage-backed securities............. 6,443 200 - 6,643
GNMA mortgage-backed securities............. 2,271 22 - 2,293
U.S. Government and related
obligations................................ 11,997 7 (2) 12,002
Preferred stock............................. 5,314 75 (258) 5,131
------- ------- ------ -------
54,515 951 (260) 55,206
------- ------- ------ -------
HELD TO MATURITY
Foreign government bonds.................... 1,375 - - 1,375
COST BASIS
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
------- ------- ------ -------
5,794 240 - 6,034
------- ------- ------ -------
$61,684 $ 1,191 $ (260) $62,615
======= ======= ====== =======
LOANS AND LOANS HELD FOR SALE
Loans held for sale decreased by $4.3 million during the 2002 quarter to
$9.2 million at March 31, 2002.
Loans decreased by $2.1 million during the 2002 quarter to $339.6 million
at March 31, 2002. This decrease is the result of a decrease in residential
mortgage loans offset by increases in commercial real estate, commercial and
consumer loans. Commercial real estate, commercial construction, and commercial
loans typically earn higher yields than residential mortgage loans, but usually
carry higher risk due to loan size.
The following table sets forth the classification of the Corporation's
loans as of March 31, 2002 and December 31, 2001 (in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
Residential mortgages................................ $ 44,743 $ 48,762
Commercial real estate............................... 202,078 200,890
Commercial construction ............................. 13,573 13,192
Commercial loans..................................... 49,247 49,225
Consumer loans....................................... 29,916 29,570
-------- --------
$339,557 $341,639
======== ========
Residential mortgage loan originations during the 2002 quarter were $20.3
million compared to $22.1 million in the 2001 quarter. The Corporation
originated $17.3 million in fixed-rate loans during the 2002 quarter compared to
$19.6 million during the 2001 quarter. Adjustable-rate loans totaling $3.0
million were
8
originated during the 2002 quarter compared to $2.5 million during the 2001
quarter. The Corporation sold loans totaling $20.9 million during the 2002
quarter compared to $20.6 million sold in the 2001 quarter.
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
maximum 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, 2002 there were three loans considered impaired and performing
totaling $1.8 million and one loan for $84,000 considered impaired and
nonperforming, compared to four loans considered impaired and performing
totaling $1.8 million at December 31, 2001.
Loans past due 90 days or more, or past due less than 90 days but in
nonaccrual status were $143,000 at March 31, 2002 (which includes the
aforementioned impaired loan for $84,000) compared to zero at December 31, 2001.
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, 2002 DECEMBER 31, 2001
-------------- -----------------
(DOLLARS IN THOUSANDS)
Accruing loans 90 days or more in arrears.............................. $ - $ -
Nonaccrual loans....................................................... 143 -
---- ----
Total nonperforming loans.............................................. $143 $ -
==== ====
Percentage of nonperforming loans to:
Total loans............................................................ 0.04% N/A
==== ===
Total assets........................................................... 0.03% N/A
==== ===
9
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan
losses for the three months ended March 31, 2002 and March 31, 2001 (dollars in
thousands):
2002 2001
------ ------
Balance at beginning of period ...................................... $ 4,973 $4,781
------- ------
Losses charged to the allowance:
Residential mortgage ............................................ -- --
Commercial mortgage and construction ............................ -- --
Commercial loans ................................................ -- --
Consumer loans .................................................. -- --
------- ------
-- --
------- ------
Loan recoveries:
Residential mortgage ............................................ 5 5
Commercial mortgage and construction ............................ 38
Commercial loans ................................................ 1 1
Consumer loans .................................................. 4 7
------- ------
48 13
------- ------
Net charge-offs ..................................................... (48) (13)
Provision for (recovery of) loan losses charged (credited) to income (38) 38
------- ------
Balance at end of period ............................................ $ 4,983 $4,832
======
Allowance to total loans at end of period ........................... 1.47% 1.38%
Allowance to nonperforming loans at end of period ................... 3,484.6% N/A
======= ======
Allocation of ending balance:
Residential mortgage ............................................ $ 482 $ 738
Commercial mortgage and construction ............................ 3,150 3,185
Commercial loans ................................................ 954 680
Consumer loans .................................................. 397 229
------- ------
$ 4,983 $4,832
======= ======
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
consistent systematic process that takes into consideration specific and general
portfolio risk, economic conditions and the current regulatory environment. For
impaired loans, management quantifies potential losses. For all other loans a
grading system is used based on assessed credit risk, and loss percentages are
applied to these loans. The loss percentages are determined by reviewing
historic loss trends in each grade category and taking into consideration
industry and regulatory norms, current economic conditions, delinquency levels,
experience of staff and other trends.
In addition to the above components, management applies an unallocated
allowance that is not attributable to any specific loan or loan grade. This
allowance is based on various factors. Among the factors are: the risk
characteristics of the loan portfolio generally; general economic trends;
assessment of the current business cycle; credit quality trends in relation to
current economic conditions; trends in the outlook of banking regulators with
respect to allowance for loan losses and supervisory concerns in general; and
10
industry trends with respect to levels of allowance for loan losses. For
purposes of the table on the preceding, the 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 $1.9
million of impaired loans, all of which is measured using the fair value method,
is $179,000 at March 31, 2002.
OTHER ASSETS
Included in other assets at March 31, 2002 and December 31, 2001 are $1.1
million and $1.0 million, respectively, of deferred income taxes receivable.
LIABILITIES
Deposits decreased to $397.6 million at March 31, 2002 from $398.3 million
at December 31, 2001.
The following table sets forth the classification of the Corporation's
deposits as of March 31, 2002 and December 31, 2001 (in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
Noninterest bearing.................................. $ 35,039 $ 30,640
NOW.................................................. 52,662 54,029
Money market......................................... 59,104 53,726
Savings.............................................. 111,257 106,319
Time................................................. 139,532 153,633
-------- --------
$397,594 $398,347
======== ========
Federal Home Loan Bank of Boston advances were $5.7 million at March 31,
2002 and December 31, 2001. Securities sold under agreement to repurchase were
$10.9 million at March 31, 2002 and $13.4 million at December 31, 2001.
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, 2002, 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.
11
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 2001
GENERAL
The Corporation recorded a profit for the 2002 quarter of $1.5 million
compared to a profit for the 2001 quarter of $1.7 million. The decrease in the
2002 quarter profit is primarily due to decreased spreads as a result of
significantly lower interest rates in the 2002 quarter, decreased gains on the
sale of mortgage loans, and increases in non-interest expenses.
Net interest income for the 2002 and 2001 quarters was $4.8 million and
$4.9 million, respectively. The weighted average interest rate spread for the
2002 quarter was 4.29% compared to 4.55% for the 2001 quarter. The net yield on
average earning assets was 4.44% for the 2002 quarter and 4.79% for the 2001
quarter. The return on average assets and the return on average stockholders'
equity were 1.36% and 14.46%, respectively, for the 2002 quarter compared to
1.61% and 18.25%, respectively, for the 2001 quarter.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income decreased to $7.1 million for the 2002
quarter from $8.5 million for the 2001 quarter. Interest on loans decreased to
$6.4 million for the 2002 quarter from $7.4 million for the 2001 quarter. The
average loan yield decreased to 7.17% for the 2002 quarter from 8.36% for the
2001 quarter and average loans outstanding increased during the 2002 quarter as
compared to the 2001 quarter. Interest and dividends on investments was $537,000
for the 2002 quarter and $803,000 for the 2001 quarter. The average amount of
investments held increased while the average yield on investments decreased to
3.44% for the 2002 quarter from 6.54% for the 2001 quarter. Mortgage-backed
securities income decreased to $137,000 in the 2002 quarter from $217,000 in the
2001 quarter primarily due to a decrease in the average amount of
mortgage-backed securities held due to paydowns, and a decrease in the average
yield to 5.85% in the 2002 quarter from 7.64% in the 2001 quarter.
INTEREST EXPENSE
Interest on deposits decreased to $2.2 million for the 2002 quarter from
$3.3 million for the 2001 quarter. The average balance of deposits increased in
the 2002 quarter, and the average cost of deposits decreased to 2.29% for the
2002 quarter from 3.57% for the 2001 quarter. Interest on borrowed funds and
escrow deposits of borrowers decreased to $109,000 from $220,000 in the 2001
quarter. Average borrowings increased during the 2002 quarter as compared to the
2001 quarter. The average cost of borrowings decreased to 2.13% in the 2002
quarter from 4.58% in the 2001 quarter.
NON-INTEREST INCOME
Total non-interest income for the 2002 quarter was $476,000 compared to
$518,000 for the 2001 quarter. The gain from the sale of mortgage loans was
$127,000 in the 2002 quarter compared to $188,000 in the 2001 quarter.
NON-INTEREST EXPENSE
Total non-interest expense increased to $3.1 million in the 2002 quarter
from $2.8 million in the 2001 quarter. Salaries and employee benefits increased
to $1.9 million in the 2002 quarter from $1.7 million in the 2001 quarter. This
increase is due to salary increases, the filling of vacant positions, and
increases in benefits-related expenses. Other expenses increased to $589,000 in
the 2002 quarter from $491,000 in the 2001 quarter. Costs associated with the
general operations of the Corporation have increased including ATM expense,
check processing, and other volume-related expenses.
INCOME TAX EXPENSE
The Corporation's tax rate decreased to 30.6% in the 2002 quarter from
34.5% in the 2001 quarter mainly due to a decrease in tax valuation reserves.
12
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
13
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 6, 2002 By: /s/ John R. Putney
--------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: May 6, 2002 By: /s/ Paul M. Peduto
--------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
14