<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
For the quarterly period ended September 30, 1998 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)
<TABLE>
<S> <C>
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)
</TABLE>
(978) 531-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirement for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class Outstanding at November 4, 1998
- --------------------------------------- --------------------------------
Common Stock, par value $.10 per share 7,915,431
</TABLE>
<PAGE> 2
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks (non-interest bearing) $ 4,804 $ 7,191
Money market funds and overnight investments 6,016 6,288
Investment and mortgage-backed securities available for sale (amortized cost
of $98,037 at September 30, 1998 and $98,737 at December 31, 1997) 100,285 101,698
Other investments (fair value of $6,784 at September 30, 1998 and $6,534 at
December 31, 1997) 6,544 6,294
Loans held for sale 1,530 1,031
Loans 257,064 240,763
Allowance for loan losses (4,023) (4,066)
-------- --------
Net loans 253,041 236,697
Banking premises and equipment, net 4,935 4,785
Accrued interest receivable 2,937 2,790
Real estate acquired by foreclosure 1,638 2,010
Other assets 2,084 2,209
-------- --------
Total assets $383,814 $370,993
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $333,431 $325,293
Borrowed funds 6,802 2,926
Escrow deposits of borrowers 1,162 1,005
Accrued interest payable 581 812
Accrued expenses and other liabilities 1,145 929
-------- --------
Total liabilities 343,121 330,965
-------- --------
Stockholders' equity:
Preferred stock, $.10 par value; Authorized - 10,000,000 shares;
Issued and outstanding - none - -
Common stock, $.10 par value; Authorized - 20,000,000 shares;
Issued - 8,094,414 shares at September 30, 1998 and 7,808,194 shares at
December 31, 1997
Outstanding - 7,910,554 shares at September 30, 1998 and 7,612,194 shares at
December 31, 1997 809 780
Additional paid-in capital 35,717 34,724
Retained earnings 3,815 4,282
Treasury stock, at cost, 183,860 shares at September 30, 1998 and 196,000 at
December 31, 1997 (1,101) (1,174)
-------- --------
39,240 38,612
-------- --------
Net unrealized gain on securities available for sale, net of taxes 1,453 1,416
Total stockholders' equity 40,693 40,028
-------- --------
Total liabilities and stockholders' equity $383,814 $370,993
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
1998 1997 1998 1997
------- ------- ------- --------
(Dollars in thousands, except per-share data)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans $ 5,642 $ 5,324 $ 16,788 $ 15,722
Interest and dividends on investments 1,279 1,100 3,739 3,329
Interest on mortgage-backed securities 423 697 1,397 2,171
------- ------- -------- --------
Total interest and dividend income 7,344 7,121 21,924 21,222
------- ------- -------- --------
Interest expense:
Interest on deposits 3,023 2,840 8,789 8,354
Interest on borrowed funds 70 30 154 112
------- ------- -------- --------
Total interest expense 3,093 2,870 8,943 8,466
------- ------- -------- --------
Net interest income 4,251 4,251 12,981 12,756
Provision for (recovery of) loan losses (22) (126) (90) (364)
------- ------- -------- --------
Net interest income after provision for or recovery of
loan losses 4,273 4,377 13,071 13,120
------- ------- -------- --------
Non-interest income:
Loan servicing fees 3 1 12 117
Customer service fees 206 213 623 689
Gains on sales of investment securities, net -- 21 188 120
Gains on sales of mortgage loans 112 38 243 129
Gain on sales of mortgage servicing rights -- 29 -- 1,436
Gain from termination of pension plan -- 457 -- 457
Other 9 1 12 6
------- ------- -------- --------
Total non-interest income 330 760 1,078 2,954
------- ------- -------- --------
Income before non-interest expense and income taxes 4,603 5,137 14,149 16,074
------- ------- -------- --------
Non-interest expense:
Salaries and employee benefits 1,513 1,411 4,403 4,301
Office occupancy and equipment 291 282 892 854
Professional services 53 14 144 179
Marketing 62 36 189 124
Real estate operations 14 17 40 390
Outside data processing expense 135 124 385 357
Other 415 388 1,277 1,189
------- ------- -------- --------
Total non-interest expenses 2,483 2,272 7,330 7,394
------- ------- -------- --------
Income before income taxes 2,120 2,865 6,819 8,680
Income tax expense 725 1,161 2,327 2,888
------- ------- -------- --------
Net income $ 1,395 $ 1,704 $ 4,492 $ 5,792
======= ======= ======== ========
Basic earnings per share $ 0.18 $ 0.23 $ 0.58 $ 0.78
======= ======= ======== ========
Diluted earnings per share $ 0.17 $ 0.22 $ 0.55 $ 0.73
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
ADDITIONAL SECURITIES
COMPREHENSIVE COMMON PAID-IN RETAINED AVAILABLE FOR TREASURY
INCOME STOCK CAPITAL EARNINGS SALE, NET STOCK TOTAL
------------- ------ ------- -------- ------------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $752 $33,869 $ 260 $ 738 $(1,174) $ 34,445
Comprehensive income:
Net income $5,792 -- -- 5,792 -- -- 5,792
------
Other comprehensive income:
Unrealized gain on securities available
for sale, net of taxes 532
Less: Reclassification adjustment for
securities gains, net tax expense of $41,
included in net income 79
------
Total other comprehensive 611 -- -- -- 611 -- 611
------
Comprehensive income $6,403
======
Dividends paid -- -- (2,769) -- -- (2,769)
Issuance of 273,720 shares for exercise
of options 28 655 -- -- -- 683
---- ------ ------- ------ ------- -------
Balance at September 30, 1997 780 34,524 3,283 1,349 (1,174) 38,762
Comprehensive income:
Net income $1,493 -- -- 1,493 -- -- 1,493
------
Other comprehensive income:
Unrealized gain on securities available
for sale, net of taxes 54
Less: Reclassification adjustment for
securities gains, net tax expense of $7,
included in net income 13
------
Total other comprehensive income 67 -- -- -- 67 -- 67
------
Comprehensive income $1,560
======
Dividends paid -- -- (494) -- -- (494)
Tax benefit of stock options exercised -- 144 -- -- -- 144
Issuance of 15,340 shares for exercise
of options -- 56 -- -- -- 56
---- ------- ------- ------ ------- -------
Balance at December 31, 1997 780 34,724 4,282 1,416 (1,174) 40,028
Comprehensive income:
Net income $4,492 -- -- 4,492 -- -- 4,492
------
Other comprehensive income:
Unrealized loss on securities available
for sale, net of taxes (88)
Less: Reclassification adjustment for
securities gains, net tax expense of $63,
included in net income 125
------
Total other comprehensive 37 -- -- -- 37 -- 37
------
Comprehensive income $4,529
======
Dividends paid -- -- (4,959) -- -- (4,959)
Tax benefit of stock options exercised -- 77 -- -- -- 77
Issuance of 260,405 common shares
and 12,140 shares of treasury stock
for exercise of options 29 916 -- -- 73 1,018
---- ------- ------ ------ ------- -------
Balance at September 30, 1998 $809 $35,717 $3,815 $1,453 $(1,101) $40,693
==== ======= ====== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 4,492 $ 5,792
Adjustments to reconcile net income to net cash
provided by operating activities:
(Recovery of) loan losses (90) (364)
Depreciation and amortization 461 452
Deferred income tax expense (benefit) 238 (461)
Amortization of premiums and discounts 259 126
(Gains) on sales of investment securities (188) (120)
(Gains) on sales of mortgage loans (243) (129)
Write-down of real estate acquired by foreclosure -- 210
(Gains) on sale of real estate acquired by foreclosure (17) (2)
(Increase) decrease in loans held for sale (499) 2,434
(Increase) in accrued interest receivable (147) (49)
(Increase) decrease in other assets (44) 275
Increase (decrease) in accrued interest payable (231) 10
Increase in other liabilities and escrow deposits 373 2,265
-------- -------
Net cash provided by operating activities 4,364 10,439
-------- -------
Cash flows from investing activities:
Net (increase) decrease in money market funds
and overnight investments 272 (720)
Purchase of investment securities (36,945) (30,047)
Proceeds from sales of investment securities available for sale 2,525 1,121
Proceeds from maturities of investment securities 28,122 30,469
Proceeds from payments of mortgage-backed securities 7,435 5,796
Proceeds from sales of real estate acquired by foreclosure 547 574
Net (increase) in loans (16,169) (13,342)
Purchases of premises and equipment (611) (473)
-------- --------
Net cash (used in) investing activities $(14,824) $ (6,622)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 8,138 $ (318)
Proceeds from Federal Home Loan Bank advances 2,000 630
Principal payments on Federal Home Loan Bank advances -- (2,674)
Net increase in other borrowed funds 1,876 946
Dividends paid (4,959) (2,769)
Stock options exercised 1,018 683
-------- --------
Net cash provided by (used in) financing activities 8,073 (3,502)
-------- --------
Net increase (decrease) in cash and due from banks (2,387) 315
Cash and due from banks at beginning of period 7,191 5,855
-------- --------
Cash and due from banks at end of period $ 4,804 $ 6,170
-------- --------
Cash paid during the period for:
Interest $ 9,214 $ 8,481
Income taxes $ 2,243 $ 2,150
Supplemental noncash investing and financing activities:
Real estate foreclosures $ 158 $ 236
Securitization of loans to mortgage-backed securities $ -- $ 1,903
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997. The accompanying consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to those
rules and regulations, but the Corporation believes that the disclosures are
adequate to make the information presented not misleading. In the opinion of
management, the consolidated financial statements reflect all adjustments
necessary for a fair presentation of the results for the interim periods
presented. Certain amounts have been reclassified to conform with the 1998
presentation. All share data reflect the effect of a 2-for-1 stock split which
occurred on May 12, 1998.
EARNINGS PER SHARE
In 1997, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." Quarter and nine months ended
September 30, 1997 earnings per share have been restated to conform to SFAS No.
128. The components of basic and diluted EPS for the quarters and nine months
ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
------------------ ----------------------- --------------------
1998 1997 1998 1997 1998 1997
------ ------ ----- ----- ----- -----
(In thousands, except per-share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,395 $1,704 7,909 7,499 $0.18 $0.23
Effect of dilutive
stock options -- -- 276 423 0.01 0.01
------ ------ ----- ----- ----- -----
Dilutive EPS $1,395 $1,704 8,185 7,922 $0.17 $0.22
====== ====== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
------------------ ----------------------- --------------------
1998 1997 1998 1997 1998 1997
------ ------ ----- ----- ----- -----
(In thousands, except per-share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $4,492 $5,792 7,802 7,447 $0.58 $0.78
Effect of dilutive
stock options -- -- 370 439 0.03 0.05
------ ------ ----- ----- ----- -----
Dilutive EPS $4,492 $5,792 8,172 7,886 $0.55 $0.73
====== ====== ===== ===== ===== =====
</TABLE>
1
<PAGE> 7
Basic EPS is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period. The effect of this
accounting change on previously reported EPS data is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
PER SHARE AMOUNTS:
Primary EPS as previously reported $0.21 $0.73
Effect of SFAS No. 128 0.02 0.05
----- -----
Basic EPS as restated $0.23 $0.78
===== =====
</TABLE>
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of a general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. This statement does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Corporation adopted SFAS No. 130 on January
1, 1998, and the components of and accumulated balance of other comprehensive
income are displayed in the "Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1997 and 1998." The financial
statements for earlier periods provided have been reclassified for comparative
purposes.
2
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995. The words "believe," "expect," "anticipate," "intend,"
"estimate," "plan," "assume" and other similar expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which are in some cases beyond the control of
the Corporation and may cause the actual results, performance or achievements of
the Corporation to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include, but are not
limited to, the following: interest rates may increase, adversely affecting the
ability of borrowers to repay adjustable-rate loans and the Corporation's
earnings and income which derive in significant part from loans to borrowers;
unemployment in the Corporation's market area may increase, adversely affecting
the ability of individual borrowers to repay loans; property values may decline,
adversely affecting the ability of borrowers to repay loans and the value of
real estate securing repayment of loans; and general economic and market
conditions in the Corporation's market area may decline, adversely affecting the
ability of borrowers to repay loans, the value of real estate securing repayment
of loans and the Corporation's ability to make profitable loans. Any of the
above may also result in lower interest income, increased loan losses,
additional charge-offs and writedowns and higher operating expenses. The section
entitled "Year 2000" contains forward-looking statements. Anticipated expenses
or delays in dealing with year-2000 issues by the Corporation, its suppliers and
borrowers could result in material differences between the forward-looking
statements and actual results. These and other factors that might cause
differences between actual and anticipated results, performance and achievements
are discussed in greater detail in the section entitled "Year 2000."
GENERAL
Warren Bancorp, Inc.'s operating results for the three and nine months
ended September 30, 1998 (the "1998 quarter" and "1998 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 a decreased profit for the 1998 period as
compared to the nine months ended September 30, 1997 (the "1997 period")
primarily due to pre-tax gains of $1.4 million from the sale of rights to
service residential mortgage loans and $457,000 from the termination of the
Bank's defined-benefit pension plan occurring in the 1997 period. Net interest
income increased due to increased levels of earning assets, but this increase
was minimized by decreased rate spreads and the yield on average earning assets
due to a highly competitive commercial lending environment, a decrease in
general interest rates and a reduction in residential mortgage loans. When
general interest rates decrease, the yield on the Bank's total assets will
typically decrease more than the cost of its funds. This is mainly because
certain sources of funds, namely demand deposits and stockholders' equity, do
not bear interest, and other sources of funds at already low rates of interest
may not have their rates reduced at the same rate as the Bank's assets. Further
reductions in general interest rates may reduce the Bank's rate spread and net
yield on average earnings assets which would have an adverse effect on the net
interest margin and net income.
Real estate acquired by foreclosure decreased to $1.6 million at
September 30, 1998 from $2.0 million at December 31, 1997. Nonperforming loans
increased by $387,000 to $1.1 million during the 1998 period. (Loans to one
borrower amounting to $597,000 were over 90 days past due but still accruing and
are reflected in the total nonperforming loans. There were no 90-day past due
loans at December 31, 1997 that were still accruing.) Management continues to
monitor these nonperforming asset portfolios closely. If conditions in the
Massachusetts' real estate market become unstable and values deteriorate, the
amount of nonaccrual loans and real estate acquired through foreclosure would be
expected to increase, resulting in lower interest income and increased loan
losses, which could require additional loan
3
<PAGE> 9
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.
SUBSEQUENT EVENT
On October 21, 1998 the Board of Directors of the Corporation
reauthorized management to repurchase up to 200,000 shares of its common stock
which represents approximately 2.5% of the 7,911,000 shares outstanding at
September 30, 1998. These repurchases may be made from time to time in the open
market or in private transactions depending on market conditions and may be
discontinued at any time. This is part of previous stock repurchase program
authorized in April, 1996.
ASSET/LIABILITY MANAGEMENT
A primary objective of the Corporation's asset/liability management
policy is to manage interest-rate risk over time to achieve a prudent level of
net interest income in changing interest-rate environments. Management's
strategies are intended to be responsive to changes in interest rates and to
recognize market demands for particular types of deposit and loan products.
These strategies are overseen by an internal Asset/Liability Management
Committee and by the Bank's Board of Directors, and the risks are managed with
techniques such as simulation analysis, which measures the effect on net
interest income of possible changes in interest rates, and "gap" analysis, using
models similar to the one shown on the following page.
The Corporation uses simulation analysis to measure exposure of net
interest income to changes in interest rates over a one-year period. This period
is measured because the Corporation is most vulnerable to changes in short-term
(one year and under) rates. Simulation analysis involves projecting future
interest income and expense under various rate scenarios. The Corporation's
policy on interest-rate risk specifies that if short-term interest rates were to
shift immediately up or down 100 basis points, estimated net interest income for
the next 12 months should decline by less than 13%. This policy remained in
effect during the period, and in management's opinion, although the
interest-rate environment has changed, there has been no material change in
interest-rate risk since December 31, 1997, the date as of which the simulation
analysis was performed. Certain shortcomings are inherent in a simulation
analysis. Estimates of customer behavior to changing interest rates may differ
significantly from actual. Areas of these estimates include loan prepayment
speeds, shifting between adjustable-rate and fixed-rate loans, and activity
within different categories of deposit products. Also, the ability of some
borrowers to repay their adjustable-rate loans may decrease in the event of
interest-rate increases.
The following table summarizes the Corporation's interest-rate
sensitivity position as of September 30, 1998. 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. None of these assets is considered a
trading asset.
4
<PAGE> 10
INTEREST-RATE SENSITIVITY POSITION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
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 ................... $ 27,064 $ 9,308 $ 20,066 $ 30,183 $ --
Loans held for sale ..................... 1,530 -- -- -- --
Adjustable-rate loans ................... 76,304 14,390 45,169 78,628 2,479
Fixed-rate loans......................... 4,425 1,760 5,344 19,974 8,093
Mortgage-backed securities............... 2,529 4,042 9,345 4,972 1,402
-------- --------- -------- -------- -------
Total interest sensitive assets....... 111,852 29,500 79,924 133,757 11,974
-------- --------- -------- -------- -------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts................................ 15,320 15,319 -- -- --
Time deposits............................ 22,752 27,688 49,589 54,444 2
Other deposits (a)....................... 66,472 66,471 -- 431 --
Borrowings............................... 4,131 -- -- 33 2,638
-------- --------- -------- -------- -------
Total interest sensitive liabilities.. 108,675 109,478 49,589 54,908 2,640
-------- --------- -------- -------- -------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities................... $ 3,177 $ (79,978) $ 30,335 $ 78,849 $ 9,334
======== ========= ======== ======== =======
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities... $ 3,177 $ (76,801) $(46,466) $ 32,383 $41,717
======== ========= ======== ======== =======
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities.......... 102.3% 64.8% 82.7% 110.0% 112.8%
======== ========= ======== ======== =======
Cumulative excess (deficiency) as a
percentage of total assets.............. 0.8% (20.0)% (12.1)% 8.4% 10.9%
======== ========= ======== ======== =======
</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 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 Depositors Insurance Fund Liquidity
Fund. During the 1998 period, the Bank did not use the Federal Reserve Bank
discount window and did not borrow from the Depositors Insurance Fund Liquidity
Fund.
The Bank also uses the longer-term borrowings facilities within its
total available credit line with the FHLBB. Advances from the FHLBB, none of
which were from the overnight facility, were $2,671,000 at September 30, 1998.
5
<PAGE> 11
During 1998, the primary sources of liquidity were $25.6 million in
loan sales, proceeds from maturities of investment securities of $28.1 million,
proceeds from sales of investment securities of $2.5 million, $57.7 million in
payoffs and paydowns of loans and proceeds from paydowns of mortgage-backed
securities of $7.5 million. Primary uses of funds were $99.5 million in
residential, commercial real estate and commercial loan originations and $36.9
million to purchase investment securities. At September 30, 1998, the Bank had
$6.0 million in overnight investments.
The primary source of liquidity for the Corporation is dividends from
the Bank. Dividends paid by the Corporation are the primary use of this
liquidity.
From time to time, the Bank has obtained time deposits in denominations
of $100,000 and over. The following table summarizes maturities of time deposits
of $100,000 or more outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Within One Year (IN THOUSANDS)
--------------- --------------
<S> <C>
Less than 3 months.................................. $ 2,991
3 to 6 months....................................... 3,794
6 to 12 months...................................... 8,791
-------
15,576
More than 12 months.................................. 9,224
-------
$24,800
=======
</TABLE>
CAPITAL ADEQUACY
Total stockholders' equity at September 30, 1998 was $40.7 million, an
increase of $700,000 from $40.0 million at December 31, 1997. Included in
stockholders' equity at September 30, 1998 is an unrealized gain on securities
available for sale, which increased stockholders' equity, of $1,453,000 as
compared to an unrealized gain at December 31, 1997 of $1,416,000. This change
in unrealized gains on securities available for sale was mainly due to decreased
interest rates during the 1998 period. Future interest-rate increases could
reduce the fair value of these securities and reduce stockholders' equity. As a
percentage of total assets, stockholders' equity was 10.60% at September 30,
1998 compared to 10.79% at December 31, 1997.
At September 30, 1998, neither the Federal Reserve Board ("FRB") nor
the FDIC permitted the unrealized gain to be used in their calculation of Tier I
capital.
The FRB's leverage capital-to-assets guidelines require the strongest
and most highly rated bank holding companies, such as the Corporation, to
maintain at least a 3.00% ratio of Tier I capital to average consolidated
assets. All other bank holding companies are required to maintain at least 4.00%
to 5.00%, depending on how the FRB evaluates their condition. The FRB may
require a higher capital ratio. At September 30, 1998, the FRB leverage capital
ratio was 10.36% compared to 10.58% at December 31, 1997.
The FDIC's leverage capital-to-assets ratio guidelines are
substantially similar to those adopted by the FRB and described above. At
September 30, 1998, the Bank's leverage capital ratio, under FDIC guidelines,
was 9.39% compared to 9.22% at December 31, 1997.
The FRB and the FDIC have also imposed risk-based capital requirements
on the Corporation and the Bank, respectively, which give different risk
weightings to assets and to off-balance sheet assets such as loan commitments
and loans sold with recourse. Both the FRB and FDIC guidelines require the
Corporation and the Bank to have an 8.00% risk-based capital ratio. The
Corporation's and the Bank's risk-based capital ratios were 13.21% and 12.08%,
respectively, at September 30, 1998 compared to 14.15% and 12.54% at December
31, 1997, thus exceeding their risk-based capital requirements.
As of September 30, 1998, the Bank's total risk-based capital ratio,
Tier I risk-based capital ratio and leverage capital ratio were 12.08%, 10.86%,
and 9.39%, respectively. Based on these capital ratios, the Bank is designated
as "well capitalized."
6
<PAGE> 12
YEAR 2000
The statements in the following section include "Year-2000 readiness
disclosure" within the meaning of the Year-2000 Information and Readiness
Disclosure Act of 1998.
The year-2000 issue is the result of systems run by computer (personal
computers, telephone systems, electric utilities, etc.) being date sensitive.
Most computer hardware and associated software applications are based on
two-digit years which will either recognize the year 2000 as 1900 or not at all.
To remedy this situation these date-sensitive systems must be reprogrammed to
recognize the year 2000.
The Corporation has developed comprehensive plans to evaluate, test,
and ensure that its computer systems and key service providers are year-2000
compliant and is on schedule to meet the timetable established to complete this
effort.
The Corporation intends to renew its contract with its current outside
data processing service provider. As part of that contract, the data service
provider will ensure year-2000 compliance on the core banking systems that it
provides to the Corporation. All costs related to this aspect of the year-2000
effort are the responsibility of the provider. The provider, who services over
600 banks in the United States, has developed a plan to complete remediation
efforts by November 30, 1998 and test its information systems by May 31, 1999.
Two separate teams made up of the Corporation's employees will input and
validate data during this testing phase. To date the provider is on schedule and
testing by the Corporation's employees began on November 3, 1998.
Test plans for systems not provided by the data service provider are in
the development phase. As these systems are identified, test scripts will be
developed on an individual basis. The testing phase began on October 16, 1998
and will continue through May 31, 1999.
As part of its 1998 business plan, the Corporation is currently
upgrading all of its personal computers and associated software, all of which
will be year-2000 certified upon purchase. This upgrade is on schedule and will
be completed by December 31, 1998. The Corporation has contacted its commercial
borrowers by personal contact and questionnaires to monitor their preparedness
and has also notified deposit customers by mail of the Corporation's year-2000
efforts. Additional customer contact will take place in 1999. A list of
significant third party vendors (telephone systems, electric utilities, security
systems, etc.) has been developed and monitoring of their year-2000 preparedness
is in process. A contingency plan is in the process of being developed in the
event that the Corporation's third party vendors do not remediate their own
year-2000 issues and is scheduled to be completed by June 30, 1999. The ability
of third parties, including the Corporation's borrowers, with whom the
Corporation transacts business to adequately address their year-2000 issues is
outside of the Corporation's control. Due to this uncertainty, the failure of
such third parties of the Corporation to adequately address their own year-2000
issues could have a material adverse effect on the Corporation's financial
condition and results of operations. These adverse effects could be the result
of but not limited to borrowers failing to repay loans, loss of business
opportunities due to a failure to properly transact business and loss of
customers to competition due to customer-service failure. This uncertainty
cannot be quantified at this time.
The Corporation is updating hardware and its associated software as
part of its ongoing operations, and the hardware and software upgrades are a
necessary result of that effort and have not been accelerated due to the
year-2000 issue. The use of internal resources for the year-2000 effort has not
delayed normal workflow or other projects from being completed. Management
estimates that out-of-pocket costs related to year-2000 issues will be less than
$50,000. These costs will not be material to the financial condition and results
of operations of the Corporation.
FINANCIAL CONDITION
The Corporation's total assets increased to $383.8 million at September
30, 1998 from $371.0 million at December 31, 1997. Increases occurred in
commercial real estate and commercial construction loans and were partially
offset by decreases in investments available for sale and residential mortgage
loans.
7
<PAGE> 13
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of money market funds and overnight
investments, investment securities and mortgage-backed securities available for
sale, and other investments, decreased to $112.8 million at September 30, 1998
from $114.3 million at December 31, 1997. This decrease occurred in overnight
investments, U.S. Treasury and U.S. Government Agency obligations,
mortgage-backed securities and preferred stocks and was partially offset by
increases in fixed-income mutual funds and corporate notes. Future increases in
interest rates could reduce the value of these investments. Mortgage-backed
securities decreased to $23.0 million at September 30, 1998 from $30.6 million
at December 31, 1997 due to principal paydowns.
INVESTMENTS AT SEPTEMBER 30, 1998 ARE AS FOLLOWS:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OVERNIGHT
Money market funds and
overnight investments..................... $ 6,016 $ -- $ -- $ 6,016
-------- ------ ------- ------
6,016 $ -- $ -- 6,016
======== ====== ======= =======
AVAILABLE-FOR-SALE
Fixed income mutual funds................... 25,787 781 -- 26,568
FNMA mortgage-backed securities............. 16,361 645 -- 17,006
GNMA mortgage-backed securities............. 5,929 64 -- 5,993
U.S. Government and related
obligations................................ 2,516 17 -- 2,533
Corporate notes............................. 40,134 85 (4) 40,215
Preferred stock............................. 7,310 660 -- 7,970
-------- ------ ------- --------
98,037 2,252 (4) 100,285
-------- ------ ------- --------
OTHER
Foreign government bonds and
notes..................................... 750 -- -- 750
Stock in Federal Home Loan Bank
of Boston................................. 4,110 -- -- 4,110
Stock in Depositors Insurance Fund
Liquidity Fund............................ 108 -- -- 108
Stock in Savings Bank Life Insurance
Company of Massachusetts ................. 1,576 240 -- 1,816
-------- ------ ------- --------
6,544 240 -- 6,784
-------- ------ ------- --------
$110,597 $2,492 $ (4) $113,085
======== ====== ======= ========
</TABLE>
8
<PAGE> 14
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $16.8 million during the
1998 period to $258.6 million at September 30, 1998. This increase is the result
of increases in commercial real estate, commercial construction and commercial
loans partially offset by paydowns and payoffs of residential mortgage loans.
The Bank typically sells all fixed-rate residential mortgage loans that it
originates to the secondary mortgage market and retains the adjustable-rate
loans in its residential mortgage portfolio. Due to the decline in interest
rates, this adjustable-rate portfolio has decreased significantly due to
refinancing into fixed-rate loans. Commercial real estate, commercial
construction and commercial loans typically earn higher yields than residential
mortgage loans, but usually carry higher risk due to loan size.
The following table sets forth the classification of the Corporation's
loans as of September 30, 1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Residential mortgages................................ $ 46,208 $ 52,707
Commercial real estate............................... 137,864 125,832
Commercial construction ............................. 29,985 19,739
Commercial loans..................................... 22,480 22,259
Consumer loans....................................... 20,527 20,226
-------- --------
$257,064 $240,763
======== ========
</TABLE>
Residential mortgage loan originations during the 1998 period were $32.7
million compared to $21.0 million in the 1997 period. The Corporation originated
$27.3 million in fixed-rate loans during the 1998 period compared to $11.1
million during the 1997 period. Adjustable-rate loans totaling $5.4 million were
originated during the 1998 period compared to $9.9 million during the 1997
period. The Corporation sold loans totaling $25.6 million during the 1998 period
compared to $19.0 million sold in the 1997 period. At September 30, 1998, the
Corporation held $1.5 million of fixed-rate residential mortgage loans for sale
compared to $1.0 million at December 31, 1997.
CREDIT QUALITY
IMPAIRED AND NONPERFORMING LOANS
Loans are deemed by the Corporation to be impaired when, based on current
information and events, it is probable that the Corporation will be unable to
collect all amounts due according to the contractual terms of the original loan
agreement. Generally, nonaccruing loans are deemed impaired. Large groups of
homogeneous loans, such as smaller balance residential mortgage and consumer
installment loans are collectively evaluated for impairment. Typically, the
minimum delay in receiving payments according to the contractual terms of the
loan that can occur before a loan is considered impaired is 90 days. Impaired
loans are analyzed and categorized by level of credit risk and collectibility in
order to determine their related allowance for loan losses. At September 30,
1998 there were four loans considered impaired and accruing totaling $712,000
compared to four loans considered impaired and accruing totaling $720,000 at
December 31, 1997.
Loans past due 90 days or more, or past due less than 90 days but in
nonaccrual status were $1,095,000 at September 30, 1998 compared to $347,000 at
December 31, 1997. Included in nonperforming loans is one loan considered
impaired due to restructuring of terms and nonaccruing in the amount of $148,000
at September 30, 1998 as compared to two loans considered impaired and
nonaccruing totaling $201,000 at December 31, 1997. Accrual of interest on loans
is discontinued either when a reasonable doubt exists as to the full, timely
collection of principal or interest or when the loans become contractually past
due by 90 days or more, unless they are adequately secured and are in the
process of collection.
9
<PAGE> 15
When a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income. Income on
such loans is recognized to the extent that cash is received and where the
ultimate collection of principal and interest is probable. Following collection
procedures, the Corporation generally institutes appropriate action to foreclose
the property or acquire it by deed in lieu of foreclosure.
The table below details nonperforming loans at:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accruing loans 90 days or more in arrears............. $ 597 $ 0
Nonaccrual loans...................................... 498 347
------ -----
Total nonperforming loans............................. $1,095 $ 347
====== =====
Percentage of nonperforming loans to:
Total loans........................................... 0.43% 0.14%
====== =====
Total assets.......................................... 0.29% 0.09%
====== =====
</TABLE>
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure totaled $1.6 million at September 30,
1998 and $2.0 million at December 31, 1997. Real estate acquired by foreclosure
is reflected at the lower of the carrying value of the loans or the net carrying
value of the property less estimated cost of disposition. These properties
consist mainly of land and single-family dwellings. Unstable conditions in the
Massachusetts real estate market could result in losses and writedowns as the
Corporation reduces the book value of real estate to reflect likely realizable
values.
In summary, nonperforming assets are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Nonperforming loans................................... $1,095 $ 347
Real estate acquired by foreclosure................... 1,638 2,010
------ ------
Total nonperforming assets............................ $2,733 $2,357
====== ======
Total nonperforming assets as a
percentage of total assets......................... 0.7% 0.6%
</TABLE>
10
<PAGE> 16
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses
for the nine months ended September 30, 1998 and September 30, 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balance at beginning of period.......................................... $ 4,066 $ 4,533
------- -------
Losses charged to the allowance:
Residential mortgage................................................ -- 204
Commercial mortgage and construction................................ -- 309
Commercial loans.................................................... -- --
Consumer loans...................................................... 63 9
------- -------
63 522
------- -------
Loan recoveries:
Residential mortgage................................................ 10 68
Commercial mortgage and construction................................ 62 232
Commercial loans.................................................... 21 112
Consumer loans...................................................... 17 7
------- -------
110 419
------- -------
Net (charge-offs) recoveries 47 (103)
------- -------
Provision for (recovery of) loan losses charged (credited) to income.... (90) (364)
------- -------
Balance at end of period................................................ $ 4,023 $ 4,066
======= =======
Allowance to total loans at end of period............................... 1.56% 1.74%
======= =======
Allowance to nonperforming loans at end of period....................... 367.4% 367.3%
======= =======
Allocation of ending balance:
Residential mortgage................................................ $ 626 $ 838
Commercial mortgage and construction................................ 2,932 2,605
Commercial loans.................................................... 264 305
Consumer loans...................................................... 201 318
------- -------
$ 4,023 $ 4,066
======= =======
</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 doubtful.
Balances in the allowance for loan losses are determined on a periodic
basis by management and the Loan Committee of the Board of Directors with
assistance from 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-offs (which decrease the allowance) and
loan-loss recoveries (which increase the allowance). The allowance for loan
losses included above attributable to $860,000 of impaired loans, of which
$456,000 is measured using the present value method and $404,000 using the fair
value method, is $192,000.
The required allowance for loan losses could increase in future periods
if the condition of the loan portfolio deteriorates or if the balance of the
portfolio increases. Such an increase in the allowance could require additional
provisions for loan losses to be charged to income.
11
<PAGE> 17
LEGAL AND OFF-BALANCE SHEET RISKS
Various legal claims arise from time to time in the course of business
of the Corporation and its subsidiaries. At September 30, 1998, there were no
legal claims against the Corporation or its subsidiaries.
The Corporation is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations of interest rates.
These financial instruments include commitments to originate loans, unused lines
of credit, standby letters of credit, recourse arrangements on sold assets and
forward commitments to sell loans. The financial instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets.
OTHER ASSETS
Included in other assets at September 30, 1998 and December 31, 1997
are $1,168,000 and $742,000, respectively, of deferred income taxes receivable.
Also included in other assets at December 31, 1997 was a current income tax
receivable of $547,000.
LIABILITIES
Deposits increased to $333.4 million at September 30, 1998 from $325.3
million at December 31, 1997. This increase took place primarily in time, NOW
and money market deposit accounts, and was partially offset by decreases in
demand deposit accounts and savings deposits.
Federal Home Loan Bank of Boston advances were $2,671,000 at September
30, 1998 and $671,000 at December 31, 1997. Securities sold under agreement to
repurchase were $4.1 million at September 30, 1998 and $2.2 million at December
31, 1997.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997
GENERAL
The Corporation's profit for the 1998 quarter was $1.4 million compared
to a profit for the 1997 quarter of $1.7 million. The decrease in the 1998
quarter is primarily due to an after-tax non-recurring gain of $109,000 realized
in the 1997 quarter from the termination of the Bank's defined-benefit pension
plan, an increase in non-interest expense and a reduction in loan loss
recoveries.
Net interest income for the 1998 and 1997 quarters was $4.3 million,
respectively. The weighted average interest rate spread for the 1998 quarter was
4.47% compared to 4.79% for the 1997 quarter. The net yield on average earning
assets was 4.70% for the 1998 quarter and 4.95% for the 1997 quarter. The
decrease in the weighted average interest rate spread and the net yield on
average earnings assets is mainly due to lower interest rates charged to
borrowers in a highly competitive commercial lending market and a reduction in
residential mortgage loans. In addition, when rates decrease in general the
yield on the Bank's assets will decrease, but certain sources of funds, namely
demand deposits and stockholders' equity, do not bear interest, and other
sources of funds at already low rates of interest may not have their rates
reduced at the same rate as the Bank's assets. Further reductions in general
interest rates may reduce the Bank's rate spread and net yield on average
earnings assets which would have an adverse effect on the net interest margin
and net income. The return on average assets and the return on average
stockholders' equity were 1.47% and 13.97%, respectively, for the 1998 quarter
compared to 1.90% and 18.03%, respectively, for the 1997 quarter.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $7.3 million for the
1998 quarter from $7.1 million for the 1997 quarter. Interest on loans increased
to $5.6 million for the 1998 quarter from $5.3 million for the 1997 quarter due
to an increase in the average loans outstanding in the 1998 quarter despite a
decrease in the average loan yield to 8.91% for the 1998 quarter compared to
9.23% for the 1997 quarter. Interest and
12
<PAGE> 18
dividends on investments was $1.3 and $1.1 million for the 1998 and 1997
quarters, respectively. This increase is attributed to an increase in the
average investments held despite a decrease in the average yield to 5.94% for
the 1998 quarter from 6.07% for the 1997 quarter. Mortgage-backed securities
income decreased to $423,000 in the 1998 quarter from $697,000 in the 1997
quarter primarily due to a decrease in the average amount of mortgage-backed
securities held due to paydowns and a decrease in the average yield to 7.17% for
the 1998 quarter compared to 7.33% in the 1997 quarter.
INTEREST EXPENSE
Interest on deposits increased to $3.0 million for the 1998 quarter
from $2.8 million for the 1997 quarter. This increase was primarily related to
an increase in the average cost of deposits to 3.61% for the 1998 quarter from
3.55% for the 1997 quarter due to a shift into higher cost time deposits.
Average total deposits outstanding also increased during the 1998 quarter as
compared to the 1997 quarter. Interest on borrowed funds and escrow deposits of
borrowers increased to $70,000 in the 1998 quarter from $30,000 for the 1997
quarter. This increase is related to an increase in borrowed funds and an
increase in the average cost of borrowings to 3.84% for the 1998 quarter from
2.57% for the 1997 quarter.
NON-INTEREST INCOME
Total non-interest income for the 1998 quarter was $330,000 compared to
$760,000 for the 1997 quarter. The gain from the sale of mortgage loans was
$112,000 in the 1998 quarter compared to $38,000 in the 1997 quarter. There were
no gains from the sale of investment securities for the 1998 quarter compared to
$21,000 in the 1997 quarter. During the 1997 quarter a non-recurring gain from
the termination of the Bank's defined benefit pension plan of $457,000 was
recognized.
NON-INTEREST EXPENSE
Total non-interest expense was $2.5 million in the 1998 quarter and
$2.3 million in the 1997 quarter. Salary and employee benefits increased to $1.5
million in the 1998 quarter from $1.4 million in the 1997 quarter. Increases in
expense related to the introduction of new banking products were incurred and
reflected in increased marketing and outside data processing expense in the 1998
quarter as compared to the 1997 quarter. Real estate operations expense
decreased to $14,000 in the 1998 quarter compared to $17,000 in the 1997
quarter.
INCOME TAX EXPENSE
Income tax expense for the 1998 quarter was $725,000 compared to $1.2
million for the 1997 quarter.
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
GENERAL
The Corporation recorded a profit for the 1998 period of $4.5 million
compared to a profit for the 1997 period of $5.8 million. The 1997 period profit
included after-tax gains of $1.1 million from the sale of rights to service
residential mortgage loans and $109,000 from the termination of the Bank's
defined-benefit pension plan.
Net interest income for the 1998 and 1997 period were $13.0 million and
$12.8 million, respectively. The weighted average interest-rate spread for the
1998 period was 4.63% compared to 4.78% for the 1997 period. The net yield on
average earning assets was 4.88% for the 1998 period and 4.97% for the 1997
period. The return on average assets and the return on average stockholders'
equity were 1.60% and 14.83%, respectively, for the 1998 period compared to
2.16% and 21.04%, respectively, for the 1997 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $21.9 million for the
1998 period from $21.2 million for the 1997 period. Interest on loans increased
to $16.8 million for the 1998 period from $15.7 million for the 1997 period due
to average loans outstanding increasing in the 1998 period despite a decrease in
the average loan yield to 9.10% for the 1998 period compared to 9.24% for the
1997 period. Interest and
13
<PAGE> 19
dividends on investments was $3.7 and $3.3 million for the 1998 and 1997
periods, respectively. This increase is attributed to an increase in the average
amount of investments held partially offset by a decrease in the average yield
on investments to 6.01% for the 1998 period from 6.02% for the 1997 period.
Mortgage-backed securities income decreased to $1.4 million in the 1998 period
from $2.2 million in the 1997 period primarily due to a decrease in the average
amount of mortgage-backed securities held due to paydowns and a decrease in the
average yield to 7.16% for the 1998 period compared to 7.27% in the 1997 period.
INTEREST EXPENSE
Interest on deposits increased to $8.8 million for the 1998 period from
$8.4 million for the 1997 period. This increase was related to an increase in
the average cost of deposits to 3.59% for the 1998 period from 3.52% for the
1997 period and to an increase in average total deposits outstanding. Interest
on borrowed funds and escrow deposits of borrowers increased to $154,000 in the
1998 period from $112,000 for the 1997 period. This increase is primarily
related to an increase in borrowed funds despite the average cost of borrowings
decreasing to 3.49% for the 1998 period from 3.24% for the 1997 period.
NON-INTEREST INCOME
Total non-interest income for the 1998 period was $1.1 million compared
to $3.0 million for the 1997 period. The 1997 period included a pre-tax gain
from the sale of $209 million of mortgage servicing rights of $1.4 million and a
$457,000 gain from the Bank's termination of its defined-benefit pension plan.
The gain from the sale of mortgage loans was $243,000 in the 1998 period
compared to $129,000 in the 1997 period. Loan servicing fees were $12,000 for
the 1998 period compared to $117,000 in the 1997 period. This decrease is mainly
due to a reduction in the amount of loans serviced for others as the result of
the sale of the above-mentioned mortgage servicing rights. The gain from the
sale of investment securities was $188,000 for the 1998 period compared to
$120,000 in the 1997 period.
NON-INTEREST EXPENSE
Total non-interest expense was $7.3 million in the 1998 period and $7.4
million in the 1997 period. Salary and employee benefits was $4.4 million in the
1998 period and $4.3 million for the 1997 period. Real estate operations expense
decreased to $40,000 in the 1998 period compared to $390,000 in the 1997 period
mainly due to a writedown in the value of real estate owned through foreclosure
occurring in the 1997 period. Increases in marketing and outside processing
expense to $189,000 and $385,000, respectively, in the 1998 period from $124,000
and $357,000, respectively, in the 1997 period were incurred due to the
introduction of new banking products.
INCOME TAX EXPENSE
Income tax expense for the 1998 period was $2.3 million compared to
$2.9 million for the 1997 period. As a result of the capital gain generated from
the sale of mortgage-servicing rights in the 1997 period, the Corporation was
able to recognize a tax benefit in the amount of $279,000 from capital losses of
prior periods during that period which substantially lowered the effective tax
rate of the 1997 period.
14
<PAGE> 20
WARREN BANCORP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
27.1 Financial Data Schedule - 1998
27.2 Financial Data Schedule - 1997 Restated
15
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARREN BANCORP, INC.
DATE: November 12, 1998 By: /s/ John R. Putney
----------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: November 12, 1998 By: /s/ Paul M. Peduto
----------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) SEPT.
30, 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,804
<INT-BEARING-DEPOSITS> 6,016
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,285
<INVESTMENTS-CARRYING> 6,544
<INVESTMENTS-MARKET> 6,784
<LOANS> 258,594
<ALLOWANCE> 4,023
<TOTAL-ASSETS> 383,814
<DEPOSITS> 333,431
<SHORT-TERM> 4,131
<LIABILITIES-OTHER> 2,888
<LONG-TERM> 2,671
0
0
<COMMON> 809
<OTHER-SE> 39,884
<TOTAL-LIABILITIES-AND-EQUITY> 383,814
<INTEREST-LOAN> 5,642
<INTEREST-INVEST> 1,702
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,344
<INTEREST-DEPOSIT> 3,023
<INTEREST-EXPENSE> 3,093
<INTEREST-INCOME-NET> 4,251
<LOAN-LOSSES> (22)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,483
<INCOME-PRETAX> 2,120
<INCOME-PRE-EXTRAORDINARY> 2,120
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,395
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
<YIELD-ACTUAL> 4.70
<LOANS-NON> 498
<LOANS-PAST> 597
<LOANS-TROUBLED> 712
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,066
<CHARGE-OFFS> 63
<RECOVERIES> 110
<ALLOWANCE-CLOSE> 4,023
<ALLOWANCE-DOMESTIC> 4,023
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) SEP. 30,
1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 6,170
<INT-BEARING-DEPOSITS> 7,452
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,816
<INVESTMENTS-CARRYING> 6,294
<INVESTMENTS-MARKET> 6,534
<LOANS> 234,644
<ALLOWANCE> 4,066
<TOTAL-ASSETS> 364,130
<DEPOSITS> 316,048
<SHORT-TERM> 3,158
<LIABILITIES-OTHER> 5,491
<LONG-TERM> 671
0
0
<COMMON> 390
<OTHER-SE> 38,372
<TOTAL-LIABILITIES-AND-EQUITY> 364,130
<INTEREST-LOAN> 5,325
<INTEREST-INVEST> 1,797
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,122
<INTEREST-DEPOSIT> 2,840
<INTEREST-EXPENSE> 2,870
<INTEREST-INCOME-NET> 4,252
<LOAN-LOSSES> (126)
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 2,272
<INCOME-PRETAX> 2,865
<INCOME-PRE-EXTRAORDINARY> 2,865
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,704
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 4.95
<LOANS-NON> 1,107
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,399
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,533
<CHARGE-OFFS> 522
<RECOVERIES> 419
<ALLOWANCE-CLOSE> 4,066
<ALLOWANCE-DOMESTIC> 4,066
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
