SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
or the quarterly period ended September 30, 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 November 4, 2002
- --------------------------------------- -----------------------------------
Common Stock, par value $.10 per share 7,487,161
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
A S S E T S (Unaudited)
Cash and due from banks (non-interest bearing) $ 18,014 $ 16,834
Money market funds and overnight investments 9,722 10,166
-------- --------
Cash and cash equivalents 27,736 27,000
Due from mortgage investors -- 13,003
Investment and mortgage-backed securities available for sale
(amortized cost of $68,848 at September 30, 2002 and $56,236 at
December 31, 2001) 70,481 57,260
Investment securities held to maturity (fair value of $1,375 at
September 30, 2002 and December 31, 2001) 1,375 1,375
Cost-basis investments (fair value of $6,034 at
September 30, 2002 and December 31, 2001) 5,794 5,794
Loans held for sale 12,915 13,510
Loans 357,842 341,639
Allowance for loan losses (5,002) (4,973)
-------- --------
Net loans 352,840 336,666
Banking premises and equipment, net 5,108 4,805
Accrued interest receivable 1,766 2,067
Other assets 2,410 2,150
-------- --------
Total assets $480,425 $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 $396,655 $398,347
Borrowed funds 33,281 19,082
Escrow deposits of borrowers 1,178 1,056
Accrued interest payable 230 435
Accrued expenses and other liabilities 3,556 2,265
-------- --------
Total liabilities 434,900 421,185
-------- --------
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 September 30, 2002 and December 31, 2001;
Outstanding -- 7,471,521 shares at September 30, 2002 and 7,382,731 shares
at December 31, 2001 809 809
Additional paid-in capital 35,568 35,595
Retained earnings 13,228 11,253
Treasury stock, at cost, 622,893 shares at September 30, 2002, and 711,683
shares at December 31, 2001 (5,139) (5,872)
-------- --------
44,466 41,785
Accumulated other comprehensive income 1,059 660
-------- --------
Total stockholders' equity 45,525 42,445
-------- --------
Total liabilities and stockholders' equity $480,425 $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)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income:
Interest on loans $ 6,186 $ 7,585 $18,530 $22,643
Interest and dividends on investments 628 656 1,768 2,165
Interest on mortgage-backed securities 104 183 362 599
------- ------- ------- -------
Total interest and dividend income 6,918 8,424 20,660 25,407
------- ------- ------- -------
Interest expense:
Interest on deposits 1,522 3,175 5,461 9,661
Interest on borrowed funds 149 317 377 840
------- ------- ------- -------
Total interest expense 1,671 3,492 5,838 10,501
------- ------- ------- -------
Net interest income 5,247 4,932 14,822 14,906
Provision for (recovery of) loan losses 0 38 (38) 47
------- ------- ------- -------
Net interest income after provision for
loan losses 5,247 4,894 14,860 14,859
------- ------- ------- -------
Non-interest income:
Customer service fees 561 332 1,422 942
Gains on sales of mortgage loans 141 292 439 660
Other 1 4 7 247
------- ------- ------- -------
Total non-interest income 703 628 1,868 1,849
------- ------- ------- -------
Income before non-interest expense and income taxes 5,950 5,522 16,728 16,708
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 2,008 1,890 5,930 5,393
Office occupancy and equipment 326 311 1,012 962
Professional services 20 41 119 139
Marketing 121 70 283 248
Outside data processing expense 156 145 450 432
Other 638 535 1,828 1,545
Merger-related expenses 483 -- 483 --
------- ------- ------- -------
Total non-interest expenses 3,752 2,992 10,105 8,719
------- ------- ------- -------
Income before income taxes 2,198 2,530 6,623 7,989
Income tax expense 661 844 2,014 2,524
------- ------- ------- -------
Net income $ 1,537 $ 1,686 $ 4,609 $ 5,465
======= ======= ======= =======
Basic earnings per share $ 0.21 $ 0.23 $ 0.62 $ 0.74
======= ======= ======= =======
Diluted earnings per share $ 0.20 $ 0.22 $ 0.59 $ 0.72
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002
(Dollars in thousands)
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
INCOME STOCK CAPITAL EARNINGS STOCK INCOME TOTAL
------------- ------ ---------- -------- -------- ------------- --------
Balance at December 31, 2001 $809 $35,595 $11,253 $5,872 $ 660 $42,445
Comprehensive income:
Net income $4,609 -- -- 4,609 -- -- 4,609
Other comprehensive income:
Unrealized gain on securities
available for sale, net of
taxes 399 -- -- -- -- 399 399
------
Comprehensive income $5,008
======
Dividends paid -- -- 2,634 -- -- 2,634
Tax benefit of options exercised -- 120 -- -- -- 120
Issuance of 88,790 shares for exercise
of options -- 147 -- 733 -- 586
---- ------- ------- ------ ------ -------
Balance at September 30, 2002 $809 $35,568 $13,228 $5,139 $1,059 $45,525
==== ======= ======= ====== ====== =======
See accompanying notes to consolidated financial statements.
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 4,609 $ 5,465
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for (recovery of) loan losses (380) 47
Depreciation and amortization 465 403
(Prepaid) income tax expense (181) --
(Accretion) of premiums and discounts (11) (106)
(Gains) on sales of mortgage loans (439) (660)
Loans originated for sale (54,561) (73,705)
Proceeds from sales of loans 65,768 61,229
Decrease in accrued interest receivable 301 11
(Increase) in other assets (289) (104)
(Decrease) in accrued interest payable (205) (18)
Increase (decrease) in other liabilities and escrow deposits 1,533 (699)
-------- --------
Net cash provided by (used in) operating activities 16,952 (8,137)
-------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale (52,906) (11,856)
Purchase of investment securities held to maturity -- (125)
Purchase of mortgage-backed securities -- (2,049)
Proceeds from maturities of investment securities available for sale 37,600 13,295
Proceeds from payments of mortgage-backed securities 2,705 2,651
Net (increase) in loans (13,306) (28,273)
Purchases of premises and equipment (768 (191)
-------- --------
Net cash (used in) investing activities (26,675) (26,548)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in deposits (1,692) 12,026
Proceeds from Federal Home Loan Bank -- 24,166
Maturities of Federal Home Loan Bank advances (3,000) --
Net increase in other borrowed funds 17,199) 5,910
Dividends paid (2,634) (2,464
Stock options exercised 586 155
-------- --------
Net cash provided by financing activities 10,459 39,793
-------- --------
Net increase in cash and cash equivalents 736 5,108
Cash and cash equivalents at beginning of period 27,000 13,743
-------- --------
Cash and cash equivalents at end of period $ 27,736 $ 18,851
======== ========
Cash paid during the period for:
Interest 6,043 10,519
Income taxes $ 440 $ 3,061
Supplmental noncash activities:
Mortgage loans converted from adjustable-rate
loans to fixed-rate loans for sale or loans sold $ 3,274 $ 10,726
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" 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
generally accepted accounting principles have been omitted pursuant to those
rules and regulations, but the Corporation believes that the disclosures are
adequate to make the information presented not misleading. The consolidated
balance sheet as of September 30, 2002, the consolidated statement of
stockholders' equity for the nine months ended September 30, 2002, the
consolidated statements of cash flows for the nine months ended September 30,
2002 and September 30, 2001, and the related consolidated statements of
operations for the three months ended and nine months ended September 30, 2002
and September 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 nine
months ended September 30, 2002 and 2001 are as follows:
QUARTER ENDED SEPTEMBER 30,
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
---------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------------
(In thousands, except per-share data)
Basic EPS $1,537 $1,686 7,453 7,366 $0.21 $0.23
Effect of dilutive
stock options -- -- 413 211 (.01) (.01)
------ ------ ----- ----- ----- -----
Dilutive EPS $1,537 $1,686 7,866 7,577 $0.20 $0.22
====== ====== ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30,
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
---------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------------
(In thousands, except per-share data)
Basic EPS $4,609 $5,465 7,423 7,354 $0.62 $0.74
Effect of dilutive
stock options -- -- 337 187 (.03) (.02)
------ ------ ------ ------ ----- -----
Dilutive EPS $4,609 $5,465 7,760 7,541 $0.59 $0.72
====== ====== ====== ====== ===== =====
BUSINESS SEGMENTS
For internal reporting, planning and business purposes, the Corporation
segments its operations into distinct business groups. An individual business
group's profit contribution to the Corporation as a whole is determined based
upon the Corporation's profitability reporting system which assigns capital and
other balance sheet items and income statement items to each of the business
groups. This segmentation mirrors the Corporation's organizational structure.
Management accounting policies are in place for assigning revenues and expenses
that are not directly incurred by the business groups, such as overhead, the
results of asset allocations, and transfer revenues and expenses. Accordingly,
the Corporation's business-segment
1
operating results will differ with other similar information published by other
financial institutions. In addition, management accounting concepts are
periodically refined and results may change to reflect these refinements.
For purposes of this disclosure, operating segments are defined as
components of an enterprise that are evaluated regularly by chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Corporation's chief operating decision maker is the President
and Chief Executive Officer of the Corporation. This disclosure has no effect on
the Corporation's primary financial statements.
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.
2
Specific reportable segment information as of and for the quarters and
nine-month periods ended September 30, 2002 and 2001 is as follows (in
thousands):
QUARTER ENDED SEPTEMBER 30, 2002
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
Interest income-external $ 5,117 $ 948 $ 708 $ 145 -- $ 6,918
Interest income-internal -- -- 1,894 -- $(1,894) --
Fee and other income 67 168 468 -- -- 703
Net income 1,587 227 19 (296) -- 1,537
QUARTER ENDED SEPTEMBER 30, 2001
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
Interest income-external $ 5,753 $ 1,820 $ 735 $ 116 -- $ 8,424
Interest income-internal -- -- 3,629 -- $(3,629) --
Fee and other income 49 310 266 3 -- 628
Net income 1,293 356 201 (164) -- 1,686
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
Interest income-external $15,187 $ 3,088 $ 2,044 $ 341 -- $20,660
Interest income-internal -- -- 6,833 -- $(6,833) --
Fee and other income 228 493 1,143 4 -- 1,868
Net income 4,305 606 198 (500) -- 4,609
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
CORPORATE RESIDENTIAL PERSONAL WARREN BANCORP
BANKING MORTGAGE BANKING OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
Interest income-external $16,919 $ 5,799 $ 2,372 $ 317 -- $25,407
Interest income-internal -- -- 11,416 -- (11,416) --
Fee and other income 165 690 751 243 -- 1,849
Net income 3,394 951 1,180 (60) -- 5,465
3
MERGER AGREEMENT WITH BANKNORTH GROUP, INC.
On August 8, 2002, Banknorth Group, Inc. ("Banknorth") and Warren
Bancorp, Inc. entered into an Agreement and Plan of Merger (the "Agreement")
pursuant to which Warren will be merged with and into Banknorth (the "Merger").
The Agreement provides, among other things, that as a result of the Merger each
outstanding share of common stock of Warren (subject to certain exceptions) will
be converted into the right to receive $15.75 in cash or a number of whole
shares of common stock of Banknorth determined by dividing $15.75 by the average
closing prices of the Banknorth common stock during a specified period preceding
the Merger, plus cash in lieu of any fractional share interest, subject to
election and allocation procedures set forth in the 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 Merger is subject to all required regulatory approvals, the
approval of Warren stockholders, and other customary conditions.
OTHER
Warren Five Cents Savings Bank established as a subsidiary company in
1999 a real estate investment trust ("REIT"). The Corporation has received from
the Massachusetts Department of Revenue ("DOR") a Notice of Assessment of
additional state taxes, and it is aware that the DOR has sent a Notice of
Assessment 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 Corporation contends that Massachusetts law
provides for a dividends-received deduction equal to 95% of certain of those
dividend distributions. Warren Five Cents Savings Bank applies the 95% deduction
to the dividends it receives from its REIT subsidiary.
The amount of assessment to the Corporation was $690,000 for tax-return
years 1999 and 2000, plus penalties and interest of $121,000, all before taking
into consideration federal tax benefits. The total amount of state tax benefit
received by the Corporation (before federal tax) by applying the aforementioned
95% dividends-received deduction from inception of the REIT through September
30, 2002, is $1,984,000 (including the $690,000 above).
The Corporation is vigorously challenging the assessment. If the DOR
prevails, it could assess the remaining $1,294,000 plus penalty and interest.
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. In
addition, if the Corporation does not prevail in its challenge to an assessment
of state taxes, penalties and interest discussed below
4
under "Other," a required payment would adversely affect the income, capital
adequacy and liquidity of the Corporation and the Bank. 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 (the "Corporation" or "Warren") operating
results for the three and nine months ended September 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 ended
September 30, 2002 due to increased non-interest expenses. Included in the 2002
period is $483,000 of expenses related to a merger with Banknorth Group, Inc.
(See "Merger Agreement with Banknorth Group, Inc." below.) 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 increased to $84,000 in the 2002 period from 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.
MERGER AGREEMENT WITH BANKNORTH GROUP, INC.
On August 8, 2002, Banknorth Group, Inc. ("Banknorth") and Warren
Bancorp, Inc. entered into an Agreement and Plan of Merger (the "Agreement")
pursuant to which Warren will be merged with and into Banknorth (the "Merger").
The Agreement provides, among other things, that as a result of the Merger each
outstanding share of common stock of Warren (subject to certain exceptions) will
be converted into the right to receive $15.75 in cash or a number of whole
shares of common stock of Banknorth determined by dividing $15.75 by the average
closing prices of the Banknorth common stock during a specified period preceding
the Merger, plus cash in lieu of any fractional share interest, subject to
election and allocation procedures set forth in the 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 Merger is subject to all required regulatory approvals, the
approval of Warren stockholders, and other customary conditions.
OTHER
Warren Five Cents Savings Bank (the "Bank") established as a
subsidiary company in 1999 a real estate investment trust ("REIT"). The
Corporation has received from the Massachusetts Department of Revenue ("DOR") a
Notice of Assessment of additional state taxes, and it is aware that the DOR has
sent a Notice of Assessment 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 Corporation contends that
Massachusetts law provides for a dividends-received deduction equal to 95% of
certain of those dividend distributions. Warren Five Cents Savings Bank applies
the 95% deduction to the dividends it receives from its REIT subsidiary.
The amount of assessment to the Corporation was $690,000 for tax-return
years 1999 and 2000, plus penalties and interest of $121,000, all before taking
into consideration federal tax benefits. The total amount of state tax benefit
received by the Corporation (before federal tax) by applying the aforementioned
95% dividends-received deduction from inception of the REIT through September
30, 2002, is $1,984,000 (including the $690,000 above).
5
The Corporation is vigorously challenging the assessment. If the DOR
prevails, it could assess the remaining $1,294,000 plus penalty and interest.
Payments required to be made by the Corporation if the DOR prevails would
adversely affect the income, capital adequacy and liquidity of the Corporation
and the Bank.
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 September 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. Nonaccruing loans are not
included in this analysis due to their status as non-earning assets. Estimates
of fixed-rate loan and fixed-rate mortgage-backed security amortization and
prepayments are included with rate sensitive assets. The following types of
deposit accounts are assumed to have effective maturities as follows based on
their past retention characteristics: NOW accounts -- up to five years; cash
manager and passbook plus accounts -- up to six months; and regular savings
accounts -up to greater than five years. None of these assets is considered a
trading asset.
6
INTEREST-RATE SENSITIVITY POSITION
SEPTEMBER 30, 2002
----------------------------------------------------------------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
-------- -------- -------- -------- --------
(Dollars in Thousands)
INTEREST SENSITIVE ASSETS:
Investment securities................................. $ 48,098 $ 4,974 $ -- $ 23,891 $ --
Loans held for sale................................... 12,915 -- -- -- --
Adjustable-rate loans................................. 107,495 10,467 42,667 140,592 438
Fixed-rate loans...................................... 4,637 4,489 6,521 32,353 8,099
Due from mortgage investors........................... -- -- -- -- --
Mortgage-backed securities............................ 1,040 1,420 3,304 1,299 26
-------- -------- -------- -------- --------
Total interest sensitive assets.................... 174,185 21,350 52,492 198,135 8,563
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts............................................. 31,080 31,080 -- -- --
Time deposits......................................... 22,940 28,243 30,173 34,787 --
Other deposits (a).................................... 14,901 14,432 28,602 102,397 11,232
Borrowings............................................ 30,624 19 -- 2,000 638
-------- -------- -------- -------- --------
Total interest sensitive liabilities............... 99,545 73,774 58,775 139,184 11,870
-------- -------- -------- -------- --------
Excess (deficiency) of interest sensitive
assets over interest sensitive
liabilities.......................................... $ 74,640 $(52,424) $ (6,283) $ 58,951 $ (3,307)
======== ======== -------- ======== ========
Excess of cumulative
interest sensitive assets over cumulative
interest sensitive liabilities....................... $ 74,640 $ 22,216 $ 15,933 $ 74,884 $ 71,577
======== ======== ======== ======== ========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities....................... 175.0% 112.8% 106.9% 120.2% 118.7%
======== ======== ======== ======== ========
Cumulative excess as a
percentage of total assets........................... 15.5% 4.6% 3.3% 15.6% 14.9%
======== ======== ======== ======== ========
- --------
(a) Other deposits consist of regular savings and N.O.W. accounts.
Interest-rate sensitivity statistics are static measures that do not
necessarily take into consideration external factors which might affect the
sensitivity of assets and liabilities and consequently cannot be used alone to
predict the operating results of a financial institution in a changing
environment. However, these measurements do reflect major trends and thus the
Corporation's sensitivity to interest rates changes over time.
LIQUIDITY
The Bank seeks to ensure sufficient liquidity is available to meet cash
requirements while earning a return on liquid assets. The Bank uses its
liquidity primarily to fund loan and investment commitments, to supplement
deposit flows and to meet operating expenses. The primary sources of liquidity
are interest and amortization from loans, mortgage-backed securities and
investments, maturities of investments, loan sales, deposits and Federal Home
Loan Bank of Boston ("FHLBB") advances, which include a $15 million overnight
line of credit as well as other overnight borrowings vehicles. The Bank also has
access to the Federal Reserve Bank's discount window and may borrow from the
Depositors Insurance Fund Liquidity Fund. During the 2002 period, the Bank did
not use the Federal Reserve Bank discount window and did not borrow from the
Depositors Insurance Fund Liquidity Fund.
7
The Bank also uses the longer term borrowings facilities within its
total available credit line with the FHLBB. Advances from the FHLBB, other than
the overnight facility, were $2.7 million at September 30, 2002.
During the 2002 period, the primary sources of liquidity were $65.8
million in loan sales, loan paydowns and amortization of $74.0 million, proceeds
from maturities of investment securities of $37.6 million, a $17.2 million
increase in borrowed funds, and proceeds from payments of mortgage-backed
securities of $2.7 million. Primary uses of funds were $142.4 million in
residential, commercial real estate, commercial, and consumer loan originations,
a $3.0 million decrease in FHLBB advances, a $1.7 million decrease in deposits
and $52.9 million of purchases of investment securities. At September 30, 2002,
the Bank had $9.6 million in overnight investments.
The primary source of liquidity for the Corporation is dividends from
the Bank. Dividends paid and, when applicable, stock repurchases by the
Corporation are the primary use of this liquidity.
From time to time, the Bank has obtained time deposits in denominations
of $100,000 and over. The following table summarizes maturities of time deposits
of $100,000 or more outstanding at September 30, 2002:
WITHIN ONE YEAR (IN THOUSANDS)
---------------
Less than 3 months....................... $ 2,785
3 to 6 months............................ 6,823
6 to 12 months........................... 4,559
-------
14,167
More than 12 months...................... 8,747
-------
$22,914
=======
CAPITAL ADEQUACY
Total stockholders' equity at September 30, 2002 was $45.5 million, an
increase of $3.1 million from $42.4 million at December 31, 2001. Included in
stockholders' equity at September 30, 2002 is an unrealized gain on securities
available for sale of $1.1 million 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 9.47% at September 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
September 30, 2002, the FRB leverage capital ratio was 9.45% compared to 9.02%
at December 31, 2001.
The FDIC's leverage capital-to-assets ratio guidelines are
substantially similar to those adopted by the FRB and described above. At
September 30, 2002, the Bank's leverage capital ratio, under FDIC guidelines,
was 8.97% 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 13.17% and 12.56%,
respectively, at September 30, 2002 compared to 12.43% and 11.98%, respectively,
at December 31, 2001, thus exceeding their risk-based capital requirements.
As of September 30, 2002, the Bank's total risk-based capital ratio,
Tier I risk-based capital ratio and leverage capital ratio were 12.56%, 11.30%,
and 8.97%, respectively. Based on these capital ratios, the Bank is considered
to be "well capitalized."
8
FINANCIAL CONDITION
The Corporation's total assets increased to $480.4 million at September
30, 2002 from $463.6 million at December 31, 2001. Decreases occurred in
mortgage-backed securities and receivables due from mortgage investors, while
increases occurred in U.S. Government and related obligations, cash and cash
equivalents, consumer loans, commercial real estate loans and commercial loans.
DUE FROM MORTGAGE INVESTORS
Due from mortgage investors was zero at September 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
$77.7 million at September 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 and related obligations and an increase in the market value of
investment securities available for sale. The amortized cost of mortgage-backed
securities decreased to $7.1 million at September 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.
INVESTMENTS AT SEPTEMBER 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 $1,348 $ (47) $29,791
FNMA mortgage-backed securities............. 5,200 169 -- 5,369
GNMA mortgage-backed securities............. 1,889 79 -- 1,968
U.S. Government and related
obligations................................ 27,955 2 -- 27,957
Preferred stock............................. 5,314 148 (66) 5,396
------- ------ ----- -------
68,848 1,746 (113) 70,481
------- ------ ----- -------
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
------- ------ ----- -------
$76,017 $1,986 $(113) $77,890
======= ====== ===== =======
LOANS AND LOANS HELD FOR SALE
Loans held for sale decreased by $595,000 during the 2002 period to
$12.9 million at September 30, 2002.
9
Loans increased by $16.2 million during the 2002 period to $357.8
million at September 30, 2002. This increase is the result of increases in
commercial real estate, commercial and consumer loans with decreases in
residential mortgage and commercial construction 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 September 30, 2002 and December 31, 2001 (in thousands):
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Residential mortgages................................ $ 48,595 $ 48,762
Commercial real estate............................... 212,449 200,890
Commercial construction ............................. 12,767 13,192
Commercial loans..................................... 49,842 49,225
Consumer loans....................................... 34,189 29,570
-------- --------
$357,842 $341,639
======== ========
Residential mortgage loan originations during the 2002 period were
$70.6 million compared to $87.0 million in the 2001 period. The Corporation
originated $46.4 million in fixed-rate loans during the 2002 period compared to
$72.1 million during the 2001 period. Adjustable-rate loans totaling $24.2
million were originated during the 2002 period compared to $14.9 million during
the 2001 period. The Corporation sold loans totaling $52.3 million during the
2002 period compared to $76.0 million sold in the 2001 period.
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
September 30, 2002 there were five loans considered impaired and performing
totaling $5.0 million and one loan for $84,000 considered impaired and
nonperforming, compared to three loans considered impaired and performing
totaling $1.8 million and no loans considered impaired and nonperforming 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 September 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.
10
The table below details nonperforming loans at:
SEPTEMBER 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
==== ====
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan
losses for the nine months ended September 30 (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
------- --------
1 1
------- --------
Loan recoveries:
Residential mortgage ................................................. 17 21
Commercial mortgage and construction ................................. 41 66
Commercial loans ..................................................... 2 5
Consumer loans ....................................................... 8 9
------- --------
68 101
------- --------
Net recoveries ........................................................... (67) (100)
------- --------
(Recovery of) provision for loan losses (credited)
charged to income ...................................................... (38) 47
------- --------
Balance at end of period ................................................. $ 5,002 $ 4,928
======= ========
Allowance to total loans at end of period ................................ 1.40% 1.35%
======= ========
Allowance to nonperforming loans at end of period ........................ 5,954.8% 1,408.00%
======= ========
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
11
of banking regulators with respect to allowance for loan losses and supervisory
concerns in general; and industry trends with respect to levels of allowance for
loan losses.
Assessing the adequacy of the allowance for loan losses involves
substantial uncertainties and is based upon management's evaluation of the
amounts required to meet estimated charge-offs in the loan portfolio after
weighting the above factors. Because the allowance for loan losses is based on
various estimates and includes a high degree of judgment, subsequent changes in
general economic conditions and the economic prospects of the borrowers may
require changes in those estimates.
The associated provision for loan losses is the amount required to
bring the allowance for loan losses to the balance considered necessary by
management at the end of the period after accounting for the effect of loan
charge-offs (which decrease the allowance) and loan-loss recoveries (which
increase the allowance). The allowance for loan losses included above
attributable to $5.1 million of impaired loans, all of which is measured using
the fair value method, is $365,000 at September 30, 2002.
OTHER ASSETS
Included in other assets at September 30, 2002 and December 31, 2001 is
$1.0 million of deferred income taxes receivable.
LIABILITIES
Deposits decreased to $396.7 million at September 30, 2002 from $398.3
million at December 31, 2001.
The following table sets forth the classification of the Corporation's
deposits as of September 30, 2002 and December 31, 2001 (in thousands):
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Noninterest bearing....................... $ 46,788 $ 30,640
NOW....................................... 58,772 54,029
Money market.............................. 62,160 53,726
Savings................................... 112,792 106,319
Time...................................... 116,143 153,633
-------- --------
$396,655 $398,347
======== ========
Federal Home Loan Bank of Boston advances were $2.7 million at
September 30, 2002 and $5.7 million at December 31, 2001. Securities sold under
agreement to repurchase were $30.6 million at September 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 September 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.
12
RESULTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 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 $1.7 million. The decrease in the
2002 quarter profit is due to increased non-interest expenses, which included
$483,000 of merger-related expenses, and a decrease in gains on sales of
mortgage loans due to lower volume of residential mortgage loans sold.
Net interest income for the 2002 and 2001 quarters was $5.2 million and
$4.9 million, respectively. The weighted average interest rate spread for the
2002 quarter was 4.60% compared to 4.24% for the 2001 quarter. The net yield on
average earning assets was 4.72% for the 2002 quarter and 4.45% for the 2001
quarter. The return on average assets and the return on average stockholders'
equity were 1.30% and 13.73%, respectively, for the 2002 quarter compared to
1.45% and 16.53%, respectively, for the 2001 quarter.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income was $6.9 million for the 2002
quarter compared to $8.4 million for the 2001 quarter. Interest on loans
decreased to $6.2 million for the 2002 quarter from $7.6 million for the 2001
quarter. The average loan yield decreased to 6.89% for the 2002 quarter from
7.79% 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 $628,000 for the 2002 quarter and $656,000 in the 2001 quarter.
The average amount of investments held increased while the average yield on
investments decreased to 2.97% for the 2002 quarter from 5.32% for the 2001
quarter. Mortgage-backed securities income decreased to $104,000 in the 2002
quarter from $183,000 in the 2001 quarter due to a decrease in the average
amount of mortgage-backed securities held and a decreased yield of 5.59% in the
2002 quarter from 6.69% in the 2001 quarter.
INTEREST EXPENSE
Interest on deposits was $1.5 million for the 2002 quarter compared to
$3.2 million for the 2001 quarter. The average balance of deposits decreased in
the 2002 quarter and the average cost of deposits decreased to 1.56% for the
2002 quarter from 3.23% for the 2001 quarter. Interest on borrowed funds and
escrow deposits of borrowers decreased to $149,000 from $317,000 for the 2002
and 2001 quarters, respectively. The average cost decreased to 1.58% for the
2002 quarter from 3.63% in the 2001 quarter, while the average balances
increased.
NON-INTEREST INCOME
Total non-interest income for the 2002 quarter was $703,000 compared to
$628,000 for the 2001 quarter. Customer service fees increased to $561,000 in
the 2002 quarter from $332,000 in the 2001 quarter 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 $141,000 in the 2002 quarter compared to $292,000 in the 2001
quarter. Because fewer residential mortgage loans were sold in the 2002 quarter,
gains on sale of mortgage loans decreased.
NON-INTEREST EXPENSE
Total non-interest expense increased to $3.8 million in the 2002
quarter from $3.0 million in the 2001 quarter. Salaries and employee benefits
were $2.0 million in the 2002 quarter and $1.9 million in the 2001 quarter. This
increase is primarily due to salary increases, the filling of vacant positions,
and increases in benefits-related expenses. Other expenses increased to $638,000
in the 2002 quarter from $535,000 in the 2001 quarter due to increases in costs
associates with the general operations of the Corporation including ATM expense,
check processing, and other volume-related expenses. Also included in
non-interest expense in the 2002 quarter is $483,000 of expenses related to the
merger with Banknorth Group, Inc. (See "Merger Agreement with Banknorth Group,
Inc." above.)
13
INCOME TAX EXPENSE
The Corporation's tax rate decreased to 30.1% in the 2002 quarter from
33.4% in the 2001 quarter. Included in income tax expense for the 2002 quarter
is a decrease in tax valuation reserves.
RESULTS OF OPERATIONS -- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001
GENERAL
The Corporation recorded a profit for the 2002 period of $4.6 million
compared to a profit for the 2001 period of $5.5 million. The decrease in the
2002 period profit is primarily due to increased non-interest expenses. Included
in the 2002 period is $483,000 of merger-related expenses. During the 2002
period, there was a decrease in gains on sales of mortgage-loans due to lower
volume of residential mortgage loans sold. 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 $14.9 million.
The weighted average interest rate spread for the 2002 period was 4.44% compared
to 4.42% for the 2001 period. The net yield on average earning assets was 4.56%
for the 2002 period and 4.63% for the 2001 period. The return on average assets
and the return on average stockholders' equity were 1.34% and 14.09%,
respectively, for the 2002 period compared to 1.62% and 18.48%, respectively,
for the 2001 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income decreased to $20.7 million for the
2002 period from $25.4 million for the 2001 period. Interest on loans decreased
to $18.5 million for the 2002 period from $22.6 million for the 2001 period.
Average loans outstanding decreased during the 2002 period and the average loan
yield decreased to 7.00% for the 2002 period compared to 8.09% for the 2001
period. Interest and dividends on investments was $1.8 and $2.2 million for the
2002 and 2001 periods, respectively. The average amount of investments held
increased while the average yield on investments decreased to 3.20% for the 2002
period from 6.07% for the 2001 period. Mortgage-backed securities income
decreased to $362,000 in the 2002 period from $599,000 in the 2001 period due to
a decrease in the average amount of mortgage-backed securities held and a
decreased yield to 5.75% in the 2002 period from 7.25% in the 2001 period.
INTEREST EXPENSE
Interest on deposits decreased to $5.5 million for the 2002 period from
$9.7 million for the 2001 period. This decrease was related to a decrease in the
average cost of deposits to 1.89% for the 2002 period from 3.38% for the 2001
period. Interest on borrowed funds and escrow deposits of borrowers decreased to
$377,000 in the 2002 period from $840,000 for the 2001 period due to the average
cost having decreased to 1.82% in the 2002 period from 4.04% in the 2001 period.
NON-INTEREST INCOME
Total non-interest income for the 2002 period was $1.9 million compared
to $1.8 million for the 2001 period. The gain from the sale of mortgage loans
was $439,000 in the 2002 period compared to $660,000 in the 2001 period. Because
fewer residential mortgage loans were sold in the 2002 period, gains on sale of
mortgage loans decreased. Customer service fees increased to $1.4 million in the
2002 period from $942,000 in the 2001 period 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. 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.
NON-INTEREST EXPENSE
Total non-interest expense was $10.1 million in the 2002 period and
$8.7 million in the 2001 period. Salaries and employee benefits were $5.9
million in the 2002 period and $5.4 million for the 2001 period. This increase
is primarily due to salary increases, the filling of vacant positions, and
increases in benefits-
14
related expenses. Occupancy and equipment increased in the 2002 period to $1.0
million from $962,000 in the 2001 period due to write offs of existing computer
equipment, which was retired during the period. Other expenses increased to $1.8
million in the 2002 period from $1.5 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. Also included in
non-interest expense for the 2002 period is $483,000 of expenses related to the
merger with Banknorth Group, Inc. (See "Merger Agreement with Banknorth Group,
Inc." above.)
INCOME TAX EXPENSE
The Corporation's tax rate decreased in the 2002 period to 30.4% from
31.6% 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 in 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.
15
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of
1934, within the 90 days prior to the date of this report, the
Corporation carried out an evaluation under the supervision and with
the participation of the Corporation's management, including the
Corporation's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Corporation's
disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Corporation in
the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. In
connection with the new rules, we currently are in the process of
further reviewing and documenting our disclosure controls and
procedures, including our internal controls and procedures for
financial reporting, and may from time to time make changes aimed at
enhancing their effectiveness and to ensure that our systems evolve
with our business.
(b) Changes in internal controls.
None.
16
WARREN BANCORP, INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARREN BANCORP, INC.
DATE: November 7, 2002 By: /s/ John R. Putney
---------------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: November 7, 2002 By: /s/ Paul M. Peduto
---------------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
18
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, John R. Putney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Warren
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of and for the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent valuation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
DATE: November 7, 2002 By: /s/ John R. Putney
-----------------------
John R. Putney
President and
Chief Executive Officer
19
CERTIFICATIONS -- (CONTINUED)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Paul M. Peduto, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Warren
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of and for the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent valuation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
c) The registrant's other certifying officer and I have
indicated in this quarterly report whether or not
there were significant changes in internal controls
or in other factors that could significantly affect
internal controls subsequent to the date of our most
recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
DATE: November 7, 2002 By: /s/ Paul M. Peduto
--------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
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