<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
or the quarterly period ended June 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________________ to ___________________
Commission File No. 0-17222
WARREN BANCORP, INC.
(Exact Name of registrant as specified in the charter)
MASSACHUSETTS 04-3024165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 MAIN STREET, PEABODY, MASSACHUSETTS 01960
(Address of principal executive offices) (Zip Code)
(508) 531-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirement for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 7, 1996
Common Stock, par value $.10 per share 3,649,327
<PAGE> 2
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
A S S E T S (Unaudited)
<S> <C> <C>
Cash and due from banks (non-interest bearing)............................ $10,756 $8,869
Money market funds and overnight investments.............................. 1,449 5,300
Investment and mortgage-backed securities available for sale
(amortized cost of $99,230 at June 30, 1996 and $104,672
at December 31, 1995)................................................... 99,481 106,838
Other investments (market value of $6,943 at June 30, 1996 and
$6,943 at December 31, 1995)............................................. 6,703 6,703
Loans held for sale....................................................... 1,391 2,809
Loans..................................................................... 220,894 216,692
Allowance for loan losses................................................. (4,533) (4,533)
-------- --------
Net loans.............................................................. 216,361 212,159
Banking premises and equipment, net....................................... 4,564 4,757
Accrued interest receivable............................................... 2,478 2,399
Real estate acquired by foreclosure or substantively repossessed.......... 2,470 3,092
Other assets.............................................................. 3,768 2,928
-------- --------
Total assets........................................................... $349,421 $355,854
========= ========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Liabilities:
Deposits............................................................... $310,756 $314,850
Borrowed funds......................................................... 4,409 7,368
Escrow deposits of borrowers........................................... 969 767
Accrued interest payable............................................... 615 588
Accrued expenses and other liabilities................................. 1,126 1,043
-------- --------
Total liabilities.................................................... 317,875 324,616
-------- --------
Stockholders' equity:
Preferred stock, $.10 par value; Authorized - 10,000,000 shares;
Issued and outstanding - none........................................ - -
Common stock, $.10 par value; Authorized - 20,000,000 shares;
Issued - 3,743,427 shares at June 30, 1996 and 3,637,542
shares at December 31, 1995..........................................
Outstanding - 3,683,427 shares at June 30, 1996 and 3,637,542 ...... 376 364
Additional paid-in capital............................................. 34,183 33,911
Accumulated deficit.................................................... (2,476) (4,401)
Treasury stock, at cost, 60,000 shares at June 30, 1996 and none ...... (709) -
-------- --------
31,374 29,874
Unrealized gain on marketable securities available for sale, net....... 172 1,364
-------- --------
Total stockholders' equity.......................................... 31,546 31,238
-------- --------
Total liabilities and stockholders' equity.......................... $ 349,421 $355,854
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited)
(Dollars in thousands, except per-share data)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans............................................ $5,028 $5,205 $10,000 $10,194
Interest and dividends on investments........................ 1,126 884 2,263 1,677
Interest on mortgage-backed securities....................... 802 907 1,665 1,809
------ ------ ------- -------
Total interest and dividend income........................ 6,956 6,996 13,928 13,680
------ ------ ------- -------
Interest expense:
Interest on deposits......................................... 2,750 2,795 5,564 5,309
Interest on borrowed funds................................... 69 127 182 251
------ ------ ------- -------
Total interest expense.................................... 2,819 2,922 5,746 5,560
------ ------ ------- -------
Net interest income....................................... 4,137 4,074 8,182 8,120
Provision for (recovery of) loan losses ........................ 23 (50) 158 (97)
------ ------ ------- -------
Net interest income after provision for (recovery of)
loan losses............................................ 4,114 4,124 8,024 8,217
------ ------ ------- -------
Non-interest income:
Loan servicing fees.......................................... 159 163 304 353
Customer service fees........................................ 227 254 469 487
Gains on sales of investment securities, net................. 40 4 241 4
Gains on sales of mortgage loans and mortgage-
servicing rights, net....................................... 132 302 182 417
Other........................................................ 3 71 3 79
------ ------ ------- -------
Total non-interest income ................................ 561 794 1,199 1,340
------ ------ ------- -------
Income before non-interest expense and income taxes....... 4,675 4,918 9,223 9,557
------ ------ ------- -------
Non-interest expense:
Salaries and employee benefits .............................. 1,380 1,268 2,773 2,564
Office occupancy and equipment............................... 262 268 543 546
Professional services........................................ 54 136 163 269
Marketing.................................................... 66 42 79 62
Deposit insurance............................................ 1 203 2 407
Real estate operations....................................... 24 511 74 770
Outside data processing expense.............................. 106 105 227 221
Other........................................................ 405 402 839 802
------ ------ ------- -------
Total non-interest expenses............................... 2,298 2,935 4,700 5,641
------ ------ ------- -------
Income before income taxes............................... 2,377 1,983 4,523 3,916
Income tax expense............................................. 927 726 1,444 1,450
------ ------ ------- -------
Net income................................................. $1,450 $1,257 $3,079 $2,466
====== ====== ====== ======
Net income per common and common-equivalent share.......... $ 0.37 $0.33 $ 0.79 $ 0.65
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) On
Retained Marketable
Additional Earnings Securities
Common Paid-in (Accumulated Available for Treasury
Stock Capital Deficit) Sale, Net Stock Total
----- ------- -------- --------- ----- -----
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............. $ 354 $ 33,759 ($ 8,702) ($ 1,616) -- $ 23,795
Net income ............................ -- -- 2,466 -- -- 2,466
Dividends paid ........................ -- -- (356) -- -- (356)
Change in unrealized gain (loss)
on marketable securities
available for sale, net ............. -- -- -- 2,469 -- 2,469
Issuance of 22,397 shares for exercise
of options and 401K benefit plan ..... 3 32 -- -- -- 35
-------- -------- -------- -------- -------- --------
Balance at June 30, 1995 ................. $ 357 $ 33,791 ($ 6,592) $ 853 $ -- $ 28,409
Net income ............................ -- -- 2,916 -- -- 2,916
Dividend paid ......................... -- -- (725) -- -- (725)
Change in unrealized gain (loss)
on marketable securities
available for sale, net ............. -- -- -- 511 -- 511
Issuance of 70,400 shares for exercise
of options and 401K benefit plan ..... 7 120 -- -- -- 127
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ............. $ 364 $ 33,911 ($ 4,401) $ 1,364 $ -- $ 31,238
Net income ............................ -- -- 3,079 -- -- 3,079
Issuance of 105,885 shares for exercise
of options ........................... 12 272 -- -- -- 284
Dividend paid ......................... -- -- (1,154) -- -- (1,154)
Purchase of treasury stock (60,000
shares) .............................. -- -- -- -- (709) (709)
Change in unrealized gain (loss)
on marketable securities
available for sale, net ............. -- -- -- (1,192) -- (1,192)
-------- -------- -------- -------- -------- --------
Balance at June 30, 1996 ................. $ 376 $ 34,183 ($ 2,476) $ 172 ($ 709) $ 31,546
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
(In thousands)
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income......................................................... $3,079 $2,466
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for (recovery of) loan losses.......................... 158 (97)
Depreciation and amortization.................................... 289 288
Deferred income taxes............................................ 1,081 508
Amortization (accretion) of premiums, fees and discounts......... 11 (35)
(Gains) on sales of investment securities........................ (241) (4)
(Gains) on sales of mortgage loans............................... (182) (417)
Provision for losses on real estate acquired by foreclosure ..... 20 598
(Gains) on sale of real estate acquired by foreclosure........... (40) (78)
(Increase) decrease in loans held for sale....................... 1,418 (4,865)
(Increase) in accrued interest receivable........................ (79) (76)
(Increase) in other assets....................................... (959) (603)
Increase in accrued interest payable............................. 27 104
Increase in other liabilities.................................... 93 472
------ ------
Net cash provided by (used in) operating activities.......... 4,675 (1,739)
------ ------
Cash flows from investing activities:
Net (increase) decrease in money market funds and
overnight investments............................................. 3,851 (900)
Purchase of investment securities.................................. (23,227) (5,723)
Proceeds from sales of investment securities available for sale.... 12,351 5,727
Proceeds from payments of mortgage-backed securities............... 6,278 3,028
Proceeds from maturities of investment securities.................. 12,182 -
Purchases of mortgage-backed securities............................ (1,911) -
Proceeds from sales of real estate acquired by foreclosure......... 785 2,123
Capital expenditures for real estate acquired by foreclosure....... - (65)
Net (increase) in loans............................................ (4,369) (605)
Purchases of premises and equipment................................ (96) (172)
------ ------
Net cash provided by investing activities....................... $5,844 $3,413
------ ------
</TABLE>
<PAGE> 6
WARREN FIVE CENTS SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS-Continued
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
(In thousands)
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) in deposits ....................................... $ (4,094) $ (1,667)
Proceeds from Federal Home Loan Bank advances .................... 693 120
Principal payments on Federal Home Loan Bank advances ............ (3,737) (300)
Net increase in other borrowed funds ............................. 85 51
Purchase of treasury stock ....................................... (709) --
Dividends paid ................................................... (1,154) (356)
Proceeds from issuance of common stock ........................... 284 35
-------- --------
Net cash used in financing activities ..................... (8,632) (2,117)
-------- --------
Net increase (decrease) in cash and due from banks ............... 1,887 (443)
Cash and due from banks at beginning of period ................... 8,869 8,231
-------- --------
Cash and due from banks at end of period ......................... $ 10,756 $ 7,788
======== ========
Cash paid during the period for:
Interest ..................................................... $ 5,719 $ 5,456
Income taxes ................................................. $ 927 $ 902
Supplemental noncash investing and financing activities:
Real estate foreclosures ...................................... $ 147 $ 277
Decrease in unrealized gain on investment and mortgage-backed
securities available for sale, net of estimated income taxes .. $ (1,192) $ (2,469)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The consolidated financial statements of Warren Bancorp, Inc. (the
"Corporation") presented herein should be read in conjunction with the
consolidated financial statements of the Corporation as of and for the year
ended December 31, 1995. In the opinion of management, the financial statements
reflect all adjustments necessary for a fair presentation of the results for the
interim periods presented. Certain amounts have been reclassified to conform
with the 1996 presentation.
EARNINGS PER COMMON AND COMMON-EQUIVALENT SHARE
Earnings-per-share data are based upon the average daily number of
shares and share equivalents (options) outstanding, which was 3,936,000 and
3,915,000, respectively, for the quarter and six months ended June 30, 1996 and
for the quarter and six months ended June 30, 1995 was 3,794,000 and 3,780,000,
respectively..
OTHER
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which became effective for the Corporation on January
1, 1996. This statement established a fair-value-based method of accounting for
stock-based compensation plans under which compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period. However, the statement allows a company to continue to measure
compensation cost for such plans under Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no
compensation cost is recorded if, at the grand date, the exercise price of
options granted is equal to the fair market value of the Corporation's stock.
The Corporation has elected to continue to follow the accounting method under
APB Opinion No. 25.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Warren Bancorp, Inc.'s (the "Corporation") operating results for the
three and six months ended June 30, 1996 (the "1996 quarter" and "1996 period,"
respectively) reflect the operations of its only subsidiary, Warren Five Cents
Savings Bank (the "Bank"). The Bank, which is wholly owned by the Corporation,
operates as a community bank and is in the business of making individual and
commercial loans to customers in its market area.
The Corporation recorded an increased profit for the 1996 period
primarily due to reduced real estate operations expense and professional
services expense compared to the period ended June 30, 1995 (the "1995 period").
In addition, deposit insurance expense decreased during the 1996 period due to
the Federal Deposit Insurance Corporation (the "FDIC") reducing the premium it
charges banks for deposit insurance. Please see the "Results of Operations for
the Six-Months Ended June 30, 1996," for further discussion on these items.
Real estate acquired by foreclosure decreased by $400,000 during the
1996 period to $2.5 million at June 30, 1996, and nonperforming loans decreased
by $1.4 million to $2.8 million. Management continues to monitor these
non-performing asset portfolios closely with special attention being given to
residential and commercial real estate loans, properties and land which comprise
a substantial portion of the Corporation's nonperforming assets.
If conditions in the Massachusetts' real estate market become unstable
and values deteriorate, the amount of nonaccrual loans and real estate acquired
through foreclosure would be expected to increase, resulting in lower interest
income and increased loan losses, which could require additional loan loss
provisions to be charged to operating income. Moreover, real estate acquired
through foreclosure may give rise to additional charge-offs and writedowns and
higher expenses for property taxes and other carrying costs.
In addition, the Board of Directors of the Corporation has authorized
management to repurchase up to 225,000 shares of its common shares in the open
market. The repurchase program commenced on April 22, 1996 and may be
discontinued at anytime. The 225,000 authorized shares represents the repurchase
of approximately 6% of the outstanding shares at the repurchase program's
commencement date. At June 30, 1996, the Corporation purchased 60,000 shares at
a total cost of $709,000.
SUBSEQUENT EVENTS
On July 18, 1996, the Corporation declared a quarterly dividend of
eleven cents ($.11) per share payable August 13, 1996 to stockholders of record
on July 29, 1996.
1995 REGULATORY PROCEEDINGS
On February 22, 1995, the FDIC and on February 28, 1995, the
Massachusetts Commissioner of Banks (the "Commissioner") terminated the Cease
and Desist Order (the "Order") which the Bank had consented to in December, 1991
and had been in effect since that time. The Order was replaced by informal
supervisory arrangements set forth in resolutions of the Bank's Board of
Directors adopted on February 15, 1995. Under this informal reporting
relationship, the Bank, among other things, continued to file with the FDIC and
the Commissioner a written plan for certain adversely classified credits. The
resolutions also specified that the Bank had to attain a leverage capital ratio
of 7.00% in order to pay a dividend which, in turn, could not exceed 33% of the
Bank's earnings for the period covered by the dividends.
In the fourth quarter of 1995, the Bank was informed by the FDIC and
the Commissioner that the Board resolutions were no longer necessary, and at its
December, 1995 meeting, the Bank's Board of Directors dissolved those
resolutions.
1
<PAGE> 9
ASSET/LIABILITY MANAGEMENT
A primary objective of the Corporation's asset/liability management
policy is to manage interest-rate risk over time to achieve a prudent level of
net interest income in changing interest-rate environments. Management's
strategies are intended to be responsive to changes in interest rates and to
recognize market demands for particular types of deposit and loan products.
These strategies are overseen by an internal Asset/Liability Management
Committee and by the Finance, Audit and Compliance Committee of the Board of
Directors.
The following table summarizes the Corporation's interest-rate
sensitivity position as of June 30, 1996. Assets and liabilities are classified
as interest-rate sensitive if they have a remaining term to maturity of 0-12
months, or are subject to interest-rate adjustments within those time periods.
Adjustable-rate loans and mortgage-backed securities are shown as if the entire
balance came due on the repricing date. Nonaccruing loans are not included in
this analysis due to their status as non-earning assets. Estimates of fixed-rate
loan and fixed-rate mortgage-backed security amortization and prepayments are
included with rate sensitive assets. Because regular savings and N.O.W. accounts
may be withdrawn at any time and are subject to interest-rate adjustments at any
time, they are presented in the table below based on an assumed maturity of less
than six months.
INTEREST-RATE SENSITIVITY POSITION
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
------ ------ ------ ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
INTEREST SENSITIVE ASSETS:
Investment securities ................... $ 20,158 $ 5,744 $ 13,391 $ 21,800 $ --
Loans held for sale ..................... 1,391 -- -- -- --
Adjustable-rate loans ................... 70,378 27,474 59,488 30,821 --
Fixed-rate loans ........................ 4,274 3,269 1,100 11,784 9,471
Mortgage-backed securities .............. 7,578 6,737 11,792 11,395 6,691
--------- --------- --------- --------- ---------
Total interest sensitive assets ...... 103,779 43,224 85,771 75,800 16,162
--------- --------- --------- --------- ---------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts ............................... 11,039 11,039 -- -- --
Time deposits ........................... 30,965 31,496 45,620 23,704 49
Other deposits (a) ...................... 70,573 70,935 -- -- --
Borrowings .............................. 1,738 -- 2,000 14 657
--------- --------- --------- --------- ---------
Total interest sensitive liabilities 114,315 113,470 47,620 23,718 706
--------- --------- --------- --------- ---------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities .................. $ (10,536) $ (70,246) $ 38,151 $ 52,082 $ 15,456
========= ========= ========= ========= =========
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities .. $ (10,536) $ (80,782) $ (42,631) $ 9,451 $ 24,907
========= ========= ========= ========= =========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ......... 90.8% 64.5% 84.5% 103.2% 108.3%
========= ========= ========= ========= =========
Cumulative excess (deficiency) as a
percentage of total assets ............. (3.0)% (23.1)% (12.2)% 2.7% 7.1%
========= ========= ========= ========= =========
</TABLE>
- ---------
(a) Other deposits consist of regular savings, club and N.O.W. accounts.
Interest-rate sensitivity statistics are static measures that do not
necessarily take into consideration external factors which might affect the
sensitivity of assets and liabilities and consequently cannot be used
2
<PAGE> 10
alone to predict the operating results of a financial institution in a changing
environment. However, these measurements do reflect major trends and thus the
Corporation's sensitivity to interest rates changes over time.
LIQUIDITY
The Bank seeks to ensure sufficient liquidity is available to meet cash
requirements while earning a return on liquid assets. The Bank uses its
liquidity primarily to fund loan and investment commitments, to supplement
deposit flows and to meet operating expenses. The primary sources of liquidity
are interest and amortization from loans, mortgage-backed securities and
investments, sales and maturities of investments, loan sales, deposits and
Federal Home Loan Bank of Boston ("FHLBB") advances, which include a $15 million
overnight line of credit. The Bank also has access to the Federal Reserve Bank's
discount window and may borrow from the Massachusetts Mutual Savings Central
Fund, Inc. During the 1996 period, the Bank did not use the Federal Reserve Bank
discount window and did not borrow from the Mutual Savings Central Fund.
The Bank also uses the longer term borrowings facilities within its
total available credit line with the FHLBB. Advances from the FHLBB were $2.8
million at June 30, 1996.
During 1996, the primary sources of liquidity were $18.0 million in
loan sales, proceeds from sale of investments of $12.4 million, proceeds from
maturities of investment securities of $12.2 million, and proceeds from paydowns
of mortgage-backed securities of $6.3 million. Primary uses of funds were $42.6
million in residential, commercial real estate and commercial loan originations
and $25.1 million to purchase investment and mortgage-backed securities. At June
30, 1996, the Bank had $1.4 million in overnight investments.
The primary source of liquidity for the Corporation is dividends from
the Bank. As noted under "Subsequent Events" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Corporation
recently declared a dividend which will be funded by a dividend paid by the Bank
to the Corporation. In addition, any additional shares purchased by the
Corporation in the stock repurchase plan will also be funded primarily by a
dividend paid by the Bank to the Corporation.
From time to time, the Bank has obtained time deposits in denominations
of $100,000 and over. The following table summarizes maturities of time deposits
of $100,000 or more outstanding at June 30, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Less than 3 months........................... $ 4,559
3 to 6 months................................ 2,605
6 to 12 months............................... 3,435
More than 12 months.......................... 4,520
-------
$15,119
-------
</TABLE>
CAPITAL ADEQUACY
Total stockholders' equity at June 30, 1996 was $31.5 million, an
increase of $300,000 from $31.2 million at the end of 1995. Included in
stockholders' equity at June 30, 1996 is an unrealized gain on marketable
securities available for sale, which increase stockholders' equity, of $172,000
as compared to an unrealized gain at December 31, 1995 of $1.4 million. This
unfavorable change in the market value of marketable securities available for
sale was due to increased interest rates during the 1996 period. Future
interest-rate increases could further reduce the market value of these
securities and reduce stockholders' equity. As a percentage of total assets,
stockholders' equity was 9.03% at June 30, 1996 compared to 8.78% at December
31, 1995.
At June 30, 1996, neither the Federal Reserve Board ("FRB") nor the
FDIC permitted the unrealized gain or loss to be used in their calculation of
Tier I capital. In addition, they require the recognition of unrealized losses
on marketable equity securities as a reduction of Tier I capital. At June 30,
1996, net of applicable income taxes, the unrealized gain on marketable
securities available for sale was $172,000, of which the unrealized loss on
marketable equity securities was zero.
3
<PAGE> 11
The Federal Reserve Board's leverage capital-to-assets guidelines
require the strongest and most highly rated bank holding companies to maintain
at least a 3.00% ratio of Tier I capital to average consolidated assets. All
other bank holding companies, including the Corporation, are required to
maintain at least 4.00% to 5.00%, depending on how the FRB evaluates their
condition. The FRB may require a higher capital ratio. At June 30, 1996, the FRB
leverage capital ratio was 8.97% compared to 8.47% at December 31, 1995.
The FDIC's leverage capital-to-assets ratio guidelines are
substantially similar to those adopted by the FRB and described above. At June
30, 1996, the Bank's leverage capital ratio, under FDIC guidelines, was 8.91%
compared to 8.43% at December 31, 1995.
If the unrealized gain on marketable securities available for sale were
used in the calculation of Tier I capital, i.e. if GAAP were used in the
calculation, the Bank's leverage capital ratio would have been 8.95% at June 30,
1996 for the FDIC and the Corporation's leverage capital ratio would have been
9.01% for the FRB.
As noted in "Subsequent Events" above, the Corporation in July declared
a dividend totaling approximately $409,000. In addition, as noted in "General"
above, the Board of Directors of the Corporation has authorized management to
repurchase up to 225,000 shares of its common shares in the open market. This
repurchase program commenced on April 22, 1996. As of June 30, 1996, the
Corporation purchased 60,000 shares at a total cost of $709,000. The dividend
and stock buyback program are funded by dividends paid by the Bank to the
Corporation. These will reduce both the Corporation's and the Bank's capital.
The FRB and the FDIC have also imposed risk-based capital requirements
on the Corporation and the Bank, respectively, which give different risk
weightings to assets and to off-balance sheet assets such as loan commitments
and loans sold with recourse. Both the FRB and FDIC guidelines require the
Corporation and the Bank to have an 8.00% risk-based capital ratio. The
Corporation's and the Bank's risk-based capital ratios were 14.46% and 14.38%,
respectively, at June 30, 1996 compared to 13.71% and 13.65% at December 31,
1995, thus exceeding their risk-based capital requirements.
As of June 30, 1996, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 14.38%, 13.13%, and
8.91%, respectively. Based on these capital ratios, the Bank is considered to be
"well capitalized."
FINANCIAL CONDITION
The Corporation's total assets decreased to $349.4 million at June 30,
1996 from $355.9 million at December 31, 1995. Decreases occurred in residential
mortgage loans, overnight investments, and investments and mortgage-backed
securities available for sale and was partially offset by increases in
commercial loans and commercial real estate loans.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of overnight investments, investment securities
and mortgage-backed securities available for sale, and other investments,
decreased to $107.6 million at June 30, 1996 from $118.8 million at December 31,
1995. A majority of this decrease was from the reduction of overnight
investments, the sale of fixed income mutual funds and maturities of corporate
notes. This decrease was partially offset by additional purchases of U.S.
Treasury and U.S. Government Agency obligations. Mortgage-backed securities
decreased to $44.3 million at June 30, 1996 from $48.6 million at December 31,
1995 due to paydowns of the underlying loans. The decrease in the market value
of these investments was due to the increase in interest rates during 1996.
Further increases in interest rates could reduce the value of these investments.
4
<PAGE> 12
INVESTMENTS AT JUNE 30, 1996 ARE AS FOLLOWS:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OVERNIGHT
Federal Home Loan Bank of Boston
overnight deposits ................ $ 1,300 $ -- $ -- $ 1,300
Money market funds ................. 149 -- -- 149
--------- --------- --------- ---------
1,449 -- -- 1,449
--------- --------- --------- ---------
AVAILABLE-FOR-SALE
Fixed income mutual funds .......... 18,990 376 -- 19,366
FNMA mortgage-backed securities .... 28,022 781 (5) 28,798
GNMA mortgage-backed securities .... 16,171 -- (642) 15,529
U.S. Government and related
obligations ....................... 19,169 2 (92) 19,079
Corporate notes .................... 8,906 4 (8) 8,902
Common stock warrants .............. -- 16 -- 16
Preferred stock .................... 7,972 126 (307) 7,791
--------- --------- --------- ---------
99,230 1,305 (1,054) 99,481
--------- --------- --------- ---------
OTHER
Foreign government bonds and
notes ............................ 500 -- -- 500
Stock in Federal Home Loan Bank
of Boston ........................ 4,110 -- -- 4,110
Stock in Mutual Savings Central
Fund, Inc. ....................... 108 -- -- 108
Advances to Thrift Institution Fund
for Economic Development ......... 409 -- -- 409
Stock in Savings Bank Life Insurance
Company of Massachusetts ......... 1,576 240 -- 1,816
--------- --------- --------- ---------
6,703 240 -- 6,943
--------- --------- --------- ---------
$ 107,382 $ 1,545 $ (1,054) $ 107,873
========= ========= ========= =========
</TABLE>
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $2.8 million during the 1996
period to $222.3 million at June 30, 1996. This increase is primarily the result
of increased commercial, commercial construction and commercial real estate
loans partially offset by loan paydowns and payoffs in residential mortgage
loans. Commercial, commercial construction and commercial loans typically earn
higher yields than residential mortgage loans, but usually carry higher credit
risk.
The following table sets forth the classification of the Corporation's
loans as of June 30, 1996 and December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Residential mortgages................................ $ 75,484 $ 85,276
Commercial real estate............................... 102,621 94,341
Commercial construction ............................. 9,832 6,254
Commercial loans..................................... 11,338 8,490
Consumer loans....................................... 21,619 22,331
-------- --------
$ 220,894 $216,692
-------- --------
</TABLE>
5
<PAGE> 13
Residential mortgage loan originations during the 1996 period were
$20.3 million compared to $13.5 million in the 1995 period. The Corporation
originated $13.6 million in fixed-rate loans during the 1996 period compared to
$5.1 million during the 1995 period. Adjustable-rate loans totaling $6.7 million
were originated during the 1996 period compared to $8.4 million during the 1995
period. The Corporation sold loans totaling $18.0 million during the 1996 period
compared to $7.0 million sold in the 1995 period. At June 30, 1996, the
Corporation held $1.4 million of fixed rate residential mortgage loans for sale
compared to $2.8 million at December 31, 1995. These are reflected at the lower
of cost or aggregate market value.
Mortgage servicing rights are created as an asset separate from the
underlying loan when a loan is sold and servicing is retained. The total cost
of creating a mortgage loan is allocated between the loan and the servicing
right based on their respective fair values. The balance of mortgage-servicing
rights, net of a valuation allowance, at June 30, 1996 and December 31, 1995 was
$501,000 and $338,000, respectively, and is included in other assets. Gains on
the sales of loans attributable to the allocation of cost to the mortgage
servicing rights was recognized in the amount of $193,000 in the 1996 period
from the sale of $16.9 million of residential mortgage loans. This compares to a
gain of $44,000 in the 1995 period from the sale of $4.4 million of residential
mortgage loans. On a quarterly basis, mortgage servicing rights, which are
stratified by the underlying loans' origination dates and maturities, are
reviewed for impairment using the net present value method of estimated cash
flows and current market conditions. Based on this review at June 30, 1996, the
valuation allowance was reduced and credited to gain on sale of mortgage loans
and mortgage servicing rights, net, in the amount of $16,200 for the individual
strata that were deemed to be impaired, bringing the valuation allowance to
$7,800 at June 30, 1996 from $24,000 at December 31, 1995. The aggregate fair
value of each strata is estimated to be $530,000 at June 30, 1996. This value
applies to the rights to service loans sold since January 1, 1995, the date
generally accepted accounting principles required the recognition of mortgage
servicing rights. The principal balance of those loans at June 30, 1996 is $43.4
million. The principal balance of all loans serviced for others at June 30, 1996
was $219.3 million. At April 30, 1996, the Bank estimated the value of the
servicing rights of all loans serviced for others (principal balance of $219.7
million at April 30) and determined it to be approximately $2.1 million.
The following table summarizes the changes in the mortgage-servicing
rights balance at June 30, 1996 (dollars in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1995 $362
Additions (income credited to gain or
loss on sales of mortgage loans and
mortgage servicing rights, net) 193
Less: amortization (charged to loan
servicing fee income) (46)
----
Balance at June 30, 1996 $509
===
</TABLE>
An analysis of the mortgage-servicing rights valuation allowance for
the period ended June 30, 1996 is as follows (dollars in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1995 $ (24)
Recovery of allowance (credited to
gain or loss on sales of mortgage
loans and mortgage servicing rights, net) 16
-----
Balance at June 30, 1996 $ (8)
=====
</TABLE>
CREDIT QUALITY
IMPAIRED LOANS
The Corporation accounts for impaired loans at the present value of the
expected future cash flows discounted at the loan's effective interest rate or
the fair value of collateral for collateral-dependent loans. Loans are deemed by
the Corporation to be impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect all amounts due
according to the contractual terms of the original loan agreement. Generally,
non-accruing loans are deemed impaired. The classification of impaired loans
does not apply to smaller balance, large groups of homogeneous loans such as
residential
6
<PAGE> 14
mortgage and consumer installment loans which are considered to be collectively
evaluated for impairment. Typically, the minimum delay in receiving payments
according to the contractual terms of the loan that can occur before a loan is
considered impaired is ninety days. Impaired loans are analyzed and categorized
by level of credit risk and collectibility in order to determine their related
allowance for loan losses. At June 30, 1996, there were three loans considered
impaired and accruing totaling $707,000 compared to four loans considered
impaired and accruing totaling $489,000 at December 31, 1995.
NONPERFORMING LOANS
Loans past due 90 days or more or past due less than 90 days but in a
nonaccrual status were $2.8 million at June 30, 1996 compared to $4.2 million at
December 31, 1995. Included in non-performing loans are six loans considered
impaired in the amount of $2.0 million at June 30, 1996 as compared to six loans
totaling $2.6 million at December 31, 1995. Accrual of interest on loans is
discontinued either when a reasonable doubt exists as to that the full, timely
collection of principal or interest or when the loans become contractually past
due by ninety days or more, unless they are adequately secured and are in the
process of collection.
When a loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed against current period interest income.
Income on such loans is recognized to the extent that cash is received and where
the ultimate collection of principal and interest is probable. Following
collection procedures, the Corporation generally institutes appropriate action
to foreclose the property or acquire it by deed in lieu of foreclosure.
The table below details non-performing loans at:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accruing loans 90 days or more in arrears.............................. $ 0 $ 155
Nonaccrual loans....................................................... 2,835 4,084
------ -----
Total nonperforming loans.............................................. $2,835 $4,239
====== =====
Percentage of nonperforming loans to:
Total loans............................................................ 1.28% 1.96%
====== ======
Total assets........................................................... 0.81% 1.19%
====== ======
</TABLE>
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure totaled $2.5 million at June 30,
1996 compared to $3.1 million at December 31, 1995. Real estate acquired by
foreclosure, net of an allowance for loss, is reflected at the lower of the net
carrying value or fair value of the property less estimated cost of disposition.
These properties consist mainly of land, one to four family houses, and
commercial real estate.
The Corporation had a net gain of $20,000 on real estate acquired by
foreclosure, net of provision for losses, in the 1996 period compared to a
provision for losses, net of gains on sale of $520,000 in the 1995 period.
Unstable conditions in the Massachusetts real estate market could result in
losses and writedowns as the Corporation reduces the book value of real estate
to reflect likely realizable values.
Changes in the allowance for losses on real estate acquired by
foreclosure for the six months ended June 30, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance at December 31, 1995........................... $457
Provision charged (credited) to expense................ 20
Net charge-offs........................................ (158)
----
Balance at June 30, 1996............................... $319
====
</TABLE>
Gains on sale and recoveries on real estate acquired by foreclosure
were $40,000 in the 1996 period.
7
<PAGE> 15
In summary, non-performing assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Non-performing loans...................... $2,835 $4,239
Real estate acquired by foreclosure....... 2,470 3,092
----- -----
Total nonperforming assets................ $5,305 $7,331
===== =====
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $4.5 million at June 30, 1996 and
December 31, 1995. The following table presents the activity in the allowance
for loan losses for the six months ended June 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period .................. $ 4,533
-------
Losses charged to the allowance:
Residential mortgage ........................ (133)
Commercial mortgage ......................... (93)
Commercial loans ............................ --
Consumer loans .............................. (33)
-------
(259)
-------
Loan recoveries:
Residential mortgage ........................ 11
Commercial mortgage ......................... 28
Commercial loans ............................ 57
Consumer loans .............................. 5
-------
101
-------
Net charge-offs ................................. (158)
-------
Provision charged to income ..................... 158
-------
Balance at end of period ........................ $ 4,533
=======
Allowance to total loans at end of period ....... 2.05%
=======
Allowance to nonperforming loans at end of period 159.9%
=======
Allocation of ending balance:
Residential mortgage ........................ $ 1,142
Commercial mortgage ......................... 2,939
Commercial loans ............................ 145
Consumer loans .............................. 307
-------
$ 4,533
=======
</TABLE>
Notwithstanding the foregoing allocations, the entire allowance for
loan losses is available to absorb charge-offs in any category of loans. Loan
losses are charged against the allowance when management believes that the
collectibility of the loan principal is unlikely.
Balances in the allowance for loan losses are determined on a periodic
basis by management and the Loan Committee of the Board of Directors with
assistance from an independent credit review consulting firm. Loan loss
allocations are based on the conditions of each loan, whether performing or
non-performing, including collectibility, collateral adequacy and the general
condition of the borrowers, economic conditions, delinquency statistics, market
area activity, the risk factors associated with each of the various loan
categories and the borrower's adherence to the original terms of the loan.
Individual loans, including loans considered impaired, are analyzed and
categorized by level of credit risk and collectibility. The associated provision
for loan losses is the amount required to bring the allowance for loan losses to
the balance considered necessary by management at the end of the period after
accounting for the effect of loan charge-
8
<PAGE> 16
offs (which decrease the allowance) and loan-loss recoveries (which increase the
allowance). The allowance for loan losses included above attributable to $2.7
million of impaired loans, of which $707,000 is measured using the present value
method and $2.0 million using the fair value method, is $853,000.
LEGAL AND OFF-BALANCE SHEET RISKS
Various legal claims arise from time to time in the course of business
of the Corporation and its subsidiaries. At June 30, 1996, there were no legal
claims against the Corporation.
The Corporation is party to financial instruments with off-balance
sheet risk in the normal course of business, to meet the financial needs of its
customers and to reduce its own exposure to fluctuations of interest rates.
These financial instruments include commitments to originate loans, unused
lines-of-credit, standby letters of credit, recourse arrangements on sold assets
and forward commitments to sell loans. The financial instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
OTHER ASSETS
Included in other assets at June 30, 1996 and December 31, 1995 are
$930,000 and $357,000, respectively, of current income taxes receivable. Also
included in other assets was a deferred income tax receivable of $357,000 at
December 31, 1995.
LIABILITIES
Deposits decreased to $310.8 million at June 30, 1996 from $314.9
million at December 31, 1995. This decrease took place primarily in time,
savings deposits and money market deposit accounts and was partially offset by
increases in demand and N.O.W. accounts.
Federal Home Loan Bank of Boston advances were $2.8 million at June 30,
1996 and $5.8 million at December 31, 1995. Securities sold under agreement to
repurchase were $1.7 million at June 30, 1996 compared to $1.6 million at
December 31, 1995. Also included in other liabilities at June 30, 1996 was a
deferred income tax payable of $192,000.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1995
GENERAL
The Corporation recorded a profit for the 1996 quarter of $1.5 million
compared to a profit for the 1995 quarter of $1.3 million. The increase in the
1996 quarter profit is primarily due to a reduction in deposit insurance and
real estate operations expenses compared to the 1995 quarter. A decrease in
non-interest expense was partially offset by a decrease in non-interest income
and an increased loan loss provision compared to the 1995 quarter. Income before
taxes was $2.4 million in the 1996 quarter compared to $2.0 million in the 1995
quarter.
Net interest income for the 1996 and 1995 quarters was $4.1 million.
The weighted average interest rate spread for the 1996 quarter was 4.66%
compared to 4.76% for the 1995 quarter. The net yield on average earning assets
was 4.92% for the 1996 quarter and 4.88% for the 1995 quarter.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income was $7.0 million for the 1996 and
1995 quarters. Interest and fees on loans decreased to $5.0 million for the 1996
quarter from $5.2 million for the 1995 quarter. This decrease is primarily the
result of a decrease in average loans outstanding for the 1996 quarter compared
to the 1995 quarter despite an increase in average loan yields to 9.24% for the
1996 quarter from 9.15% for the 1995 quarter. Interest and dividends on
investments increased to $1.1 million from $884,000 for the 1996 and 1995
quarters, respectively. This increase is attributed to an increase in the
average amount of investments held and by an increase in the average yield on
investments to 6.53% for the 1996 quarter from 6.49% for the 1995 quarter.
Mortgage-backed securities income decreased to $802,000 in the 1996
9
<PAGE> 17
quarter from $907,000 in the 1995 quarter primarily due to a decrease in the
average yield to 7.06% for the 1996 quarter compared to 7.09% in the 1995
quarter and a decrease in the average amount of mortgage-backed securities held.
INTEREST EXPENSE
Interest on deposits was $2.8 million for the 1996 and 1995 quarters,
respectively. The average cost of deposits decreased to 3.55% for the 1996
quarter compared to 3.58% for the 1995 quarter, while average interest-bearing
deposits outstanding increased during the 1996 quarter. Interest on borrowed
funds decreased to $69,000 from $127,000 for the 1996 and 1995 quarters,
respectively. This decrease is primarily related to a significant decrease in
borrowings. The average cost of borrowings was 4.40% for the 1996 quarter and
6.40% for the 1995 quarter.
NON-INTEREST INCOME
Total non-interest income for the 1996 quarter was $561,000 compared to
$794,000 for the 1995 quarter. The gain from the sale of mortgage loans and
mortgage-servicing rights, net, was $132,000 for the 1996 quarter compared to
$302,000 for the 1995 quarter. Included in the gain from the sale of mortgage
loans and mortgage servicing rights, net, was $239,000 gain from the sale of
mortgage servicing rights in the 1995 quarter, compared to zero in the 1996
quarter. The gain from the sale of investment securities, net was $40,000 in the
1996 quarter from $4,000 in the 1995 quarter.
NON-INTEREST EXPENSE
Total non-interest expense was $2.3 million in the 1996 quarter and
$2.9 million in the 1995 quarter. Increases in salaries and employee benefits
and marketing were offset by decreases in professional services, deposit
insurance and real estate operations expenses. Deposit insurance was $1,000 in
the 1996 quarter compared to $203,000 in the 1995 quarter due to the FDIC's
reduction of the premium it charges the Bank for deposit insurance. Real estate
operations expenses decreased to $24,000 in the 1996 quarter compared to a
$511,000 in the 1995 quarter mainly due to a net gain of $22,000 in the 1996
quarter compared to a net provision for losses of $406,000 in the 1995 quarter
and decreased operating expenses related to the reduction of real estate owned.
The decrease in professional services is also related to this reduction.
INCOME TAX EXPENSE
The income tax expense for the 1996 quarter was $927,000 compared to
$726,000 for the 1995 quarter. This increase is due to higher taxable income.
The net deferred tax liability at June 30, 1996 is $193,000 compared to a net
deferred tax asset of $357,000 at December 31, 1995.
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1995
GENERAL
The Corporation recorded a profit for the 1996 period of $3.1 million
compared to a net profit for the 1995 period of $2.5 million, primarily due to
lower deposit insurance, decreased real estate operations expenses and a tax
credit of $400,000 as discussed below under "Income Tax Expense". Income before
taxes was $4.5 million for the 1996 period compared to $3.9 million in the 1995
periods.
Net interest income for the 1996 period was $8.2 million compared to
$8.1 million for the 1995 period. The weighted average interest rate spread for
the 1996 period was 4.72% compared to 4.79% for the 1995 period. The net yield
on average earning assets was 4.90% for the 1996 and the 1995 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $13.9 million for the
1996 period from $13.7 million for the 1995 period. Interest and fees on loans
decreased to $10.0 million for the 1996 period from $10.2 million for the 1995
period. This decrease is primarily the result of a lower volume of loans
outstanding
10
<PAGE> 18
during the 1996 period despite an increase in average loan yield to 9.15% for
the 1996 period from 9.01% for the 1995 period. Interest and dividends on
investments increased to $2.3 million for the 1996 period compared to $1.7
million for the 1995 period due to a increase to the average amount of
investments held despite a decrease in the average yield on investments to 6.43%
for the 1996 period from 6.60% for the 1995 period. Mortgage-backed securities
income was $1.7 million for the 1996 period and $1.8 million for the 1995
period.
INTEREST EXPENSE
Interest on deposits increased to $5.6 million in the 1996 period from
$5.3 million for the 1995 period. This increase was primarily related to an
increase in the average cost of deposits to 3.58% for the 1996 period from 3.46%
for the 1995 period offset by a decrease in average interest-bearing deposits
during 1996. This increase in deposit cost was related to generally higher
interest rates during the 1996 period. Interest on borrowed funds decreased to
$182,000 from $251,000 for the 1995 period. This decrease is primarily related
to a decrease in borrowed funds and a decrease in the average cost of borrowings
to 5.18% for the 1996 period from 6.37% for the 1995 period.
NON-INTEREST INCOME
Total non-interest income for the 1996 period was $1.2 million compared
to $1.3 million for the 1995 period. The gain from investment securities was
$241,000 for the 1996 period compared to $4,000 for the 1995 period. The
Corporation recorded a gain on sales of mortgage loans and mortgage servicing
rights, net of $182,000 in the 1996 period compared to $417,000 in the 1995
period. Included in the gain from sale of mortgage loans and mortgage servicing
rights, net, was a $359,000 gain from the sale of mortgage servicing rights in
the 1995 period, compared to zero in the 1996 period.
NON-INTEREST EXPENSE
Total non-interest expense decreased to $4.7 million in the 1996 period
from $5.6 million in the 1995 period. This decrease is primarily attributed to a
decrease in deposit insurance, professional services and real estate operations
expenses. These decreases were partially offset by increases in salaries and
employee benefits and marketing expenses. Deposit insurance was $2,000 in the
1996 period compared to $407,000 in the 1995 period due to the FDIC's reduction
of the premium it charges the Bank for deposit insurance. Real estate operations
expense of $74,000 in the 1996 period included a net gain on sales of $20,000
compared to a net provision for losses of $520,000 in the 1995 period and
decreased operating expenses related to the reduction of Real Estate Owned. The
decrease in professional services is also related to this reduction.
INCOME TAX EXPENSE
Income tax expense for the 1996 and 1995 period was $1.4 million. In
connection with a recent audit by the IRS and a review of certain tax and
related matters, the Bank recorded a $400,000 income tax credit which is
included in income tax expense for the 1996 period. The credit is mainly the
result of two changes required by the audit. First, the IRS required the
Corporation to reduce its tax-return bad-debt deduction in prior years due to
loss carrybacks the Corporation had taken. Although that requirement in itself
had no financial statement effect on income, it enabled the Corporation to
increase its dividend-received deduction in the year of the change, thus
providing tax-return and financial statement benefit. Second, the IRS required
the Corporation to shift tax-return loan chargeoffs from one tax period to other
tax period. For federal-tax purposes, these shifts had no financial statement
effect on income. For state-tax purposes, the shift sheltered income which had
been taxed in prior years, thus providing tax-return and financial-statement
benefit.
Also due to certain tax-return adjustments based on the recent audit
and depending on the outcome of certain tax rulings by federal and state taxing
authorities over the next two-to-three years not specific to Warren Bancorp, and
depending upon the outcome of certain pending federal legislation, the
Corporation may have the ability to record additional tax credits of up to an
estimated $1.6 million in future periods.
11
<PAGE> 19
WARREN BANCORP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
ANNUAL MEETING - MAY 1, 1996
A. ELECTION OF DIRECTORS
TERM TO EXPIRE IN 1999
<TABLE>
<CAPTION>
Total Vote for Total Vote Withheld
Each Director From Each Director
------------- ------------------
<S> <C> <C>
Peter V. Bent 3,001,393 30,334
Paul J. Curtin 2,992,893 38,834
Stephen R. Howe 2,994,993 36,734
Arthur E. McCarthy 3,000,993 30,734
John D. Smidt 3,001,393 30,334
</TABLE>
OTHER DIRECTORS
TERM TO EXPIRE IN 1997 TERM TO EXPIRE IN 1998
Stephen J. Connolly, IV Francis L. Conway
Robert R. Fanning, Jr. Arthur E. Holden, Jr.
John C. Jeffers Stephen G. Kasnet
Paul M. Peduto Linda Lerner
Arthur J. Pappathanasi
George W. Phillips
John H. Womack
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
None
12
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARREN BANCORP, INC.
DATE: August 9, 1996 By: /s/ George W. Phillips
----------------------------
George W. Phillips
President and
Chief Executive Officer
DATE: August 9, 1996 By: /s/ Paul M. Peduto
-----------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
13
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUN-30-1996
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 10756
<INT-BEARING-DEPOSITS> 1449
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99481
<INVESTMENTS-CARRYING> 6703
<INVESTMENTS-MARKET> 6943
<LOANS> 222285
<ALLOWANCE> 4533
<TOTAL-ASSETS> 349421
<DEPOSITS> 310756
<SHORT-TERM> 3738
<LIABILITIES-OTHER> 2710
<LONG-TERM> 671
0
0
<COMMON> 376
<OTHER-SE> 31170
<TOTAL-LIABILITIES-AND-EQUITY> 349421
<INTEREST-LOAN> 5028
<INTEREST-INVEST> 1928
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6956
<INTEREST-DEPOSIT> 2750
<INTEREST-EXPENSE> 2819
<INTEREST-INCOME-NET> 4137
<LOAN-LOSSES> 23
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 2298
<INCOME-PRETAX> 2377
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1450
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 4.92
<LOANS-NON> 2835
<LOANS-PAST> 0
<LOANS-TROUBLED> 707
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4533
<CHARGE-OFFS> 259
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 4533
<ALLOWANCE-DOMESTIC> 4533
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
