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 June 30, 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 August 9, 2002
- --------------------------------------- ------------------------------
Common Stock, par value $.10 per share 7,446,311
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30,
2002 December 31,
(Unaudited) 2001
----------- -----------
A S S E T S
Cash and due from banks (non-interest bearing) $ 27,871 $ 16,834
Money market funds and overnight investments 9,886 10,166
--------- ---------
Cash and cash equivalents 37,757 27,000
Due from mortgage investors -- 13,003
Investment and mortgage-backed securities available for sale (amortized cost of
$56,705 at June 30, 2002 and $56,236 at December 31, 2001) 58,091 57,260
Investment securities held to maturity (fair value of $1,375 at June 30, 2002 and
December 31, 2001) 1,375 1,375
Cost-basis investments (fair value of $6,034 at June 30, 2002 and
December 31, 2001) 5,794 5,794
Loans held for sale 7,153 13,510
Loans 345,283 341,639
Allowance for loan losses (4,992) (4,973)
--------- ---------
Net loans 340,291 336,666
Banking premises and equipment, net 5,006 4,805
Accrued interest receivable 1,996 2,067
Other assets 2,263 2,150
--------- ---------
Total assets $ 459,726 $ 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 $ 394,380 $ 398,347
Borrowed funds 17,040 19,082
Escrow deposits of borrowers 983 1,056
Accrued interest payable 295 435
Accrued expenses and other liabilities 2,600 2,265
--------- ---------
Total liabilities 415,298 421,185
--------- ---------
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 June 30, 2002 and December 31, 2001 809 809
Outstanding -- 7,440,111 shares at June 30, 2002 and 7,382,731 shares at
December 31, 2001
Additional paid-in capital 35,535 35,595
Retained earnings 12,584 11,253
Treasury stock, at cost, 654,303 shares at June 30, 2002 and 711,683 shares
at December 31, 2001 (5,398) (5,872)
--------- ---------
43,530 41,785
Accumulated other comprehensive income 898 660
--------- ---------
Total stockholders' equity 44,428 42,445
--------- ---------
Total liabilities and stockholders' equity $ 459,726 $ 463,630
========= =========
See accompanying notes to unaudited consolidated financial statements.
2
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per-share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Interest and dividend income:
Interest on loans $ 5,936 $ 7,617 $ 12,344 $ 15,058
Interest and dividends on investments 603 706 1,140 1,509
Interest on mortgage-backed securities 121 199 258 416
-------- -------- -------- --------
Total interest and dividend income 6,660 8,522 13,742 16,983
-------- -------- -------- --------
Interest expense:
Interest on deposits 1,732 3,194 3,939 6,486
Interest on borrowed funds 119 303 228 523
-------- -------- -------- --------
Total interest expense 1,851 3,497 4,167 7,009
-------- -------- -------- --------
Net interest income 4,809 5,025 9,575 9,974
Provision for (recovery of) loan losses 0 (29) (38) 9
-------- -------- -------- --------
Net interest income after provision for
loan losses 4,809 5,054 9,613 9,965
-------- -------- -------- --------
Non-interest income:
Customer service fees 517 322 861 610
Gains on sales of mortgage loans 171 180 298 368
Other 1 201 6 243
-------- -------- -------- --------
Total non-interest income 689 703 1,165 1,221
-------- -------- -------- --------
Income before non-interest expense and income taxes 5,498 5,757 10,778 11,186
-------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits 2,015 1,774 3,922 3,503
Office occupancy and equipment 353 320 686 651
Professional services 57 58 99 98
Marketing 114 134 162 178
Outside data processing expense 149 152 294 287
Other 601 519 1,190 1,010
-------- -------- -------- --------
Total non-interest expenses 3,289 2,957 6,353 5,727
-------- -------- -------- --------
Income before income taxes 2,209 2,800 4,425 5,459
Income tax expense 676 762 1,353 1,680
-------- -------- -------- --------
Net income $ 1,533 $ 2,038 $ 3,072 $ 3,779
======== ======== ======== ========
Basic earnings per share $ 0.21 $ 0.28 $ 0.41 $ 0.51
======== ======== ======== ========
Diluted earnings per share $ 0.20 $ 0.27 $ 0.40 $ 0.50
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002
(Dollars in thousands)
(Unaudited)
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 $3,072 -- -- 3,072 -- -- 3,072
Other comprehensive income:
Unrealized gain on securities
available for sale, net
of taxes 238 -- -- - - 238 -- 238
------
Comprehensive income $3,310
======
Dividends paid -- -- (1,741) -- -- (1,741)
Tax benefit of options exercised -- 60 -- -- -- 60
Issuance of 57,380 shares for
exercise of options -- (120) -- -- 474 354
---- ------- ------- ---- ------ -------
Balance at June 30, 2002 $809 $35,535 $12,584 $898 ($5,398) $44,428
==== ======= ======= ==== ====== =======
See accompanying notes to unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2002 2001
---- ----
Cash flows from operating activities:
Net Income $ 3,072 $ 3,779
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for (recovery of) loan losses (38) 9
Depreciation and amortization 319 268
Deferred income tax expense 41 0
Amortization (accretion) of premiums and discounts 8 (66)
(Gains) on sales of mortgage loans (298) (368)
Loans originated for sale (36,744) (49,136)
Proceeds from sales of loans 53,156 35,657
Decrease in accrued interest receivable 71 204
(Increase) in other assets (278) (345)
(Decrease) increase in accrued interest payable (140) 17
Increase (decrease) in other liabilities and escrow deposits 322 (849)
-------- --------
Net cash (used in) operating activities 19,491 (10,830)
-------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale (11,981) (3,942)
Purchase of investment securities held to maturity -- (125)
Proceeds from maturities of investment securities available for sale 9,600 9,570
Proceeds from payments of mortgage-backed securities 1,904 1,524
Net (increase) in loans (341) (30,282)
Purchases of premises and equipment (520) (117)
-------- --------
Net cash provided by (used in) investing activities (1,338) (23,372)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in deposits (3,967) 3,393
Proceeds from Federal Home Loan Bank -- 29,981
Net increase (decrease) in other borrowed funds (2,042) 4,167
Dividends paid (1,741) (1,617)
Stock options exercised 354 155
-------- --------
Net cash (used in) provided by financing activities (7,396) 36,079
-------- --------
Net increase in cash and cash equivalents 10,757 1,877
Cash and cash equivalents at beginning of period 27,000 13,743
-------- --------
Cash and cash equivalents at end of period $ 37,757 $ 15,620
======== ========
Cash paid during the period for:
Interest $ 4,307 $ 6,992
Income taxes $ 265 $ 2,171
Supplemental noncash activities:
Mortgage loans converted from adjustable-rate
loans to fixed-rate loans for sale or loans sold $ 1,966 $ 8,347
See accompanying notes to unaudited consolidated financial statements.
5
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated financial statements of Warren Bancorp, Inc. (the
"Corporation" or "Warren") 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
accounting principles generally accepted in the United States of America 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 June 30, 2002, the
condensed consolidated statement of stockholders' equity for the six months
ended June 30, 2002, the condensed consolidated statements of cash flows for the
six months ended June 30, 2002 and June 30, 2001, and the related condensed
consolidated statements of operations for the three months ended and six months
ended June 30, 2002 and June 30, 2001 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 six months
ended June 30, 2002 and 2001 are as follows:
QUARTER ENDED JUNE 30,
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
--------------------- ----------------------- --------------------
2002 2001 2002 2001 2002 2001
------ ------ ------ ------ ----- -----
(In thousands, except per-share data)
Basic EPS $1,533 $2,038 7,423 7,358 $0.21 $0.28
Effect of dilutive
stock options -- -- 329 194 .01 .01
------ ------ ------ ------ ----- -----
Dilutive EPS $1,533 $2,038 7,752 7,552 $0.20 $0.27
====== ====== ====== ====== ===== =====
SIX MONTHS ENDED JUNE 30,
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
--------------------- ----------------------- --------------------
2002 2001 2002 2001 2002 2001
------ ------ ------ ------ ----- -----
(In thousands, except per-share data)
Basic EPS $3,072 $3,779 7,407 7,348 $0.41 $0.51
Effect of dilutive
stock options -- -- 305 176 .01 .01
------ ------ ------ ------ ----- -----
Dilutive EPS $3,072 $3,779 7,712 7,524 $0.40 $0.50
====== ====== ====== ====== ===== =====
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
6
operating results will differ with other similar information published by other
financial institutions. In addition, management accounting concepts are
periodically refined and results may change to reflect these refinements.
For purposes of this disclosure, operating segments are defined as
components of an enterprise that are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Corporation's chief operating decision maker is the President
and Chief Executive Officer of the Corporation. This disclosure has no effect on
the Corporation's primary financial statements.
The Corporation has identified its reportable operating business
segments as the Corporate Banking Business, 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 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.
7
Specific reportable segment information as of and for the quarters and
six-month periods ended June 30, 2002 and 2001 is as follows (in thousands):
QUARTER ENDED JUNE 30, 2002
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
Interest income-external $ 4,900 $ 953 $ 683 $ 124 -- $ 6,660
Interest income-internal -- -- 2,297 -- $(2,297) --
Fee and other income 86 185 418 -- -- 689
Net income 1,344 183 138 (132) -- 1,533
QUARTER ENDED JUNE 30, 2001
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
Interest income-external $ 5,642 $ 2,033 $ 759 $ 88 -- $ 8,522
Interest income-internal -- -- 3,845 -- $(3,845) --
Fee and other income 64 186 253 200 -- 703
Net income 1,085 309 390 254 -- 2,038
SIX MONTH PERIOD ENDED JUNE 30, 2002
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
Interest income-external $10,070 $ 2,140 $ 1,336 $ 196 -- $13,742
Interest income-internal -- -- 4,939 -- $(4,939) --
Fee and other income 161 325 675 4 -- 1,165
Net income 2,718 379 179 (204) -- 3,072
SIX MONTH PERIOD ENDED JUNE 30, 2001
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
Interest income-external $11,166 $ 3,979 $ 1,637 $ 201 -- $16,983
Interest income-internal -- -- 7,787 -- $(7,787) --
Fee and other income 116 380 485 240 -- 1,221
Net income 2,101 595 979 104 -- 3,779
8
OTHER
The Bank established as a subsidiary company in 1999 a real estate
investment trust ("REIT"). The Corporation has become aware that the
Massachusetts Department of Revenue (the "DOR") has sent a Notice of Intent to
Assess additional state taxes plus penalties and interest to a number of other
banks that have REIT subsidiaries. The DOR contends that dividend distributions
from the REITs to the banks are fully taxable in Massachusetts. The banks
contend that Massachusetts law provides for a dividends-received deduction equal
to 95% of certain of those dividend distributions. The Bank applies the 95%
deduction to the dividends it receives from its REIT subsidiary, and the
positive impact of that deduction on the net income of the Corporation is as
follows: 1999 -- $172,000; 2000 -- $320,000; 2001 -- $469,000; 2002 (through
June 30) -- $240,000. No potential penalties or interest have been estimated.
As of this date, the Bank has not received a Notice of Intent to Assess
from the DOR. The likelihood of receiving and the timing of any notice, and the
amount of assessment (including possible penalties and interest) if a notice is
issued by the DOR to the Bank cannot be determined at this time. If the DOR
assesses the Bank with additional state taxes with regard to the above, the
Corporation will vigorously challenge the assessment.
SUBSEQUENT EVENT
On August 8, 2002, the Corporation entered into an Agreement and Plan
of Merger with Banknorth Group, Inc. Under the terms of the agreement, for each
share of Warren common stock, the Corporation's shareholders will receive either
$15.75 in cash, without interest, or $15.75 in Banknorth common stock determined
by dividing $15.75 by the average closing price of Banknorth common stock during
the 20 trading-day period preceding the effective date of the merger. The
Corporation's shareholders will have the opportunity to elect the form of
consideration to be received for their shares of Warren common stock, subject to
allocation procedures set forth in the merger agreement, which are intended to
ensure that 50% of the outstanding shares of Warren common stock will be
converted into the right to receive Banknorth common stock and 50% of the
outstanding shares of Warren common stock will be converted into the right to
receive cash. The transaction is intended to qualify as a reorganization for
federal income tax purposes, and, as a result, the shares of Warren stock
exchanged for Banknorth common stock are expected to be transferred on a
tax-free basis. The transaction, which is expected to be completed by the end of
the year, is subject to Warren shareholder and regulatory approvals, and other
customary conditions.
9
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 six months
ended June 30, 2002 (the "2002 quarter" and "2002 period") reflect the
operations of its only subsidiary, Warren Five Cents Savings Bank (the "Bank").
The Bank, which is wholly owned by the Corporation, operates as a community bank
and is in the business of making individual and commercial loans to customers in
its market area.
The Corporation recorded a decreased profit for the 2002 period as
compared to the six months ended June 30, 2001 (the "2001 period") primarily due
to decreased spreads. Rates during the 2002 quarter were lower than the 2001
quarter. The yield on the one-year treasury constant maturity index decreased to
2.06% at June 30, 2002 from 3.72% at June 30, 2001, and prime rate decreased to
4.75% at June 30, 2002 from 6.75% at June 30, 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 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, net interest income
decreased in the 2002 period. Also, included in the 2001 period was the receipt
of state-tax refunds plus interest for the resolution of certain tax matters of
prior years.
Nonperforming loans were $84,000 at June 30, 2002 compared to zero at
December 31, 2001. 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.
SUBSEQUENT EVENT -- MERGER AGREEMENT WITH BANKNORTH
On August 8, 2002, the Corporation entered into an Agreement and Plan
of Merger with Banknorth Group, Inc. Under the terms of the agreement, for each
share of Warren common stock, the Corporation's shareholders will receive either
$15.75 in cash, without interest, or $15.75 in Banknorth common stock determined
by dividing $15.75 by the average closing price of Banknorth common stock during
the 20
10
trading-day period preceding the effective date of the merger. The
Corporation's shareholders will have the opportunity to elect the form of
consideration to be received for their shares of Warren common stock, subject to
allocation procedures set forth in the merger agreement, which are intended to
ensure that 50% of the outstanding shares of Warren common stock will be
converted into the right to receive Banknorth common stock and 50% of the
outstanding shares of Warren common stock will be converted into the right to
receive cash. The transaction is intended to qualify as a reorganization for
federal income tax purposes, and, as a result, the shares of Warren stock
exchanged for Banknorth common stock are expected to be transferred on a
tax-free basis. The transaction, which is expected to be completed by the end of
the year, is subject to Warren shareholder and regulatory approvals, and other
customary conditions.
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 June 30, 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.
11
INTEREST-RATE SENSITIVITY POSITION
JUNE 30, 2002
-------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
-------- -------- -------- -------- --------
(Dollars in Thousands)
INTEREST SENSITIVE ASSETS:
Investment securities $ 32,328 $ 7,957 $ -- $ 23,891 $ --
Loans held for sale 7,153 -- -- -- --
Adjustable-rate loans 107,047 12,625 38,460 133,129 1,300
Fixed-rate loans 4,252 925 6,121 32,667 8,673
Mortgage-backed securities 202 3,084 2,852 1,698 61
-------- -------- -------- -------- --------
Total interest sensitive assets 150,982 24,591 47,433 191,385 10,034
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts 30,208 30,207 -- -- --
Time deposits 25,080 21,989 37,920 37,796 --
Other deposits (A) 14,702 15,069 28,965 103,304 11,234
Borrowings 14,383 -- 19 2,000 638
-------- -------- -------- -------- --------
Total interest sensitive liabilities 84,373 67,265 66,904 143,100 11,872
-------- -------- -------- -------- --------
Excess (deficiency) of interest sensitive
assets over interest sensitive
liabilities $ 66,609 $(42,674) $(19,471) $ 48,285 $ (1,838)
======== ======== ======== ======== ========
Excess of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities $ 66,609 $ 23,935 $ 4,464 $ 52,749 $ 50,911
======== ======== ======== ======== ========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities 178.9% 115.8% 102.0% 114.6% 113.6%
======== ======== ======== ======== ========
Cumulative excess as a
percentage of total assets 14.5% 5.2% 1.0% 11.5% 11.1%
======== ======== ======== ======== ========
- ---------
(a) Other deposits consist of regular savings and N.O.W. accounts.
12
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 period, 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 June 30, 2002.
During the 2002 period, the primary sources of liquidity were $53.2
million in loan sales, loan paydowns and amortization of $59.9 million, proceeds
from maturities of investment securities of $9.6 million, and proceeds from
payments of mortgage-backed securities of $1.9 million. Primary uses of funds
were $97.3 million in residential, commercial real estate, commercial, and
consumer loan originations, a $2.0 million decrease in borrowed funds, a $4.0
million decrease in deposits and a $12.0 million purchase of investment
securities. At June 30, 2002, the Bank had $9.8 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 June 30, 2002:
WITHIN ONE YEAR (IN THOUSANDS)
---------------
Less than 3 months........................... $ 5,676
3 to 6 months................................ 2,549
6 to 12 months............................... 6,574
-------
14,799
More than 12 months.......................... 8,718
-------
$23,517
=======
CAPITAL ADEQUACY
Total stockholders' equity at June 30, 2002 was $44.4 million, an
increase of $2.0 million from $42.4 million at December 31, 2001. Included in
stockholders' equity at June 30, 2002 is an unrealized gain, net of tax, on
securities available for sale, which increased stockholders' equity, of $898,000
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 9.66% at June 30, 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
June 30, 2002, the FRB leverage capital ratio was 9.63% compared to 9.02% at
December 31, 2001.
13
The FDIC's leverage capital-to-assets ratio guidelines are
substantially similar to those adopted by the FRB and described above. At June
30, 2002, the Bank's leverage capital ratio, under FDIC guidelines, was 9.18%
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 13.08% and 12.52%,
respectively, at June 30, 2002 compared to 12.43% and 11.98%, respectively at
December 31, 2001, thus exceeding their risk-based capital requirements.
As of June 30, 2002, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 12.52%, 11.27%, and
9.18%, respectively. Based on these capital ratios, the Bank is considered to be
"well capitalized."
FINANCIAL CONDITION
The Corporation's total assets decreased to $459.7 million at June 30,
2002 from $463.6 million at December 31, 2001. Decreases occurred in
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 loans.
DUE FROM MORTGAGE INVESTORS
Due from mortgage investors was zero at June 30, 2002 compared to $13.0
million at December 31, 2001. This represented 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, increased to
$65.3 million at June 30, 2002 from $64.4 million at December 31, 2001. The
increase is the result of a net increase of the amortized cost of U.S.
Government Agencies and an increase in the market value of investment securities
available for sale. The amortized cost of mortgage-backed securities decreased
to $7.9 million at June 30, 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.
14
INVESTMENTS AT JUNE 30, 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 $ 1,011 $ (28) $ 29,473
FNMA mortgage-backed securities ...................... 5,808 189 -- 5,997
GNMA mortgage-backed securities ...................... 2,089 61 -- 2,150
U.S. Government and related
obligations ......................................... 15,004 4 (1) 15,007
Preferred stock ...................................... 5,314 150 -- 5,464
-------- -------- -------- --------
56,705 1,415 (29) 58,091
-------- -------- -------- --------
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
-------- -------- -------- --------
$ 63,874 $ 1,655 $ (29) $ 65,500
======== ======== ======== ========
LOANS AND LOANS HELD FOR SALE
Loans held for sale decreased by $6.3 million during the 2002 period to
$7.2 million at June 30, 2002.
Loans increased by $3.6 million during the 2002 period to $345.3
million at June 30, 2002. This increase is the result of increases in commercial
real estate and consumer loans offset by a decrease in residential mortgage
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 June 30, 2002 and December 31, 2001 (in thousands):
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Residential mortgages ......................... $ 43,227 $ 48,762
Commercial real estate ........................ 208,433 200,890
Commercial construction ....................... 12,493 13,192
Commercial loans .............................. 49,002 49,225
Consumer loans ................................ 32,128 29,570
-------- --------
$345,283 $341,639
======== ========
Residential mortgage loan originations during the 2002 period were
$42.6 million compared to $58.2 million in the 2001 period. The Corporation
originated $30.9 million in fixed-rate loans during the 2002 period compared to
$48.4 million during the 2001 period. Adjustable-rate loans totaling $11.7
million were originated during the 2002 period compared to $9.8 million during
the 2001 period. The Corporation sold loans totaling $39.9 million during the
2002 period compared to $51.8 million sold in the 2001 period.
15
CREDIT QUALITY
IMPAIRED AND NONPERFORMING LOANS
Loans are deemed by the Corporation to be impaired when, based on
current information and events, it is probable that the Corporation will be
unable to collect all amounts due according to the contractual terms of the
original loan agreement. Generally, nonaccruing loans are deemed impaired. Large
groups of homogeneous loans, such as smaller balance residential mortgage and
consumer installment loans are collectively evaluated for impairment. Typically,
the 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
June 30, 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 three 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 $84,000 at June 30, 2002 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:
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(DOLLARS IN THOUSANDS)
Accruing loans 90 days or more in arrears .............. $ -- $--
Nonaccrual loans ....................................... 84 --
------ -----
Total nonperforming loans .............................. $ 84 $--
====== =====
Percentage of nonperforming loans to:
Total loans ............................................ 0.02% N/A
====== =====
Total assets ........................................... 0.02% N/A
====== =====
16
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan
losses for the six months ended June 30, 2002 and June 30, 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 ............................................................. -- 1
------- -------
-- 1
------- -------
Loan recoveries:
Residential mortgage ....................................................... 10 13
Commercial mortgage and construction ....................................... 39 66
Commercial loans ........................................................... 2 2
Consumer loans ............................................................. 6 10
------- -------
57 91
------- -------
Net charge-offs ................................................................ (57) (90)
------- -------
Provision for (recovery of) loan losses charged (credited) to income ........... (38) 9
------- -------
Balance at end of period ....................................................... $ 4,992 $ 4,880
======= =======
Allowance to total loans at end of period ...................................... 1.45% 1.32%
======= =======
Allowance to nonperforming loans at end of period .............................. 5,942.9% 2,440.0%
======= =======
Allocation of ending balance:
Residential mortgage ....................................................... $ 452 $ 630
Commercial mortgage and construction ....................................... 3,181 3,243
Commercial loans ........................................................... 941 678
Consumer loans ............................................................. 418 329
------- -------
$ 4,992 $ 4,880
======= =======
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
17
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 $182,000 at June 30, 2002.
OTHER ASSETS
Included in other assets at June 30, 2002 and December 31, 2001 are
$832,000 and $1.0 million, respectively, of deferred income taxes receivable.
LIABILITIES
Deposits decreased to $394.4 million at June 30, 2002 from $398.3
million at December 31, 2001.
The following table sets forth the classification of the Corporation's
deposits as of June 30, 2002 and December 31, 2001 (in thousands):
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Noninterest bearing ...................... $ 37,906 $ 30,640
NOW ...................................... 60,570 54,029
Money market ............................. 60,415 53,726
Savings .................................. 112,704 106,319
Time ..................................... 122,785 153,633
-------- --------
$394,380 $398,347
======== ========
Federal Home Loan Bank of Boston advances were $5.7 million at June 30,
2002 and December 31, 2001. Securities sold under agreement to repurchase were
$11.4 million at June 30, 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 June 30, 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.
18
RESULTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2001
GENERAL
The Corporation recorded a profit for the 2002 quarter of $1.5 million
compared to a profit for the 2001 quarter of $2.0 million. The decrease in the
2002 quarter profit is primarily due to decrease spreads as a result of lower
interest rates in the 2002 quarter and increases in non-interest expenses. Also
included in the 2001 quarter was the receipt of $467,000 of state-tax refunds
plus interest ($294,000, or $.04 per share, net of applicable taxes) for the
resolution of certain tax matters of prior years.
Net interest income for the 2002 and 2001 quarters was $4.8 million and
$5.0 million, respectively. The weighted average interest rate spread for the
2002 quarter was 4.39% compared to 4.45% for the 2001 quarter. The net yield on
average earning assets was 4.51% for the 2002 quarter and 4.68% for the 2001
quarter. The return on average assets and the return on average stockholders'
equity were 1.35% and 14.07%, respectively, for the 2002 quarter compared to
1.81% and 20.66%, respectively, for the 2001 quarter.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income decreased to $6.7 million for the
2002 quarter from $8.5 million for the 2001 quarter. Interest on loans decreased
to $5.9 million for the 2002 quarter from $7.6 million for the 2001 quarter. The
average loan yield decreased to 6.94% for the 2002 quarter from 8.11% for the
2001 quarter and average loans outstanding decreased during the 2002 quarter as
compared to the 2001 quarter. Interest and dividends on investments was $603,000
for the 2002 quarter and $706,000 in the 2001 quarter. The average amount of
investments held increased and the average yield on investments decreased to
3.11% for the 2002 quarter from 6.13% for the 2001 quarter. Mortgage-backed
securities income decreased to $121,000 in the 2002 quarter from $199,000 in the
2001 period due to a decrease in the average amount of mortgage-backed
securities held due to paydowns and a decrease in yield to 5.77% in the 2002
quarter from 7.43% in the 2001 quarter.
INTEREST EXPENSE
Interest on deposits decreased to $1.7 million for the 2002 quarter
from $3.2 million for the 2001 quarter. The average balance of deposits
increased in the 2002 quarter, and the average cost of deposits decreased to
1.81% for the 2002 quarter from 3.37% for the 2001 quarter. Interest on borrowed
funds and escrow deposits of borrowers decreased to $119,000 from $303,000 for
the 2002 and 2001 quarters. The average borrowings decreased and the average
cost decreased to 1.91% for the 2002 quarter from 4.15% in the 2001 quarter.
NON-INTEREST INCOME
Total non-interest income for the 2002 quarter was $689,000 compared to
$703,000 for the 2001 quarter. Customer service fees were $517,000 in the 2002
quarter and $322,000 in the 2001 quarter. Included in this change is an increase
in commissions for selling annuities and an increase in general deposit fees due
to increases in prices and deposit account activity. The gain from the sale of
mortgage loans was $171,000 in the 2002 quarter compared to $180,000 in the 2001
quarter. Also included in non-interest income in the 2001 quarter is $200,000 of
pre-tax interest for the resolution of certain tax matters of prior years.
NON-INTEREST EXPENSE
Total non-interest expense increased to $3.3 million in the 2002
quarter from $3.0 million in the 2001 quarter. Salaries and employee benefits
increased to $2.0 million in the 2002 quarter from $1.8 million in the 2001
quarter. This increase is primarily due to salary increases, the filling of
vacant positions, and increases in benefits-related expenses. Office occupancy
and equipment has increased from $353,000 in the 2002 quarter from $320,000 in
the 2001 quarter due to write-offs of existing computer equipment which was
retired during the quarter. Other expense was $601,000 in the 2002 quarter and
$519,000 in the 2001 quarter.
19
The increase is due to increases in costs associated with the general operations
of the Corporation including ATM expense, check processing, and other
volume-related expenses.
INCOME TAX EXPENSE
The Corporation's tax rate increased to 30.6% in the 2002 quarter from
27.2% in the 2001 quarter. Included in income tax expense for 2002 quarter is a
decrease in tax valuation reserves. Included in the 2001 quarter is $176,000
reduction of state tax expense, net of federal tax, due to resolution of certain
tax matters of prior years.
RESULTS OF OPERATIONS -- FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2001
GENERAL
The Corporation recorded a profit for the 2002 period of $3.1 million
compared to a profit for the 2001 period of $3.8 million. The decrease in the
2002 period profit is primarily due to decreased spreads as a result of lower
interest rates in the 2002 period and increase in non-interest expenses. Also
included in the 2001 period was the receipt of $467,000 of state-tax refunds
plus interest ($294,000, or $.04 per share, net of applicable taxes) for the
resolution of certain tax matters of prior years.
Net interest income for the 2002 and 2001 periods was $9.6 million and
$10.0 million, respectively. The weighted average interest rate spread for the
2002 period was 4.34% compared to 4.50% for the 2001 period. The net yield on
average earning assets was 4.47% for the 2002 period and 4.73% for the 2001
period. The return on average assets and the return on average stockholders'
equity were 1.36% and 14.26%, respectively, for the 2002 period compared to
1.71% and 19.49%, respectively, for the 2001 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income decreased to $13.7 million for the
2002 period from $17.0 million for the 2001 period. Interest on loans decreased
to $12.3 million for the 2002 period from $15.1 million for the 2001 period.
Average loans outstanding decreased during the 2002 period while the average
loan yield decreased to 7.06% for the 2002 period compared to 8.26% for the 2001
period. Interest and dividends on investments was $1.1 and $1.5 million for the
2002 and 2001 periods, respectively. The average amount of investments held
increased and the average yield on investments decreased to 3.27% for the 2002
period from 6.34% for the 2001 period. Mortgage-backed securities income
decreased to $258,000 in the 2002 period from $416,000 in the 2001 period due to
a decrease in the average amount of mortgage-backed securities held due to
paydowns and a decrease in yield to 5.81% in the 2002 period from 7.54% in the
2001 period.
INTEREST EXPENSE
Interest on deposits decreased to $3.9 million for the 2002 period from
$6.5 million for the 2001 period. This decrease was related to a decrease in the
average cost of deposits to 2.05% for the 2002 period from 3.47% for the 2001
period despite an increased average balance of deposits. Interest on borrowed
funds and escrow deposits of borrowers decreased to $228,000 in the 2002 period
from $523,000 in the 2001 period. The average cost decreased to 2.01% in the
2002 period from 4.32% in the 2001 period, and the average balance of borrowed
funds decreased.
NON-INTEREST INCOME
Total non-interest income for the 2002 and 2001 periods was $1.2
million. Customer service fees increased to $861,000 in the 2002 period from
$610,000 in the 2001 period. This increase is due to an increase in commissions
for selling annuities and an increase in general deposit fees due to increases
in prices and deposit account activity. The gain from the sale of mortgage loans
was $298,000 in the 2002 period compared to $368,000 in the 2001 period. 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. A $40,000
pre-tax recovery of an investment written off several years ago is also
reflected in the 2001 period.
20
NON-INTEREST EXPENSE
Total non-interest expense was $6.4 million in the 2002 period and $5.7
million in the 2001 period. Salaries and employee benefits increased to $3.9
million in the 2002 period from $3.5 million in the 2001 period. This increase
is primarily due to salary increases, the filling of vacant positions and
increases in benefits-related expenses. Occupancy and equipment increased in the
2002 period to $686,000 from $651,000 in the 2001 period due to write offs of
existing computer equipment, which was retired during the period. Other expense
increased to $1.2 million in the 2002 period from $1.0 million in the 2001
period due to increases in costs associated with the general operations of the
Corporation including ATM expense, check processing, and other volume-related
expenses.
INCOME TAX EXPENSE
The Corporation's tax rate decreased in the 2002 period to 30.6% from
30.8% in the 2001 period. Included in income tax expense for the 2002 period is
a decrease in tax valuation reserves. Included in income tax expense during the
2001 period is $176,000 reduction of state tax expense, net of federal tax, due
to resolution of certain tax matters of prior years.
20
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
ANNUAL MEETING -- MAY 1, 2002
A. ELECTION OF DIRECTORS
TERM TO EXPIRE IN 2005
Total Vote for Total Vote Withheld
Each Director From Each Director
--------------- --------------------
Peter V. Bent 6,435,171 88,520
Stephen R. Howe 6,434,883 88,808
Arthur E. McCarthy 6,435,443 88,248
William F. Scanlon, Jr. 6,422,259 101,432
John D. Smidt 6,434,883 88,808
OTHER DIRECTORS
TERM TO EXPIRE IN 2003 TERM TO EXPIRE IN 2004
---------------------- ----------------------
Stephen J. Connolly, IV Francis L. Conway
Robert R. Fanning, Jr. Arthur E. Holden
Paul M. Peduto Stephen G. Kasnet
John R. Putney Linda Lerner
George W. Phillips
John H. Womack
B. PROPOSAL TO APPROVE THE WARREN BANCORP, INC. 2002 STOCK OPTION AND
INCENTIVE PLAN
FOR AGAINST ABSTAIN
--------- ------- -------
5,545,042 951,611 27,038
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On May 20, 2002 the Corporation filed a current report on Form 8-K
regarding a change in its certifying accountant.
21
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: August 12, 2002 By: /s/ John R. Putney
-------------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: August 12, 2002 By: /s/ Paul M. Peduto
-------------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
22