<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 June 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 (I.R.S. Employer
incorporation 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 4,733,018 shares of common stock, par value $0.01 per
share, outstanding as of August 4, 2000.
<PAGE>
WORONOCO BANCORP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION ----
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at
June 30, 2000 and December 31, 1999............................................................ 1
Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2000 and 1999.................................................. 2
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2000 and 1999............................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 ............................................................................. 27
Item 6. Exhibits and Reports on Form 8-K.............................................................. 27
SIGNATURES................................................................................................ 28
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
Unaudited
June 30, December 31,
Assets 2000 1999
------------------- ------------------
<S> <C> <C>
Cash and due from banks $10,942 $13,569
Interest-bearing balances 3,970 2,616
------------------- ------------------
Total cash and cash equivalents 14,912 16,185
Securities available for sale, at fair value 181,873 149,957
Federal Home Loan Bank stock, at cost 10,850 7,542
Loans, net of allowance for loan losses ($2,347 at
June 30, 2000 and $2,309 at December 31, 1999) 357,789 307,407
Other real estate owned, net 96 883
Banking premises and equipment, net 8,589 8,859
Accrued interest receivable 2,796 2,263
Net deferred tax asset 5,007 4,922
Cash surrender value of life insurance 2,157 2,075
Other assets 1,287 855
------------------- ------------------
Total assets $585,356 $500,948
=================== ==================
Liabilities and Stockholders' Equity
Deposits $311,548 $263,196
Federal Home Loan Bank advances 198,930 152,147
Repurchase agreements 53 170
Mortgagors' escrow accounts 783 883
Accrued expenses and other liabilities 2,009 3,657
------------------- ------------------
Total liabilities 513,323 420,053
------------------- ------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock ($.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 June 30, 2000 and December 31,
1999; shares outstanding: 4,812,018 at June 30, 2000 and
5,822,360 at December 31, 1999) 60 60
Additional paid-in capital 57,880 57,874
Unearned compensation (6,176) (6,604)
Retained earnings 36,765 35,230
Accumulated other comprehensive loss - net unrealized
loss on securities available-for-sale, net of tax effects (4,366) (3,875)
Treasury stock, at cost (1,186,842 shares at June 30, 2000
and 176,500 shares at December 31, 1999) (12,130) (1,790)
------------------- ------------------
Total stockholders' equity 72,033 80,895
------------------- ------------------
Total liabilities and stockholders' equity $585,356 $500,948
=================== ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Interest and dividend income:
<S> <C> <C> <C> <C>
Interest and fees on loans $6,531 $5,398 $12,492 $10,780
Interest and dividends on investment securities:
Interest 2,406 1,310 4,584 2,798
Dividends 780 335 1,510 619
Interest on federal funds sold 24 17 24 323
Other interest income 89 10 126 24
--------------- --------------- --------------- ---------------
Total interest and dividend income 9,830 7,070 18,736 14,544
--------------- --------------- --------------- ---------------
Interest expense:
Interest on deposits 2,437 2,343 4,508 4,729
Interest on borrowings 3,233 839 5,753 2,186
--------------- --------------- --------------- ---------------
Total interest expense 5,670 3,182 10,261 6,915
--------------- --------------- --------------- ---------------
Net interest income 4,160 3,888 8,475 7,629
Provision for loan losses 40 60 60 120
--------------- --------------- --------------- ---------------
Net interest income, after provision for loan losses 4,120 3,828 8,415 7,509
--------------- --------------- --------------- ---------------
Other income:
Fee income 542 478 1,026 920
Insurance commissions 122 - 239 -
Gain on sales and disposition of securities, net 321 355 639 803
Other income 77 66 114 95
--------------- --------------- --------------- ---------------
Total other income 1,062 899 2,018 1,818
--------------- --------------- --------------- ---------------
Other expenses:
Salaries and employee benefits 1,925 1,539 3,881 2,938
Occupancy and equipment 460 430 947 880
Marketing 236 206 382 409
Professional services 235 246 427 391
Data processing 191 190 394 366
Contributions 6 1 10 4,446
Other general and administrative 602 498 1,255 964
--------------- --------------- --------------- ---------------
Total other expenses 3,655 3,110 7,296 10,394
--------------- --------------- --------------- ---------------
Income (loss) before income tax expense (benefit) 1,527 1,617 3,137 (1,067)
Income tax expense (benefit) 528 609 1,093 (427)
--------------- --------------- --------------- ---------------
Net income (loss) $999 $1,008 $2,044 ($640)
=============== =============== =============== ===============
Earnings per share:
Basic $0.22 $0.18 $0.42 NA
Diluted $0.22 $0.18 $0.41 NA
Weighted average shares outstanding:
Basic 4,568,297 5,519,062 4,923,695 NA
Diluted 4,597,900 5,519,062 4,936,317 NA
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2000 and 1999
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Additio- Comprehe-
nal Unearned nsive
Common Paid-in Compen- Retained (Loss) Treasury
Stock Capital sation Earnings 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 - - - 2,044 - - 2,044
Change in net unrealized loss on securities
available for sale, net of reclassification
adjustment and tax effects - - - - (491) - (491)
---------
Total comprehensive income 1,553
---------
Decrease in unearned compensation - 6 428 - - - 434
Cash dividends declared - - - (509) - - (509)
Treasury stock purchased - - - - - (10,340) (10,340)
------- -------- ------- -------- --------- ---------- ---------
Balance at June 30, 2000 $ 60 $57,880 (6,176) $36,765 $ (4,366) $ (12,130) $72,033
======= ======== ======= ======== ========= ========== =========
Balance at December 31, 1998 $ - $ - $ - $34,060 $ 1,713 $ - $35,773
---------
Comprehensive income (loss):
Net loss - - - (640) - - (640)
Change in net unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effects - - - - (1,689) - (1,689)
---------
Total comprehensive loss (2,329)
---------
Issuance of common stock in connection with
Bank's conversion from mutual to stock-
owned savings bank 60 57,891 (4,609) - - - 53,342
Decrease in unearned compensation - - 136 - - - 136
------- -------- ------- -------- --------- ---------- ---------
Balance at June 30, 1999 $ 60 $57,891 (4,473) $33,420 $ 24 $ - $86,922
======= ======== ======= ======== ========= ========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Unaudited
Six Months Ended June 30,
2000 1999
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $2,044 ($640)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses 60 120
Charitable contribution in the form of equity securities - 4,444
Net (accretion) amortization of investments (35) 36
Depreciation and amortization 448 351
Employee stock ownership plan expense 202 136
Stock-based incentive plan expense 232 -
Deferred tax benefit - (1,511)
Gain on sales and disposition of securities, net (639) (803)
Gain on sale of other real estate owned (5) -
Amortization of goodwill 39 -
Changes in operating assets and liabilities:
Accrued interest receivable (533) (243)
Accrued expenses and other liabilities (1,648) (1,162)
Other, net 234 596
------------ ------------
Net cash provided by operating activities 399 1,324
------------ ------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 4,072 6,200
Purchases of securities available for sale (41,620) (18,252)
Proceeds from maturities of securities available for sale - 433
Principal payments on mortgage-backed investments 5,743 7,009
Purchases of Federal Home Loan Bank stock (3,308) (85)
Loans originated/purchased, net of loan payments received (50,503) (9,702)
Purchases of banking premises and equipment (178) (971)
Proceeds from sales of foreclosed real estate 853 81
Payment to purchase A.J. Agan Insurance Agency, Inc. (800) -
Loan to fund employee stock ownership plan - (4,609)
------------ ------------
Net cash used in investing activities (85,741) (19,896)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 48,352 2,339
Net increase (decrease) in Federal Home Loan Bank Advances 46,783 (36,163)
Net (decrease) increase in repurchase agreements (117) 54
Net (decrease) increase in mortgagors' escrow accounts (100) 12
Net proceeds from initial public offering - 53,507
Cash dividends paid (509) -
Treasury stock purchased (10,340) -
------------ ------------
Net cash provided by financing activities 84,069 19,749
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,273) 1,177
Cash and cash equivalents at beginning of period 16,185 11,978
------------ ------------
Cash and cash equivalents at end of period $14,912 $13,155
============ ============
Supplemental cash flow information:
Interest paid on deposits $4,559 $4,732
Interest paid on borrowings 5,641 2,279
Income taxes paid 1,040 1,094
Transfer from loans to other real estate owned 61 51
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
June 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 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 six month interim periods covered hereby are not
necessarily indicative of the operating results for a full year.
2. New Accounting Pronouncements
In June 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, 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
six months ended June 30, 1999 since shares of common stock were not issued
until March 19, 1999.
7
<PAGE>
The following table sets forth the calculation of basic and diluted earnings per
share for the periods indicated (dollars in thousands except per share amounts).
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $999 $1,008 $2,044 NA
Weighted average shares outstanding:
Weighted average shares outstanding 5,998,860 5,998,860 5,998,860 NA
Less: unearned ESOP shares (429,808) (479,798) (434,862) NA
Less: treasury shares (1,000,755) - (640,303) NA
------------- ------------- -------------
Basic 4,568,297 5,519,062 4,923,695 NA
Effect of dilutive stock options 29,603 - 12,622 NA
------------- ------------- -------------
Diluted 4,597,900 5,519,062 4,936,317 NA
============= ============= =============
Net income per share:
Basic $0.22 $0.18 $0.42 NA
Diluted $0.22 $0.18 $0.41 NA
</TABLE>
4. Dividends
On July 20, 2000, the Company declared a cash dividend of $0.06 per share
payable on August 24, 2000 to shareholders of record as of the close of business
on August 4, 2000.
5. Loan commitments
Outstanding commitments for all loans totaled $15.1 million at June 30, 2000
compared to $7.7 million at December 31, 1999.
8
<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 six months ended June 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. Examples of these assumptions may be found in the discussion of
Allowance for Loan Losses, Provision for Loan Losses, Liquidity and Regulatory
Capital.
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.
9
<PAGE>
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets increased $84.5 million, or 16.8%, to $585.4 million at June 30,
2000, from $500.9 million at December 31, 1999 primarily reflecting increases in
securities available for sale and loans. Asset growth was funded primarily by
increases in deposits and Federal Home Loan Bank advances. Stock repurchases
totaling $10.3 million, offset by net income of $2.0 million, contributed to a
net decrease in stockholders' equity of $8.9 million to $72.0 million at June
30, 2000 from $80.9 million at December 31, 1999.
Investments
At June 30, 2000, the Company's securities portfolio totaled $181.9 million, or
31.1% 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>
June 30, 2000 December 31, 1999
------------------------------------ ---------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------ ---------------- --------------- ---------------------
(Dollars In Thousands)
Equity securities:
<S> <C> <C> <C> <C>
Preferred stock $ 4,540 $ 4,110 $ 4,358 $ 3,924
Common stock 15,677 14,173 14,270 13,683
Trust preferred 19,444 17,865 13,353 12,345
------------------ ----------------- ---------------- --------------------
Total equity securities 39,661 36,148 31,981 29,952
------------------ ----------------- ---------------- --------------------
Mortgage-backed and mortgage-related securities:
Freddie Mac 22,544 22,141 23,502 23,081
Fannie Mae 81,599 80,913 54,001 52,916
Ginnie Mae 38,287 35,960 39,912 37,049
REMICS 6,496 6,711 6,712 6,959
------------------ ----------------- ---------------- --------------------
Total mortgage-backed securities 148,926 145,725 124,127 120,005
------------------ ----------------- ---------------- --------------------
Total securities (1) $ 188,587 $ 181,873 $ 156,108 $ 149,957
================== ================= ================ ====================
</TABLE>
1) Does not include $10.9 million and $7.5 million of FHLB-Boston stock held at
June 30, 2000 and December 31, 1999, respectively.
Securities available for sale increased $31.9 million, or 21.3%, primarily due
to purchases of $30.5 million of mortgage-backed securities, mainly from Fannie
Mae, and $6.1 million of trust preferred securities.
10
<PAGE>
Lending Activities
At June 30, 2000, the Company's gross loan portfolio was $364.1 million, or
62.2%, 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>
June 30, 2000 December 31, 1999
----------------------------------- ----------------------------------
Percent Percent
Amount of Total Amount of Total
---------------- ---------------- ---------------- ---------------
(Dollars In Thousands)
Real estate loans
<S> <C> <C> <C> <C>
One- to four-family $199,738 54.86% $170,808 54.83%
Multi-family 32,687 8.98% 26,104 8.38%
Commercial 27,611 7.58% 23,796 7.64%
Construction and development 4,973 1.37% 2,873 0.92%
---------------- ---------------- ---------------- ---------------
Total real estate loans 265,009 72.79% 223,581 71.77%
---------------- ---------------- ---------------- ---------------
Consumer loans
Home equity loans 78,849 21.66% 69,821 22.41%
Automobile 11,159 3.06% 9,653 3.10%
Other 3,635 1.00% 3,551 1.14%
---------------- ---------------- ---------------- ---------------
Total consumer loans 93,643 25.72% 83,025 26.65%
---------------- ---------------- ---------------- ---------------
Commercial loans 5,439 1.49% 4,907 1.58%
---------------- ---------------- ---------------- ---------------
Total loans 364,091 100.00% 311,513 100.00%
================ ===============
Less:
Unadvanced loan funds (1) (4,670) (2,350)
Deferred loan origination costs 715 553
Allowance for loan losses (2,347) (2,309)
---------------- ----------------
Net loans $ 357,789 $ 307,407
================ ================
</TABLE>
(1) Includes committed but unadvanced loan amounts.
Total gross loans rose $52.6 million, or 16.9%, during the six months ended
June 30, 2000. Loan growth was strong across several categories, with increases
of 16.9% in one- to four-family residential real estate loans, 25.2% in multi-
family real estate loans, 16.0% in commercial real estate loans and 12.9% in
home equity loans. The increase in one- to four-family residential real estate
loans is primarily due to loan purchases and, to a lesser extent, loan
originations, partially offset by prepayments and amortization of the existing
portfolio. Solid 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.
11
<PAGE>
Non-performing Assets
The following table sets forth information regarding nonaccrual loans, real
estate owned and restructured loans.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- ----------------
(Dollars in Thousands)
Nonaccruing loans:
Real estate:
<S> <C> <C>
One- to four- family $ 53 $ 49
Commercial 12 12
Home equity loans and lines of credit 67 114
---------------- ----------------
Total 132 175
Other real estate owned, net (1) 96 879
Other repossessed assets - 4
---------------- ----------------
Total non-performing assets 228 1,058
Troubled debt restructurings - -
Troubled debt restructurings and
---------------- ----------------
total non-performing assets $ 228 $ 1,058
================ ================
Total non-performing loans and
troubled debt restructurings as a
percentage of total loans (2) (3) 0.04% 0.06%
Total non-performing assets and
troubled debt restructurings as a
percentage of total assets (3) 0.04% 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 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.
12
<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 Six Months
Ended June 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 56 23
-------------- --------------
Total charged-off loans 56 30
-------------- --------------
Recoveries on loans previously charged-off:
Real estate 14 9
Consumer 20 16
-------------- --------------
Total recoveries 34 25
-------------- --------------
Net loans charged off 22 5
Provision for loan losses 60 120
-------------- --------------
Allowance for loan losses, end of period $2,347 $2,281
============== ==============
Net loans charged-off to average
interest-earning loans 0.01% -
Allowance for loan losses to total loans (1) 0.65% 0.77%
Allowance for loan losses to non-performing
loans and troubled debt restructurings (2) 1778.03% 247.40%
Net loans charged-off to allowance for loan losses 1.87% 0.44%
Recoveries to charge-offs 60.71% 83.33%
</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 ot the collectibility of interest or
principal.
13
<PAGE>
Deposits
The following table sets forth the distribution of deposit accounts for the
periods indicated.
<TABLE>
<CAPTION>
June 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 $14,008 4.50% $11,975 4.55%
Savings 66,755 21.43% 67,169 25.52%
Money market 26,752 8.59% 30,321 11.52%
NOW 45,811 14.70% 35,076 13.33%
Brokered deposits 30,000 9.63% - -
Certificates of deposit 128,222 41.15% 118,655 45.08%
-------------- ------------- -------------- -------------
Total deposits $ 311,548 100.00% $ 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 June 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 due to the active promotion of demand and NOW products as well as new
customers gained as a result of ongoing consolidation in the banking industry.
During the six months ended June 30, 2000, the introduction of the Premium
Investment Account resulted in approximately $2.5 million in new deposits.
The Company acquired $30.0 million of brokered certificates of deposit during
the six months ended June 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 funds 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.
14
<PAGE>
Comparison of Operating Results for the Three Months Ended June 30, 2000 and
1999
General
The Company reported net income of $1.0 million or $0.22 per diluted share for
the quarter ended June 30, 2000 compared to $1.0 million or $0.18 per diluted
share for the same period last year. Results for the second quarter of 2000
included nonrecurring severance expenses totaling $113,000 associated with a
restructuring of certain management positions completed in the second quarter of
2000. Excluding the severance expenses and the related tax benefit of $40,000,
operating income would have been $1.1 million or $0.23 per diluted share.
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.
15
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
------------------------------------------------------------------------
2000 1999
---------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ---------- --------- ----------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets: (1)
Investments:
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ 135,974 $ 2,406 7.08% $ 82,329 $ 1,310 6.36%
Equity securities 36,882 630 6.83% 23,695 245 4.14%
FHLB stock 10,337 150 5.80% 5,733 90 6.28%
Loans: (2)
Residential real estate loans 219,058 4,017 7.34% 186,766 3,382 7.24%
Commercial real estate loans 29,676 610 8.22% 23,494 531 9.04%
Consumer loans 90,534 1,795 7.97% 75,737 1,390 7.36%
Commercial loans 5,269 109 8.18% 5,154 95 7.29%
----------- ---------- ----------- ----------
Loans, net 344,537 6,531 7.59% 291,151 5,398 7.42%
Other 8,561 113 5.22% 3,109 27 3.44%
----------- ---------- ----------- ----------
Total interest-earning assets 536,291 9,830 7.34% 406,017 7,070 6.97%
---------- ----------
Noninterest-earning assets 33,801 27,089
----------- -----------
Total assets $ 570,092 $ 433,106
=========== ===========
Interest-bearing liabilities:
Deposits:
Money market accounts $ 27,811 $ 213 3.08% $ 28,487 $ 217 3.06%
Savings accounts (3) 68,496 339 1.99% 69,452 350 2.02%
NOW accounts 42,121 119 1.14% 33,711 88 1.05%
Certificates of deposit 136,696 1,766 5.20% 134,343 1,688 5.04%
----------- ---------- ----------- ----------
Total interest-bearing deposits 275,124 2,437 3.56% 265,993 2,343 3.53%
Borrowings 203,913 3,233 6.27% 68,115 839 4.87%
----------- ---------- ----------- ----------
Total interest-bearing liabilities 479,037 5,670 4.72% 334,108 3,182 3.81%
---------- --------- ---------- ----------
Demand deposits 12,784 8,278
Other noninterest-bearing liabilities 4,017 3,114
----------- -----------
Total liabilities 495,838 345,500
Total stockholders' equity 74,254 87,606
----------- -----------
Total liabilities and stockholders' equity $ 570,092 $ 433,106
=========== ===========
Net interest-earning assets $ 57,254 $ 71,909
=========== ===========
Net interest income/interest
rate spread (4) $ 4,160 2.62% $ 3,888 3.16%
========== ========= ========== ==========
Net interest margin as a percentage
of interest-earning assets (5) 3.10% 3.83%
========= ==========
Ratio of interest earning assets
to interest-bearing liabilities 111.95% 121.52%
========= ==========
</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) 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.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
16
<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 June 30,
2000 compared to 1999
-----------------------------------------------------
Increase (Decrease)
Due to
-----------------------------------------------------
Volume Rate Net
--------------- --------------- --------------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C>
Mortgage-backed securities $ 935 $ 161 $ 1,096
Equity securities 177 208 385
FHLB stock 66 (6) 60
Loans:
Residential real estate loans 592 43 635
Commercial real estate loans 120 (41) 79
Consumer loans 284 121 405
Commercial loans 2 12 14
--------------- --------------- --------------
Total loans 998 135 1,133
Other 66 20 86
--------------- --------------- --------------
Total interest-earning assets $ 2,242 $ 518 $ 2,760
--------------- --------------- --------------
Interest-bearing liabilities:
Deposits:
Money market accounts $ (7) $ 3 $ (4)
Savings accounts (1) (6) (5) (11)
NOW accounts 24 7 31
Certificates of deposit 28 50 78
--------------- --------------- --------------
Total deposits 39 55 94
Borrowings 2,093 301 2,394
--------------- --------------- --------------
Total interest-bearing liabilities 2,132 356 2,488
--------------- --------------- --------------
Increase in net interest income $ 110 $ 162 $ 272
=============== =============== ==============
</TABLE>
(1) Includes interest on mortgagors' escrow deposits.
17
<PAGE>
Net interest income totaled $4.2 million for the three months ended June 30,
2000 compared to $3.9 million for the same period in 1999. This increase in net
interest income of $272,000, or 7.0%, resulted from a significant increase in
average interest-earning assets offset by a lower net interest margin. Net
interest margin declined 73 basis points to 3.10% in the second quarter of 2000
from the same period in 1999 due to increased funding costs related to stock
repurchases, increased rates on FHLB advances and narrower spreads.
Interest and dividend income increased $2.8 million, or 39.0%, to $9.8 million
for the three months ended June 30, 2000 reflecting growth in average
interest-earning assets and a higher yield on interest-earning assets. Average
interest-earning assets totaled $536.3 million for the second quarter of 2000
compared to $406.0 million for the same period last year, an increase of $130.3
million, or 32.1%. Average investments increased $66.8 million, or 63.0%,
resulting from the use of additional borrowings to fund the purchases of
mortgage-backed and trust preferred equity securities. Average loans increased
$53.4 million, or 18.3%, primarily due to 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 37
basis points to 7.34% in the second quarter of 2000 mainly due to the purchase
of higher-yielding trust preferred securities, and to a lesser extent, the
higher interest rate environment which 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 $2.5 million, or 78.2%, to $5.7 million for the
three months ended June 30, 2000 resulting primarily from an increase in average
borrowings and higher rates paid on borrowings due to the higher interest rate
environment. Average borrowings grew $135.8 million reflecting management's
decision to increase its utilization of borrowings to fund asset growth and
share repurchases.
Provision for Loan Losses
The Company's provision for loan losses decreased by $20,000, or 33.3%, to
$40,000 for the second quarter of 2000 from $60,000 for the same period in 1999.
Management determined that a decrease in the provision was warranted based upon
the reserve coverage ratios, a decrease in total nonperforming loans and
troubled debt restructurings and an analysis of the adequacy of the balance in
the allowance for loan losses. At June 30, 1999, the Company's allowance for
loan losses was $2.3 million, or 0.77% of total loans, and 247.40% of
nonperforming loans and troubled debt restructurings as compared to $2.3
million, or 0.65% of total loans, and 1778.03% of nonperforming loans and
troubled debt restructurings as of June 30, 2000. Total nonperforming loans and
troubled debt restructurings decreased $790,000, or 86%, from $922,000 at June
30, 1999 compared to $132,000 at June 30, 2000.
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.
18
<PAGE>
Other Income
Total other income increased $163,000, or 18.1%, to $1.1 million for the quarter
ended June 30, 2000 from $899,000 in the 1999 period as a result of growth in
fee income and insurance commissions, partially offset by lower gain on sales of
securities. Fee income increased $64,000, or 13.4%, for the three months ended
June 30, 2000 reflecting solid growth in core deposits. During the period from
June 30, 1999 through June 30, 2000, the Company experienced a 12% increase in
net new transaction accounts. The increase in insurance commissions was due to
the purchase of Agan Insurance Agency in January 2000.
Other Expenses
Other expenses totaled $3.7 million for the second quarter of 2000 compared to
$3.1 million for the 1999 period. Excluding the one-time severance expenses
totaling $113,000, other expenses for the three months ended June 30, 2000
increased $432,000, or 13.9%. Salaries and benefits, excluding severance
expenses, increased $273,000, or 17.7%, primarily due to 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 to staff Agan
Insurance Agency. Other general and administrative expenses grew $104,000, or
20.9%, principally due to expenses associated with the Company's larger deposit
base, costs attributable to the purchase and initial operations of Agan
Insurance Agency, including goodwill amortization, increased expenditures as a
result of significant growth in customers using Woronoco Online Link, our online
banking product, and telemarketing costs related to home equity loan products.
Income Taxes
Total income tax expense decreased $81,000, or 13.3%, for the three months ended
June 30, 2000 compared to the same period in 1999 primarily reflecting lower
income before taxes and a lower effective tax rate.
19
<PAGE>
Comparison of Operating Results for the Six Months Ended June 30, 2000 and 1999
General
The Company reported net income of $2.0 million or $0.41 per diluted share for
the six months ended June 30, 2000 compared to a net loss of $640,000 in 1999.
Excluding the nonrecurring severance expenses totaling $113,000 and the related
tax benefit of $40,000, operating net income was $2.1 million or $0.43 per
diluted share during the six months ended June 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 $2.3 million
for the six months ended June 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.
20
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-----------------------------------------------------------------------
2000 1999
--------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ---------- --------- ---------- --------- ----------
(Dollars in Thousands)
Interest-earning assets: (1)
Investments:
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ 130,117 $ 4,584 7.05% $ 84,543 $ 2,798 6.62%
Equity securities 36,117 1,241 6.87% 22,860 474 4.15%
FHLB stock 9,485 269 5.67% 5,719 145 5.07%
Loans: (2)
Residential real estate loans 208,884 7,645 7.32% 183,946 6,744 7.33%
Commercial real estate loans 27,996 1,183 8.45% 23,776 1,045 8.79%
Consumer loans 87,717 3,450 7.91% 76,383 2,802 7.40%
Commercial loans 5,241 214 8.08% 5,051 189 7.44%
---------- ---------- ---------- ---------
Loans, net 329,838 12,492 7.58% 289,156 10,780 7.47%
Other 6,502 150 4.56% 15,851 347 4.35%
---------- ---------- ---------- ---------
Total interest-earning assets 512,059 18,736 7.32% 418,129 14,544 6.97%
---------- ---------
Noninterest-earning assets 33,215 27,538
---------- ----------
Total assets $ 545,274 $ 445,667
========== ==========
Interest-bearing liabilities:
Deposits:
Money market accounts $ 28,987 $ 445 3.09% $ 28,058 $ 425 3.05%
Savings accounts (3) 67,977 655 1.94% 85,014 680 1.61%
NOW accounts 38,629 172 0.90% 32,412 165 1.03%
Certificates of deposit 128,289 3,236 5.07% 136,175 3,459 5.12%
---------- ---------- ---------- ---------
Total interest-bearing deposits 263,882 4,508 3.44% 281,659 4,729 3.39%
Borrowings 187,925 5,753 6.06% 86,213 2,186 5.04%
---------- ---------- ---------- ---------
Total interest-bearing liabilities 451,807 10,261 4.53% 367,872 6,915 3.77%
---------- --------- --------- ----------
Demand deposits 12,358 9,058
Other noninterest-bearing liabilities 3,862 3,068
---------- ----------
Total liabilities 468,027 379,998
Total stockholders' equity 77,247 65,669
---------- ----------
Total liabilities and stockholders' equity $ 545,274 $ 445,667
========== ==========
Net interest-earning assets $ 60,252 $ 50,257
========== ==========
Net interest income/interest
rate spread (4) $ 8,475 2.79% $ 7,629 3.20%
========== ========= ========= ==========
Net interest margin as a percentage
of interest-earning assets (5) 3.31% 3.65%
========= ==========
Ratio of interest earning assets
to interest-bearing liabilities 113.34% 113.66%
========= ==========
</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) 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.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
21
<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>
Six Months Ended June 30,
2000 compared to 1999
-----------------------------------------------------
Increase (Decrease)
Due to
-----------------------------------------------------
Volume Rate Net
--------------- --------------- --------------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C>
Mortgage-backed securities $ 1,596 $ 190 $ 1,786
Equity securities 360 407 767
FHLB stock 105 19 124
Loans:
Residential real estate loans 913 (12) 901
Commercial real estate loans 176 (38) 138
Consumer loans 442 206 648
Commercial loans 8 17 25
--------------- --------------- --------------
Total loans 1,539 173 1,712
Other (215) 18 (197)
--------------- --------------- --------------
Total interest-earning assets $ 3,385 $ 807 $ 4,192
--------------- --------------- --------------
Interest-bearing liabilities:
Deposits:
Money market accounts $ 15 $ 5 $ 20
Savings accounts (1) (150) 125 (25)
NOW accounts 20 (13) 7
Certificates of deposit (191) (32) (223)
--------------- --------------- --------------
Total deposits (306) 85 (221)
Borrowings 3,049 518 3,567
--------------- --------------- --------------
Total interest-bearing liabilities 2,743 603 3,346
--------------- --------------- --------------
Increase in net interest income $ 642 $ 204 $ 846
=============== =============== ==============
</TABLE>
(1) Includes interest on mortgagors' escrow deposits.
22
<PAGE>
Net interest income totaled $8.5 million for the six months ended June 30, 2000
compared to $7.6 million for the same period in 1999. The increase of $846,000,
or 11.1%, in net interest income was primarily due to an increase in average
interest-earning assets, partially offset by a lower net interest margin. The
net interest margin fell 34 basis points to 3.31% for the six months ended June
30, 2000 mainly resulting from increased funding costs related to stock
repurchases, increased rates on FHLB advances and narrower spreads.
Interest and dividend income increased $4.2 million, or 28.8%, to $18.7 million
for the six months ended June 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 $512.1 million
for the six months ended June 30, 2000 compared to $418.1 million for the same
period last year, an increase of $93.9 million, or 22.5%. Average investments
increased $58.8 million, or 54.8%, mainly due to the use of additional
borrowings to fund the purchases of mortgage-backed and trust preferred equity
securities. Average loans increased $40.7 million, or 14.1%, 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.
Growth in average investments and loans was offset to some extent by a decrease
in other interest-earning assets attributable to the absence in 2000 of the
temporary savings deposits by subscribers to purchase stock associated with the
Company's initial public offering in 1999. The yield on interest-earning assets
rose 35 basis points to 7.32% for the six months ended June 30, 2000 mainly due
to the purchase of higher-yielding trust preferred securities, and to a lesser
extent, the higher interest rate environment which led to improved yields on new
assets as well as the repricing of existing consumer and commercial loans.
Total interest expense increased $3.3 million, or 48.4%, to $10.3 million for
the six months ended June 30, 2000 resulting primarily from an increase in
average borrowings and higher rates paid on borrowings as a result of the higher
interest rate environment, offset by decreased average interest-bearing
deposits. Average borrowings increased $101.7 million resulting from
management's decision to increase its utilization of borrowings to fund asset
growth and share repurchases. The reduction in average interest-bearing deposits
primarily reflects approximately $18 million of average balances held in
temporary savings deposits associated with the Company's initial public offering
in 1999 and lower certificates of deposit balances. The maturing of
previously-offered premium-rate "specials" as well as the inability to retain
other certificates of deposit due to competitive pricing pressures, contributed
to the reduction in certificates of deposits.
Provision for Loan Losses
The Company's provision for loan losses decreased by $60,000, or 50.0%, to
$60,000 for the six months ended June 30, 2000 from $120,000 for the same period
in 1999. Management determined that a decrease in the provision was warranted
based upon the reserve coverage ratios, a decrease in total nonperforming loans
and troubled debt restructurings and an analysis of the adequacy of the balance
in the allowance for loan losses.
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
23
<PAGE>
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.
Other Income
Total other income increased $200,000, or 11.0%, to $2.0 million for the six
months ended June 30, 2000 from $1.8 million in the 1999 period as a result of
growth in fee income and insurance commissions, partially offset by lower gain
on sales of securities. Fee income increased $106,000, or 11.5%, for the six
months ended June 30, 2000 reflecting solid growth in core deposits. During the
period from June 30, 1999 through June 30, 2000, the Company experienced a 12%
increase in net new transaction accounts. The increase in insurance commissions
was due to the purchase of Agan Insurance Agency in January 2000.
Other Expenses
Other expenses totaled $7.3 million for the six months ended June 30, 2000
compared to $10.4 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 six
months ended June 30, 2000 increased $1.2 million, or 20.7%. Salaries and
benefits, excluding the severance expenses, increased $830,000, or 28.3%,
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 $291,000, or 30.2%, 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 $1.1 million for the six months ended June 30,
2000, compared to an income tax benefit of $427,000 in 1999. Excluding the $1.5
million tax effect related to the 1999 contribution to establish Woronoco
Savings Charitable Foundation, income tax expense would have totaled $1.1
million.
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, as well as 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 utilization of FHLB advances. During the six months ended June
30, 2000, the Company's loan originations and purchases totaled $54.4 million
and $26.3 million, respectively. At June 30, 2000, the Company's investments in
mortgage-backed and equity securities totaled $181.9 million. During the six
months ended June 30, 2000, total deposits increased
24
<PAGE>
$48.4 million. The Company issued $30.0 million of brokered certificates of
deposit during the first six months of 2000, which contributed to growth in
deposits. 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
June 30, 2000, the Company had $198.9 million of FHLB borrowings.
Outstanding commitments for all loans totaled $15.1 million at June 30, 2000.
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 June 30, 2000, totaled $104.7
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 June 30,
2000, the Company and the Bank met all capital adequacy requirements to which
they were subject.
As of June 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 June 30, 2000
and December 31, 1999 are also presented in the table.
<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 June 30, 2000:
--------------------
Total Capital to Risk Weighted Assets
<S> <C> <C> <C> <C> <C> <C>
Company $76,065 20.5% $29,731 8.0% N/A N/A
Bank $57,953 15.7% $29,609 8.0% $37,012 10.0%
Tier 1 Capital to Risk Weighted Assets
Company $73,718 19.8% $14,865 4.0% $22,298 6.0%
Bank $55,606 15.0% $14,805 4.0% $22,207 6.0%
Tier 1 Capital to Average Assets
Company $73,718 12.8% $22,987 4.0% $28,733 5.0%
Bank $55,606 9.7% $17,219 3.0% - $28,698 5.0%
$28,698 5.0%
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999:
------------------------
Total Capital to Risk Weighted Assets
<S> <C> <C> <C> <C> <C> <C>
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 six months
ended June 30, 2000.
25
<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. Since December 31, 1999, 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.
26
<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.
---------------------------------------------------
a. An annual meeting of shareholders of the Company was held on
April 26, 2000 (the "Annual Meeting").
b. Not applicable.
c. There were 5,698,860 shares of Common Stock of the Company
eligible to be voted at the Annual Meeting and 4,841,152 shares
were represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual Meeting
and the vote for each proposal were as follows:
1. Election of directors for a three-year term
Director Nominees Elected
For Three Year Term: For Withheld
------------------------- ----- --------
James A. Adams 4,767,647 73,505
Francis J. Ehrhardt 4,761,139 80,013
Cornelius D. Mahoney 4,763,089 78,063
D. Jeffrey Templeton 4,763,375 77,777
2. The approval of certain amendments to the Woronoco Bancorp,
Inc. 1999 Stock-Based Incentive Plan
For Against Abstain
--------- --------- ---------
4,318,223 492,006 30,923
3. The ratification of the appointment of Wolf & Company, P.C.
as independent auditors of Woronoco Bancorp, Inc. for the
fiscal year ending December 31, 2000.
For Against Abstain
--------- --------- ---------
4,747,856 17,917 75,379
Item 5. Other Information.
-----------------
27
<PAGE>
None.
Item 6. Exhibits and Reports on Form 8-K (ss.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)
10.1 Woronoco Bancorp, Inc. 1999 Stock-Based Incentive Plan (3)
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.
(3) Incorporated by reference into this document from the
Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders filed on March 20, 2000.
(b) Reports on Form 8-K
On April 6, 2000, the Company filed an 8-K relating to the press
release issued on April 6, 2000 which announced the completion of
its plan to repurchase up to 10% of its outstanding shares of
common stock. A press release announcing the stock repurchase was
filed by exhibit.
On April 17, 2000, the Company filed an 8-K relating to the press
release issued on April 14, 2000 which announced its intention to
repurchase up to 10% of its 5,128,968 outstanding shares of common
stock. A press release announcing the stock repurchase was filed by
exhibit.
28
<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: August 14, 2000 By: /s/ Cornelius D. Mahoney
------------------------
Cornelius D. Mahoney
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Dated: August 14, 2000 By: /s/ Debra L. Murphy
-------------------
Debra L. Murphy
Senior Vice President and
Chief Financial Officer
(principal financial and accounting
officer)
29
