<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 1-14671
WORONOCO BANCORP, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3444269
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
31 Court Street, Westfield, Massachusetts 01085
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(413) 568-9141
--------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the registrant has (1) 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 reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The issuer had 4,240,064 shares of common stock, par value $0.01 per share,
outstanding as of November 7, 2000.
<PAGE>
WORONOCO BANCORP, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at
September 30, 2000 and December 31, 1999.................... 1
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2000 and 1999........... 2
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2000 and 1999....... 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999............... 4
Notes to Unaudited Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 25
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 2. Changes in Securities and Use of Proceeds................... 26
Item 3. Defaults Upon Senior Securities............................. 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Item 5. Other Information........................................... 26
Item 6. Exhibits and Reports on Form 8-K............................ 26
SIGNATURES........................................................... 27
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
Unaudited
September 30, December 31,
Assets 2000 1999
------------------------- -------------------------
<S> <C> <C>
Cash and due from banks $15,162 $13,569
Interest-bearing balances 4,374 2,616
------------------------- -------------------------
Total cash and cash equivalents 19,536 16,185
Securities available for sale, at fair value 180,117 149,957
Federal Home Loan Bank stock, at cost 11,228 7,542
Loans, net of allowance for loan losses ($2,403 at
September 30, 2000 and $2,309 at December 31, 1999) 380,105 307,407
Other real estate owned, net 96 883
Banking premises and equipment, net 8,566 8,859
Accrued interest receivable 3,172 2,263
Net deferred tax asset 3,699 4,922
Cash surrender value of life insurance 2,197 2,075
Other assets 1,779 855
------------------------- -------------------------
Total assets $610,495 $500,948
========================= =========================
Liabilities and Stockholders' Equity
Deposits $306,257 $263,196
Federal Home Loan Bank advances 224,049 152,147
Repurchase agreements 58 170
Mortgagors' escrow accounts 1,574 883
Accrued expenses and other liabilities 6,926 3,657
------------------------- -------------------------
Total liabilities 538,864 420,053
------------------------- -------------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock ($.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding) - -
Common stock ($.01 par value; 16,000,000 shares authorized;
shares issued: 5,998,860 at September 30, 2000 and December 31,
1999; shares outstanding: 4,500,071 at September 30, 2000 and
5,822,360 at December 31, 1999) 60 60
Additional paid-in capital 57,902 57,874
Unearned compensation (5,957) (6,604)
Retained earnings 37,451 35,230
Accumulated other comprehensive loss - net unrealized
loss on securities available-for-sale, net of tax effects (1,936) (3,875)
Treasury stock, at cost (1,498,789 shares at September 30, 2000
and 176,500 shares at December 31, 1999) (15,889) (1,790)
------------------------- -------------------------
Total stockholders' equity 71,631 80,895
------------------------- -------------------------
Total liabilities and stockholders' equity $610,495 $500,948
========================= =========================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
1
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $7,074 $5,513 $19,566 $16,293
Interest and dividends on investment securities:
Interest 2,535 1,609 7,119 4,407
Dividends 801 519 2,311 1,138
Interest on federal funds sold 1 3 25 326
Other interest income 69 13 195 37
---------- ------------ --------- ----------
Total interest and dividend income 10,480 7,657 29,216 22,201
---------- ------------ --------- ----------
Interest expense:
Interest on deposits 2,902 2,259 7,410 6,988
Interest on borrowings 3,594 1,292 9,347 3,478
---------- ------------ --------- ----------
Total interest expense 6,496 3,551 16,757 10,466
---------- ------------ --------- ----------
Net interest income 3,984 4,106 12,459 11,735
Provision for loan losses 60 60 120 180
---------- ------------ --------- ----------
Net interest income, after provision for loan losses 3,924 4,046 12,339 11,555
---------- ------------ --------- ----------
Other income:
Fee income 559 451 1,585 1,371
Insurance commissions 111 - 350 -
Gain on sales and disposition of securities, net 323 384 962 1,187
Other income 49 103 163 198
---------- ------------ --------- ----------
Total other income 1,042 938 3,060 2,756
---------- ------------ --------- ----------
Other expenses:
Salaries and employee benefits 1,860 1,643 5,741 4,581
Occupancy and equipment 465 452 1,412 1,332
Marketing 262 215 644 624
Professional services 187 248 614 639
Data processing 207 196 601 562
Contributions - 1 10 4,447
Other general and administrative 586 569 1,841 1,533
---------- ------------ --------- ----------
Total other expenses 3,567 3,324 10,863 13,718
---------- ------------ --------- ----------
Income before income tax expense 1,399 1,660 4,536 593
Income tax expense 454 646 1,547 219
---------- ------------ --------- ----------
Net income $945 $1,014 $2,989 $374
========== ============ ========= ==========
Earnings per share:
Basic $0.22 $0.18 $0.64 NA
Diluted $0.22 $0.18 $0.63 NA
Weighted average shares outstanding:
Basic 4,272,132 5,529,059 4,705,379 NA
Diluted 4,361,379 5,529,059 4,740,483 NA
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2000 and 1999
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive Treasury
Stock Capital Compensation Earnings (Loss) Income Stock Total
------- ---------- ------------- --------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 60 $57,874 $ (6,604) $35,230 $ (3,875) $ (1,790) $80,895
----------
Comprehensive income:
Net income - - - 2,989 - - 2,989
Change in net unrealized loss on securities
available for sale, net of reclassification
adjustment and tax effects - - - - 1,939 - 1,939
----------
4,928
Total comprehensive income ----------
Decrease in unearned compensation - 28 647 - - - 675
Cash dividends declared - - - (768) - - (768)
Treasury stock purchased - - - - - (14,099) (14,099)
------ ---------- --------- -------- ---------- ----------- ----------
Balance at September 30, 2000 $ 60 $57,902 $ (5,957) $37,451 $ (1,936) $ (15,889) $71,631
====== ========== ========= ======== ========== =========== ==========
Balance at December 31, 1998 $ - $ - $ - $34,060 $ 1,713 $ - $35,773
----------
Comprehensive income (loss):
Net income - - - 374 - - 374
Change in net unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effects - - - - (3,766) - (3,766)
----------
Total comprehensive loss (3,392)
----------
Issuance of common stock in connection with
Bank's conversion from mutual to stock-
owned savings bank 60 57,870 (4,609) - - - 53,321
Cash dividends declared - - - (235) - - (235)
Decrease in unearned compensation - - 267 - - - 267
------ ---------- --------- -------- ---------- ----------- ----------
Balance at September 30, 1999 $ 60 $57,870 $ (4,342) $34,199 $ (2,053) $ - $85,734
====== ========== ========= ======== ========== =========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended September 30,
2000 1999
---------------------------- ----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,989 $374
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120 180
Charitable contribution in the form of equity securities - 4,444
Net (accretion) amortization of investments (40) 30
Depreciation and amortization 661 561
Employee stock ownership plan expense 319 267
Stock-based incentive plan expense 356 -
Deferred tax benefit - (1,511)
Gain on sales and disposition of securities, net (962) (1,187)
Gain on sale of other real estate owned (3) -
Amortization of goodwill 58 -
Changes in operating assets and liabilities:
Accrued interest receivable (909) (530)
Accrued expenses and other liabilities 1,813 (351)
Other, net (315) 237
---------------------------- ----------------------------
Net cash provided by operating activities 4,087 2,514
---------------------------- ----------------------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 7,850 8,312
Purchases of securities available for sale (43,194) (71,213)
Proceeds from maturities of securities available for sale - 684
Principal payments on mortgage-backed investments 9,359 10,618
Purchases of Federal Home Loan Bank stock (3,686) (949)
Loans originated/purchased, net of loan payments received (72,879) (13,899)
Purchases of banking premises and equipment (368) (1,231)
Proceeds from sales of foreclosed real estate 851 87
Payment to purchase Agan Insurance Agency, Inc. (800) -
Loan to fund employee stock ownership plan - (4,609)
---------------------------- ----------------------------
Net cash used in investing activities (102,867) (72,200)
---------------------------- ----------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 43,061 (3,237)
Net increase in Federal Home Loan Bank Advances 71,902 19,264
Net (decrease) increase in repurchase agreements (112) 10
Net increase in mortgagors' escrow accounts 691 781
Net proceeds from initial public offering - 53,486
Cash dividends paid (768) -
Treasury stock purchased (12,643) -
---------------------------- ----------------------------
Net cash provided by financing activities 102,131 70,304
---------------------------- ----------------------------
Net increase in cash and cash equivalents 3,351 618
Cash and cash equivalents at beginning of period 16,185 11,978
---------------------------- ----------------------------
Cash and cash equivalents at end of period $19,536 $12,596
============================ ============================
Supplemental cash flow information:
Interest paid on deposits $7,521 $6,987
Interest paid on borrowings 8,986 3,399
Income taxes paid 1,230 1,574
Transfer from loans to other real estate owned 61 58
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
(Dollars in thousands except per share amounts)
1. Consolidated Financial Statements
The Consolidated Financial Statements of Woronoco Bancorp, Inc. and its
subsidiaries (the "Company") included herein are unaudited, and in the opinion
of management all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of the financial condition, results of
operations and cash flows, as of and for the periods covered herein, have been
made. Certain information and note disclosures normally included in the
Consolidated Financial Statements have been omitted as they are included in the
most recent Securities and Exchange Commission ("SEC") Form 10-K and
accompanying Notes to the Consolidated Financial Statements (the "Form 10-K")
filed by the Company for the year ended December 31, 1999. Management believes
that the disclosures contained herein are adequate to make a fair presentation.
These unaudited consolidated financial statements should be read in conjunction
with the Form 10-K.
The results for the three and nine month interim periods covered hereby are not
necessarily indicative of the operating results for a full year.
2. New Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which as amended by SFAS 137 and
SFAS 138, is effective for all fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
embedded in other contracts, and requires that an entity recognize those items
as assets or liabilities in the balance sheet and measure them at fair value.
If certain conditions are met, an entity may elect to designate a derivative as
follows: (a) a hedge of the exposure to changes in the fair market value of a
recognized asset or liability, or of an unrecognized firm commitment that is
attributable to a particular risk, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of an unrecognized firm commitment, an available-for-sale security, a
foreign currency denominated forecasted transaction, or a net investment in a
foreign operation. The Statement generally provides for matching the timing of
the recognition of the gain or loss on derivatives designated as hedging
instruments with the recognition of the changes in the fair value of the item
being hedged. Depending on the type of hedge, such recognition will be in
either net income or other comprehensive income. For a derivative not
designated as a hedging instrument, changes in fair value will be recognized in
net income in the period of change. Management is currently evaluating the
impact of adopting this Statement on the consolidated financial statements, but
does not anticipate that it will have a material impact.
3. Earnings Per Share
Basic earnings per share represents net income divided by the weighted-average
number of common shares outstanding during the period. Diluted earnings per
share reflects additional common shares that would have been outstanding if
potential dilutive shares, such as stock options or restricted stock, had been
issued. However, options will have a dilutive effect only when the average
market price of the common stock exceeds the exercise price of the options.
Earnings per share data is not presented in these financial statements for the
nine months ended September 30, 1999 since shares of common stock were not
issued until March 19, 1999.
5
<PAGE>
The following table sets forth the calculation of basic and diluted earnings per
share for the periods indicated (dollars in thousands except share amounts and
per share amounts).
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
------------------ ----------------- ------------------ ------------
<S> <C> <C> <C> <C>
Net income $945 $1,014 $2,989 NA
Weighted average shares outstanding:
Weighted average shares outstanding 5,998,860 5,998,860 5,998,860 NA
Less: unearned ESOP shares (419,811) (469,801) (429,845) NA
Less: treasury shares (1,306,917) - (863,636) NA
------------------ ----------------- ------------------
Basic 4,272,132 5,529,059 4,705,379 NA
Effect of dilutive stock options 89,247 - 35,104 NA
------------------ ----------------- ------------------
Diluted 4,361,379 5,529,059 4,740,483 NA
================== ================= ==================
Net income per share:
Basic $0.22 $0.18 $0.64 NA
Diluted $0.22 $0.18 $0.63 NA
</TABLE>
4. Dividends
On October 26, 2000, the Company declared a cash dividend of $0.0625 per share
payable on November 23, 2000 to shareholders of record as of the close of
business on November 3, 2000.
5. Loan commitments
Outstanding loan commitments totaled $15.3 million at September 30, 2000
compared to $7.7 million at December 31, 1999. At September 30, 2000, the
Company had commitments to purchase loans totaling $20.0 million.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
The following analysis discusses changes in the financial condition and results
of operations at and for the three and nine months ended September 30, 2000 and
1999, and should be read in conjunction with the Company's Unaudited
Consolidated Financial Statements and the notes thereto, appearing in Part I,
Item 1 of this document.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such forward-
looking statements to be covered by the safe harbor provisions for forward-
looking statements contained in the Private Securities Litigation Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company include, but are not limited to: changes in interest
rates, general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality or composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company's market area and accounting
principles and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
The Company does not undertake - and specifically disclaims any obligation - to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
7
<PAGE>
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Total assets increased $109.5 million, or 21.9%, to $610.5 million at September
30, 2000, from $500.9 million at December 31, 1999, primarily reflecting
increases in securities available for sale and loans. Asset growth was funded
principally by increases in deposits and Federal Home Loan Bank advances. Stock
repurchases totaling $14.1 million, offset by net income of $3.0 million and a
reduction of $1.9 million in the net unrealized loss on securities available for
sale, net of taxes, contributed to a net decrease in stockholders' equity of
$9.3 million to $71.6 million at September 30, 2000 from $80.9 million at
December 31, 1999.
Investments
At September 30, 2000, the Company's securities portfolio totaled $180.1
million, or 29.5% of assets, all of which was categorized as available-for-sale.
The following table sets forth information regarding the amortized cost and
market values of the Company's investment securities.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------------------ -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ---------------- --------------- --------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Equity securities:
Preferred stock $ 4,441 $ 4,130 $ 4,358 $ 3,924
Common stock 13,894 13,800 14,270 13,683
Trust preferred 19,450 18,145 13,353 12,345
------------ ------------- --------------- ---------------
Total equity securities 37,785 36,075 31,981 29,952
------------ ------------- --------------- ---------------
Mortgage-backed and mortgage-related securities:
Freddie Mac 21,900 21,810 23,502 23,081
Fannie Mae 79,531 79,942 54,001 52,916
Ginnie Mae 37,498 35,710 39,912 37,049
REMICS 6,381 6,580 6,712 6,959
------------ ------------- --------------- ---------------
Total mortgage-backed securities 145,310 144,042 124,127 120,005
------------ ------------- --------------- ---------------
Total securities (1) $ 183,095 $ 180,117 $ 156,108 $ 149,957
============ ============= =============== ===============
</TABLE>
(1) Does not include $11.2 million and $7.5 million of FHLB-Boston stock held at
September 30, 2000 and December 31, 1999, respectively.
Securities available for sale increased $30.2 million, or 20.1%, primarily due
to purchases of $30.5 million of mortgage-backed securities, mainly from Fannie
Mae, and $6.1 million of trust preferred securities, as well as a decrease of
$3.2 million in the net unrealized loss on securities available for sale, offset
by principal payments on mortgage-backed securities totaling $9.4 million.
8
<PAGE>
Lending Activities
At September 30, 2000, the Company's gross loan portfolio was $386.1 million, or
63.2%, of total assets. The following table sets forth the composition of the
Company's loan portfolio in dollar amounts and as a percentage of the respective
portfolio.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
--------------------------------- ---------------------------------
Percent Percent
Amount of Total Amount of Total
--------------- --------------- --------------- ---------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Real estate loans
One- to four-family $216,548 56.07% $170,808 54.83%
Multi-family 32,532 8.43% 26,104 8.38%
Commercial 28,519 7.39% 23,796 7.64%
Construction and development 6,429 1.67% 2,873 0.92%
--------------- --------------- --------------- ---------------
Total real estate loans 284,028 73.56% 223,581 71.77%
--------------- --------------- --------------- ---------------
Consumer loans
Home equity loans 80,753 20.91% 69,821 22.41%
Automobile 12,480 3.23% 9,653 3.10%
Other 3,545 0.92% 3,551 1.14%
--------------- --------------- --------------- ---------------
Total consumer loans 96,778 25.06% 83,025 26.65%
--------------- --------------- --------------- ---------------
Commercial loans 5,318 1.38% 4,907 1.58%
--------------- --------------- --------------- ---------------
Total loans 386,124 100.00% 311,513 100.00%
=============== ===============
Less:
Unadvanced loan funds (1) (4,392) (2,350)
Deferred loan origination costs 776 553
Allowance for loan losses (2,403) (2,309)
--------------- ---------------
Net loans $ 380,105 $ 307,407
=============== ===============
</TABLE>
(1) Includes committed but unadvanced loan amounts.
Total gross loans rose $74.6 million, or 24.0%, during the nine months ended
September 30, 2000. Loan growth was strong across several categories, with
increases of 26.8% in one- to four-family residential real estate loans, 24.6%
in multi-family real estate loans, 19.8% in commercial real estate loans and
15.7% in home equity loans. The increase in one- to four-family residential
real estate loans was primarily due to loan purchases and originations,
partially offset by prepayments and amortization of the existing portfolio.
Solid loan origination volume, partially offset by prepayments and amortization
of the existing portfolio, was mainly responsible for the increases in multi-
family real estate, commercial real estate and home equity loans.
9
<PAGE>
Non-performing Assets
The following table sets forth information regarding nonaccrual loans, real
estate owned and restructured loans.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
(Dollars in Thousands)
<S> <C> <C>
Nonaccruing loans:
Real estate:
One- to four- family $ 120 $ 49
Commercial 235 12
Home equity loans 52 114
--------------- ---------------
Total 407 175
Other real estate owned, net (1) 96 879
Other repossessed assets - 4
--------------- ---------------
Total non-performing assets 503 1,058
Troubled debt restructurings - -
Troubled debt restructurings and
--------------- ---------------
total non-performing assets $ 503 $ 1,058
=============== ===============
Total non-performing loans and
troubled debt restructurings as a
percentage of total loans (2) (3) 0.11% 0.06%
Total non-performing assets and
troubled debt restructurings as a
percentage of total assets (3) 0.08% 0.21%
</TABLE>
(1) Other real estate owned balances are shown net of related allowances.
(2) Total loans includes loans, less unadvanced loan funds, plus net deferred
loan costs.
(3) Non-performing assets consist of nonperforming loans and other real estate
owned, net. Nonperforming loans consist of nonaccruing loans and all loans
90 days or more past due and other loans which have been identified by the
Company as presenting uncertainty with respect to the collectibility of
interest or principal.
The increase in commercial real estate nonaccruing loans from December 31, 1999
was attributable to one loan for $225,000 placed on nonaccrual status and which
is secured by a restaurant. The Company has initiated foreclosure proceedings
and does not expect to realize a material loss from liquidating the property.
The reduction in other real estate owned from December 31, 1999 primarily
reflects the sale of an office/retail building with a book value of $738,000 for
$737,000 in the first quarter of 2000.
10
<PAGE>
Allowance for Loan Losses
The following table sets forth activity in the allowance for loan losses for the
periods set forth in the table.
<TABLE>
<CAPTION>
At or for the Nine Months
Ended September 30,
-----------------------------------
2000 1999
-------------- --------------
(Dollars in Thousands)
<S> <C> <C>
Allowance for loan losses, beginning of period $2,309 $2,166
Charged-off loans:
Real estate - 7
Consumer 77 43
-------------- --------------
Total charged-off loans 77 50
-------------- --------------
Recoveries on loans previously charged-off:
Real estate 22 9
Consumer 29 25
-------------- --------------
Total recoveries 51 34
-------------- --------------
Net loans charged off 26 16
Provision for loan losses 120 180
-------------- --------------
Allowance for loan losses, end of period $2,403 $2,330
============== ==============
Net loans charged-off to average
interest-earning loans 0.01% 0.01%
Allowance for loan losses to total loans (1) 0.63% 0.78%
Allowance for loan losses to non-performing
loans and troubled debt restructurings (2) 590.42% 248.40%
Net loans charged-off to allowance for loan losses 1.44% 0.92%
Recoveries to charge-offs 66.23% 68.00%
</TABLE>
(1) Total loans includes loans, less unadvanced loan funds, plus deferred loan
costs (fees), net.
(2) Nonperforming loans consist of nonaccruing loans and all loans 90 days or
more past due and other loans which have been identified by the Company as
presenting uncertainty with respect to the collectibility of interest or
principal.
11
<PAGE>
Deposits
The following table sets forth the distribution of deposit accounts for the
periods indicated.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
--------------------------- ---------------------------
Percent Percent
of Total of Total
Balance Deposits Balance Deposits
------------- ------------ ------------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Demand deposits $14,650 4.78% $11,975 4.55%
Savings 65,660 21.44% 67,169 25.52%
Money market 27,312 8.92% 30,321 11.52%
NOW 45,711 14.93% 35,076 13.33%
Brokered deposits 30,000 9.80% - -
Certificates of deposit 122,924 40.13% 118,655 45.08%
------------- ------------ ------------- -----------
Total deposits $ 306,257 100.00% $ 263,196 100.00%
============= ============ ============= ===========
</TABLE>
Core deposits, excluding brokered deposits and certificates of deposit,
increased $8.8 million, or 6.1%, to $153.3 million at September 30, 2000 from
$144.5 million at December 31, 1999 primarily due to growth in total number of
deposit accounts, and to a lesser extent, the introduction of a new interest
checking product, the Premium Investment Account. The growth in number of
accounts was mainly attributable to promotional activities and ongoing
consolidation in the banking industry.
The Company issued $30.0 million of brokered certificates of deposit during the
nine months ended September 30, 2000. The Company from time to time utilizes
brokered deposits as an alternate source of funding and to reduce dependence on
FHLB Advances when such brokered deposits have a competitive interest rate.
These brokered deposits have maturities of five and ten years and are callable,
at the option of the Company, beginning after one year.
12
<PAGE>
Comparison of Operating Results for the Three Months Ended September 30, 2000
and 1999
General
The Company reported net income of $945,000 or $0.22 per diluted share for the
quarter ended September 30, 2000 compared to $1.0 million or $0.18 per diluted
share for the same period last year.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
The following table sets forth, for the periods indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. The average yields and costs are derived
by dividing income or expense by the average balance of interest-earning assets
or interest-bearing liabilities, respectively, for the periods shown. The
yields and costs are annualized. Average balances are derived from average
daily balances. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any
accrued interest from nonaccruing loans.
13
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
--------------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ ----------- ----------- ------------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Investments:
Mortgage-backed securities $ 144,178 $ 2,535 7.03% $ 96,407 $ 1,609 6.68%
Equity securities 36,931 608 6.59% 34,823 420 4.82%
FHLB stock 10,980 193 7.03% 5,742 99 6.90%
Loans: (2)
Residential real estate loans 236,079 4,397 7.45% 188,175 3,405 7.24%
Commercial real estate loans 31,380 674 8.59% 24,558 566 9.22%
Consumer loans 95,256 1,893 7.91% 76,051 1,426 7.44%
Commercial loans 5,186 110 8.30% 6,185 116 7.34%
------------ ----------- ------------- -----------
Loans, net 367,901 7,074 7.68% 294,969 5,513 7.46%
Other 5,783 70 4.74% 1,815 16 3.45%
------------ ----------- ------------- -----------
Total interest-earning assets 565,773 10,480 7.40% 433,756 7,657 7.05%
----------- -----------
Noninterest-earning assets 32,965 29,917
------------ -------------
Total assets $ 598,738 $ 463,673
============ =============
Interest-bearing liabilities:
Deposits:
Money market accounts $ 27,113 $ 209 3.07% $ 30,303 $ 237 3.10%
Savings accounts (3) 67,536 325 1.91% 69,775 342 1.94%
NOW accounts 43,019 146 1.35% 34,366 68 0.79%
Certificates of deposit (4) 156,065 2,222 5.66% 128,548 1,612 4.98%
------------ ----------- ------------- -----------
Total interest-bearing deposits 293,733 2,902 3.93% 262,992 2,259 3.41%
Borrowings 214,178 3,594 6.57% 98,455 1,292 5.13%
------------ ----------- ------------- -----------
Total interest-bearing liabilities 507,911 6,496 5.04% 361,447 3,551 3.88%
----------- ----------- ----------- -----------
Demand deposits 14,267 12,225
Other noninterest-bearing liabilities 4,003 3,123
------------ -------------
Total liabilities 526,181 376,795
Total stockholders' equity 72,557 86,878
------------ -------------
Total liabilities and stockholders' equity $ 598,738 $ 463,673
============ =============
Net interest-earning assets $ 57,862 $ 72,309
============ =============
Net interest income/interest
rate spread (5) $ 3,984 2.36% $ 4,106 3.17%
=========== =========== =========== ===========
Net interest margin as a percentage
of interest-earning assets (6) 2.82% 3.79%
=========== ===========
Ratio of interest earning assets
to interest-bearing liabilities 111.39% 120.01%
=========== ===========
</TABLE>
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan origination fees, unadvanced loan funds,
allowance for loan losses and includes nonaccrual loans. The Company records
interest income on nonaccruing loans on a cash basis.
(3) Savings accounts include mortgagors' escrow deposits.
(4) Certificates of deposit included brokered certificates of deposit.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
14
<PAGE>
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 compared to 1999
-----------------------------------------------------
Increase (Decrease)
Due to
----------------------------------
Volume Rate Net
--------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Mortgage-backed securities $ 836 $ 90 $ 926
Equity securities 26 162 188
FHLB stock 92 2 94
Loans:
Residential real estate loans 889 103 992
Commercial real estate loans 144 (36) 108
Consumer loans 374 93 467
Commercial loans (29) 23 (6)
--------------- -------------- --------------
Total loans 1,378 183 1,561
Other 46 8 54
--------------- -------------- --------------
Total interest-earning assets $ 2,378 $ 445 $ 2,823
--------------- -------------- --------------
Interest-bearing liabilities:
Deposits:
Money market accounts $ (25) $ (3) $ (28)
Savings accounts (1) (13) (4) (17)
NOW accounts 20 58 78
Certificates of deposit (2) 370 240 610
--------------- -------------- --------------
Total deposits 352 291 643
Borrowings 1,861 441 2,302
--------------- -------------- --------------
Total interest-bearing liabilities 2,213 732 2,945
--------------- -------------- --------------
Decrease in net interest income $ 165 $ (287) $ (122)
=============== ============== ==============
</TABLE>
(1) Includes interest on mortgagors' escrow deposits.
(2) Includes interest on brokered certificates of deposit.
15
<PAGE>
Net interest income totaled $4.0 million for the three months ended September
30, 2000 compared to $4.1 million for the same period in 1999, representing a
decrease of $122,000, or 3.0%. Net interest income was lower during the quarter
reflecting net interest margin compression, offset by an increase in average
interest-earning assets. Net interest margin declined 97 basis points to 2.82%
in the third quarter of 2000 from the same period in 1999 due to higher funding
costs associated with stock repurchases and the impact of rising interest rates.
Interest and dividend income increased $2.8 million, or 36.9%, to $10.5 million
for the three months ended September 30, 2000 reflecting growth in average
interest-earning assets and a higher yield on interest-earning assets. Average
interest-earning assets totaled $565.8 million for the third quarter of 2000
compared to $433.8 million for the same period last year, representing an
increase of $132.0 million, or 30.4%. Average investments increased $49.9
million, or 38.0%, resulting from the use of additional borrowings to fund the
purchases of mortgage-backed and trust preferred equity securities. Average
loans increased $72.9 million, or 24.7%, primarily due to originations of
residential real estate, commercial real estate and home equity loans and
purchases of residential real estate loans, partially offset by amortization and
prepayments of the existing loan portfolio. The yield on interest-earning
assets rose 35 basis points to 7.40% in the third quarter of 2000 mainly due to
the purchase of higher-yielding trust preferred securities, and to a lesser
extent, the impact of rising interest rates. The higher interest rate
environment led to improved yields on new assets as well as the repricing of
existing residential real estate, consumer and commercial loans.
Total interest expense increased $2.9 million, or 82.9%, to $6.5 million for the
three months ended September 30, 2000 resulting primarily from an increase in
average interest-bearing liabilities and the impact of rising interest rates.
The average balance of interest-bearing liabilities was $507.9 million for the
quarter ended September 30, 2000 as compared to $361.4 million for the same
period in 1999, reflecting an increase of $146.5 million, or 40.5%. The growth
in average interest-bearing liabilities largely reflects the issuance of $30.0
million of brokered certificates of deposit in 2000 as well as an increase of
$115.7 million in average borrowings to fund share repurchases and incremental
asset growth. Rates paid on interest-bearing liabilities rose 1.16% principally
as a result of the higher interest rate environment which led to increased
borrowing costs, the issuance of brokered certificates of deposit at a rate
higher than the weighted average rate of the existing certificates of deposit
portfolio and, to a lesser extent, the introduction of the Premium Investment
Account which has a higher rate than the traditional interest checking account.
Provision for Loan Losses
The Company's provision for loan losses was $60,000 for the third quarters of
2000 and 1999. Management of the Company assesses the adequacy of the allowance
for loan losses based on known and inherent risks in the loan portfolio and upon
management's continuing analysis of the factors underlying the quality of the
loan portfolio. While management believes that, based on information currently
available, the Company's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Company's level of allowance for loan losses will be sufficient to cover loan
losses inherent in the portfolio or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. Management may in
the future increase its level of allowance for loan losses as a percentage of
total loans and non-performing loans in the event it increases the level of
commercial real estate, multi-family, commercial, construction and development
or consumer lending as a percentage of its total loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to provide additions to the allowance based upon judgments
different from management.
16
<PAGE>
Other Income
Total other income increased $104,000, or 11.1%, to $1.0 million for the three
months ended September 30, 2000, as a result of growth in fee income and
insurance commissions, partially offset by lower gains on sales of securities.
Fee income increased $108,000, or 23.9%, for the three months ended September
30, 2000, mainly due to higher fees associated with solid growth in core deposit
accounts. The increase in insurance commissions was due to the purchase of Agan
Insurance Agency in January 2000.
Other Expenses
Other expenses increased $243,000, or 7.3%, to $3.6 million for the third
quarter of 2000 compared to $3.3 million for the 1999 period. Salaries and
benefits increased $217,000, or 13.2%, primarily due to higher expenses related
to the Company's employee stock ownership and stock-based incentive plans,
additional staff required to support the growth of the Company and costs
associated with Agan Insurance Agency. Marketing expenses grew $47,000, or
21.9%, due to increased promotional activities designed to gain new accounts and
to capitalize on continued consolidation in the local market. Professional
services expense decreased $61,000, or 24.6%, mainly as a result of costs
incurred in 1999 related to the Company's annual meeting and the Year 2000
Project.
Income Taxes
Total income tax expense decreased $192,000, or 29.7%, for the three months
ended September 30, 2000 compared to the same period in 1999 primarily
reflecting lower income before taxes and a lower effective tax rate.
17
<PAGE>
Comparison of Operating Results for the Nine Months Ended September 30, 2000 and
1999
General
The Company earned $3.0 million or $0.63 per diluted share for the nine months
ended September 30, 2000 compared to $374,000 in 1999. Excluding nonrecurring
severance expenses totaling $113,000 related to a management restructuring and
the associated tax benefit of $40,000, operating net income was $3.1 million or
$0.65 per diluted share during the nine months ended September 30, 2000.
Excluding a $4.4 million contribution to establish the Woronoco Savings
Charitable Foundation and the related tax benefit of $1.5 million, operating net
income was $3.3 million for the nine months ended September 30, 1999.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
The following table sets forth, for the periods indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. The average yields and costs are derived
by dividing income or expense by the average balance of interest-earning assets
or interest-bearing liabilities, respectively, for the periods shown. The
yields and costs are annualized. Average balances are derived from average
daily balances. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any
accrued interest from nonaccruing loans.
18
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
--------------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ ----------- ----------- ------------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Investments:
Mortgage-backed securities $ 134,838 $ 7,119 7.04% $ 88,541 $ 4,407 6.64%
Equity securities 36,390 1,849 6.77% 26,892 894 4.43%
FHLB stock 9,987 462 6.17% 5,727 244 5.68%
Loans: (2)
Residential real estate loans 218,595 12,042 7.35% 185,378 10,149 7.30%
Commercial real estate loans 28,552 1,857 8.67% 22,921 1,549 9.01%
Consumer loans 90,249 5,343 7.91% 76,272 4,228 7.41%
Commercial loans 5,223 324 8.15% 6,544 367 7.40%
------------ ----------- ------------- -----------
Loans, net 342,619 19,566 7.62% 291,115 16,293 7.47%
Other 6,262 220 4.62% 11,120 363 4.30%
------------ ----------- ------------- -----------
Total interest-earning assets 530,096 29,216 7.35% 423,395 22,201 6.99%
----------- -----------
Noninterest-earning assets 33,157 28,349
------------ -------------
Total assets $ 563,253 $ 451,744
============ =============
Interest-bearing liabilities:
Deposits:
Money market accounts $ 28,358 $ 654 3.08% $ 28,814 $ 662 3.07%
Savings accounts (3) 67,829 980 1.93% 79,879 1,022 1.71%
NOW accounts 40,103 318 1.06% 33,070 233 0.94%
Certificates of deposit (4) 137,480 5,458 5.30% 133,604 5,071 5.07%
------------ ----------- ------------- -----------
Total interest-bearing deposits 273,770 7,410 3.62% 275,367 6,988 3.39%
Borrowings 196,740 9,347 6.24% 90,339 3,478 5.08%
------------ ----------- ------------- -----------
Total interest-bearing liabilities 470,510 16,757 4.71% 365,706 10,466 3.81%
----------- ----------- ----------- -----------
Demand deposits 13,105 10,084
Other noninterest-bearing liabilities 3,884 3,138
------------ -------------
Total liabilities 487,499 378,928
Total stockholders' equity 75,754 72,816
------------ -------------
Total liabilities and stockholders' equity $ 563,253 $ 451,744
============ =============
Net interest-earning assets $ 59,586 $ 57,689
============ =============
Net interest income/interest
rate spread (5) $ 12,459 2.64% $ 11,735 3.18%
=========== =========== =========== ===========
Net interest margin as a percentage
of interest-earning assets (6) 3.13% 3.70%
=========== ===========
Ratio of interest earning assets
to interest-bearing liabilities 112.66% 115.77%
=========== ===========
</TABLE>
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan origination fees, unadvanced loan funds,
allowance for loan losses and includes nonaccrual loans. The Company records
interest income on nonaccruing loans on a cash basis.
(3) Savings accounts include mortgagors' escrow deposits.
(4) Certificates of deposit included brokered certificates of deposit.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
19
<PAGE>
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 compared to 1999
-----------------------------------------------------
Increase (Decrease)
Due to
----------------------------------
Volume Rate Net
--------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Mortgage-backed securities $ 2,429 $ 283 $ 2,712
Equity securities 383 572 955
FHLB stock 195 23 218
Loans:
Residential real estate loans 1,830 63 1,893
Commercial real estate loans 363 (55) 308
Consumer loans 816 299 1,115
Commercial loans (88) 45 (43)
--------------- -------------- --------------
Total loans 2,921 352 3,273
Other (171) 28 (143)
--------------- -------------- --------------
Total interest-earning assets $ 5,757 $ 1,258 $ 7,015
--------------- -------------- --------------
Interest-bearing liabilities:
Deposits:
Money market accounts $ (10) $ 2 $ (8)
Savings accounts (1) (164) 122 (42)
NOW accounts 54 31 85
Certificates of deposit (2) 152 235 387
--------------- -------------- --------------
Total deposits 32 390 422
Borrowings 4,912 957 5,869
--------------- -------------- --------------
Total interest-bearing liabilities 4,944 1,347 6,291
--------------- -------------- --------------
Increase in net interest income $ 813 $ (89) $ 724
=============== ============== ==============
</TABLE>
(1) Includes interest on mortgagors' escrow deposits.
(2) Includes interest on brokered certificates of deposit.
20
<PAGE>
Net interest income totaled $12.5 million for the nine months ended September
30, 2000 compared to $11.7 million for the same period in 1999, representing an
increase of $724,000, or 6.2%. The expansion in net interest income resulted
from growth in average interest-earning assets offset by net interest margin
compression. The net interest margin fell 57 basis points to 3.13% for the nine
months ended September 30, 2000 mainly due to increased funding costs associated
with stock repurchases and the impact of rising interest rates.
Interest and dividend income increased $7.0 million, or 31.6%, to $29.2 million
for the nine months ended September 30, 2000 largely reflecting growth in
average interest-earning assets and, to a lesser extent, a higher yield on
interest-earning assets. Average interest-earning assets totaled $530.1 million
for the nine months ended September 30, 2000 compared to $423.4 million for the
same period last year, representing an increase of $106.7 million, or 25.2%.
Average investments increased $55.8 million, or 48.3%, mainly due to the use of
additional borrowings to fund the purchases of mortgage-backed and trust
preferred equity securities. Average loans increased $51.5 million, or 17.7%,
primarily reflecting originations of residential real estate, commercial real
estate and home equity loans as well as purchases of residential real estate
loans, partially offset by amortization and prepayments of the existing loan
portfolio. The yield on interest-earning assets rose 36 basis points to 7.35%
for the nine months ended September 30, 2000 primarily due to the purchase of
higher-yielding trust preferred securities, and to a lesser extent, the impact
of rising interest rates. The higher interest rate environment led to improved
yields on new assets as well as the repricing of existing residential real
estate, consumer and commercial loans.
Total interest expense increased $6.3 million, or 60.1%, to $16.8 million for
the nine months ended September 30, 2000 resulting primarily from an increase in
average borrowings, higher rates paid on borrowings as a result of the rising
interest rate environment, and, to a lesser extent, the issuance of brokered
certificates of deposit in 2000. Average borrowings increased $106.4 million
resulting from management's decision to increase its utilization of borrowings
to fund incremental asset growth and share repurchases. The reduction in
average savings deposits is mainly due to approximately $18 million of average
balances held in temporary savings deposits associated with the Company's
initial public offering in 1999. The growth in average NOW accounts reflects
the introduction of a new product in 2000, the Premium Investment Account.
Provision for Loan Losses
The Company's provision for loan losses decreased by $60,000, or 33.3%, to
$120,000 for the nine months ended September 30, 2000 from $180,000 for the same
period in 1999. Management of the Company assesses the adequacy of the
allowance for loan losses based on known and inherent risks in the loan
portfolio and upon management's continuing analysis of the factors underlying
the quality of the loan portfolio. While management believes that, based on
information currently available, the Company's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the Company's level of allowance for loan losses
will be sufficient to cover loan losses inherent in the portfolio or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan
losses. Management may in the future increase its level of allowance for loan
losses as a percentage of total loans and non-performing loans in the event it
increases the level of commercial real estate, multi-family, commercial,
construction and development or consumer lending as a percentage of its total
loan portfolio. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to provide additions to the
allowance based upon judgments different from management.
21
<PAGE>
Other Income
Total other income increased $304,000, or 11.0%, to $3.1 million for the nine
months ended September 30, 2000, as a result of growth in fee income and
insurance commissions, partially offset by lower gains on sales of securities.
Fee income increased $214,000, or 15.6%, for the nine months ended September 30,
2000, mainly due to higher fees associated with solid growth in core deposit
accounts. The increase in insurance commissions was due to the purchase of Agan
Insurance Agency in January 2000.
Other Expenses
Other expenses totaled $10.9 million for the nine months ended September 30,
2000 compared to $13.7 million for the 1999 period. Excluding severance
expenses totaling $113,000 in 2000 and the $4.4 million contribution to
establish the Woronoco Savings Charitable Foundation in 1999, other expenses for
the nine months ended September 30, 2000 increased $1.5 million, or 15.9%.
Salaries and benefits, excluding the severance expenses, increased $1.0 million,
or 22.9%, primarily due to expenses associated with the Company's employee stock
ownership and stock-based incentive plans, additional staff required to support
the growth of the Company and expenses associated with Agan Insurance Agency.
Other general and administrative expenses rose $308,000, or 20.0%, principally
due to increased investor-related expenses, expenses associated with the
Company's larger deposit base, increased expenditures attributable to
significant growth in customers using Woronoco Online Link, our online banking
product, costs attributed to the purchase and initial operations of Agan
Insurance Agency, including goodwill amortization, telemarketing costs related
to home equity loan products and Delaware franchise taxes.
Income Taxes
Total income tax expense was $1.5 million for the nine months ended September
30, 2000 compared to $219,000 in 1999. Excluding the $1.5 million tax effect
related to the 1999 contribution to establish Woronoco Savings Charitable
Foundation, income tax expense for the nine months ended September 30, 2000
decreased $183,000, or 10.6%, primarily due to lower income before taxes and a
lower effective tax rate.
Liquidity
Liquidity and funding strategies are the responsibility of the Asset/Liability
Management Committee (the "ALCO"). The ALCO is responsible for establishing
liquidity targets and implementing strategies to meet desired goals. Liquidity
is measured by the Company's ability to raise cash within 30 days at a
reasonable cost and with a minimum of loss. The Company's primary sources of
funds are deposits, principal and interest payments on loans and investment
securities and borrowings from the FHLB-Boston. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The primary investing activities of the Company are the origination of
residential one-to four-family mortgage loans and consumer loans, primarily home
equity loans and lines of credit, and, to a lesser extent, multi-family and
commercial real estate loans, construction and development loans, commercial
business loans and other types of consumer loans, the purchase of adjustable
rate one-to four-family residential mortgage loans and the investment in
mortgage-backed and equity securities. These activities are funded primarily by
principal and interest payments on loans and investment securities, deposit
growth and the
22
<PAGE>
utilization of FHLB advances. During the nine months ended September 30, 2000,
the Company's loan originations and purchases totaled $77.4 million and $37.9
million, respectively. At September 30, 2000, the Company's investments in
mortgage-backed and equity securities totaled $180.1 million. During the nine
months ended September 30, 2000, total deposits increased $43.1 million,
including the issuance of $30.0 million of brokered certificates of deposit.
Deposit flows are affected by the overall level of interest rates, the interest
rates and products offered by the Company and its local competitors and other
factors. The Company closely monitors its liquidity position on a daily basis.
If the Company requires funds beyond its ability to generate them internally,
additional sources of funds are available through FHLB advances. At September
30, 2000, the Company had $224.0 million of FHLB borrowings.
Outstanding loan commitments totaled $15.3 million at September 30, 2000
compared to $7.7 million at December 31, 1999. At September 30, 2000, the
Company had commitments to purchase loans totaling $20.0 million. Management of
the Company anticipates that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit, which are scheduled to mature
in one year or less from September 30, 2000, totaled $114.1 million. The Company
relies primarily on competitive rates, customer service, and long-standing
relationships with customers to retain deposits. From time to time, the Company
will also offer competitive special products to its customers to increase
retention and to attract new deposits. Based upon the Company's experience with
deposit retention and current retention strategies, management believes that,
although it is not possible to predict future terms and conditions upon renewal,
a significant portion of such deposits will remain with the Company.
Regulatory Capital
The Company and the Bank are subject to various regulatory capital requirements
administered by the 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 Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. Prompt corrective action provisions are not applicable to
savings and loan holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined) to risk
weighted assets (as defined) and to average assets (as defined). As of
September 30, 2000, the Company and the Bank met all capital adequacy
requirements to which they were subject.
As of September 30, 2000 and December 31, 1999, the most recent notification
from the Federal Deposit Insurance Corporation 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 1 risk-based and Tier 1 leverage ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Company's and Bank's actual capital amounts and ratios as of September 30,
2000 and December 31, 1999 are also presented in the table.
23
<PAGE>
<TABLE>
<CAPTION>
Minimum
to be Well
Capitalized Under
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------ --------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ---------- ------------ ---------- ------------ ----------
As of September 30, 2000:
-------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets
Company $74,838 19.3% $30,956 8.0% N/A N/A
Bank $59,723 15.5% $30,834 8.0% $38,543 10.0%
Tier 1 Capital to Risk Weighted Assets
Company $72,435 18.7% $15,478 4.0% $23,217 6.0%
Bank $57,320 14.9% $15,417 4.0% $23,126 6.0%
Tier 1 Capital to Average Assets
Company $72,435 12.0% $24,092 4.0% $30,115 5.0%
Bank $57,320 9.5% $18,016 3.0% - $30,026 5.0%
$30,026 5.0%
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999:
------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets
Company $86,046 27.0% $25,520 8.0% N/A N/A
Bank $58,976 18.6% $25,399 8.0% $31,749 10.0%
Tier 1 Capital to Risk Weighted Assets
Company $83,737 26.2% $12,760 4.0% $19,140 6.0%
Bank $56,667 17.8% $12,700 4.0% $19,049 6.0%
Tier 1 Capital to Average Assets
Company $83,737 17.9% $18,728 4.0% $23,410 5.0%
Bank $56,667 12.1% $14,003 3.0% - $23,338 5.0%
$23,338 5.0%
</TABLE>
The reduction in the Company's capital amounts and ratios from December 31, 1999
primarily reflects stock repurchases and growth in assets during the nine months
ended September 30, 2000.
24
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Information regarding quantitative and qualitative disclosure about market risk
is presented in the Securities and Exchange Commission Form 10-K filed by the
Company for the year ended December 31, 1999. There have been no material
changes in the Company's market risk since December 31, 1999. During the nine
months ended September 30, 2000 the Company has entered into several interest
rate swap agreements with notional values totaling $40 million. The Company
utilizes interest rate swaps to manage the risk associated with interest rate
volatility. Under the terms of the swap agreements, the Company exchanges
payments based on the one month or three month LIBOR rate for payments based on
a fixed rate. The first swap, with a notional value of $10 million, has a
maturity of 13 months and is not callable. The other swaps, with notional
values of $5 million and $10 million each, have maturities of five and ten years
and are callable after one year.
The Company has also entered into four interest rate cap agreements since
December 31, 1999. The Company periodically enters into cap agreements to
moderate its exposure to interest rate changes and offset borrowing costs. The
notional values of the cap agreements amounted to $100 million, are for a period
of two years and mature in August 2002. Under terms of cap agreements totaling
$50 million, the Company paid premiums equaling $145,000 in exchange for future
cash payments if the three month LIBOR rate increases above 7.00%. Under terms
of cap agreements totaling $50 million, the Company paid premiums equaling
$203,750 in exchange for future cash payments if the three month LIBOR rate
increases above 7.25%.
25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the financial condition and results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
As set forth in a press release dated July 17, 2000, Woronoco Bancorp, Inc.
announced the appointment of a new director to the Company's Board of Directors.
Item 6. Exhibits and Reports on Form 8-K ((S)249.308 of this Chapter).
-------------------------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Woronoco Bancorp, Inc. (1)
3.2 Amended Bylaws of Woronoco Bancorp, Inc. (2)
4.0 Stock Certificate of Woronoco Bancorp, Inc. (1)
11.0 Statement Re: Computation of Per Share Earnings (Incorporated
Herein By Reference to Part 1 - Earnings Per Share)
27.0 Financial Data Schedule
_____________________________
(1) Incorporated by reference into this document from the Exhibits
filed with the Registration Statement on Form S-1, and any
amendments thereto, Registration No. 333-67255.
(2) Incorporated by reference into this document from the Exhibit
filed with the Company's Form 10-Q on May 15, 2000.
(b) Reports on Form 8-K
On July 17, 2000, Woronoco Bancorp, Inc. issued a press release which
announced the appointment of a new director to the Company's Board of
Directors. A press release announcing the appointment was filed by
exhibit.
On September 18, 2000, Woronoco Bancorp, Inc. issued a press release
which announced the completion of its third repurchase plan and its
intention to repurchase up to an additional 10% of its 4,616,071
outstanding shares of common stock. A press release announcing the
stock repurchase was filed by exhibit.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WORONOCO BANCORP, INC.
Dated: November 14, 2000 By: /s/ Cornelius D. Mahoney
---------------------------------------
Cornelius D. Mahoney
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Dated: November 14, 2000 By: /s/ Debra L. Murphy
-------------------------------------
Debra L. Murphy
Senior Vice President and
Chief Financial Officer
(principal financial and accounting officer)
27
