1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES 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 01960
PEABODY, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(978) 531-7400
(Registrant's telephone number, including area code)
--------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.10 per share
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant based on the closing sale price for the
registrant's common stock on March 1, 1998, as reported by NASDAQ was
$76,404,114.
The number of shares of the registrant's common stock outstanding as of
March 1, 1998 was 3,816,992.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 6, 1998 are incorporated by reference into the Annual Report as
portions of Part III of Form 10-K.
2
NOTE: This amendment is filed to include the "Selected Financial Data"
Schedule inadvertently omitted in the original 10-K filing of March 30,
1998, a revised "Exhibits, Financial Statement Schedules, and Reports
on Form 8-K" Index Page, and a restated "1996 Financial Data Schedule"
to conform to Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" and amends and restates the March 30, 1998 filing
in its entirety. This amended and restated Annual Report on Form 10-K
does not reflect any change in the Issuers reported consolidated
financial condition and results of operations.
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======================================================================================================================
SELECTED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Total assets $370,993 $358,954 $355,854 $348,239 $391,208
Investment securities 83,701 75,618 69,427 50,822 68,163
Mortgage-backed securities 30,579 42,730 49,414 51,472 63,055
Net loans 236,697 218,313 212,159 217,724 212,421
Real estate acquired by foreclosure or
substantively repossessed 2,010 2,230 3,092 8,354 14,970
Deposits 325,293 316,366 314,850 315,063 322,234
Borrowed funds 2,926 4,927 7,368 6,602 41,863
Stockholders' equity 40,028 34,445 31,238 23,795 24,418
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Interest and dividend income $ 28,539 $ 27,781 $ 27,750 $ 25,640 $ 27,239
Interest expense 11,404 11,469 11,608 9,961 12,722
-------- -------- -------- -------- --------
Net interest income 17,135 16,312 16,142 15,679 14,517
Provision for (recovery of) loan losses (316) 116 (154) (287) 1,023
Non-interest income (loss) 3,339 2,149 2,049 (2,553) 5,261
Non-interest expenses 9,857 9,768 11,003 10,376 12,970
-------- -------- -------- -------- --------
Income before income taxes 10,933 8,577 7,342 3,037 5,785
Income tax expense (benefit) 3,648 1,968 1,960 1,436 (1,468)
-------- -------- -------- -------- --------
Net income $ 7,285 $ 6,609 $ 5,382 $ 1,601 $ 7,253
======== ======== ======== ======== ========
Basic earnings per share $ 1.92 $ 1.80 $ 1.50 $ 0.45 $ 2.07
======== ======== ======== ======== ========
Diluted earnings per share $ 1.83 $ 1.69 $ 1.40 $ 0.42 $ 1.94
======== ======== ======== ======== ========
Cash dividends paid $ 0.87 $ 0.53 $ 0.30 $ - $ -
======== ======== ======== ======== ========
OTHER DATA:
Return on average assets 2.02% 1.87% 1.54% 0.44% 1.84%
Return on average stockholders' equity 19.50 20.47 19.30 6.64 36.35
Stockholders' equity to assets at year end 10.79 9.60 8.78 6.83 6.24
Dividend payout ratio 44.79 29.47 20.09 - -
Weighted average interest rate spread 4.80 4.69 4.71 4.52 4.01
Net yield on average earning assets 5.03% 4.88% 4.84% 4.55% 3.97%
Number of banking offices 6 6 6 6 6
The consolidated financial data for the Corporation and its subsidiaries
presented above are expanded and explained in more detail by the financial
information contained elsewhere herein. The consolidated financial data were
derived from audited consolidated financial statements of the Corporation and
the Bank at and for the periods shown.
See footnote 5 in the Consolidated Financial Statements for December 31, 1997,
1996 and 1995 for an explanation of the restatement of earnings per share.
3
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CROSS REFERENCE SHEET OF INFORMATION REQUIRED BY ITEMS IN
FORM 10-K
Page
----
Item 1. Business................................................................................................. 22-25
Item 2. Properties............................................................................................... 16
Item 3. Legal Proceedings........................................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 25
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 71
Item 6. Selected Financial Data.................................................................................. 3
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................................ 5-22
Item 8. Financial Statements and Supplementary Data.............................................................. 27-67
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.............................................................................................. 25
Item 10. Directors and Executive Officers of the Corporation...................................................... 26
Item 11. Executive Compensation................................................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 26
Item 13. Certain Relationships and Related Transactions........................................................... 26
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 68
STATISTICAL DISCLOSURE FOR BANK HOLDING COMPANIES
(2) Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential................................................................................ 18-19
(3) Investment Portfolio...................................................................................... 11
(4) Loan Portfolio............................................................................................ 12
(5) Summary of Loan Loss Experience........................................................................... 15
(6) Deposits.................................................................................................. 17
(7) Return on Equity and Assets............................................................................... 3
(8) Short-Term Borrowings .................................................................................... 48
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in this Annual Report, including Form 10-K,
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
Annual Report, including Form 10-K, under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business".
Management's discussion and analysis of financial condition and results
of operations should be read in conjunction with the audited financial
statements and notes thereto appearing elsewhere in this report.
GENERAL
Warren Bancorp, Inc.'s (the "Corporation") operating results for the
year ending December 31, 1997 (the "1997 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 an increased profit for the 1997 period
primarily due to gains from sales of rights to service residential mortgage
loans, a gain resulting from the termination of its defined-benefit pension
plan, an increase in net interest income and a decrease in the provision for
loan loss to a recovery compared to the year ended December 31, 1996 (the "1996
period"). On January 31, 1997, the Corporation sold its rights to service
approximately $209 million of residential mortgage loans representing over 95%
of its portfolio of loans serviced for others. The Corporation received net
proceeds of $2.6 million. Certain assets and expenses totaling $1.2 million
consisting mainly of capitalized mortgage-servicing rights and capitalized
excess service fees, were charged against this gain resulting in a pre-tax gain
of $1.4 million. Please see "Loans and Loans Held-for-Sale," and "Other Assets
and "Non-Interest Income" under "Results of Operations-1997 Compared to 1996,"
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion. Also, during the 1997 period the Bank
terminated its defined-benefit pension plan resulting in a pre-income tax gain
of $538,000 from excess plan assets reverting back to the Bank. Please see
"Non-interest Income" under "Results of Operations-1997 Compared to 1996," for
further discussion on this item.
Stockholders' equity increased in 1997 due to profits and to an
increase in the unrealized gain on securities available for sale, net of income
taxes. These increases were partially offset by the payment of dividends. The
increase in the unrealized gain was primarily the result of decreased interest
5
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rates during the 1997 period. Future increases in interest rates could reduce
the value of the securities portfolio and stockholders' equity.
Real estate acquired by foreclosure decreased by $220,000 to $2.0
million at December 31, 1997 and nonperforming loans decreased by $2.4 million
to $347,000 during the 1997 period from December 31, 1996. Management continues
to monitor those nonperforming asset portfolios 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.
In 1997, the Corporation paid regular quarterly dividends totaling $.50
per share and paid a special dividend of $.37 per share.
The Board of Directors has authorized management to repurchase up to
225,000 shares of its common shares in the open market. The repurchase program
commenced on April 22, 1996 and may be discontinued at any time. Through
December 31, 1997, the Corporation had purchased 98,000 shares at a total cost
of $1.2 million. The Corporation did not repurchase any shares in 1997. The
127,000 remaining authorized shares represent approximately 3% of the
outstanding shares.
REGULATORY PROCEEDINGS
There were no regulatory proceedings in 1997. In February 1995, the
FDIC and the Massachusetts Commissioner of Banks (the "Commissioner") terminated
the Cease and Desist Order (the "Order") which the Bank had consented to in
December 1991 and had been in effect since that time. The Order was replaced by
informal supervisory arrangements set forth in resolutions of the Bank's Board
of Directors adopted in February 1995. In the fourth quarter of 1995, the Bank
was informed by the FDIC and the Commissioner that the Board resolutions were no
longer necessary, and the Bank's Board of Directors dissolved those resolutions.
YEAR 2000
The Corporation has developed plans to address the possible exposures
related to the impact on its computer systems and key service providers of the
year 2000.
In 1998, the Corporation will either renew its contract with its
current outside data processing service provider or convert to a new service
provider. In either case, the data service provider will ensure year-2000
compliance, and the costs related to that aspect of the year-2000 effort are the
responsibility of the provider. Management will ensure that the service provider
has the financial resources to complete the effort.
As part of its 1998 business plan, the Corporation will upgrade its
personal computers and related software, all of which will be year-2000
certified upon purchase. Because the Corporation is updating systems as part of
its ongoing operations and the hardware and software upgrades are a necessary
result of that effort, management estimates that the incremental costs incurred
by the Corporation for year-2000 compliance will not be material.
The ability of third parties, including the Corporation's borrowers,
with whom the Corporation transacts business to adequately address their
year-2000 issues is outside of the Corporation's control. Failure of such third
parties of the Corporation to adequately address their respective year-2000
issues could have a material adverse effect on the Corporation's financial
condition and results of operation.
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ASSET/LIABILITY MANAGEMENT
A primary objective of the Corporation's asset/liability management
policy is to manage the Corporation's prevalent market risk, 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 specify that if short-term interest rates were to
shift immediately up or down 100 basis points, estimated net interest income for
the next 12 months should decline by less than 13%. The following table reflects
the Corporation's estimated exposure as a percentage of estimated net interest
income for the next 12 months, assuming an immediate shift in short-term
interest rates:
Estimated increase (decrease) in
Rate change (basis points) net interest income
-------------------------- -------------------
+100 4.2%
-100 (4.4)%
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 December 31, 1997. 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. Because regular savings and
N.O.W. accounts may be withdrawn at any time and are subject to interest-rate
adjustments at anytime, they are presented in the table below based on an
assumed maturity of six months. None of these assets is considered a trading
asset.
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INTEREST-RATE SENSITIVITY POSITION
DECEMBER 31, 1997
-----------------
WITHIN ONE YEAR
---------------------------------------------------------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
------ ------ ------ ----- -----
(Dollars in Thousands)
INTEREST SENSITIVE ASSETS:
Investment securities ................. $ 28,306 $ 9,291 $ 18,206 $24,824 $ --
Loans held for sale ................... 1,031 -- -- -- --
Adjustable-rate loans ................. 71,430 29,648 58,477 47,388 --
Fixed-rate loans ...................... 6,369 1,995 4,697 12,771 7,641
Mortgage-backed securities ............ 1,736 3,821 14,774 7,035 2,380
--------- --------- -------- ------- -------
Total interest sensitive assets .... 108,872 44,755 96,154 92,018 10,021
--------- --------- -------- ------- -------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts ............................. 15,922 13,314 -- -- --
Time deposits ......................... 43,263 28,544 30,310 43,498 9
Other deposits(a) ..................... 66,640 67,430 94 -- --
Borrowings ............................ 2,255 -- -- 14 657
--------- --------- -------- ------- -------
Total interest sensitive
liabilities ...................... 128,080 109,288 30,404 43,512 666
--------- --------- -------- ------- -------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ................ $ (19,208) $ (64,533) $ 65,750 $48,506 $ 9,355
========= ========= ======== ======= =======
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive
liabilities ........................ $ (19,208) $ (83,741) $(17,991) $30,515 $39,870
========= ========= ======== ======= =======
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ....... 85.0% 64.7% 93.3% 109.8% 112.8%
========= ========= ======== ======= =======
Cumulative excess (deficiency) as a
percentage of total assets ........... (5.2)% (22.6)% (4.8)% 8.2% 10.7%
========= ========= ======== ======= =======
- ----------
(a) Other deposits consist of regular savings, club 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 rate changes over time.
LIQUIDITY
The Bank seeks to ensure that 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, sales and maturities of investments, loan sales, deposits and
Federal Home Loan Bank of Boston ("FHLBB") advances, which include a $15 million
overnight line of credit. The Bank also has access to the Federal Reserve Bank's
discount window and may borrow from the Depositors Insurance Fund Liquidity
Fund.
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During 1997, 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 borrowing facilities within its
total available credit line with the FHLBB. Advances from the FHLBB, other than
the overnight facility, were $671,000 at December 31, 1997 compared to $2.7
million at December 31, 1996.
During 1997, the primary sources of liquidity were $24.4 million in
loan sales, proceeds from sales and maturities of investments of $47.3 million,
proceeds from the sales of rights to service mortgage loans of $2.6 million and
proceeds from sale and paydowns of mortgage-backed securities of $14.2 million.
Primary uses of funds were $94.7 million in residential, commercial real estate
and commercial loan originations, $55.1 million to purchase investment
securities and $2.0 million to pay down Federal Home Loan Bank advances. At
December 31, 1997, the Bank had $6.3 million in money market funds and overnight
investments.
The primary source of liquidity for the Corporation is dividends from
the Bank. Dividends paid by the Corporation are the primary uses 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 December 31, 1997:
Within one year: (IN THOUSANDS)
Less than 3 months ....................... $ 7,123
3 to 6 months ............................ 3,409
6 to 12 months ........................... 4,416
-------
14,948
More than one year ........................... 6,637
-------
$21,585
=======
CAPITAL ADEQUACY
Total stockholders' equity at December 31, 1997 was $40.0 million, an
increase of $5.6 million from $34.4 million at the end of 1996. Included in
stockholders' equity is an unrealized gain on securities available for sale,
which increased stockholders' equity, of $1,416,000 as compared to an unrealized
gain at December 31, 1996 of $738,000. This favorable change in the fair value
of securities available for sale was due mainly to decreased interest rates
during the 1997 period. 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 10.79% at December 31, 1997 compared to
9.60% at December 31, 1996.
At December 31, 1997, neither the Federal Reserve Board ("FRB") nor the
FDIC permitted the unrealized gain or loss to be used in their calculations of
Tier I capital. In addition, they require the recognition of unrealized losses
on marketable equity securities as a reduction of Tier I capital. At December
31, 1997, net of applicable income taxes, the unrealized gain on securities
available for sale was $1,416,000, of which the unrealized loss on marketable
equity securities was zero.
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
December 31, 1997, the FRB leverage capital ratio was 10.58% compared to 9.48%
at December 31, 1996.
The FDIC's leverage capital-to-assets ratio guidelines are
substantially similar to those adopted by the FRB and described above. At
December 31, 1997, the Bank's leverage capital ratio, under FDIC guidelines, was
9.22% compared to 9.14% at December 31, 1996.
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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% total risk-based capital ratio. The
Corporation's and the Bank's total risk-based capital ratios were 14.15% and
12.54%, respectively, at December 31, 1997 compared to 14.72% and 14.28%,
respectively, at December 31, 1996 for both the Corporation and the Bank, thus
exceeding their risk-based capital requirements.
As of December 31, 1997, the Bank's total risk-based capital ratio,
Tier I risk-based capital ratio and leverage capital ratio were 12.54%, 11.29%,
and 9.22%, respectively. Based on these capital ratios, the Bank is considered
to be "well capitalized."
FINANCIAL CONDITION
The Corporation's total assets increased to $371.0 million at December
31, 1997 from $359.0 million at December 31, 1996. Increases occurred in cash
and due from banks, commercial loans and commercial real estate loans and were
partially offset by decreases in residential mortgage loans, money market funds
and overnight investments, and investments and mortgage-backed securities
available for sale and from the elimination of certain "other" assets related to
the sale of the rights to service residential mortgage loans consisting mainly
of capitalized mortgage-servicing rights and capitalized excess servicing fees.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of money market funds and overnight
investments, investment securities and mortgage-backed securities available for
sale, and other investments, decreased to $114.3 million at December 31, 1997
from $118.3 million at December 31, 1996. A majority of this decrease was from
the sale of mortgage-backed securities, maturities of U.S. Treasury and U.S.
Government Agency obligations and paydowns of mortgage-backed securities. This
decrease was partially offset by additional purchases of corporate notes.
Mortgage-backed securities decreased to $29.7 million at December 31, 1997 from
$42.7 million at December 31, 1996 due to sales and paydowns of the underlying
loans partially offset by the securitization of $1.9 million of loans into
mortgage-backed securities. The increase in the fair value of these investments
was primarily due to the decrease in interest rates during 1997. Increases in
interest rates could reduce the value of these investments.
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INVESTMENTS. Certain information regarding the Corporation's
investments as of December 31 is presented below (in thousands):
1997 1996
---- ----
Amortized Cost:
Money market funds and overnight investments........................ $ 6,288 $ 6,733
U.S. Treasury and U.S. Government Agency
obligations available for sale................................... 10,536 24,636
Foreign government bond held to maturity............................ 500 500
Fixed-income mutual funds available for sale........................ 19,009 18,990
Mortgage-backed securities available for sale....................... 29,746 42,234
Corporate notes available for sale.................................. 32,286 10,000
Common and preferred stock available for sale....................... 7,919 7,942
Other investments................................................... 5,794 6,178
-------- --------
Total amortized cost................................................... 112,078 117,213
Unrealized gain on investment securities
available for sale.................................................. 2,202 1,135
-------- -------
Total carrying value................................................... $114,280 $118,348
======== ========
Total fair value of investment securities.............................. $114,520 $118,588
======== ========
The following table presents the maturity distribution of the
investment securities portfolio and the weighted average yield for each type and
range of maturity as of December 31, 1997. Adjustable-rate mortgage-backed
securities are shown as if the entire balance came due on the repricing date.
Estimates are made of fixed-rate mortgage-backed security amortization and
prepayments (dollars in thousands).
WITHIN ONE TO FIVE TO OVER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------- ---------- --------- --------- -----
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Money market funds and
overnight investments..... $ 6,288 5.64% $ -- -- % $ -- -- % $ -- -- % $ 6,288 5.64%
U.S. Treasury and agency
obligations available
for sale................. $ 8,006 5.77 2,530 5.49 -- -- -- -- 10,536 5.70
Mortgage-backed securities
available for sale........ 20,330 7.70 7,035 7.03 2,363 6.14 18 6.14 29,746 7.42
Corporate notes
available for sale........ 29,250 5.88 3,036 5.99 -- -- -- -- 32,286 5.89
Foreign government bonds
held to maturity.......... 250 7.50 -- -- 250 7.80 -- -- 500 7.65
------- -------- ------ ----- --------
$64,124 6.41% $ 12,601 6.47% $2,613 6.30% $ 18 6.14% $ 79,356 6.43%
======= ======== ====== ===== ========
At December 31, 1997, the Corporation did not hold securities of any
single issuer, excluding U.S. Treasury and U.S. Government Agency obligations
and FHLB of Boston stock, that exceeded ten percent of stockholders' equity at
December 31, 1997.
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $16.0 million during the
1997 period to $241.8 million at December 31, 1997. This increase is primarily
the result of increased commercial, commercial construction and commercial real
estate loans partially offset by loan paydowns and payoffs in residential
mortgage loans and the securitization of $1.9 million of residential mortgage
loans into mortgage-backed securities. Commercial, commercial construction and
commercial loans typically earn higher yields than residential mortgage loans,
but usually carry higher risk due to loan size.
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The following table sets forth the classification of the Corporation's
loans as of December 31 (in thousands):
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Residential mortgages.................. $ 52,707 $ 66,654 $ 85,276 $104,724 $110,373
Commercial real estate................. 125,832 107,428 94,341 83,846 73,707
Commercial construction ............... 19,739 10,742 6,254 3,914 1,129
Commercial loans....................... 22,259 16,458 8,490 4,964 4,936
Consumer loans......................... 20,226 21,564 22,331 25,065 28,218
-------- -------- -------- -------- --------
$240,763 $222,846 $216,692 $222,513 $218,363
======== ======== ======== ======== ========
Balances in residential mortgage loans are decreasing mainly as a
result of loan paydowns and securitization of adjustable-rate mortgage loans.
Balances in commercial real estate, commercial construction, and commercial
loans are increasing mainly due to the Corporation's increasing emphasis on
corporate lending.
Residential mortgage loan originations decreased during 1997 to $32.0
million from $37.9 million in 1996. The Corporation originated $17.3 million in
fixed-rate loans during 1997 compared to $24.2 million during 1996.
Adjustable-rate loans totaling $14.7 million were originated during 1997
compared to $13.7 million during 1996. The Corporation sold or securitized loans
totaling $26.3 million during 1997 compared to $32.3 million in 1996. At
year-end 1997, the Corporation held $1.0 million of fixed-rate residential
mortgage loans for sale compared to $3.0 million at year-end 1996.
The following table sets forth a maturity distribution of the
Corporation's commercial real estate, commercial construction, and commercial
loans as of December 31, 1997. For purposes of compiling this table, fixed rate
loans are treated as if the entire balance were due on the last contractual
payment date. Adjustable-rate loans are shown at the adjustment period date.
Based on experience with such loans, partial or full repayment of a portion of
the Corporation's commercial real estate loans prior to contractual maturity can
be expected.
WITHIN ONE TO OVER TOTAL
ONE YEAR FIVE YEARS FIVE YEARS GROSS LOANS
-------- ---------- ---------- -----------
(IN THOUSANDS)
Commercial real estate............................... $ 89,287 $35,872 $ 673 $125,832
Commercial construction.............................. 3,954 14,418 1,367 19,739
Commercial loans..................................... 20,301 1,944 14 22,259
-------- ------- -------- --------
Total........................................... $113,542 $52,234 $ 2,054 $167,830
======== ======= ======== ========
Loans with adjustable rate........................... $41,535 $ 1,367
Loans with fixed rate................................ 10,699 687
------- --------
$52,234 $ 2,054
======= ========
On January 31, 1997, the Corporation sold its rights to service
approximately $209 million of residential mortgage loans representing over 95%
of the portfolio of loans serviced for others. Included in the sale were all
mortgage servicing rights, the balance of which was charged against the total
proceeds on the date of the sale. In the future, the Corporation intends to sell
servicing released all residential fixed-rate mortgage loans it originates.
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
12
13
considered to be collectively evaluated for impairment. Typically, the minimum
delay in receiving payments according to the contractual terms of the loan that
can occur before a loan is considered impaired is ninety days. Impaired loans
are analyzed and categorized by level of credit risk and collectibility in order
to determine their related allowance for loan losses. At December 31, 1997,
there were four loans considered impaired and accruing interest totaling
$720,000.
Loans past due 90 days or more, or past due less than 90 days but in a
nonaccrual status, decreased to $347,000 at December 31, 1997 compared to $2.7
million at December 31, 1996. Included in these nonperforming loans are two
loans considered impaired in the amount of $201,000 at December 31, 1997.
Accrual of interest on loans is discontinued either when reasonable doubt exists
as to 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 December 31 (dollars in
thousands):
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Accruing loans 90 days or more
past due .......................... $ -- $ -- $ 155 $ 89 $ 156
Nonaccrual loans .................... 347 2,712 4,084 3,244 1,731
------- ------- ------ ------ ------
Total nonperforming loans ........... $ 347 $ 2,712 $4,239 $3,333 $1,887
======= ======= ====== ====== ======
Percentage of nonperforming loans to:
Total loans ......................... 0.14% 1.22% 1.96% 1.50% 0.86%
======= ======= ====== ====== ======
Total assets ........................ 0.09% 0.76% 1.19% 0.96% 0.48%
======= ======= ====== ====== ======
The decrease in nonaccrual loans between December 31, 1997 and December
31, 1996, was mainly in commercial real estate and residential mortgage loans.
In addition, at December 31, 1997 and 1996, the Corporation had $1,213,000 and
$784,000, respectively, of loans past due 60 to 89 days and still accruing
interest not included above. These loans are closely monitored by management and
they are considered in reviews of the adequacy of the loan loss reserve.
The Corporation's lending activities are conducted throughout eastern
Massachusetts with emphasis in Essex County, Massachusetts and contiguous
counties, including those in southern New Hampshire, although from time to time
loans will be made outside of this area. The Bank makes single family,
residential construction, condominium and multi-family residential loans,
commercial real estate loans, commercial loans, and a variety of consumer loans.
Most loans granted by the Bank are collateralized by real estate. The ability
and willingness of the single family residential and consumer borrowers to honor
their repayment commitments is generally dependent on the level of overall
economic activity and real estate values within the borrower's geographic area.
The ability and willingness of commercial real estate and commercial loan
borrowers to honor their repayment commitments is generally dependent on the
health of the real estate economic sector and the general economy in the
borrower's geographic area.
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure totaled $2.0 million at December
31, 1997 compared to $2.2 million at December 31, 1996. Real estate acquired by
foreclosure is reflected at the lower of the carrying value of the loan or the
net carrying value of the property less estimated cost of disposition. These
properties consist mainly of land and single family and multi-family dwellings.
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14
The Corporation had a write-down of $208,000 on real estate acquired by
foreclosure, net of gains on sale, in the 1997 period compared to a net gain of
$1,000 on the sale of real estate acquired by foreclosure in the 1996 period.
Unstable conditions in the Massachusetts real estate market could result in
losses and writedowns as the Corporation reduces the book value of real estate
to reflect likely realizable values.
In summary, nonperforming assets are as follows (in thousands):
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Nonperforming loans.................... $ 347 $ 2,712 $ 4,239 $ 3,333 $ 1,887
Loans foreclosed in sub-
stance*............................... - - - 1,454 3,180
Real estate acquired by
foreclosure........................... 2,010 2,230 3,092 6,900 11,790
-------- -------- -------- -------- ------
Total nonperforming assets............. $ 2,357 $ 4,942 $ 7,331 $ 11,687 $ 16,857
======== ======== ======== ======== ========
* Reported with loans after December 31, 1994, and with real estate acquired by
foreclosure for the two years prior. Prior-year balances have not been restated
since management has deemed the reclassification to have an immaterial effect on
the financial statements.
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ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan
losses for the years ended December 31:
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance at beginning of period ..................... $ 4,533 $ 4,533 $ 4,789 $ 5,942 $ 6,136
------- ------- ------- ------- -------
Losses charged to the allowance:
Commercial ..................................... -- -- -- (108) (45)
Commercial mortgage ............................ (344) (143) (113) (647) (631)
Residential mortgage ........................... (241) (280) (472) (561) (784)
Consumer loans ................................. (23) (33) (31) (16) (66)
------- ------- ------- ------- -------
(608) (456) (616) (1,332) (1,526)
------- ------- ------- ------- -------
Loan recoveries:
Commercial ..................................... 116 61 79 94 40
Commercial mortgage
and construction ............................... 248 233 255 276 24
Residential mortgage ........................... 75 30 161 85 229
Consumer loans ................................. 18 16 19 11 16
------- ------- ------- ------- -------
457 340 514 466 309
------- ------- ------- ------- -------
Net charge-offs ................................ (151) (116) (102) (866) (1,217)
Provision for (recovery of) loan
losses charged (credited)
to expense ..................................... (316) 116 (154) (287) 1,023
------- ------- ------- ------- -------
Balance at end of period ........................... $ 4,066 $ 4,533 $ 4,533 $ 4,789 $ 5,942
======= ======= ======= ======= =======
Allowance to total loans
at end of period ............................... 1.69% 2.03% 2.09% 2.15% 2.72%
======= ======= ======= ======= =======
Allowance to nonperforming
loans at end of period ......................... 1,171.8% 167.1% 106.9% 143.7% 314.9%
======= ======= ======= ======= =======
Net charge-offs to average
loans outstanding .............................. .07% .05% .27% .39% .49%
======= ======= ======= ======= =======
Allocation of ending balance:
Commercial ..................................... $ 295 $ 218 $ 116 $ 202 $ 529
Commercial mortgage ............................ 2,752 3,099 2,940 2,854 3,227
Residential mortgage ........................... 727 936 1,237 1,441 1,829
Consumer loans ................................. 292 280 240 292 357
------- ------- ------- ------- -------
$ 4,066 $ 4,533 $ 4,533 $ 4,789 $ 5,942
======= ======= ======= ======= =======
Percentage of loans in each category to total loans:
Commercial ..................................... 9.2% 7.4% 3.9% 2.2% 2.3%
Commercial mortgage ............................ 60.5 53.0 46.4 39.4 34.3
Residential mortgage ........................... 21.9 29.9 39.4 47.1 50.5
Consumer loans ................................. 8.4 9.7 10.3 11.3 12.9
------- ------- ------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
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.
15
16
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 an independent credit review consulting firm. Loan loss
allocations are based on the conditions of each loan, whether performing or
nonperforming, including collectibility, collateral adequacy and the general
condition of the borrowers, economic conditions, delinquency statistics, market
area activity, the risk factors associated with each of the various loan
categories and the borrower's adherence to the original terms of the loan.
Individual loans, including loans considered impaired, are analyzed and
categorized by level of credit risk and collectibility. 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 $921,000 of impaired loans, of which
$461,000 is measured using the present value method and $460,000 using the fair
market method, is $179,000.
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 December 31, 1997 there were no
legal claims against the Corporation.
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. (See note 11 in the Notes to
Consolidated Financial Statements.)
PROPERTIES
The Bank operates a main office and three additional banking offices in
Peabody and two banking offices in Beverly. At December 31, 1997, management
believes that the Bank's existing properties are adequate for the conduct of its
business.
The following table sets forth certain information relating to the
Bank's offices as of December 31, 1997:
OWNED LEASE LEASE
YEAR OR EXPIRATION RENEWAL
OFFICE LOCATION OPENED LEASED DATE OPTION
--------------- ------ ------ ---- ------
Peabody Square
10 Main Street................................ 1854 Owned -- --
Northshore Shopping Center...................... 1958 Leased 2000 Yes
West Peabody
Russell and Lowell Street..................... 1971 Leased 2003 No*
South Peabody
Lynn Street................................... 1979 Owned -- --
Beverly
175 Cabot Street.............................. 1867 Owned -- --
North Beverly
55 Dodge Street............................... 1968 Leased 2006 No
* BANK HAS OPTION TO PURCHASE.
16
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OTHER ASSETS
Included in other assets at December 31, 1997 and December 31, 1996 are
$742,000 and $980,000, respectively, of deferred income taxes receivable. Also
included in other assets was a current income tax receivable of $547,000 at
December 31, 1997 compared to $278,000 at December 31, 1996. A noted previously,
on January 31, 1997, the Bank sold its rights to service approximately $209
million of residential mortgage loans. In that regard the entire balance of
mortgage-servicing rights and capitalized excess servicing fees were charged
against the gain from the sale of mortgage-servicing rights. These assets were
included in other assets at December 31, 1996 and had balances of $682,000 and
$344,000, respectively. Also noted previously, the Bank liquidated its pension
plan in October of 1997. At December 31, 1996 other assets included a prepaid
pension asset of $864,000 that was charged against the gain.
LIABILITIES
Year-end deposit levels increased to $325.3 million at December 31,
1997 from $316.4 million at December 31, 1996. This increase took place
primarily in time, NOW, and money market deposits and was partially offset by a
decrease in regular savings and non-interest bearing deposits.
AVERAGE DEPOSITS. The following table presents the average balance and
average cost of the Corporation's deposits for the years ended December 31
(dollars in thousands):
1997 1996 1995
---- ---- ----
AMOUNT COST AMOUNT COST AMOUNT COST
------ ---- ------ ---- ------ ----
Non-interest bearing.......... $ 15,977 --% $ 15,211 --% $ 13,279 --%
NOW accounts.................. 32,242 0.76 31,366 0.96 29,352 0.96
Savings....................... 129,585 2.60 132,130 2.52 143,727 2.61
Time.......................... 139,507 5.48 134,091 5.60 126,234 5.62
-------- -------- --------
Total deposits.......... $317,311 3.54% $312,798 3.56% $312,592 3.56%
======== ======== ========
Federal Home Loan Bank of Boston advances were $671,000 at December 31,
1997 and $2.7 million at December 31, 1996. Securities sold under agreement to
repurchase were $2.2 million at December 31, 1997 and 1996.
17
18
INCOME YIELD AND COST OF FUNDS ANALYSIS. The table below sets forth
information concerning the Corporation's average balances, interest income and
expense, and yield information for the three years shown. Average loan balances
include nonaccruing loans. The yields on investments are calculated on a fully
taxable-equivalent basis using a federal tax rate of 34%.
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
Loans.................. $229,889 $21,248 9.24% $220,847 $20,237 9.17% $223,314 $20,383 9.13%
Investments............ 76,476 4,499 6.13 71,325 4,311 6.25 57,363 3,683 6.42
Mortgage-backed
securities............ 38,159 2,792 7.32 45,327 3,233 7.13 52,070 3,684 7.08
-------- ------- -------- ------- -------- -------
Total interest-
earning assets.... 344,524 28,539 8.34% 337,499 27,781 8.28% 332,747 27,750 8.34%
Non-interest earning
assets................. 15,130 15,212 16,825
-------- -------- --------
Total assets............. $359,654 $352,711 $349,572
======== ======== ========
Interest-bearing
liabilities:
Deposits............... $301,334 11,258 3.74% $297,587 11,147 3.75% $299,313 11,093 3.72%
Borrowings............. 4,525 146 3.23 6,690 322 4.80 8,073 515 6.38
-------- ------ -------- ------ -------- ------
Total interest-
bearing liabilities.. 305,859 11,404 3.73 304,277 11,469 3.77 307,386 11,608 3.79
Non-interest bearing
deposits............... 15,977 15,211 13,279
-------- ------- -------
Total deposits and
borrowed funds......... 321,836 3.54 319,488 3.59 320,665 3.63
Non-interest bearing
liabilities............ 463 936 1,026
Stockholders' equity..... 37,355 32,287 27,881
-------- -------- --------
Total liabilities
and stockholders'
equity............. $359,654 $352,711 $349,572
======== ======== ========
Net interest income...... $17,135 $16,312 $16,142
======= ======= =======
Weighted average
rate spread............ 4.80% 4.69% 4.71%
Net yield on average
earning assets......... 5.03% 4.88% 4.84%
18
19
RATE/VOLUME ANALYSIS. The following table sets forth information
concerning the Bank's interest and dividend income, interest expense and net
interest income changes for the years listed.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
--------------------- ---------------------
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------- ---------------------
DUE TO DUE TO
------ ------
AVERAGE AVERAGE
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------ ---- ------ ----- ------ ---- ------ -----
(IN THOUSANDS)
Interest and dividend income:
Investments .................. $ 312 $(115) $ (9) $ 188 $ 896 $ (70) $(52) $ 774
Mortgage-backed securities ... (510) 83 (14) (441) (477) 30 (4) (451)
Loans ........................ 829 175 7 1,011 (225) 80 (1) (146)
----- ----- ---- ------- ----- ----- ---- -----
Total interest and dividend
income ................. 631 143 (16) 758 194 40 (57) 177
Interest expense:
Deposits:
N.O.W ....................... 9 (64) (2) (57) 18 1 0 19
Savings ..................... (64) 98 (2) 32 (303) (131) 11 (423)
Time ........................ 304 (162) (7) 135 439 18 1 458
Borrowings ................... (104) (105) 34 (175) (88) (128) 23 (193)
----- ----- ---- ------- ----- ----- ---- -----
Total interest expense ... 145 (233) 23 (65) 66 (240) 35 (139)
----- ----- ---- ------- ----- ----- ---- -----
Net interest income ............ $ 486 $ 376 $(39) $ 823 $ 128 $ 280 $(92) $ 316
===== ===== ==== ======= ===== ===== ==== =====
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
GENERAL
The Corporation recorded a profit for the 1997 period of $7.3 million
compared to a net profit for the 1996 period of $6.6 million, primarily due to
gains from the sales of rights to service mortgage loans, a gain from the
termination of pension plan, an increase in net interest income and a decrease
in the provision for loan loss to a recovery. Income before taxes was $10.9
million for the 1997 period compared to $8.6 million in the 1996 period.
Net interest income for the 1997 period was $17.1 million compared to
$16.3 million for the 1996 period. The weighted average interest rate spread for
the 1997 period was 4.80% compared to 4.69% for the 1996 period. The net yield
on average earning assets was 5.03% for the 1997 period and 4.88% for the 1996
period.
19
20
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $28.5 million for the
1997 period from $27.8 million for the 1996 period. Interest on loans increased
to $21.2 million for the 1997 period from $20.2 million for the 1996 period.
This increase is primarily the result of a higher volume of loans outstanding
during the 1997 period and from an increase in average loan yield to 9.24% for
the 1997 period from 9.17% for the 1996 period. Interest and dividends on
investments was $4.5 million for the 1997 period and $4.3 million for the 1996
period. The average amount of investments held increased and the average yield
on investments decreased to 6.13% for the 1997 period from 6.25% for the 1996
period. Mortgage-backed securities income was $2.8 million for the 1997 period
and $3.2 million for the 1996 period, the decrease primarily due to a decrease
in the average amount of mortgage-backed securities held.
INTEREST EXPENSE
Interest on deposits increased to $11.3 million in the 1997 period from
$11.1 million for the 1996 period. This increase was primarily related to an
increase in average interest-bearing deposits outstanding during the 1997
period. Interest on borrowed funds decreased to $146,000 from $322,000 for the
1996 period. This decrease is primarily related to a decrease in borrowed funds.
NON-INTEREST INCOME
Total non-interest income for the 1997 period was $3.3 million compared
to $2.2 million for the 1996 period. The gains from the sales of mortgage
servicing rights, noted above, were $1.4 million for the 1997 period. The gain
from termination of pension plan, also noted above, was $538,000 in the 1997
period. The gains from the sales of mortgage loans were $181,000 in the 1997
period compared to $318,000 in the 1996 period. Loan servicing fees were
$129,000 for the 1997 period compared to $613,000 in the 1996 period. This
decrease is mainly due to the sales of the above-mentioned mortgage-servicing
rights. The gains from the sales of investment securities were $140,000 for the
1997 period compared to $250,000 in the 1996 period.
NON-INTEREST EXPENSE
Total non-interest expense increased to $9.9 million in the 1997 period
from $9.8 million in the 1996 period. This increase is primarily attributed to
an increase in real estate operations expense to $409,000 in the 1997 period
from $180,000 in the 1996 period mainly due to a writedown in the value of real
estate owned through foreclosure.
INCOME TAX EXPENSE
Income tax expense for the 1997 period was $3.6 million compared to
$2.0 million for the 1996 period. In the 1996 period the Corporation recognized
a tax credit of $400,000 in connection with an IRS audit and a one-time tax
benefit of $885,000 based on the Corporation's analysis of the "Fresh Start"
provision of the Small Business Job Protection Act of 1996. Also, depending on
the outcome of certain tax rulings by federal and state taxing authorities over
the next one-to-two years not specific to Warren Bancorp, the Corporation may
have the ability to record additional tax credits of up to an estimated $470,000
in future periods.
The deferred income tax valuation allowance at December 31, 1997 and
1996 was $62,000 and $347,000, respectively. The net deferred tax asset at
December 31, 1997 and 1996 was $742,000 and $980,000, respectively. Management
believes it is more likely than not that sufficient taxable income will be
generated to fully realize the deferred income tax asset. For further
information, see note 8 of the Notes to the Consolidated Financial Statements.
20
21
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
GENERAL
The Corporation recorded a net profit for 1996 of $6.6 million compared
to a net profit for 1995 of $5.4 million. The increase is primarily due to gains
on the sale of investment securities, lower deposit insurance and decreased real
estate operations expense as well as the recognition of a one-time tax benefit
of $885,000. Income before taxes was $8.6 million for 1996 compared to $7.3
million for 1995.
Net interest income for 1996 was $16.3 million compared to $16.1
million for 1995. The weighted average interest rate spread for 1996 was 4.69%
compared to 4.71% for 1995. The net yield on average earning assets was 4.88%
for 1996 compared to 4.84% for 1995.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income remained at $27.8 million for 1996
and 1995. Interest and fees on loans decreased to $20.2 million in 1996 from
$20.4 million for 1995. This decrease is primarily the result of decreased
average loan volume despite an increase in average loan yields to 9.17% for 1996
from 9.13% for 1995. Interest and dividends on investments increased to $4.3
million in 1996 from $3.7 million in 1995. This increase is attributed to
increases in the average amount of investments held despite a decrease in the
average yield on investments to 6.25% for 1996 from 6.42% for 1995.
Mortgage-backed securities income decreased to $3.2 million from $3.7 million
despite an increase in average yield to 7.13% for 1996 compared to 7.08% for
1995 due mainly to a decrease in the average amount of mortgage-backed
securities held.
INTEREST EXPENSE
Interest on deposits remained at $11.1 million in 1996 and 1995. The
average cost of deposits increased to 3.75% for 1996 from 3.72% for 1995. This
is the result of a shift to higher-cost time deposits from lower-cost savings,
NOW and money market deposits during 1996. Interest on borrowed funds decreased
to $322,000 in 1996 from $515,000 in 1995. This decrease is primarily related to
a decrease in the average cost of borrowings to 4.80% in 1996 from 6.38% in 1995
and a decrease in average borrowings during 1996.
NON-INTEREST INCOME
Total non-interest income for 1996 was $2.2 million compared to $2.0
million for 1995. The gains from the sales of investment securities were
$250,000 for 1996 compared to losses of $20,000 for 1995. On December 31, 1995,
the Corporation took a charge to earnings of $321,000 based on a determination
that the unrealized loss on its investment in adjustable-rate preferred stocks
at December 31, 1995 was other than temporary. The Corporation recorded gains on
sales of mortgage loans and mortgage-servicing rights of $318,000 in 1996
compared to $630,000 to in 1995. Included in the 1995 gains was a $359,000 gain
from the sale of mortgage servicing rights on $31.5 million of residential
mortgage loans compared to zero in 1996. Loan servicing fee income was $613,000
in 1996 compared to $660,000 in 1995.
NON-INTEREST EXPENSE
Total non-interest expense decreased to $9.8 million in 1996 from $11.0
million in 1995. This decrease is primarily attributed to a decrease in deposit
insurance, professional services and real estate operations expenses. Real
estate operations expense was $180,000 in 1996 compared to $1.3 million in 1995
which included a write-down on real estate acquired by foreclosure of $902,000
in 1995 versus a net gain on sale of real estate acquired by foreclosure of
$1,000 in 1996. Salary expense increased to $6.0 million in 1996 from $5.6
million in 1995 due mainly to salary increases and higher discretionary bonus
payments in 1996. Deposit insurance expense
21
22
was a negative expense of $83,000 in 1996 compared to an expense of $384,000 in
1995 due to a reduction in the premium the FDIC charges the Bank for deposit
insurance and an $87,000 refund in 1996 compared to an $81,000 refund in 1995
from the Depositors Insurance Fund, a Massachusetts insurance fund which insures
deposits in excess of the FDIC limit.
INCOME TAX EXPENSE
Total income tax expense remained at $2.0 million in 1996 and 1995
despite having pre-tax income of $8.6 million in 1996 versus $7.3 million in
1995. In connection with an audit by the IRS and a review of certain tax and
related matters, the Corporation recorded a $400,000 income tax credit in the
first quarter of 1996 which is included in income tax expense. The credit is
mainly the result of two changes required by the audit. First, the IRS required
the Corporation to reduce its tax-return bad-debt deduction in prior years due
to loss carrybacks the Corporation had taken. Although that requirement in
itself had no financial statement effect on income, it enabled the Corporation
to increase its dividend-received deduction in the year of the change, thus
providing tax-return and financial statement benefit. Second, the IRS required
the Corporation to shift tax-return loan chargeoffs from one tax period to other
tax periods. For federal-tax purposes, these shifts had no financial statement
effect on income. For state-tax purposes, the shift sheltered income which had
been taxed in prior years, thus providing tax-return and financial-statement
benefit. In addition, the Corporation recognized a one-time tax benefit of
$885,000 based on its analysis of the "Fresh Start" provision of the Small
Business Job Protection Act of 1996.
BUSINESS
GENERAL
THE CORPORATION. Warren Bancorp, Inc. is a business corporation
organized under the General Laws of the Commonwealth of Massachusetts. The only
office of the Corporation, and its principal place of business, is located at 10
Main Street, Peabody, Massachusetts 01960. The Corporation's telephone number is
(978) 531-7400.
The Corporation is a bank holding company which owns all of the
outstanding common stock of its only subsidiary, Warren Five Cents Savings Bank.
The Corporation charges fees to the Bank for providing certain administrative
services for the Bank. Such fees are charged on a cost basis.
THE BANK. The Bank, a wholly owned subsidiary of the Corporation, is a
Massachusetts-chartered savings bank incorporated in 1854. The Bank conducts its
business from four banking offices in Peabody and two banking offices in
Beverly.
The Bank is engaged principally in the business of attracting retail
and wholesale deposits from the general public and investing those deposits in
various types of residential and commercial mortgages, consumer and commercial
loans, and various securities. The Bank offers a wide variety of deposit, loan
and investment products and services to individuals and commercial customers.
The Bank has been a member of the FDIC since 1983. The Bank's deposits
are insured by the FDIC up to FDIC limits (generally $100,000 per depositor) and
by the Depositors Insurance Fund (the "DIF") for the portion of deposits in
excess of that insured by the FDIC. The Bank is also a member of the Federal
Home Loan Bank ("FHLB") system.
MARKET AREA
The Corporation's primary business and market area are the same as the
Bank's business and market area. The Bank's primary market area is centered in
Peabody (where its main office is located) and Beverly, Massachusetts, both
approximately 18 miles north of Boston, and
22
23
includes the other cities and towns of Essex County, Massachusetts. However, the
Bank will make loans and provide services to customers throughout eastern
Massachusetts and parts of southern New Hampshire. The population of Essex
County increased to 680,000 in 1996 from 670,000 in 1990, and median family
income in 1996 was $58,700. In addition, the unemployment rate in December 1997
in the Boston labor market was 3.2% compared to 3.9% in Massachusetts and 4.7%
in the United States. This compares to 3.2%, 3.9% and 5.3% in December 1996 for
the Boston labor market, Massachusetts and the United States, respectively.
COMPETITION
The primary business of the Corporation is currently the ongoing
business of the Bank. Therefore, the competitive conditions faced by the
Corporation are the same as those faced by the Bank.
The Bank faces competition in its market area both in originating loans
and attracting deposits. Competition in originating loans comes primarily from
thrift institutions, commercial banks, mortgage companies and consumer finance
companies. Within the Bank's market area and surrounding communities, there are
many competing commercial banks and thrift institutions. Further, there are
numerous mortgage companies from Essex County and metropolitan Boston with
offices in the area or calling officers soliciting in the area. The Bank
competes for loans principally on the basis of interest rates and repricing
terms, loan fees, the types of loans originated and the quality of service
provided to borrowers. Management believes that through the Bank's various loan
programs, it can compete for most types of loans in this market area.
In attracting deposits, the Bank's primary competitors are thrift
institutions, commercial banks, money market funds, credit unions and the
capital markets. Competition for deposits comes not only from local
institutions, but from those located in the Boston metropolitan market, through
branching networks, proximity to the work place and the general reach of the
mass media (particularly newspapers). The Bank competes for deposits primarily
on the basis of interest rate paid, scope of services provided, convenience and
quality of customer service. In order to appeal to customers and attract
depositors, the Bank plans to continue to offer a wide range of high quality
customer services, professional staff, and convenient offices and hours, in
addition to paying competitive rates on deposits.
REGULATION
Both the Corporation and the Bank are regulated under federal and state
statutes and regulations. The following summaries of the statutes and
regulations affecting banks and bank holding companies do not purport to be
complete. Such summaries are qualified in their entirety by reference to such
statutes and regulations.
23
24
WARREN BANCORP, INC.
FEDERAL LAW
FEDERAL RESERVE BOARD. The Corporation is registered as a bank holding
company under the Federal Bank Holding Company Act of 1956, as amended ("BHCA"),
and is required to file with the Federal Reserve Board ("FRB") annual and
periodic reports and such other information as the FRB may require. The
Corporation is subject to limitations on the scope of its activities and to
continuing regulation, supervision and examination by the FRB under the BHCA and
related federal statutes.
The FRB has adopted risk-based and leverage capital guidelines for bank
holding companies. A discussion of these guidelines and the Corporation's
capital requirements and capital position is given in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the heading
"Capital Adequacy."
MASSACHUSETTS LAW
As a Massachusetts corporation, the Corporation must comply with the
General Laws of the Commonwealth of Massachusetts and is subject to corporate
regulation by the Massachusetts Secretary of State.
WARREN FIVE CENTS SAVINGS BANK
As a Massachusetts-chartered, FDIC-insured savings bank, the Bank is
subject to regulation, examination and supervision by the FDIC and the
Commissioner of Banks of the Commonwealth of Massachusetts.
FEDERAL LAW
FEDERAL RESERVE BOARD. The FRB has established regulations that require
FDIC-insured savings banks to maintain non-earning reserves against certain
deposit accounts.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC insures the Bank's
deposit accounts up to a maximum of $100,000 per separately insured account;
therefore, the Bank is subject to regulation, supervision and reporting
requirements of the FDIC. The FDIC has adopted a regulation that defines and
sets the minimum requirements for capital adequacy. Under this regulation,
insured state banks, such as the Bank, are required to maintain a "leverage"
ratio of total capital to total assets and a risk-based capital-to-assets ratio
that are substantially the same as the Federal Reserve guidelines noted above. A
discussion of these guidelines and the Bank's capital requirements and capital
position is given in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the heading "Capital Adequacy."
STATE LAW
MASSACHUSETTS COMMISSIONER OF BANKS. The Bank is subject to regulation
and examination by the Commissioner. Massachusetts statutes and regulations
govern, among other things, investment powers, lending powers, deposit
activities, borrowings, maintenance of surplus reserve accounts, distribution of
earnings and payment of dividends. The Bank is also subject to regulatory
provisions covering such matters as issuance of capital stock, branching, and
mergers and consolidations.
DEPOSITORS INSURANCE FUND. Deposit accounts that are not covered by
federal insurance are insured by the DIF, a corporation created by the
Massachusetts Legislature for the purpose of insuring the deposits of savings
banks not covered by federal deposit insurance. All
24
25
Massachusetts-chartered savings banks, including the Bank, are required to be
members of the DIF.
EMPLOYEES
At the present time, the Corporation does not have any employees other
than its officers, who are compensated by the Bank. The Corporation may utilize
the support staff of the Bank from time to time without the payment of any fees
to the Bank. If the Corporation expands the scope or size of its financial
services business, or acquires or pursues other lines of business, it may hire
additional employees.
At December 31, 1997, the Bank had 155 employees, 37 of whom were
part-time. None of the employees of the Bank are represented by a collective
bargaining group, and management considers its relations and communications with
employees to be satisfactory.
BANK SUBSIDIARIES AND OTHER ACTIVITIES
The Bank has six wholly owned subsidiaries. Those with significant
activity include:
Northbank Realty, Inc., a Massachusetts corporation incorporated in
1976, owns the Bank's South Peabody branch office and land which it leases to
the Bank.
Warren Securities Corporation II, a Massachusetts corporation
incorporated in 1997, owns investment securities which it received as an equity
contribution from the Bank.
SAVINGS BANK LIFE INSURANCE
The Bank acts as an issuing agent for Savings Bank Life Insurance
Company of Massachusetts and earns commissions for selling life insurance and
annuities.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On August 20, 1997, the Corporation's Board of Directors retained
Arthur Andersen LLP as its independent public accountants and dismissed the
Corporation's former independent public accountants effective September 1, 1997.
There were no disagreements with the former auditors on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure at the time of the change or with respect to the Corporation's
financial statements for fiscal years 1995 and 1996, which, if not resolved to
the former auditors' satisfaction, would have caused them to make reference to
the subject matter of the disagreement in connection with their reports. Prior
to retaining Arthur Andersen LLP, the Corporation had not consulted with Arthur
Andersen LLP regarding accounting principles. In addition, there were no
disagreements with the current independent public accountants on matters of
accounting principles or financial statement disclosure.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
25
26
DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
Information pertaining to directors and executive officers is set forth
under "Election of a Class of Directors" and "Executive Officers" in the Proxy
Statement for the Annual Meeting of the Corporation to be held on May 6, 1998
and is incorporated herein by reference.
EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under
"Executive Compensation" in the Proxy Statement for the Annual Meeting of the
Corporation to be held on May 6, 1998 and is incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of management and
beneficial owners of more than five percent of the Corporation's common stock is
set forth under "Beneficial Ownership of Common Stock" in the Proxy Statement
for the Annual Meeting of the Corporation to be held on May 6, 1998 and is
incorporated herein by reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related
transactions is set forth under "Certain Relationships and Related Transactions"
in the Proxy Statement for the Annual Meeting of the Corporation to be held on
May 6, 1998 and is incorporated herein by reference.
26
27
INDEX TO FINANCIAL STATEMENTS OF
WARREN BANCORP, INC. AND SUBSIDIARIES
PAGES
-----
Reports of Independent Public Accountants............................................................28-29
Consolidated Balance Sheets at December 31, 1997 and December 31, 1996............................... 30
Consolidated Statements of Operations for the year ended
December 31, 1997, 1996 and 1995................................................................... 31
Consolidated Statements of Changes in Stockholders' Equity for the year ended
December 31, 1997, 1996 and 1995................................................................... 32
Consolidated Statements of Cash Flows for the year ended
December 31, 1997, 1996 and 1995...................................................................33-34
Notes to Consolidated Financial Statements...........................................................35-67
27
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Warren Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Warren Bancorp,
Inc. and subsidiaries (collectively, the Corporation) as of December 31, 1997,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Warren Bancorp, Inc.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 20, 1998
28
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Warren Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Warren Bancorp,
Inc. and subsidiaries as of December 31, 1996 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Warren Bancorp, Inc.
and subsidiaries as of December 31, 1996 and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 23, 1997
29
30
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
1997 1996
---- ----
A S S E T S
Cash and due from banks (non-interest bearing) (note 11) ............................... $ 7,191 $ 5,855
Money market funds and overnight investments (note 2) .................................. 6,288 6,733
Investment and mortgage-backed securities available for sale (amortized cost of $99,496
at December 31, 1997 and $103,802 at December 31, 1996) (notes 2 and 7).............. 101,698 104,937
Other investments (fair value of $6,534 at December 31, 1997 and $6,918
at December 31, 1996) (note 2) ...................................................... 6,294 6,678
Loans held for sale .................................................................... 1,031 3,003
Loans (notes 3 and 11) ................................................................. 240,763 222,846
Allowance for loan losses (note 3) ..................................................... (4,066) (4,533)
--------- ---------
Net loans ........................................................................... 236,697 218,313
Banking premises and equipment, net (note 4) ........................................... 4,785 4,604
Accrued interest receivable ............................................................ 2,790 2,660
Real estate acquired by foreclosure .................................................... 2,010 2,230
Other assets (notes 3 and 8) ........................................................... 2,209 3,941
--------- ---------
Total assets ........................................................................ $ 370,993 $ 358,954
========= =========
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 (note 6) ................................................................... $ 325,293 $ 316,366
Borrowed funds (note 7) ............................................................. 2,926 4,927
Escrow deposits of borrowers ........................................................ 1,005 1,108
Accrued interest payable ............................................................ 812 632
Accrued expenses and other liabilities (note 8) ..................................... 929 1,476
--------- ---------
Total liabilities ................................................................. 330,965 324,509
--------- ---------
Commitments and contingencies (notes 4 and 11)
Stockholders' equity: (notes 9 and 10)
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 - 3,904,097 shares at December 31, 1997 and 3,759,567 shares
at December 31, 1996 ...........................................................
Outstanding - 3,806,097 shares at December 31, 1997 and 3,661,567 shares at
December 31, 1996 ............................................................... 390 376
Additional paid-in capital .......................................................... 35,114 34,245
Retained earnings ................................................................... 4,282 260
Treasury stock, at cost, 98,000 shares at December 31, 1997 and 1996 ................ (1,174) (1,174)
--------- ---------
38,612 33,707
Net unrealized gain on securities available for sale, net of taxes (note 2).......... 1,416 738
--------- ---------
Total stockholders' equity ....................................................... 40,028 34,445
--------- ---------
Total liabilities and stockholders' equity ....................................... $ 370,993 $ 358,954
========= =========
See accompanying notes to consolidated financial statements.
30
31
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(In thousands, except per-share data)
Interest and dividend income:
Interest on loans ........................................................... $ 21,248 $ 20,237 $ 20,383
Interest and dividends on investments ....................................... 4,499 4,311 3,683
Interest on mortgage-backed securities ...................................... 2,792 3,233 3,684
-------- -------- --------
Total interest and dividend income ....................................... 28,539 27,781 27,750
-------- -------- --------
Interest expense:
Interest on deposits ........................................................ 11,258 11,147 11,093
Interest on borrowed funds .................................................. 146 322 515
-------- -------- --------
Total interest expense ................................................... 11,404 11,469 11,608
-------- -------- --------
Net interest income ...................................................... 17,135 16,312 16,142
Provision for (recovery of) loan losses (note 3)................................ (316) 116 (154)
-------- -------- --------
Net interest income after provision for (recovery of)
loan losses ........................................................... 17,451 16,196 16,296
-------- -------- --------
Non-interest income:
Loan servicing fees ......................................................... 129 613 660
Customer service fees ....................................................... 906 987 1,017
Gains (losses) on sales of investment securities, net (note 2)............... 140 250 (20)
Write-down of securities due to other-than-temporary
decline in value (note 2) ................................................ -- (25) (364)
Gains on sales of mortgage servicing rights.................................. 1,436 -- --
Gains on sales of mortgage loans ............................................ 181 318 630
Gain from termination of pension plan (note 10).............................. 538 -- --
Other ....................................................................... 9 6 126
-------- -------- --------
Total non-interest income ................................................ 3,339 2,149 2,049
-------- -------- --------
Non-interest expenses:
Salaries and employee benefits (note 10) .................................... 5,753 5,992 5,577
Office occupancy and equipment .............................................. 1,147 1,080 1,079
Professional services ....................................................... 234 315 475
Marketing ................................................................... 241 201 132
Deposit insurance ........................................................... (39) (83) 384
Real estate operations ...................................................... 409 180 1,305
Outside data processing expense ............................................. 488 436 426
Other ....................................................................... 1,624 1,647 1,625
-------- -------- --------
Total non-interest expenses .............................................. 9,857 9,768 11,003
-------- -------- --------
Income before income taxes .............................................. 10,933 8,577 7,342
Income tax expense (note 8) .................................................... 3,648 1,968 1,960
-------- -------- --------
Net income .............................................................. $ 7,285 $ 6,609 $ 5,382
======== ======== ========
Basic earnings per share (note 5) ........................................ $ 1.92 $ 1.80 $ 1.50
======== ======== ========
Diluted earnings per share (note 5) ...................................... $ 1.83 $ 1.69 $ 1.40
======== ======== ========
See accompanying notes to consolidated financial statements.
31
32
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
UNREALIZED
RETAINED GAIN (LOSS) ON
ADDITIONAL EARNINGS SECURITIES
COMMON PAID-IN (ACCUMULATED AVAILABLE FOR TREASURY
STOCK CAPITAL DEFICIT) SALE, NET STOCK TOTAL
------ ---------- ------------ -------------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at December 31, 1994 ........ $354 $33,759 ($8,702) ($1,616) $ -- $ 23,795
Net income ....................... -- -- 5,382 -- -- 5,382
Issuance of 92,797 shares for
exercise of options and 401(k)
benefit plan .................... 10 152 -- -- -- 162
Dividends paid ................... -- -- (1,081) -- (1,081)
Change in unrealized loss
on securities available for sale,
net of taxes .................... -- -- 2,980 -- 2,980
---- ------- ------- ------- -------- --------
Balance at December 31, 1995 ........ 364 33,911 (4,401) 1,364 -- 31,238
Net income ....................... -- -- 6,609 -- 6,609
Issuance of 122,025 shares for
exercise of options.............. 12 334 -- -- -- 346
Dividends paid ................... -- -- (1,948) -- (1,948)
Purchase of treasury stock
(98,000 shares) ................. -- -- -- -- (1,174) (1,174)
Change in unrealized gain
on securities available for sale,
net of taxes .................... -- -- -- (626) -- (626)
---- ------- ------- ------- -------- --------
Balance at December 31, 1996 ........ 376 34,245 260 738 (1,174) 34,445
Net income ....................... -- -- 7,285 -- -- 7,285
Issuance of 144,530 shares for
exercise of options.............. 14 725 -- -- -- 739
Tax benefit of stock options
exercised ...................... -- 144 -- -- -- 144
Dividends paid ................... -- -- (3,263) -- -- (3,263)
Change in unrealized gain
on securities available for sale,
net of taxes .................... -- -- -- 678 -- 678
---- ------- ------- ------- -------- --------
Balance at December 31, 1997......... $390 $35,114 $ 4,282 $ 1,416 ($ 1,174) $ 40,028
==== ======= ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
32
33
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net Income .................................................................. $ 7,285 $ 6,609 $ 5,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) loan losses ................................... (316) 116 (154)
Depreciation and amortization ............................................. 592 570 578
Tax benefit of stock options exercised .................................... 144 -- --
Deferred income tax expense (benefit) .................................... (210) (391) 617
Amortization (accretion) of premiums, fees and discounts .................. 420 54 (119)
(Gains) losses on sale of investment securities ........................... (140) (250) 20
Write-down of securities due to other-than-temporary decline in
value ................................................................... -- 25 364
(Gains) on sales of mortgage loans ........................................ (181) (318) (630)
Write-down of real estate acquired by foreclosure ......................... 210 138 983
(Gains) on sale of real estate acquired by foreclosure .................... (2) (139) (81)
(Increase) decrease in loans held for sale ................................ 1,972 (194) (2,185)
(Increase) in accrued interest receivable ................................. (130) (261) (252)
(Increase) decrease in other assets ....................................... 1,553 (217) (1,261)
Increase in accrued interest payable ...................................... 180 44 25
Increase (decrease) in other liabilities and escrow deposits .............. (650) 774 (406)
-------- -------- --------
Net cash provided by operating activities ............................. 10,727 6,560 2,881
-------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in money market funds and overnight
investments ................................................................ 445 (1,433) (3,300)
Purchase of investment securities available for sale ........................ (55,112) (46,347) (26,885)
Purchase of mortgage-backed securities available for sale ................... -- (1,911) --
Proceeds from sales of investment securities available for sale ............. 8,987 14,308 13,274
Proceeds from maturities of investment securities available for sale ........ 38,274 26,802 --
Proceeds from sales of mortgage-backed securities available for sale ........ 5,721 -- --
Proceeds from payments of mortgage-backed securities
available for sale ........................................................ 8,443 10,381 12,386
Proceeds from sales of real estate acquired by foreclosure .................. 574 1,579 4,684
Capital expenditures for real estate acquired by foreclosure ................ -- -- (71)
Net (increase) in loans ..................................................... (20,352) (8,835) (1,645)
Purchases of premises and equipment ......................................... (773) (417) (320)
-------- -------- --------
Net cash (used in) investing activities ............................... $(13,793) $ (5,873) $ (1,877)
-------- -------- --------
33
34
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-Continued
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Cash flows from financing activities: (In thousands)
Net increase (decrease) in deposits ....................... $ 8,927 $ 1,516 $ (213)
Proceeds from Federal Home Loan Bank advances ............. 630 1,045 826
Principal payments on Federal Home Loan Bank advances ..... (2,674) (4,133) (773)
Net increase in other borrowed funds ...................... 43 647 713
Dividends paid ............................................ (3,263) (1,948) (1,081)
Purchases of treasury stock ............................... -- (1,174) --
Proceeds from issuance of common stock .................... 739 346 162
-------- -------- --------
Net cash provided by (used in) financing activities 4,402 (3,701) (366)
-------- -------- --------
Net increase (decrease) in cash and due from banks ........ 1,336 (3,014) 638
Cash and due from banks at beginning of year .............. 5,855 8,869 8,231
-------- -------- --------
Cash and due from banks at end of year .................... $ 7,191 $ 5,855 $ 8,869
======== ======== ========
Cash paid during the year for:
Interest .............................................. $ 11,224 $ 11,425 $ 11,583
Income taxes .......................................... $ 3,924 $ 2,568 $ 2,731
Supplemental noncash investing and financing activities:
Foreclosures on real estate ............................ $ 602 $ 719 $ 1,046
Securitization of loans to mortgage-backed securities .. $ 1,903 $ 2,171 $ 7,859
See accompanying notes to consolidated financial statements.
34
35
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The accounting and reporting policies of Warren Bancorp, Inc. (the
"Corporation") conform to generally accepted accounting principles and to
general practices within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the balance
sheets and income and expense for the periods. Actual results could differ from
those estimates.
Material estimates that are susceptible to change relate to the
determination of the allowance for loan losses, the valuation of real estate
acquired by foreclosure and the realizability of the deferred tax asset. In
connection with the determination of the allowance for loan losses and the
carrying value of real estate acquired by foreclosure, management obtains
independent appraisals for significant properties as deemed necessary.
A substantial portion of the Corporation's loans are secured by real
estate in markets primarily in Massachusetts. All of the real estate acquired by
foreclosure is located in the same markets. Accordingly, the ultimate
collectibility of a substantial portion of the Corporation's loan portfolio and
the recovery of all the real estate acquired by foreclosure is susceptible to
changing conditions in these markets.
The following is a summary of the more significant accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, Warren Five Cents Savings Bank (the
"Bank"), and the Bank's wholly owned subsidiaries, The Warren Mortgage Company,
Inc., Northbank Realty, Inc., Northbank Financial Corporation, Hannah
Investments, Inc., Warren Mortgage Corporation Two, Warren Securities
Corporation II and Peabody Development Corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain amounts
for 1996 and 1995 have been reclassified to conform with the 1997 presentation.
LOANS HELD FOR SALE AND SALES OF LOANS
Loans held for sale are stated at the lower of aggregate cost or fair
value. The fair value of loans held for sale is estimated based on outstanding
investor commitments or, in the absence of such commitments, current investor
yield requirements. Net unrealized losses, if any, are provided for in a
valuation allowance by charges to operations.
35
36
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
In years prior to 1997, the Corporation retained servicing on
residential mortgages sold. On January 1, 1996 the Corporation adopted Statement
of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights and recognized as separate assets from the related loans the
rights to service mortgage loans for others, either through acquisition of those
rights or from the sale or securitization of loans with the servicing rights
retained on those loans, based on their relative fair values. To determine the
fair value of the servicing rights created, the Corporation used the market
prices under comparable servicing sale contracts, when available, or
alternatively used a valuation model that calculated the present value of future
cash flows to determine the fair value of the servicing rights. In using this
valuation method, the Corporation incorporated assumptions that market
participants would use in estimating future net servicing income, which includes
estimates of the cost of the servicing loans, a discount rate, ancillary income,
prepayment speeds, and default rates. Originated mortgage loan servicing rights
were amortized as a reduction of loan servicing fee income in proportion to and
over the period of estimated net servicing income.
On a quarterly basis, the Corporation assessed the carrying values of
originated and purchased mortgage loan servicing rights for impairment based on
the fair value of such rights. The fair value was estimated using market prices
when available, or alternatively, using the valuation model referred to above
with current assumptions. Any impairment was recognized as a charge to earnings
through a valuation allowance. The risk characteristics of the underlying loans
used to measure impairment of originated and purchased mortgage loan servicing
rights included loan type, interest rate, loan origination date and term to
maturity.
36
37
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
When loans are sold, a gain or loss is recognized to the extent that
the sale proceeds exceed or are less than their carrying values. Gains and
losses are determined using the specific identification method. In years prior
to 1997, the Corporation retained servicing on residential and mortgage loans
sold, and gains and losses resulting from the sale of loans with servicing
retained were adjusted to recognize the present value of differences between the
weighted average interest rate on the loans sold, adjusted for a normal
servicing fee and guaranty fees, and the agreed yield to the buyer. The
resulting excess mortgage servicing rights were amortized as a reduction of
servicing fee income, using the effective interest method over the estimated
remaining lives of the loans. Actual prepayment experience was reviewed
periodically and adjustments were made when appropriate.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Debt securities that the Corporation has the positive intent and
ability to hold to maturity and non-marketable equity securities are classified
as other investments and reported at amortized cost; debt and equity securities
that are bought and held principally for the purpose of selling in the near term
are classified as trading and reported at fair value, with unrealized gains and
losses included in earnings; and debt and equity securities not classified as
either other or trading are classified as available for sale and reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity, net of income taxes. After
mortgage loans are converted to mortgage-backed securities, they are subject to
these same classification provisions. The Corporation classifies its investment
and mortgage-backed securities into two categories: available for sale and
other; the Corporation has no securities held for trading.
Premium and discounts on investment and mortgage-backed securities are
amortized or accreted into income by use of the effective interest method. If a
decline in fair value below the amortized cost basis of an investment or
mortgage-backed security is judged to be other than temporary, the cost basis of
the investment is written down to fair value as a new cost basis and the amount
of the write-down is included as a charge against earnings. Gains and losses on
the sale of investment and mortgage-backed securities are recognized at the time
of sale on a specific identification basis.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is available for future credit losses
inherent in the loan portfolio. Additions to the allowance are charged to
earnings. Loan losses are charged against the allowance when management believes
that the collectibility of the loan principal is doubtful. Recoveries on loans
previously charged off are credited to the allowance.
The allowance is an amount management believes will be adequate to
absorb loan losses based on evaluations of known and inherent risks in the
portfolio, changes in the nature of the loan portfolio, overall portfolio
quality, specific problem loans, prior loss experience and current and
anticipated economic conditions that may affect the borrowers' ability to pay.
Impaired loans are analyzed and categorized by level of credit risk and
collectibility in order to determine their related allowance for loan losses.
37
38
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Management believes that the allowance for loan losses is adequate, and
it is assisted by an independent credit review consulting firm in making that
determination. 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 the independent credit review consulting firm. Loan loss
allocations are based on the conditions of each loan, whether performing or
nonperforming, including collectibility, collateral adequacy and the general
condition of the borrowers, economic conditions, delinquency statistics, market
area activity, the risk factors associated with each of the various loan
categories and the borrower's adherence to the original terms of the loan.
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) during the period. In addition, various regulatory
agencies, as part of their examination process, periodically review the
Corporation's allowance for loan losses. Such agencies may require the
Corporation to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
IMPAIRED AND NONACCRUAL LOANS
The Corporation accounts for impaired loans at the present value of the
expected future cash flows discounted at the loans' effective interest rates or
the fair value of collateral for collateral-dependent loans. When the measure of
the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through the allowance for loan losses. Loans are deemed
by the Corporation to be impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect all amounts due
according to the contractual terms of the original loan agreement. Generally,
nonaccruing loans are deemed impaired. Large groups of homogeneous loans, such
as smaller balance residential mortgage and consumer installment loans, are
collectively evaluated for impairment. Typically, the minimum delay in receiving
payments according to the contractual terms of the loan that can occur before a
loan is considered impaired is ninety days.
Nonaccrual loans, which may include impaired loans, are loans on which
the accrual of interest has been discontinued. Accrual of interest income on
loans is discontinued either when a reasonable doubt exists as to 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. Loans are removed from nonaccrual when they become
less than ninety days past due and when concern no longer exists as to the
collectibility of principal or interest or when they are adequately secured and
are in the process of collection.
38
39
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
LOAN FEES
Loan origination fees and certain direct incremental loan origination
costs are deferred and amortized over the life of the related loans as yield
adjustments using primarily the effective interest method. When the loans are
sold or paid off, the unamortized fees and costs are recognized as income or
expense.
BANKING PREMISES AND EQUIPMENT
Banking premises, equipment and leasehold improvements are stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization are computed principally on the straight-line method over the
estimated useful lives of the assets or the terms of leases, if shorter.
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure is comprised of properties acquired
through foreclosure proceedings, acceptance of a deed in lieu of foreclosure or
by taking possession of collateral and is recorded and subsequently carried at
the lower of the carrying value of the loan or the fair value of the property
received, less estimated costs of disposition. Loan losses arising from the
acquisition of such properties are charged against the allowance for loan
losses. Operating expenses and any subsequent write-downs are charged to real
estate operations. The Corporation periodically assesses the realizability of
its long-lived assets in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Based on its review, the Corporation does not believe that any material
impairment of its long-lived assets has occurred.
PENSION BENEFITS
The Corporation's policy is to record net periodic pension cost on an
actuarially determined basis.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
39
40
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
EARNINGS PER SHARE
In 1997, the Corporation adopted the provisions of SFAS No. 128,
Earnings Per Share. This statement revises the standards for computing and
presenting earning per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. This statement replaces the presentation
of primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerators and denominators of the basic and diluted EPS computations. This
statement also requires a restatement of all prior-period EPS data presented.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. However, SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of SFAS No. 125," requires
the deferral of implementation as it relates to repurchase agreements,
dollar-rolls, securities lending and similar transactions until after December
31, 1997. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of the Corporation does not
expect that adoption of SFAS No. 127 will have a material impact on the
Corporation's financial position, results of operations, or liquidity.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This statement is effective for the
Corporation's fiscal year ended December 31, 1998. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
40
41
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities at December 31, 1997 and 1996
are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
1997
- ----
Money market funds and overnight
investments ..................... $ 6,288 $ -- $ -- $ 6,288
-------- ------- --------- --------
AVAILABLE FOR SALE
Fixed income mutual funds .......... 19,009 578 (1) 19,586
FNMA mortgage-backed securities .... 22,537 881 -- 23,418
GNMA mortgage-backed securities .... 7,209 -- (48) 7,161
U.S. Government and related
obligations ....................... 10,536 4 (4) 10,536
Corporate notes .................... 32,286 5 (49) 32,242
Preferred stock .................... 7,901 772 -- 8,673
Common stock ....................... 18 64 -- 82
-------- ------- --------- --------
99,496 2,304 (102) 101,698
-------- ------- --------- --------
OTHER
Foreign government bonds
held to maturity .................. 500 -- -- 500
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
-------- ------- --------- --------
6,294 240 -- 6,534
-------- ------- --------- --------
$112,078 $ 2,544 $ (102) $114,520
======== ======= ========= ========
41
42
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
1996
- ----
Money market funds and overnight
investments ..................... $ 6,733 $ -- $ -- $ 6,733
-------- ------- --------- --------
AVAILABLE FOR SALE
Fixed income mutual funds .......... 18,990 530 -- 19,520
FNMA mortgage-backed securities .... 27,234 887 -- 28,121
GNMA mortgage-backed securities .... 15,000 -- (391) 14,609
U.S. Government and related
obligations ....................... 24,636 10 (35) 24,611
Corporate notes .................... 10,000 3 (3) 10,000
Preferred stock .................... 7,924 122 (8) 8,038
Common stock warrants .............. 18 20 -- 38
-------- ------- --------- --------
103,802 1,572 (437) 104,937
-------- ------- --------- --------
OTHER
Foreign government bonds
held to maturity .................. 500 -- -- 500
Stock in Federal Home Loan Bank
of Boston ........................ 4,110 -- -- 4,110
Stock in Depositors Insurance Fund
Liquidity Fund .................... 108 -- -- 108
Advances to Thrift Institution Fund
for Economic Development ......... 384 -- -- 384
Stock in Savings Bank Life Insurance
Company of Massachusetts ......... 1,576 240 -- 1,816
-------- ------- --------- --------
6,678 240 -- 6,918
-------- ------- --------- --------
$117,213 $ 1,812 $ (437) $118,588
======== ======= ========= ========
In 1997 proceeds from sales of mortgage-backed securities amounted to
$5,721,000 and realized losses on such sales were $98,000. There were no sales
of mortgage-backed securities in 1997 and 1996. There were no sales of other
types of debt securities in 1997 and 1996. In 1995 proceeds from sales of other
debt securities were $7,547,000 and realized losses were $24,000.
42
43
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED)
Proceeds from the sales of equity securities were $8,987,000,
$14,301,000 and $1,596,000 in 1997, 1996 and 1995, respectively. Realized gains
on sales of equity securities were $217,000, $405,000 and $4,000 in 1997, 1996
and 1995, respectively. Realized losses on sales of equity securities were
$155,000 in 1996. There were no realized losses on sales of equity securities in
1997 and 1995.
Writedowns due to impairment in value of investment securities were
$25,000 and $364,000 in 1996 and 1995, respectively.
Mortgage-backed securities with an amortized cost and market value of
$6,751,000 and $7,021,000, respectively, at December 31, 1997 and $2,487,000 and
$2,427,000, respectively, at December 31, 1996 were pledged to secure securities
sold under agreements to repurchase.
The following table presents a maturity distribution of the amortized
cost and fair value of the debt securities portfolio as of December 31, 1997.
Adjustable-rate mortgage-backed securities are shown as if the entire balance
came due on the repricing date. Estimates are made of fixed-rate,
mortgage-backed security amortization and prepayments.
AFTER AFTER
ONE FIVE
BUT BUT
WITHIN WITHIN WITHIN AFTER
ONE FIVE TEN TEN
YEAR YEARS YEARS YEARS TOTAL
---- ----- ----- ----- -----
(IN THOUSANDS)
AVAILABLE FOR SALE
- ------------------
Amortized cost ......... $63,874 $ 12,601 $2,363 $ 18 $78,856
======= ======== ====== ======== =======
Fair Value ............. $62,104 $ 15,105 $2,416 $ 20 $79,645
======= ======== ====== ======== =======
OTHER (HELD TO MATURITY)
Amortized cost ......... $ 250 $ -- $ 250 $ -- $ 500
======= ======== ====== ======== =======
Fair Value ............. $ 250 $ -- $ 250 $ -- $ 500
======= ======== ====== ======== =======
The Bank, as a member of the Federal Home Loan Bank of Boston
("FHLBB"), is required to invest in $100 par value stock in the amount of one
percent of its outstanding home loans or 1/20th of its outstanding advances from
the FHLBB, whichever is higher. As and when such stock is redeemed, the Bank
would receive from the FHLBB an amount equal to the par value of the stock.
43
44
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(3) LOANS
Loans at December 31 are summarized as follows:
1997 1996
--------- ---------
Residential mortgage: (IN THOUSANDS)
Adjustable-rate ............ $ 46,255 $ 59,706
Fixed-rate ................. 6,452 6,948
--------- ---------
52,707 66,654
--------- ---------
Commercial mortgage:
Adjustable-rate ............ 111,971 90,782
Fixed-rate ................. 13,861 16,646
Construction
adjustable-rate.......... 19,739 10,742
--------- ---------
145,571 118,170
--------- ---------
Commercial loans ............... 22,259 16,458
--------- ---------
Consumer loans:
Home equity ................ 16,196 16,921
Other ...................... 4,030 4,643
--------- ---------
20,226 21,564
--------- ---------
Total loans ................ 240,763 222,846
Allowance for loan losses ...... (4,066) (4,533)
--------- ---------
Net loans ............ $ 236,697 $ 218,313
========= =========
Changes in the allowance for loan losses for the years ended December
31 are as follows:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year ............................................... $ 4,533 $ 4,533 $ 4,789
Provision for (recovery of) loan losses charged
(credited) to expense ..................................................... (316) 116 (154)
Loans charged off .......................................................... (608) (456) (616)
Loan recoveries ............................................................ 457 340 514
------- ------- -------
Balance at end of year ..................................................... $ 4,066 $ 4,533 $ 4,533
======= ======= =======
44
45
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(3) LOANS - (CONTINUED)
The allowance for loan losses attributable to $921,000 of impaired
loans, of which $460,000 is measured using the present value method and $461,000
using the fair value of collateral method, is $179,000.
At December 31, 1997 and 1996, the Corporation had net deferred loan
fees of $149,000 and $105,000, respectively, reflected as a reduction of the
appropriate loan categories.
On January 31, 1997, the Corporation sold its rights to service
approximately $209 million of residential mortgage loans representing over 95%
of the portfolio of loans serviced for others. At December 31, 1997, 1996 and
1995 the Corporation serviced residential loans for investors of approximately
$3,983,000, $214,528,000 and $220,428,000, respectively, which are not reflected
in the accompanying consolidated financial statements because they are not
assets of the Corporation. At December 31, 1997 no formal recourse provisions
exist in connection with such servicing.
Loans on nonaccrual amounted to $347,000, $2,712,000 and $4,084,000 at
December 31, 1997, 1996 and 1995, respectively. Interest income of approximately
$21,000, $161,000 and $326,000 would have been recorded in 1997, 1996 and 1995,
respectively, on these nonaccrual loans if these loans had been on a current
basis in accordance with their original terms. Interest income actually recorded
on these nonaccrual loans amounted to $1,000, $38,000 and $162,000 in 1997, 1996
and 1995, respectively. Of those loans on nonaccrual at December 31, 1997,
$201,000 was considered impaired compared to $1.9 million at December 31, 1996.
At December 31, 1997 and 1996, there were $720,000 and $1.4 million,
respectively, of additional loans considered impaired and performing. The
Corporation would have recorded additional interest income of approximately
$18,000 and $17,000 had these loans performed under their original terms.
Interest income actually recorded on these loans amounted to $85,000 and
$110,000 as of December 31, 1997 and 1996, respectively.
During 1997 and 1996, the average recorded investment in impaired loans
was $1.9 million and $2.7 million, respectively.
During 1997, the Corporation did not capitalized mortgage-servicing
rights from loans sold due to the above-mentioned mortgage-servicing-rights
sale. During 1996, $344,000 was capitalized and included in other assets.
The balance of capitalized mortgage-servicing rights, net of a
valuation allowance, at December 31, 1996 was $682,000 and is included in other
assets. Due to the sale of mortgage servicing rights, capitalized mortgage
servicing rights were zero at December 31, 1997. Gains on sales of mortgage
loans of $181,000 and $318,000 were realized during the 1997 and 1996 periods,
respectively, from the sale of $24.4 and $30.2 million of residential mortgage
loans.
The Corporation's lending activities are conducted throughout eastern
Massachusetts with emphasis in Essex County, Massachusetts and contiguous
counties, including those in southern New Hampshire. From time to time loans
will be made outside of this area. The Bank makes single family, condominium and
multi-family residential loans, commercial real estate loans, commercial loans,
and a variety of consumer loans. Most loans made by the Bank are collateralized
by real
45
46
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(3) LOANS - (CONTINUED)
estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity and real estate values within the
borrower's geographic area. The ability and willingness of commercial real
estate and commercial borrowers to honor their repayment commitments is
generally dependent on the health of the real estate economic sector and the
general economy in the borrower's geographic area.
In the ordinary course of business, the Bank has made loans to
executive officers and directors of the Corporation and its subsidiaries and to
affiliates of the executive officers and directors at substantially the same
terms, including interest and collateral, as those prevailing at the time for
comparable transactions with unrelated borrowers. The aggregate amount of these
loans at December 31, 1997 was $6,081,000. Activity in these loans during the
year ended December 31, 1997 included loan additions of $2,670,000 and loan
repayments of $549,000. The balance of these loans at December 31, 1996 was
$3,960,000.
(4) BANKING PREMISES AND EQUIPMENT
Banking premises and equipment at December 31 are as follows:
1997 1996
---- ----
(IN THOUSANDS)
Land...................................................... $ 1,186 $ 1,186
Buildings................................................. 4,505 3,925
Equipment................................................. 3,863 3,698
Leasehold improvements.................................... 1,251 1,235
------- -------
10,805 10,044
Accumulated depreciation and amortization................. (6,020) (5,440)
------- -------
$ 4,785 $ 4,604
======= =======
Depreciation and amortization expense related to the Corporation's
premises and equipment were $592,000, $570,000, and $578,000 in 1997, 1996 and
1995, respectively.
At December 31, 1997, the Bank is obligated, under noncancelable operating
leases for premises, for minimum rentals in future periods as follows:
YEAR ENDED DECEMBER 31, MINIMUM RENTALS
- ----------------------- ---------------
(IN THOUSANDS)
1998.............................................. $130
1999.............................................. 120
2000.............................................. 90
2001.............................................. 89
2002.............................................. 89
Thereafter........................................ 327
----
$845
====
Rent expense for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $138,000, $111,000 and $111,000, respectively.
46
47
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(5) EARNINGS PER SHARE
In 1998, the Corporation adopted the provisions of SFAS No. 128,
"Earnings Per Share." Prior year 1996 and 1995 earnings-per-share data have been
restated to conform to SFAS No. 128. The components of basic and diluted EPS for
the years ended 1997, 1996 and 1995 are as follows:
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
---------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
---------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Basic EPS................ $7,285 $6,609 $5,382 3,785 3,671 3,585 $1.92 $1.80 $1.50
Effect of dilutive
stock options......... -- -- -- 202 245 252 0.09 0.11 0.10
------ ------ ------ ----- ----- ----- ----- ----- -----
Diluted EPS.............. $7,285 $6,609 $5,382 3,987 3,916 3,837 $1.83 $1.69 $1.40
====== ====== ====== ===== ===== ===== ===== ===== =====
Basic EPS is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. The effect of this
accounting change on previously reported EPS data is as follows:
1996 1995
----- -----
Per Share Amounts:
Primary EPS as previously reported................. $1.67 $1.39
Effect of SFAS No. 128............................. 0.13 0.11
----- -----
Basic EPS as restated.............................. $1.80 $1.50
===== =====
(6) DEPOSITS
Deposits at December 31 are summarized as follows:
1997 1996
-------- --------
(IN THOUSANDS)
Non-interest bearing ........................................ $ 16,269 $ 17,002
-------- --------
Savings deposits:
Regular savings and club accounts ....................... 100,377 106,092
NOW accounts ............................................ 33,787 31,943
Cash Manager and Passbook Plus accounts ................. 29,236 24,065
-------- --------
Total savings deposits .................................. 163,400 162,100
Time deposits ............................................... 145,624 137,264
-------- --------
Total deposits .......................................... $325,293 $316,366
======== ========
Contractual maturities of time deposits at December 31, 1997 follow:
(IN THOUSANDS)
Within one year............................................. $102,117
From one to two years....................................... 24,994
From two to five years...................................... 18,504
After five years............................................ 9
--------
$145,624
========
47
48
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(6) DEPOSITS - (CONTINUED)
The aggregate amount of individual time deposits with a minimum
denomination of $100,000 or more was $21,585,000 and $16,717,000 at December 31,
1997 and 1996, respectively. Interest expense related to such deposits was
approximately $1,010,000 in 1997 and $926,000 in 1996 and $1,036,000 in 1995.
(7) BORROWED FUNDS
Borrowed funds at December 31 are summarized as follows:
1997 1996
------------------ -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Securities sold under agreements
to repurchase maturing in January,
1998 and January, 1997, at December
31, 1997 and 1996, respectively................ $2,255 3.00% $2,212 3.00%
Advances from the Federal Home Loan
Bank, 3.07% to 6.00% at December 31,
1997 and 3.07% to 8.10% at December 31, 1996,
maturing through 2011.......................... 671 5.74 2,715 7.47
------ ------
Total borrowed funds....................... $2,926 3.63% $4,927 5.46%
====== ======
Mortgage-backed securities, with a total amortized cost of $6,751,000
and $2,487,000 were pledged as collateral to secure agreements to repurchase at
December 31, 1997 and 1996, respectively. The fair value of the collateral was
$7,021,000 and $2,427,000 at December 31, 1997 and 1996, respectively.
The following table sets forth information for securities sold under
agreement to repurchase for the years ended December 31, 1997, 1996 and 1995
(dollars in thousands):
1997 1996 1995
------ ------ ------
Highest month end balance ........... $3,652 $2,212 $1,774
Weighted average balance outstanding
during the year .................. 2,282 1,664 1,171
Average interest rate
during the year .................. 3.00% 3.00% 3.00%
48
49
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(7) BORROWED FUNDS - (CONTINUED)
A summary of Federal Home Loan Bank of Boston advances at December 31
by year of maturity follows (dollars in thousands):
1997 1996
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY IN: AMOUNT RATE AMOUNT RATE
------ -------- ------ --------
1997 $ -- --% $2,044 8.03%
2001 14 3.78 14 3.78
2003 19 3.07 19 3.07
2009 450 6.00 450 6.00
2011 188 5.54 188 5.54
---- ------
$671 5.74% $2,715 7.47%
==== ======
The following table sets forth information for Federal Home Loan Bank
advances for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
Highest month end balance.......................... $2,715 $5,822 $5,803
Weighted average balance outstanding
during the year................................ 989 3,208 5,627
Average interest rate during the year.............. 7.01% 7.95% 8.34%
49
50
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(8) INCOME TAXES
The components of income tax expense for the years ended December 31,
were as follows:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Current:
Federal .................................................................... $ 3,198 $ 1,693 $ 1,140
State ...................................................................... 660 666 203
------- ------- -------
3,858 2,359 1,343
------- ------- -------
Deferred:
Federal .................................................................... 133 (155) 1,143
State ...................................................................... (58) (260) 310
Increase (decrease) in beginning-of-the-year balance
of valuation allowance for deferred tax assets ......................... (285) 24 (836)
------- ------- -------
(210) (391) 617
------- ------- -------
$ 3,648 $ 1,968 $ 1,960
======= ======= =======
A reconciliation of income tax expense attributable to operations with
Federal income taxes at the statutory rate of 34% for the years ended December
31, 1997, 1996 and 1995 follows:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Computed "expected" tax expense at
statutory rate .............................................................. $ 3,716 $ 2,916 $ 2,496
Items affecting income tax expense:
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated to
income tax expense ....................................................... (285) 24 (836)
Dividends received deduction ............................................... (134) (139) (54)
State income taxes, net of Federal income
tax benefit, before change in valuation
allowance ................................................................. 384 268 339
Adjustment to beginning deferred tax asset ................................. -- 20 --
Other ...................................................................... (33) 164 15
Bad debts .................................................................. -- (885) --
Tax audit settlement ...................................................... -- (400) --
------- ------- -------
Income tax expense ..................................................... $ 3,648 $ 1,968 $ 1,960
======= ======= =======
50
51
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(8) INCOME TAXES - (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
1997 1996
------- -------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss and other carryforwards .......................... $ 13 $ 15
Capital loss carryforward ........................................... -- 63
Allowance for loan losses ........................................... 2,153 2,660
Valuation adjustments on real estate owned .......................... 152 66
Valuation adjustments on securities ................................. 372 632
Deferred loan fees .................................................. 81 61
Deferred directors' fees ............................................ 60 41
Cash versus accrual adjustments ..................................... 350 252
Depreciation of banking premises and equipment ...................... 143 142
Basis difference on REO ............................................. 213 198
------- -------
Total gross deferred tax assets .................................. 3,537 4,130
Less valuation allowance ...................................... (62) (347)
------- -------
Net deferred tax assets ...................................... 3,475 3,783
------- -------
Deferred tax liabilities:
Deferred loan sale premium .......................................... -- 308
Purchase accounting adjustments ..................................... 688 711
Gain on distribution of SBLI stock .................................. 550 550
Accounting for partnership interests ................................ 512 509
Unrealized gains on debt and equity securities
available for sale ............................................... 785 397
Prepaid retirement .................................................. -- 301
Other ............................................................... 198 27
------- -------
Total gross deferred tax liabilities ......................... 2,733 2,803
------- -------
Net deferred tax asset ....................................... $ 742 $ 980
======= =======
A valuation allowance is provided when it is more likely than not that
some portion of the gross deferred tax asset will not be realized. Management
has established a valuation allowance principally for the state tax effects of
the valuation adjustments on securities.
The Corporation has certain tax bad debt reserves which will not be
subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the tax bad debt reserves
continues to be subject to a provision of the current law that requires
recapture
51
52
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(8) INCOME TAXES - (CONTINUED)
in the case of certain excess distributions to shareholders. The tax effect of
the tax bad debt reserves subject to recapture in the case of certain excess
distributions is approximately $885,000.
(9) STOCKHOLDERS' EQUITY
CAPITAL ADEQUACY
The Corporation is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The Federal Reserve Board's ("FRB") leverage capital-to-assets
guidelines require the strongest and most highly rated bank holding companies to
maintain 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. The FDIC's leverage capital-to-assets ratio guidelines on the
Bank are substantively similar to those adopted by the FRB described above.
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 a 4.00% Tier I risk-based capital ratio and an
8.00% total risk-based capital ratio. At December 31, 1997, neither the FRB nor
the FDIC permitted the unrealized gain on marketable securities available for
sale to be used in their calculation of regulatory capital.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes would cause a change in the Bank's
categorization.
52
53
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(9) STOCKHOLDERS' EQUITY - (CONTINUED)
The Corporation's and the Bank's actual regulatory capital amounts (for
purposes of computing the ratios) and ratios at December 31, 1997 and 1996 are
presented in the following table (dollars in thousands):.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY ACTION PROVISIONS
-------------------- --------------------- ---------------------
REGULATORY CAPITAL REGULATORY CAPITAL REGULATORY CAPITAL
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- ------- ---------- -------
1997
- ----
WARREN BANCORP, INC.
Leverage capital $38,612 10.58% $14,600 4.0% N/A N/A
Tier I Risk-based capital 38,612 12.90% 11,977 4.0% N/A N/A
Total Risk-based capital 42,379 14.15% 23,955 8.0% N/A N/A
WARREN FIVE CENTS SAVINGS BANK
Leverage capital 33,655 9.22% 10,951 3.0% $18,250 5.0%
Tier I Risk-based capital 33,655 11.29% 11,926 4.0% 17,889 6.0%
Total Risk-based capital 37,386 12.54% 23,852 8.0% 29,816 10.0%
=================================================================================================================
1996
- ----
WARREN BANCORP, INC.
Leverage capital $33,707 9.48% $14,219 4.0% N/A N/A
Tier I Risk-based capital 33,707 13.47% 10,008 4.0% N/A N/A
Total Risk-based capital 36,852 14.72% 20,106 8.0% N/A N/A
WARREN FIVE CENTS SAVINGS BANK
Leverage capital 32,495 9.14% 14,219 4.0% $17,773 5.0%
Tier I Risk-based capital 32,495 13.02% 9,985 4.0% 14,977 6.0%
Total Risk-based capital 35,633 14.28% 19,969 8.0% 24,962 10.0%
53
54
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(9) STOCKHOLDERS' EQUITY - (CONTINUED)
PREFERRED STOCK PURCHASE RIGHTS
In April 1989, the Board of Directors declared a dividend distribution
of one Preferred Stock Purchase Right for each outstanding share of the
Corporation's common stock. These rights, which expire in 1999, entitle their
holders to purchase from the Corporation one one-hundredth of a share (a "unit")
of Series A Junior Participating Cumulative Preferred Stock, par value $0.10 per
share, ("preferred stock") at a cash exercise price of $35 per unit, subject to
adjustment. The rights will trade separately from the common stock and will
become exercisable when a person or group has acquired 20% or more of the
outstanding common stock, upon a tender offer that would result in a person or
group acquiring 20% or more of the outstanding common stock, or upon the
declaration by the Board of Directors that any person is an "adverse person"
holding 10% or more of the outstanding stock.
In the event a person or group acquires 20% or more of the outstanding
common stock or the Board of Directors declares a person an "adverse person",
each right would entitle its holder (except if the holder is a person or group
described above) to receive upon exercise sufficient units of preferred stock to
equal a value of two times the exercise price of the purchase right. In the
event the Corporation is acquired in a merger or other business combination
transaction or if 50% or more of the Corporation's assets or earning power is
sold, each holder may receive upon exercise common stock of the acquiring
company with a value equal to two times the exercise price of the right.
The rights are redeemable by the Board of Directors at a price of $.02
per right any time before a person or group acquires 20% or more of the
outstanding common stock or the Board of Directors declares a person is an
"adverse person".
RETAINED EARNINGS
At the time of the Bank's conversion from mutual to stock form of ownership
in 1986, the Bank established a liquidation account for the benefit of eligible
account holders who continue to maintain their accounts in the Bank after the
Conversion. Liquidation subaccounts totaling $12,340,000 were established for
each such eligible account holder equal to such holder's proportionate share of
total qualifying deposits on February 28, 1986. After the acquisition of Beverly
Savings Bank ("Beverly"), the Bank established a separate liquidation account
for the benefit of eligible account holders of Beverly who continue to maintain
their account after Beverly's conversion from mutual to stock form of ownership
and the subsequent Beverly acquisition, and subaccounts for each such holder
based on such holder's proportionate share of Beverly's total qualifying assets
on April 30, 1986. The balance in the two liquidation accounts at December 31,
1997, the latest measurement date, was $1,970,000 (unaudited). Both liquidation
accounts will be reduced to the extent that eligible account holders have
reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in his liquidation subaccount. In the event
of a complete liquidation of the Bank, and in only such event, each eligible
account holder will be entitled to receive a distribution from the liquidation
accounts equal to the current adjusted qualifying balance of his subaccount, to
the extent of the Bank's assets remaining after payment of all prior claims.
The Bank may not declare or pay a dividend to the holding company if
the effect thereof would reduce capital below regulatory minimums or otherwise
violate banking regulations.
54
55
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) EMPLOYEE BENEFITS
401(k) SAVINGS PLAN
The Bank provides a 401(k) Savings Plan for the benefit of its
employees. Under this defined-contribution plan, the Corporation contributes 3%
of each eligible employee's W-2 compensation to his or her 401(k) account. In
addition, the Corporation matches employee contributions, up to 8% of the
employee's compensation, at a rate of 25%. The Corporation may also make a
profit-sharing distribution to employees' 401(k) accounts. The plan is
administered by a third party. Contribution rates are subject to change.
The Corporation's contributions to the plan charged to operations were
as follows (in thousands):
1997 1996 1995
---- ---- ----
Employer contribution ..... $136 $136 $132
Employer match ............ 58 60 56
Profit sharing
distribution ........... -- 159 130
---- ---- ----
$194 $355 $318
==== ==== ====
One of the investment alternatives for the plan's participants is
Warren Bancorp, Inc. common stock. In that regard, the Corporation reserved
135,000 shares of authorized but unissued shares for issuance thereunder.
TERMINATION OF PENSION PLAN
As of October 1, 1997, the Bank terminated its defined-benefit,
non-contributory pension plan administered by the Savings Bank Employees
Retirement Association ("SBERA") . In conjunction with the 401(k) Savings Plan,
the Corporation restructured the pension plan and, effective September 30, 1993,
stopped providing new pension benefits for employee services after that date.
The funded status of the plan and the amounts recognized in the
Corporation's financial statements at December 31, 1996, was as follows (in
thousands):
Actuarial present value of benefit obligations:
Vested benefit obligations .......................... $ 2,746
Nonvested benefit obligations ....................... --
-------
Accumulated benefit obligations ..................... 2,746
Additional benefit related to future compensation ... --
-------
Projected benefit obligation ........................ 2,746
Plan assets at fair value, invested primarily in U.S.
Government obligations and equity securities ........ 5,587
-------
Plan assets in excess of projected benefit
obligation ........................................ 2,841
Unrecognized net gain .................................... (1,853)
Unrecognized net asset existing at December 31, 1986
and remaining at year end ......................... (124)
-------
Prepaid pension cost .......................... $ 864
=======
55
56
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) EMPLOYEE BENEFITS - (CONTINUED)
There was no prepaid or accrued pension cost at December 31, 1997.
Net pension expense for the plan years ended December 31 includes the
following:
1997* 1996 1995
----- ----- -----
(IN THOUSANDS)
Current period service costs ............................................. $-- $-- $--
Interest costs on projected benefit obligations .......................... 154 229 220
Return on plan assets .................................................... (366) (745) (843)
Net amortization and deferral ............................................ (77) 260 (411)
Provision for Federal excise tax ......................................... 43 38 32
----- ----- -----
Net periodic pension (income) ......................................... $(246) $(218) $(180)
===== ===== =====
* Through October 1, 1997, the date the plan was terminated.
56
57
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) EMPLOYEE BENEFITS - (CONTINUED)
The key assumptions used in the development of the actuarially
determined pension data for 1997 and 1996 were a discount rate of 7.50% and
7.00%, respectively and an expected long-term rate of return on plan assets of
8.75% for both years
To terminate the plan, SBERA made distributions to participants
computed using interest-rate and actuarial assumptions prescribed by the Pension
Benefit Guarantee Corporation. Net proceeds to the Corporation after
distributions to participants were $2,547,000. The Corporation set aside 25% of
these proceeds, or $637,000, into the 401(k) plan for the benefit of current
employees to be distributed into employees' individual 410(k) accounts on
January of 1998, 1999 and 2000 as a special profit-sharing distribution. The
Corporation also paid a federal excise tax of $382,000 in conjunction with the
termination of the plan.
The gain on termination of pension plan of $538,000 is computed as
follows (in thousands):
Total pension asset after distribution to participants.......................... $2,547
25% setaside for current employees.............................................. (637)
------
Net.................................................................... $1,910
20% federal excise tax.......................................................... (382)
------
Net.................................................................... $1,528
Prepaid pension cost at date of termination..................................... $1,153
Accrued federal excise tax liability at date of termination..................... (173)
------
Net prepaid pension asset.............................................. (980)
Costs associated with termination............................................... (10)
------
Net gain on termination of pension plan................................ $ 538
=======
SUPPLEMENTAL RETIREMENT ARRANGEMENT
Effective July 1, 1995, the Bank established a supplemental retirement
benefit arrangement for the former Chief Executive Officer. The expense to
maintain that arrangement amounted to $168,000 in 1997 and $164,000 in 1996.
Included in the accompanying balance sheet are accrued expenses of $234,000 and
$135,000 at December 31, 1997 and 1996, respectively. The arrangement is being
partially funded by a life insurance policy.
STOCK OPTION PLAN
The Corporation instituted three stock option plans, one each in 1986,
1991 and 1995 (the "Option Plans"), for the benefit of officers and directors
and reserved 300,000 shares of authorized but unissued common stock for each
plan of issuance thereunder. The terms of the Option Plans are similar and
provide for options to be granted at the fair market value of the common stock
on the date of grant. Options granted expire ten years after the date for grant.
As permitted under SFAS 123, the Corporation continues to apply APB
Opinion No. 25 and related interpretations in accounting for the Option Plans;
therefore, no compensation cost has been recognized.
57
58
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) EMPLOYEE BENEFITS - (CONTINUED)
Under SFAS No. 123, the Corporation's net income and earnings per share would
have been reduced to the pro-forma amounts indicated below;
1997 1996 1995
---- ---- ----
Net income:
As reported......... $7,285,000 $6,609,000 $5,382,000
Pro-forma........... $7,013,000 $6,450,000 $5,281,000
Basic earnings per share:
As reported......... $1.92 $1.80 $1.50
Pro-forma........... $1.85 $1.76 $1.47
Diluted earnings per share:
As reported......... $1.83 $1.69 $1.40
Pro-forma........... $1.76 $1.65 $1.38
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield
of 3.72%, 3.61% and 4.96%; expected volatility of 34%, 32% and 38%; risk-free
interest rates of 6.6%, 6.6% and 6.5%; and expected lives of six years for 1997,
1996 and 1995. The weighted average grant-date fair value per share of stock
options issued in 1997, 1996 and 1995 were $4.54, $2.86 and $1.81, respectively.
Changes in options outstanding during 1997, 1996 and 1995 were as
follows:
AVERAGE
EXERCISE
EXERCISE PRICE PRICE PER
SHARES RANGE PER SHARE SHARE
--------- ------------------- ---------
Outstanding, December 31, 1994................................ 556,600 $0.50 to $ 8.00 $4.61
(317,100 shares exercisable)
Granted during 1995........................................... 96,800 $8.1875 to $10.25 $8.30
Exercised during 1995......................................... (90,100) $1.00 to $6.625 $1.65
Canceled during 1995.......................................... (1,560) $3.625 to $6.625 $5.47
--------
Outstanding, December 31, 1995................................ 561,740 $0.50 to $10.25 $5.72
(347,893 shares exercisable)
Granted during 1996........................................... 95,550 $12.375 to $15.125 $12.52
Exercised during 1996......................................... (122,025) $ .50 to $8.188 $2.84
Canceled during 1996.......................................... (18,590) $3.625 to $12.375 $8.83
--------
Outstanding, December 31, 1996................................ 516,675 $1.00 to $15.125 $7.50
(330,285 shares exercisable)
Granted during 1997........................................... 102,500 $15.125 to $15.75 $15.73
Exercised during 1997......................................... (144,530) $1.00 to $12.375 $5.10
Canceled during 1997.......................................... (5,540) $8.00 to $15.75 $10.93
--------
Outstanding, December 31, 1997................................ 469,105 $1.00 to $15.75 $9.99
========
(282,175 shares exercisable)
58
59
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) EMPLOYEE BENEFITS - (CONTINUED)
The following table summarizes information about the options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
------ ------ ---- ----- ------ -----
$0 - $5 33,820 3.80 $3.08 33,820 $3.08
5 - 10 244,675 5.61 7.67 191,775 7.54
10 - 15 83,910 7.73 12.30 34,080 12.26
16 - 20 106,700 9.33 15.70 22,500 15.68
------- -------
Total 469,105 6.70 9.99 282,175 8.22
======= =======
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES
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. The contract or notional amounts
of these instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for loan
commitments, standby letters of credit and recourse arrangements is represented
by the contractual amount of these instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. For forward commitments to sell loans, the
contract or notional amounts do not represent exposure to credit loss. The
Corporation controls the credit risk on its forward commitments through credit
approvals, limits and monitoring procedures.
59
60
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES - (CONTINUED)
Financial instruments with off-balance sheet risk at December 31 are as
follows:
CONTRACT
AMOUNT
---------------------
(IN THOUSANDS)
1997 1996
---- ----
Financial Instruments Whose Contract Amounts Represent
Credit Risk:
Commitments to originate loans.............................................. $ 7,672 $ 4,278
Unused lines of credit...................................................... 26,450 25,209
Standby letters of credit................................................... 1,836 1,179
Unadvanced portions of construction loans................................... 16,974 13,307
Loans sold with recourse.................................................... 2,217 2,504
Financial Instruments Whose Contract Amounts
Exceed the Amount of Credit Risk:
Forward commitments to sell loans........................................... $3,795 $1,526
Commitments to originate loans, unused lines of credit, and unadvanced
portions of construction loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower. Collateral held varies but may include single family houses,
inventory, property, plant and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance by a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements, bond financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that in extending loan
facilities to customers.
Forward commitments to sell loans are contracts which the Corporation
enters into for the purpose of reducing the interest rate risk associated with
originating loans for sale. In order to fulfill a forward commitment, the
Corporation typically receives cash to be exchanged for the loans at a specified
price at a future date agreed to by both parties. Risk may arise from the
possible inability of the Corporation to deliver the loans specified on the
commitment. Unrealized gains and losses on contracts used to hedge the
Corporation's closed loans and pipeline of loans expected to close are
considered in determining the lower of cost or market value of loans held for
sale.
60
61
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES - (CONTINUED)
A portion of the Bank's loans were sold with recourse in the event of
default by the borrower. These transactions were recorded as a sale of assets
for financial reporting purposes.
As a nonmember of the Federal Reserve System, the Corporation is
required to maintain certain reserves of vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement included
in cash and due from banks was $1.2 million at December 31, 1997.
There are no legal claims against the Corporation arising in the normal
course of business at December 31, 1997.
(12) WARREN BANCORP, INC. (PARENT COMPANY ONLY)
The condensed information of Warren Bancorp, Inc. is as follows:
BALANCE SHEETS: AT DECEMBER 31,
---------------------
1997 1996
---- ----
(IN THOUSANDS)
ASSETS
Cash.............................................................. $ 5,013 $ 1,231
Investment in subsidiary.......................................... 35,071 33,233
Other assets...................................................... 101 115
--------- ---------
Total assets................................................. $ 40,185 $ 34,579
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses............................................... $ 157 $ 134
--------- ---------
Total liabilities.......................................... 157 134
Stockholders' equity.............................................. 40,028 34,445
--------- ---------
Total liabilities and stockholders' equity................. $ 40,185 $ 34,579
========= =========
61
62
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(12) WARREN BANCORP, INC. (PARENT COMPANY ONLY) - (CONTINUED)
STATEMENTS OF OPERATIONS: YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Income:
Dividend income from subsidiary ....................... $ 6,296 $ 3,850 $ 1,081
Interest .............................................. 13 -- --
Management fees ....................................... 81 89 106
------- ------- -------
Total operating income ......................... 6,390 3,939 1,187
Expenses:
Other expenses ....................................... (81) (89) (106)
Income tax expense ................................... (21) (13) --
Equity in undistributed net income of subsidiary ......... 997 2,772 4,301
------- ------- -------
Net income ............................................... $ 7,285 $ 6,609 $ 5,382
======= ======= =======
The parent-company-only statements of changes in stockholders' equity
are identical to the consolidated statement of changes in stockholders' equity
for the three year period ended December 31, 1997 and therefore are not
reprinted here.
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Net income ............................................ $ 7,285 $ 6,609 $ 5,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Bank
subsidiary ...................................... (997) (2,772) (4,301)
(Increase) decrease in other assets ................ 14 12 (122)
Increase (decrease) in liabilities ................. 4 (11) 147
------- ------- -------
Net cash provided by operating activities ....... 6,306 3,838 1,106
------- ------- -------
Cash flows from investing activities:
Capital contribution to subsidiary .................... -- -- (23)
------- ------- -------
Net cash (used in) investing activities ........ -- -- (23)
------- ------- -------
Cash flows from financing activities:
Dividends paid ........................................ (3,263) (1,948) (1,081)
Purchase of treasury stock ............................ -- (1,174) --
Proceeds from issuance of common stock ................ 739 346 162
------- ------- -------
Net cash (used in) financing activities ........ (2,524) (2,776) (919)
------- ------- -------
Increase in cash and cash equivalents .................... 3,782 1,062 164
Cash and cash equivalents at beginning of year ........... 1,231 169 5
------- ------- -------
Cash and cash equivalents at end of year ................. $ 5,013 $ 1,231 169
======= ======= =======
62
63
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED 1997
-----------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
-------- -------- ----- -----
(TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA)
Interest and dividend income......................... $7,317 $7,121 $7,180 $ 6,921
Interest expense..................................... 2,938 2,870 2,789 2,807
----- ----- -------- -------
Net interest income............................... 4,379 4,251 4,391 4,114
Provision for (recovery of) loan losses.............. 48 (126) (198) (40)
-------- -------- -------- -------
Net interest income after provision
for loan losses................................. 4,331 4,377 4,589 4,154
Non-interest income (1)............................. 385 760 228 1,966
Non-interest expense (2)............................ 2,463 2,272 2,374 2,748
-------- -------- -------- -------
Income before income taxes........................ 2,253 2,865 2,443 3,372
Income tax expense................................... 760 1,161 819 908
-------- -------- -------- -------
Net income ................................ $ 1,493 $ 1,704 $ 1,624 $ 2,464
======== ======== ======== =======
Basic earnings per share:............................ $ 0.39 $ 0.45 $ 0.43 $ 0.67
======== ======== ======== =======
Diluted earnings per share: ......................... $ 0.37 $ 0.43 $ 0.41 $ 0.63
======== ======== ======== =======
- -------------
(1) Non-interest income includes gains (loss) on sale mortgage servicing rights,
$1,462,000, $(55,000), $29,000 and none for the three months ended March 31,
1997, June 30, 1997, September 30, 1997 and December 31, 1997, respectively.
Gains on sales of investment securities, net, were $99,000, $21,000 and $20,000
for the three months ended March 31, 1997, September 30, 1997 and December 31,
1997, respectively. Gains from termination of pension plan were $457,000 and
$81,000 for the three months ended September 30, 1997 and December 31, 1997,
respectively.
(2) Non-interest expense includes real estate operations expense of $343,000,
$30,000, $17,000 and $19,000 for the three months ended March 31, 1997, June 30,
1997, September 30, 1997 and December 31, 1997, respectively.
63
64
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - (CONTINUED)
THREE MONTHS ENDED 1996
------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
-------- --------- ----- ------
(TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA)
Interest and dividend income......................... $6,939 $6,914 $6,956 $6,972
Interest expense..................................... 2,887 2,386 2,819 2,927
------ ------ ------ ------
Net interest income............................... 4,052 4,078 4,137 4,045
Provision for (recovery of) loan losses.............. 99 (141) 23 135
------ ------ ------ ------
Net interest income after provision
for loan losses................................. 3,953 4,219 4,114 3,910
Non-interest income (1)............................. 412 563 561 638
Non-interest expense................................. 2,711 2,382 2,298 2,402
------ ------ ------ ------
Income before income taxes........................ 1,654 2,400 2,377 2,146
Income tax expense (benefit) (2)..................... (297) 821 927 517
------ ------ ------ ------
Net income ................................ $1,951 $1,579 $1,450 $1,629
------ ------ ------ ------
Basic earnings per share:............................ $ 0.53 $ 0.43 $ 0.39 $ 0.44
====== ====== ====== ======
Diluted earnings per share: ......................... $ 0.50 $ 0.41 $ 0.37 $ 0.42
====== ====== $===== ======
- -------------
(1) Non-interest income includes gains on sale of mortgage loans and mortgage
servicing rights, net, of $50,000, $132,000, $76,000 and $60,000 for the three
months ended March 31, 1996, June 30, 1996, September 30, 1996 and December 31,
1996, respectively. Gains on sales of investment securities, net, were $201,000,
$40,000 and $9,000 for the three months ended March 31, 1996, June 30, 1996 and
December 31, 1996, respectively. There were no gains or losses on sales of
investment securities for the three months ended September 30, 1996.
(2) Includes income tax benefits of $400,000 and $760,000 for the three months
ended March 31, 1996 and December 31, 1996, respectively.
Basic and diluted earnings per share may not accumulate to annual
amounts due to changes in average common shares and common-equivalent shares
outstanding during the year and rounding.
64
65
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation estimates the fair value of its financial instruments
at a discrete point in time based on relevant market information and information
about the financial instruments. Because no active market exists for a portion
of those financial instruments, fair value estimates are based on judgment
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
CASH AND DUE FROM BANKS, ACCRUED INTEREST RECEIVABLE, ACCRUED INTEREST PAYABLE
AND OTHER BORROWED FUNDS
Cash and due from banks, accrued interest receivable, accrued interest
payable, and other borrowed funds are short-term in nature and are not subject
to material interest rate changes which would result in a material difference
between fair value and book value. In addition, an adjustment to fair value for
credit risk is not considered necessary because of the current financial status
of the various counterparties. The book value of these financial instruments is
representative of their fair value.
INVESTMENT SECURITIES
U.S. Treasury and Government Agency securities, mortgage-backed
securities, money market funds and overnight investments, fixed income mutual
funds and common and preferred stock are actively traded in a secondary market.
Published investment securities market values are used as fair value for most of
these securities. Refer to Note 2 for the fair value of these securities. Stock
in the Federal Home Loan Bank and the Depositors Insurance Fund Liquidity Fund
and advances to the Thrift Institution Fund for Economic Development are not
traded in a secondary market. Based upon the characteristics of these
securities, however, book value is a reasonable estimate of fair value. The fair
value of stock in SBLI is based upon its most recent appraisal.
LOANS
Fair value of loans is estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as residential
mortgage, commercial real estate, commercial, and consumer.
The fair value of fixed-rate residential mortgage loans is primarily
based upon secondary market rates for mortgage-backed securities consisting of
mortgages similar in nature to the loans included in the Bank's residential
mortgage loan portfolio. The fair value of all other types of loans is estimated
by discounting contractual cash flows using estimated market discount rates
which reflect the interest rate and credit risk inherent in the loans. The
discount rate used in the fair value estimation reflects rates that are
available to customers who meet the Bank's underwriting standards.
65
66
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
Management has made estimates of fair value of loans that it believes
are reasonable. However, because there is no market for many of the types of
loans, management has no basis to determine whether the fair value presented
would be indicative of the value negotiated in an actual sale.
DEPOSIT LIABILITIES AND ESCROW DEPOSITS OF BORROWERS
The fair value of deposits with no stated maturity such as savings
deposits, non-interest deposits and escrow deposits of borrowers is equal to the
book value of these accounts. The fair value of time deposits (including
retirement time deposits) is based upon the discounted value of contractual cash
flows. The discount rate has been estimated using the rates offered for deposits
of a similar remaining maturity as of December 31, 1997 and 1996. Early
withdrawal assumptions, based on the Bank's experience, do not materially affect
the estimation of fair value.
FEDERAL HOME LOAN BANK ADVANCES
The fair value of Federal Home Loan Bank advances is based upon the
discounted value of contractual cash flows. The discount rate is estimated using
the rates for advances of a similar remaining maturity as of December 31, 1997
and 1996.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the Corporation's commitments to extend credit is
estimated using fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties'
credit standing. The fair value of the Corporation's commitments to sell loans
is based on current market prices. At December 31, 1997 and 1996, management has
estimated the fair values of these financial instruments to be immaterial.
66
67
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows (in thousands):
1997 1996
---- ----
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
Financial assets:
Cash and due from banks........................... $ 7,191 $ 7,191 $ 5,855 $ 5,855
Money market funds and overnight
investments.................................... 6,288 6,288 6,733 6,733
Investment securities............................. 101,698 101,698 104,937 104,937
Loans held for sale............................... 1,031 1,041 3,003 3,003
Loans, net........................................ 236,697 239,508 218,313 222,100
Other investments................................. 6,294 6,534 6,678 6,918
Financial liabilities:
Non-time deposits................................. 179,669 179,669 179,102 179,102
Time deposits..................................... 145,624 145,900 137,264 137,500
FHLB borrowings................................... 671 652 2,715 2,715
Repurchase agreements............................. 2,255 2,255 2,212 2,212
67
68
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Included in Item 8.
(a)(2) Financial Statement Schedules. (none)
(a)(3) Exhibits
3.1 -- Articles of Organization of Warren Bancorp, Inc. (6)
3.2 -- By-laws of Warren Bancorp, Inc., (6)
4.1 -- Form of Stock Certificate of Warren Bancorp, Inc. (7)
10.1 -- Warren Bancorp, Inc. 1986 Incentive and Nonqualified Stock
Option Plan, as amended. (4)
10.2 -- Special Termination Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and Paul M. Peduto. (3)
10.3 -- Special Termination Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and Leo C. Donahue. (3)
10.4 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and Paul M. Peduto. (1)
10.5 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and Leo C. Donahue, Jr. (1)
10.6 -- Beverly Savings Bank 1986 Incentive and Nonqualified Stock
Option Plan, as amended. (2)
10.7 -- Beverly Savings Bank 1986 Nonemployees Nonqualified Stock
Option Plan, as amended (2)
10.8 -- Special Termination Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and John R. Putney. (3)
10.9 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and John R. Putney. (3)
10.10 -- Warren Bancorp, Inc. 1991 Incentive and Nonqualified Stock
Option Plan, as amended. (2)
10.11 -- Employment Agreement among Warren Bancorp, Inc., Warren
Five Cents Savings Bank and George W. Phillips. (7)
10.12 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and Mark J. Terry (8)
10.13 -- Special Termination Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and Mark J. Terry. (8)
10.14 -- Warren Bancorp, Inc. 1995 Incentive and Nonqualified Stock
Option Plan (5)
10.15 -- Executive Supplemental Retirement Agreement among Warren
Bancorp, Inc., Warren Five Cents Savings Bank and George W.
Phillips. (7)
10.16 -- Split-Dollar Agreement between Warren Five Cents Savings
Bank and George W. Phillips (7)
10.17 -- Employment Agreement between Warren Five Cents Savings Bank
and John R. Putney (8)
10.18 -- Consulting Agreement between Warren Bancorp, Inc. and
George W. Phillips (8)
21.1 -- List of Subsidiaries of Warren Bancorp, Inc. (8)
23.1 -- Consent of Independent Public Accountants. (8)
23.2 -- Consent of Independent Public Accountants. (8)
27.0 -- Financial Data Schedule - 1997
27.1 -- Financial Data Schedule - 1996 Restated
(b) Reports on Form 8-K. None.
- -----------------
(1) Previously filed as an exhibit to the Corporation's Registration Statement
on Form S-4 filed with the Securities and Exchange Commission on March 15,
1988 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Corporation's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on June 13,
1995 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K with the Securities and Exchange Commission on March 31, 1990 and
incorporated herein by reference.
(4) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1991
and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registration Statement on Form S-8
filed with the Securities and Exchange Commission on May 3, 1995 and
incorporated herein by reference.
(6) Previously filed as an exhibit to the Corporation's Current Report on Form
8-K filed with the Securities and Exchange Commission on May 9, 1995.
(7) Previously filed as an exhibit to the Corporation's Current Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1996.
(8) Filed herewith.
68
69
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
May 28, 1998 By: /s/ Paul M. Peduto
----------------------------------
Paul M. Peduto
Treasurer; Director
(Principal Financial Officer and
Principal Accounting Officer)
69
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly created this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Peabody, Commonwealth of Massachusetts, on March 18, 1998.
WARREN BANCORP, INC.
By: /s/ Stephen G. Kasnet
--------------------------------
STEPHEN G. KASNET
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ John R. Putney President and Chief Executive March 18, 1998
- ------------------------------- Officer; Director (Principal
JOHN R. PUTNEY Executive Officer)
/s/ Paul M. Peduto Treasurer; Director March 18, 1998
- ------------------------------- (Principal Financial Officer
PAUL M. PEDUTO and Principal Accounting Officer)
Director
- -------------------------------
PETER V. BENT
/s/ Stephen J. Connolly, IV Director March 18, 1998
- -------------------------------
STEPHEN J. CONNOLLY, IV
/s/ Francis L. Conway Director March 18, 1998
- -------------------------------
FRANCIS L. CONWAY
/s/ Paul J. Curtin Director March 18, 1998
- -------------------------------
PAUL J. CURTIN
/s/ Robert R. Fanning, Jr. Director March 18, 1998
- -------------------------------
ROBERT R. FANNING, JR.
Director
- -------------------------------
ARTHUR E. HOLDEN
/s/ Stephen R. Howe Director March 18, 1998
- -------------------------------
STEPHEN R. HOWE
/s/ John C. Jeffers Director March 18, 1998
- -------------------------------
JOHN C. JEFFERS
/s/ Stephen G. Kasnet Director March 18, 1998
- -------------------------------
STEPHEN G. KASNET
/s/ Linda Lerner Director March 18, 1998
- -------------------------------
LINDA LERNER
/s/ Arthur E. McCarthy Director March 18, 1998
- -------------------------------
ARTHUR E. MCCARTHY
Director
- -------------------------------
ARTHUR J. PAPPATHANASI
/s/ George W. Phillips Director March 18, 1998
- -------------------------------
GEORGE W. PHILLIPS
/s/ John D. Smidt Director March 18, 1998
- -------------------------------
JOHN D. SMIDT
Director
- -------------------------------
JOHN H. WOMACK
70
71
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders of Warren Bancorp, Inc. will be held at the
King's Grant Inn, Route 128, Danvers, Massachusetts, on Wednesday, May 6, 1998,
at 10:00 a.m. A formal notice of the meeting, together with a proxy statement
and proxy form, is being mailed to shareholders with this annual report.
FORM 10-K AND OTHER REPORTS
Additional copies of this Annual Report to Shareholders, which contains the
Corporation's annual report to the Securities and Exchange Commission on Form
10-K (without exhibits), a copy of the exhibits to the Annual Report on Form
10-K and copies of quarterly reports may be obtained without charge by writing:
Warren Bancorp, Inc., Shareholder Relations, 10 Main Street, Post Office Box
6159, Peabody, Massachusetts 01960.
SHAREHOLDER INFORMATION
INDEPENDENT PUBLIC
SHAREHOLDER RELATIONS TRANSFER AGENT & REGISTRAR ACCOUNTANTS
Paul M. Peduto, Treasurer Registrar and Transfer Company Arthur Andersen LLP
Warren Bancorp, Inc. 10 Commerce Drive 225 Franklin Street
10 Main Street Cranford, NJ 07016-3572 Boston, MA 02110-2812
Post Office Box 6159
Peabody, Massachusetts 01960
(978) 531-7400
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded over the counter and is quoted in the
NASDAQ National Market System under the symbol WRNB. The following table sets
forth the high and low closing prices for the common stock of the Corporation
during the two-year period ended December 31, 1997. All prices set forth below
are based upon information provided by NASDAQ.
COMMON STOCK
------------
HIGH LOW
---- ---
1997 4th Quarter.......................................... $24.13 $19.25
3rd Quarter.......................................... 19.68 17.25
2nd Quarter.......................................... 19.00 15.00
1st Quarter.......................................... 16.25 14.75
1996 4th Quarter.......................................... $16.38 $12.75
3rd Quarter.......................................... 13.25 11.88
2nd Quarter.......................................... 13.25 10.50
1st Quarter.......................................... 11.13 10.25
As of March 1, 1998, the Corporation had approximately 663 stockholders of
record who held 3,816,992 shares of common stock. The number of shareholders
indicated does not reflect the number of persons or entities who hold their
common stock in nominee names through various brokerage firms or other entities.
71
72
SHAREHOLDER INFORMATION - (CONTINUED)
Dividends were paid by the Corporation during 1997 and 1996 as follows:
PAYMENT DIVIDEND
DATE PER SHARE
---- ---------
1997 4th Quarter........................ November 10, 1997 $.13
3rd Quarter................................. August 11, 1997 .13
2nd Quarter*....................... May 12, 1997 .50
1st Quarter................................. February 4, 1997 .11
* Includes special dividend of $.37 per share.
1996 4th Quarter........................ November 13, 1996 $.11
3rd Quarter................................. August 13, 1996 .11
2nd Quarter**...................... May 14, 1996 .21
1st Quarter................................. February 21, 1996 .10
** Includes special dividend of $.10 per share.
72
73
CORPORATE INFORMATION
WARREN BANCORP, INC. AND WARREN FIVE CENTS SAVINGS BANK
AS OF MARCH 9, 1998
DIRECTORS PRINCIPAL OFFICERS
PETER V. BENT #** LINDA LERNER #+** WARREN BANCORP, INC.
Owner/Manager, Retired
Brown's Yacht Yard STEPHEN G. KASNET
ARTHUR E. MCCARTHY *- Chairman of the Board
STEPHEN J. CONNOLLY, IV -+ Vice President &
President, Managing Director, JOHN R. PUTNEY
Connolly Brothers, Inc. Tucker Anthony, Inc. President and
Construction Company Chief Executive Officer
ARTHUR J. PAPPATHANASI #**
FRANCIS L. CONWAY # President & PAUL M. PEDUTO
President & Treasurer, Chief Executive Officer, Treasurer
F.L. Conway & Sons, Inc. West Lynn Creamery, Inc. and
Richdale Dairy Stores, Inc. SUSAN G. OUELLETTE
PAUL J. CURTIN *+ Clerk
Certified Public Accountant PAUL M. PEDUTO
Treasurer, WARREN FIVE CENTS SAVINGS BANK
ROBERT R. FANNING, JR. *#-** Warren Bancorp, Inc., and
President & Executive Vice President, STEPHEN G. KASNET
Chief Executive Officer, Chief Financial Officer and Treasurer, Chairman of the Board
Northeast Health Warren Five Cents Savings Bank
Systems, Inc. and JOHN R. PUTNEY
Beverly Hospital Corporation GEORGE W. PHILLIPS ++** President and
Retired Chief Executive Officer
ARTHUR E. HOLDEN *-
President, JOHN R. PUTNEY PAUL M. PEDUTO
Holden Oil, Inc. President & Executive Vice President,
Chief Executive Officer, Chief Financial Officer and Treasurer
STEPHEN R. HOWE +#** Warren Bancorp, Inc. and
Certified Public Accountant Warren Five Cents Savings Bank LEO C. DONAHUE
Senior Vice President for
JOHN C. JEFFERS #+ JOHN D. SMIDT + Personal Banking
Vice President, President & Treasurer,
Jeffers Millwork John Smidt Co., Inc. MARK J. TERRY
Senior Vice President for
STEPHEN G. KASNET*-+ JOHN H. WOMACK + Corporate Banking and
President, President, Senior Lending Officer
Pioneer Real Estate Advisors, JJS Services, Inc.
Chairman of the Board, SUSAN G. OUELLETTE
Warren Bancorp, Inc. and Clerk
Warren Five Cents Savings Bank
* Executive Committee
# Finance, Audit and Compliance Committee
- - Nominating Committee
+ Loan Committee (Warren Five Cents Savings Bank)
++ Director of Warren Bancorp, Inc. only
** Strategic Planning Committee
73
74
WARREN FIVE CENTS SAVINGS BANK
VICE PRESIDENTS OTHER OFFICERS
JEFFREY O. BREWER WILLIAM H. ANDERSON
NANCY A. CAVANAUGH PATRICIA M. F. BATES
KERIN E. DEEDY CAROL M. BRUNTON
KENNETH R. DILLON NANCY B. CLAY
COLLEEN GOLDEN BARBARA J. DeDONATO
MARY C. HELMING PATRICIA R. DiGIOVANNI
BARBARA L. KELLY SHERRY M. O'CONNELL
SUZANNA R. LEVINE LINDA A. PALMER
WILLIAM F. LINDQUIST, III CHERYL L. PRESTON
MITCHELL MARCUS
ARTHUR T. McCARTHY
ASSISTANT VICE PRESIDENTS
PATRICIA A. ACQUAVIVA
MEGAN T. CARLTON
RUTH M. DAY
CYNTHIA J. GOLDSMITH
KAREN A. GRINDROD
CYNTHIA J. HICKEY
WILLIAM J. KELL
MARIA C. LIMA
ELEANOR M. MANNING
PAUL A. NUCCIO
JEROME J. SALERNO
SUSAN S. SHORTSLEEVE
JOAN C. WILLIAMS
74