<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-17222
WARREN BANCORP, INC.
(Exact Name of registrant as specified in the charter)
------------------
MASSACHUSETTS 04-3024165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 MAIN STREET 01960
PEABODY, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(978) 531-7400
(Registrant's telephone number, including area code)
--------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirement for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant based on the closing sale price for the
registrant's common stock on March 1, 1999, as reported by NASDAQ was
$58,653,684.
The number of shares of the registrant's common stock outstanding as of
March 1, 1999 was 7,674,691.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 5, 1999 are incorporated by reference into the Annual Report as
portions of Part III of Form 10-K.
1
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SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets ................................ $397,065 $370,993 $358,954 $355,854 $348,239
Investment securities ....................... 93,950 83,701 75,618 69,427 50,822
Mortgage-backed securities .................. 20,430 30,579 42,730 49,414 51,472
Net loans ................................... 262,452 236,697 218,313 212,159 217,724
Real estate acquired by foreclosure or
substantively repossessed ................. 1,450 2,010 2,230 3,092 8,354
Deposits .................................... 347,012 325,293 316,366 314,850 315,063
Borrowed funds .............................. 7,674 2,926 4,927 7,368 6,602
Stockholders' equity ........................ 39,921 40,028 34,445 31,238 23,795
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Interest and dividend income ................ $29,253 $28,539 $27,781 $27,750 $25,640
Interest expense ............................ 12,060 11,404 11,469 11,608 9,961
------- ------- ------- ------- -------
Net interest income ....................... 17,193 17,135 16,312 16,142 15,679
Provision for (recovery of) loan losses ..... (91) (316) 116 (154) (287)
Non-interest income (loss) .................. 1,443 3,339 2,149 2,049 (2,553)
Non-interest expenses ....................... 10,099 9,857 9,768 11,003 10,376
------- ------- ------- ------- -------
Income before income taxes .................. 8,628 10,933 8,577 7,342 3,037
Income tax expense .......................... 2,724 3,648 1,968 1,960 1,436
------- ------- ------- ------- -------
Net income .................................. $ 5,904 $ 7,285 $ 6,609 $ 5,382 $ 1,601
======= ======= ======= ======= =======
Basic earnings per share (A) .............. $ 0.75 $ 0.96 $ 0.90 $ 0.75 $ 0.23
======= ======= ======= ======= =======
Diluted earnings per share (A) ............ $ 0.72 $ 0.91 $ 0.84 $ 0.70 $ 0.21
======= ======= ======= ======= =======
Cash dividends paid (A) ................... $ 0.72 $ 0.44 $ 0.27 $ 0.15 $ --
======= ======= ======= ======= =======
OTHER DATA:
Return on average assets .................... 1.57% 2.02% 1.87% 1.54% 0.44%
Return on average stockholders' equity ...... 14.79 19.50 20.47 19.30 6.64
Stockholders' equity to assets at year end .. 10.05 10.79 9.60 8.78 6.83
Dividend payout ratio ....................... 96.04 44.79 29.47 20.09 --
Weighted average interest rate spread ....... 4.53 4.80 4.69 4.71 4.52
Net yield on average earning assets ......... 4.79% 5.03% 4.88% 4.84% 4.55%
Number of banking offices ................... 6 6 6 6 6
</TABLE>
The consolidated financial data for the Corporation and its subsidiaries
presented above are expanded and explained in more detail by the financial
information contained elsewhere herein. The consolidated financial data were
derived from audited consolidated financial statements of the Corporation and
the Bank at and for the periods shown.
(A) Share data have been retroactively restated to reflect the 2-for-1 common
stock split which occurred on May 12, 1998.
2
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CROSS REFERENCE SHEET OF INFORMATION REQUIRED BY ITEMS IN
FORM 10-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Business.................................................................. 24-27
Item 2. Properties................................................................ 16
Item 3. Legal Proceedings......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................... 27
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 74
Item 6. Selected Financial Data................................................... 2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................... 4-24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................ 7
Item 8. Financial Statements and Supplementary Data............................... 28-69
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures......................................................... 27
Item 10. Directors and Executive Officers of the Corporation....................... 27
Item 11. Executive Compensation.................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 27
Item 13. Certain Relationships and Related Transactions............................ 27
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 70
</TABLE>
STATISTICAL DISCLOSURE FOR BANK HOLDING COMPANIES
<TABLE>
<S> <C>
(2) Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential................................................... 18-19
(3) Investment Portfolio........................................................... 11
(4) Loan Portfolio................................................................. 12
(5) Summary of Loan Loss Experience................................................ 15
(6) Deposits....................................................................... 17
(7) Return on Equity and Assets.................................................... 2
(8) Short-Term Borrowings ......................................................... 48-49
</TABLE>
3
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995. The words "believe," "expect," "anticipate," "intend,"
"estimate," "plan," "assume" and other similar expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which are in some cases beyond the control of
the Corporation and may cause the actual results, performance or achievements of
the Corporation to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include, but are not
limited to, the following: interest rates may increase, adversely affecting the
ability of borrowers to repay adjustable-rate loans and the Corporation's
earnings and income which derive in significant part from loans to borrowers;
unemployment in the Corporation's market area may increase, adversely affecting
the ability of individual borrowers to repay loans; property values may decline,
adversely affecting the ability of borrowers to repay loans and the value of
real estate securing repayment of loans; and general economic and market
conditions in the Corporation's market area may decline, adversely affecting the
ability of borrowers to repay loans, the value of real estate securing repayment
of loans and the Corporation's ability to make profitable loans. Any of the
above may also result in lower interest income, increased loan losses,
additional charge-offs and writedowns and higher operating expenses. The section
entitled "Year 2000" also 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 this Annual Report, including
Form 10-K, under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," and the section entitled "Year 2000."
Management's discussion and analysis of financial condition and results
of operations should be read in conjunction with the audited financial
statements and notes thereto appearing elsewhere in this report.
GENERAL
Warren Bancorp, Inc.'s (the "Corporation") operating results for the
year ending December 31, 1998 (the "1998 period") reflect the operations of its
only subsidiary, Warren Five Cents Savings Bank (the "Bank"). The Bank, which is
wholly owned by the Corporation, operates as a community bank and is in the
business of making individual and commercial loans to customers in its market
area.
The Corporation recorded a decreased profit for the 1998 period as
compared to the year ended December 31, 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 $538,000 from the termination of the Bank's defined-benefit
pension plan occurring in the 1997 period. Net interest income increased during
the 1998 period due to increased levels of earning assets, but this increase was
minimized by decreased rate spreads and the decreased yield on average earning
assets due to a highly competitive commercial lending environment, a decrease in
general interest rates and a reduction in the residential mortgage loan
portfolio. 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.
Stockholders' equity decreased in 1998 due to a decrease in the
unrealized gain on securities available for sale net of income taxes, the
payment of dividends equal to over 96% of net income and the
4
<PAGE> 5
purchase of treasury stock. Future increases in interest rates could reduce the
value of the securities portfolio and stockholders' equity.
Real estate acquired by foreclosure decreased by $560,000 to $1.5
million at December 31, 1998 and nonperforming loans increased to $638,000
during the 1998 period from $347,000 at December 31, 1997. Management continues
to monitor those nonperforming asset portfolios closely. If conditions in the
Massachusetts real estate market become unstable and values deteriorate, the
amount of nonaccrual loans and real estate acquired through foreclosure would be
expected to increase, resulting in lower interest income and increased loan
losses, which could require additional loan loss provisions to be charged to
operating income. Moreover, real estate acquired through foreclosure may give
rise to additional charge-offs and writedowns and higher expenses for property
taxes and other carrying costs.
In 1998, the Corporation paid regular quarterly dividends totaling $.34
per share and paid a special dividend of $.38 per share.
On April 16, 1998 the Corporation announced a 2-for-1 stock split in
the form of a stock dividend. Stockholders of record on April 27, 1998 received
one additional share for each share they owned as of that date. The additional
shares were issued on May 12, 1998. All share data have been retroactively
restated to reflect this 2-for-1 stock split.
In October 1998 the Board of Directors reauthorized management to
repurchase up to 200,000 shares of the Corporation's common stock. During the
1998 period the Corporation repurchased 103,000 shares at a cost of $928,000. In
January, 1999 the Corporation completed the repurchase program with the
repurchase of 106,000 shares at a cost of $928,000.
Also, on January 20, 1999 the Board of Directors authorized another
common stock repurchase program which allows management to repurchase up to an
additional 386,000 shares of its common stock which represent 5% of the
7,721,000 shares outstanding on that date. The repurchases, including block
repurchases, may be made from time to time in the open market or in private
transactions depending on market condition and may be discontinued at any time.
YEAR 2000
The statements in the following section are "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.
Older 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 or
replaced 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.
During 1998 the Corporation renewed its contract with its outside data
processing service provider. As part of that contract, the data service provider
will ensure year-2000 compliance of 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, which services over 600 banks
in the United States, has completed remediation efforts and testing is well
underway on its information systems and is scheduled to be completed by May 31,
1999. The first phase of testing began in November, 1998 with two separate teams
made up of the Corporation's employees inputting and validating data. Another
testing phase began in February, 1999. To date, the provider is on schedule and
testing by the Corporation's employees has produced satisfactory results.
5
<PAGE> 6
Test plans for systems not provided by the data service provider are
ongoing. As these systems are identified, test scripts are developed on an
individual basis. The testing phase began on October 16, 1998 and will continue
through May 31, 1999 on these systems.
Included in its 1998 business plan, the Corporation upgraded all of its
personal computers and associated software, all of which were year-2000
certified upon purchase. This upgrade is substantially completed with a small
number of units to be installed on or before June 30, 1999. 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 that will include direct mailing, a web page and a dedicated telephone
line specifically for year-2000 issues. 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. At the present time the
Corporation has not received any indication from its vendors that they will not
be year-2000 compliant. 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 has updated hardware and its associated software as
part of its normal ongoing operations, and the hardware and software upgrades
were a necessary result of that plan 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 or results
of operations of the Corporation.
6
<PAGE> 7
ASSET/LIABILITY MANAGEMENT
A primary objective of the Corporation's asset/liability management
policy is to manage the 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 money market interest
rates were to shift immediately up or down 100 basis points, estimated net
interest income for the next 12 months should decline by less than 13%. The
Corporation was in compliance with this policy at December 31, 1998 and 1997.
The following table reflects the Corporation's estimated exposure as a
percentage of estimated net interest income for the next 12 months, assuming an
immediate shift in short-term interest rates:
<TABLE>
<CAPTION>
Estimated increase (decrease) in
Rate change (basis points) net interest income
-------------------------- --------------------
December 31,
------------
<S> <C> <C>
1998 1997
---- ----
+100 1.3% 4.2%
-100 (0.8)% (4.4)%
</TABLE>
Certain shortcomings are inherent in a simulation analysis. Estimates
of customer behavior to changing interest rates may differ significantly from
actual. Areas of these estimates include loan prepayment speeds, shifting
between adjustable-rate and fixed-rate loans, and activity within different
categories of deposit products. Also, the ability of some borrowers to repay
their adjustable-rate loans may decrease in the event of interest-rate
increases.
The following table summarizes the Corporation's interest-rate
sensitivity position as of December 31, 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 anytime, they are presented in the table below based on an
assumed maturity of six months. None of these assets is considered a trading
asset.
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INTEREST-RATE SENSITIVITY POSITION
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
WITHIN ONE YEAR
---------------------------------------------------------------
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 ................... $ 24,974 $ 9,930 $ 25,044 $ 31,519 $ --
Loans held for sale ..................... 1,192 -- -- -- --
Adjustable-rate loans ................... 73,080 17,972 42,246 85,369 2,464
Fixed-rate loans ........................ 8,546 2,808 6,705 19,898 6,912
Mortgage-backed securities .............. 1,809 3,803 8,993 4,130 1,253
--------- --------- --------- --------- ---------
Total interest sensitive assets ...... 109,601 34,513 82,988 140,916 10,629
--------- --------- --------- --------- ---------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts ............................... 18,808 15,319 -- -- --
Time deposits ........................... 28,629 33,446 38,343 52,284 2
Other deposits(a) ....................... 70,803 70,803 103 -- --
Borrowings .............................. 5,003 -- -- 33 2,638
--------- --------- --------- --------- ---------
Total interest sensitive liabilities.. 123,243 119,568 38,446 53,317 2,640
--------- --------- --------- --------- ---------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities .................. $ (13,642) $ (85,055) $ 44,542 $ 87,599 $ 7,989
========= ========= ========= ========= =========
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities .. $ (13,642) $ (98,697) $ (54,155) $ 33,444 $ 41,433
========= ========= ========= ========= =========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ......... 88.9% 59.4% 80.8% 110.0% 112.3%
========= ========= ========= ========= =========
Cumulative excess (deficiency) as a
percentage of total assets ............. (3.4)% (24.9)% (13.6)% 8.4% 10.4%
========= ========= ========= ========= =========
</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 rate changes over time.
LIQUIDITY
The Bank seeks to ensure that sufficient liquidity is available to meet
cash requirements while earning a return on liquid assets. The Bank uses its
liquidity primarily to fund loan and investment commitments, to supplement
deposit flows and to meet operating expenses. The primary sources of liquidity
are interest and amortization from loans, mortgage-backed securities and
investments, sales and maturities of investments, loan sales, deposits and
Federal Home Loan Bank of Boston ("FHLBB") advances, which include a $15 million
overnight line of credit. The Bank also has access to the Federal Reserve Bank's
discount window and may borrow from the Depositors Insurance Fund Liquidity
Fund.
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During 1998, the Bank did not use the Federal Reserve Bank discount window and
did not borrow from the Depositors Insurance Fund Liquidity Fund.
The Bank also uses the longer term borrowing facilities within its
total available credit line with the FHLBB. Advances from the FHLBB, other than
the overnight facility, were $2,671,000 at December 31, 1998 compared to
$671,000 at December 31, 1997.
During 1998, the primary sources of liquidity were $34.3 million in
loan sales, proceeds from sales and maturities of investments of $39.9 million,
proceeds from paydowns of mortgage-backed securities of $9.7 million, a net
increase in deposits of $21.7 million and a $4.8 million increase in Federal
Home Loan Bank advances and other borrowed funds. Primary uses of funds were
$142.6 million in residential, commercial real estate and commercial loan
originations, $53.0 million to purchase investment securities and $5.7 million
to pay dividends to shareholders. At December 31, 1998, the Bank had $4.5
million in money market funds and overnight investments.
The primary source of liquidity for the Corporation is dividends from
the Bank. Dividends paid and stock repurchases by the Corporation are the
primary uses of this liquidity.
From time to time, the Bank has obtained time deposits in denominations
of $100,000 and over. The following table summarizes maturities of time deposits
of $100,000 or more outstanding at December 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Within one year:
Less than 3 months ................................ $ 4,379
3 to 6 months ..................................... 4,596
6 to 12 months .................................... 6,459
-------
15,434
More than one year .................................... 8,901
-------
$24,335
=======
</TABLE>
CAPITAL ADEQUACY
Total stockholders' equity at December 31, 1998 was $39.9 million, a
decrease of $100,000 from $40.0 million at the end of 1997. Included in
stockholders' equity is an unrealized gain on securities available for sale,
which decreased stockholders' equity, of $799,000 as compared to an unrealized
gain at December 31, 1997 of $1,416,000. 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 10.05% at December 31, 1998
compared to 10.79% at December 31, 1997.
At December 31, 1998, neither the Federal Reserve Board ("FRB") nor the
FDIC permitted the unrealized gain or loss to be used in their calculations of
Tier I capital. At December 31, 1998, net of appropriate taxes, the unrealized
gain on securities available for sale was $799,000.
The FRB's leverage capital-to-assets guidelines require the strongest
and most highly rated bank holding companies to maintain at least a 3.00% ratio
of Tier I capital to average consolidated assets. All other bank holding
companies are required to maintain at least 4.00% to 5.00%, depending on how the
FRB evaluates their condition. The FRB may require a higher capital ratio. At
December 31, 1998, the FRB leverage capital ratio was 10.10% 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
December 31, 1998, the Bank's leverage capital ratio, under FDIC guidelines, was
9.20% 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
9
<PAGE> 10
Corporation and the Bank to have an 8.00% total risk-based capital ratio. The
Corporation's and the Bank's total risk-based capital ratios were 12.71% and
11.68%, respectively, at December 31, 1998 compared to 14.15% and 12.54%,
respectively, at December 31, 1997 for both the Corporation and the Bank, thus
exceeding their risk-based capital requirements.
As of December 31, 1998, the Bank's total risk-based capital ratio,
Tier I risk-based capital ratio and leverage capital ratio were 11.68%, 10.50%,
and 9.20%, respectively. Based on these capital ratios, the Bank is considered
to be "well capitalized." (For further discussion on capital adequacy see note 9
in the Notes to Consolidated Financial Statements.)
FINANCIAL CONDITION
The Corporation's total assets increased to $397.1 million at December
31, 1998 from $371.0 million at December 31, 1997. Increases occurred in
investments available for sale and commercial loans and commercial real estate
loans and were partially offset by decreases in residential mortgage loans,
money market funds and overnight investments, and mortgage-backed securities
available for sale.
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, increased to $114.4 million at December 31, 1998
from $114.3 million at December 31, 1997. Increases in fixed-income mutual funds
and corporate notes were partially offset by decreases in overnight investments,
U.S. Treasury and U.S. Government Agency Obligations, mortgage-backed securities
and preferred stocks. Future increases in interest rates could reduce the value
of these investments. Mortgage-backed securities decreased to $20.4 million at
December 31, 1998 from $30.6 million at December 31, 1997 due to principal
paydowns.
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<PAGE> 11
INVESTMENTS. Certain information regarding the Corporation's
investments as of December 31 is presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Amortized Cost:
Money market funds and overnight investments........................ $ 4,542 $ 6,288
U.S. Treasury and U.S. Government Agency
obligations available for sale................................... 2,510 10,536
Foreign government bond held to maturity............................ 750 500
Fixed-income mutual funds available for sale........................ 28,706 19,009
Mortgage-backed securities available for sale....................... 19,988 29,746
Corporate notes available for sale.................................. 43,541 32,286
Preferred stock available for sale.................................. 7,310 7,919
Other investments................................................... 5,794 5,794
-------- --------
Total amortized cost................................................... 113,141 112,078
Unrealized gain on investment securities
available for sale.................................................. 1,239 2,202
-------- --------
Total carrying value................................................... $114,380 $114,280
======== ========
Total fair value of investment securities.............................. $114,620 $114,520
======== ========
</TABLE>
The following table presents the maturity distribution of the
investment securities portfolio and the weighted average yield for each type and
range of maturity as of December 31, 1998. Adjustable-rate mortgage-backed
securities are shown as if the entire balance came due on the repricing date.
Estimates are made of fixed-rate mortgage-backed security amortization and
prepayments (dollars in thousands):
<TABLE>
<CAPTION>
WITHIN ONE TO FIVE TO OVER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- --------- --------- -----
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market funds and
overnight investments..... $ 4,542 4.87% $ - -% $ - -% $ - -% $ 4,542 4.87%
U.S. Treasury and agency
obligations available
for sale................. 2,510 5.49 - - - - - - 2,510 5.49
Mortgage-backed securities
available for sale........ 14,604 7.56 4,130 6.63 1,254 6.27 - - 19,988 7.29
Corporate notes
available for sale........ 35,738 5.65 7,803 5.36 - - - - 43,541 5.60
Foreign government bonds
held to maturity.......... - - 250 7.00 250 7.80 250 6.75 750 7.18
------- -------- ------ ---- -------
$57,394 6.07% $ 12,183 5.82% $1,504 6.52% $250 6.75% $71,331 6.04%
======= ======== ====== ==== =======
</TABLE>
At December 31, 1998, the Corporation did not hold securities of any
single issuer, excluding FHLB of Boston stock, that exceeded ten percent of
stockholders' equity.
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $25.9 million during the
1998 period to $267.7 million at December 31, 1998. 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 risk due to loan size.
11
<PAGE> 12
The following table sets forth the classification of the Corporation's
loans as of December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Residential mortgages ... $ 45,658 $ 52,707 $ 66,654 $ 85,276 $104,724
Commercial real estate .. 163,154 125,832 107,428 94,341 83,846
Commercial construction . 13,620 19,739 10,742 6,254 3,914
Commercial loans ........ 23,726 22,259 16,458 8,490 4,964
Consumer loans .......... 20,317 20,226 21,564 22,331 25,065
-------- -------- -------- -------- --------
$266,475 $240,763 $222,846 $216,692 $222,513
======== ======== ======== ======== ========
</TABLE>
Balances in residential mortgage loans are decreasing mainly as a result of loan
paydowns. 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 during the 1998 period, this adjustable-rate portfolio has
decreased significantly due to refinancing into fixed rate loans. Balances in
commercial real estate, commercial construction, and commercial loans are
increasing mainly due to the Corporation's increasing emphasis on corporate
lending.
Residential mortgage loan originations increased during 1998 to $46.1
million from $32.0 million in 1997. The Corporation originated $36.1 million in
fixed-rate loans during 1998 compared to $17.3 million during 1997.
Adjustable-rate loans totaling $10.0 million were originated during 1998
compared to $14.7 million during 1997. The Corporation sold loans totaling $34.3
million during 1998 compared to $26.3 million in 1997. At year-end 1998, the
Corporation held $1.2 million of fixed-rate residential mortgage loans for sale
compared to $1.0 million at year-end 1997.
The following table sets forth a maturity distribution of the
Corporation's commercial real estate, commercial construction, and commercial
loans as of December 31, 1998. For purposes of compiling this table, fixed rate
loans are treated as if the entire balance were due on the last contractual
payment date. Adjustable-rate loans are shown at the adjustment period date.
Based on experience with such loans, partial or full repayment of a portion of
the Corporation's commercial real estate loans prior to contractual maturity can
be expected.
<TABLE>
<CAPTION>
WITHIN ONE TO OVER TOTAL
ONE YEAR FIVE YEARS FIVE YEARS GROSS LOANS
-------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial real estate ......... $ 66,122 $ 93,544 $ 3,488 $163,154
Commercial construction ........ 13,075 545 -- 13,620
Commercial loans ............... 19,074 3,447 1,205 23,726
-------- -------- -------- --------
Total ..................... $ 98,271 $ 97,536 $ 4,693 $200,500
======== ======== ======== ========
Loans with adjustable rate ..... $ 79,797 $ 2,464
Loans with fixed rate .......... 17,539 2,229
-------- --------
$ 97,536 $ 4,693
======== ========
</TABLE>
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
12
<PAGE> 13
allowance for loan losses. At December 31, 1998, there were four loans
considered impaired and accruing interest totaling $710,000.
Loans past due 90 days or more, or past due less than 90 days but in a
nonaccrual status, increased to $638,000 at December 31, 1998 compared to
$347,000 at December 31, 1997. There were no impaired loans included in these
nonperforming loans at December 31, 1998. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full, timely
collection of principal or interest or when the loans become contractually past
due by 90 days or more, unless they are adequately secured and are in the
process of collection.
When a loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed against current period interest income.
Income on such loans is recognized to the extent that cash is received and where
the ultimate collection of principal and interest is probable. Following
collection procedures, the Corporation generally institutes appropriate action
to foreclose the property or acquire it by deed in lieu of foreclosure.
The table below details nonperforming loans at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days or more
past due .......................... $ 163 $ -- $ -- $ 155 $ 89
Nonaccrual loans .................... 475 347 2,712 4,084 3,244
----- ----- ------ ------ ------
Total nonperforming loans ........... $ 638 $ 347 $2,712 $4,239 $3,333
===== ===== ====== ====== ======
Percentage of nonperforming loans to:
Total loans ......................... 0.24% 0.14% 1.22% 1.96% 1.50%
===== ===== ====== ====== ======
Total assets ........................ 0.16% 0.09% 0.76% 1.19% 0.96%
===== ===== ====== ====== ======
</TABLE>
In addition, at December 31, 1998 and 1997, the Corporation had
$491,000 and $1,213,000, respectively, of loans past due 60 to 89 days and still
accruing interest not included above. These loans are closely monitored by
management and they are considered in reviews of the adequacy of the loan loss
reserve.
The Corporation's lending activities are conducted throughout eastern
Massachusetts with emphasis in Essex County, Massachusetts and contiguous
counties, including those in southern New Hampshire, although from time to time
loans will be made outside of this area. The Bank makes single family,
residential construction, condominium and multi-family residential loans;
commercial real estate, commercial construction and commercial loans; and a
variety of consumer loans. Most loans granted by the Bank are collateralized by
real estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity and real estate values within the
borrower's geographic area. The ability and willingness of commercial real
estate, commercial construction and commercial loan borrowers to honor their
repayment commitments is generally dependent on the health of the real estate
economic sector, the borrower's business/industrial sector and the general
economy in the borrower's geographic area.
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure totaled $1.5 million at December
31, 1998 compared to $2.0 million at December 31, 1997. Real estate acquired by
foreclosure is reflected at the lower of the carrying value of the loan or the
net carrying value of the property less estimated cost of disposition. These
properties consist mainly of land.
The Corporation had a net gain of $2,000 on the sale of real estate
acquired by foreclosure in the 1998 period compared to a write-down of $208,000
on real estate acquired by foreclosure, net of gains on sale, in the 1997
period. If conditions become unstable in the Massachusetts real estate market,
losses and writedowns could occur as the Corporation reduces the book value of
real estate to reflect likely realizable values.
13
<PAGE> 14
In summary, nonperforming assets are as follows at December 31, (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming loans .......... $ 638 $ 347 $ 2,712 $ 4,239 $ 3,333
Loans foreclosed in sub-
stance* ..................... -- -- -- -- 1,454
Real estate acquired by
foreclosure ................. 1,450 2,010 2,230 3,092 6,900
------- ------- ------- ------- -------
Total nonperforming assets ... $ 2,088 $ 2,357 $ 4,942 $ 7,331 $11,687
======= ======= ======= ======= =======
</TABLE>
* Reported with loans after December 31, 1994 and with real estate acquired by
foreclosure at December 31, 1994.
14
<PAGE> 15
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan
losses for the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ..................... $ 4,066 $ 4,533 $ 4,533 $ 4,789 $ 5,942
------- ------- ------- ------- -------
Losses charged to the allowance:
Commercial ..................................... -- -- -- -- (108)
Commercial mortgage and
construction ................................ -- (344) (143) (113) (647)
Residential mortgage ........................... -- (241) (280) (472) (561)
Consumer loans ................................. (98) (23) (33) (31) (16)
------- ------- ------- ------- -------
(98) (608) (456) (616) (1,332)
------- ------- ------- ------- -------
Loan recoveries:
Commercial ..................................... 24 116 61 79 94
Commercial mortgage
and construction ............................... 79 248 233 255 276
Residential mortgage ........................... 23 75 30 161 85
Consumer loans ................................. 20 18 16 19 11
------- ------- ------- ------- -------
146 457 340 514 466
------- ------- ------- ------- -------
Net (charge-offs) recoveries ................... 48 (151) (116) (102) (866)
Provision for (recovery of) loan
losses charged (credited)
to expense ..................................... (91) (316) 116 (154) (287)
------- ------- ------- ------- -------
Balance at end of period ........................... $ 4,023 $ 4,066 $ 4,533 $ 4,533 $ 4,789
======= ======= ======= ======= =======
Allowance to total loans
at end of period ............................... 1.50% 1.69% 2.03% 2.09% 2.15%
======= ======= ======= ======= =======
Allowance to nonperforming
loans at end of period ......................... 630.6% 1171.18% 167.1% 106.9% 143.7%
======= ======= ======= ======= =======
Net (charge-offs) recoveries to
Average loans outstanding ...................... .02% (.07)% (.05)% (.27)% (.39)%
======= ======= ======= ======= =======
Allocation of ending balance:
Commercial ..................................... $ 298 $ 295 $ 218 $ 116 $ 202
Commercial mortgage and
construction ................................ 2,917 2,752 3,099 2,940 2,854
Residential mortgage ........................... 619 727 936 1,237 1,441
Consumer loans ................................. 189 292 280 240 292
------- ------- ------- ------- -------
$ 4,023 $ 4,066 $ 4,533 $ 4,533 $ 4,789
======= ======= ======= ======= =======
Percentage of loans in each category to total loans:
Commercial ..................................... 8.9% 9.2% 7.4% 3.9% 2.2%
Commercial mortgage and
construction ................................. 66.3 60.5 53.0 46.4 39.4
Residential mortgage ........................... 17.1 21.9 29.9 39.4 47.1
Consumer loans ................................. 7.7 8.4 9.7 10.3 11.3
------- ------- ------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>
15
<PAGE> 16
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
nonperforming, including collectibility, collateral adequacy and the general
condition of the borrowers, economic conditions, delinquency statistics, market
area activity, the risk factors associated with each of the various loan
categories and the borrower's adherence to the original terms of the loan.
Individual loans, including loans considered impaired, are analyzed and
categorized by level of credit risk and collectibility. In determining the
allowance, management uses specific estimated losses on certain problem loans,
loss factors determined for each category of credit risk using historical
charge-off statistics and factors that consider economic condition and trends.
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 $710,000 of
impaired loans, of which $454,000 is measured using the present value method and
$256,000 using the fair value method, is $118,000.
LEGAL AND OFF-BALANCE SHEET RISKS
Various legal claims arise from time to time in the course of business
of the Corporation and its subsidiaries. At December 31, 1998 there were no
legal claims against the Corporation.
The Corporation is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations of interest rates.
These financial instruments include commitments to originate loans, unused lines
of credit, standby letters of credit, recourse arrangements on sold assets and
forward commitments to sell loans. The financial instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets. (See "Asset/Liability Management"
in this section and note 11 in the Notes to Consolidated Financial Statements.)
PROPERTIES
The Bank operates a main office and three additional banking offices in
Peabody and two banking offices in Beverly. At December 31, 1998, management
believes that the Bank's existing properties are adequate for the conduct of its
business.
The following table sets forth certain information relating to the
Bank's offices as of December 31, 1998:
<TABLE>
<CAPTION>
OWNED LEASE LEASE
YEAR OR EXPIRATION RENEWAL
OFFICE LOCATION OPENED LEASED DATE OPTION
--------------- ------ ------ ---- ------
<S> <C> <C> <C> <C>
Peabody Square
10 Main Street .................. 1854 Owned -- --
Northshore Shopping Center ........ 1958 Leased 2000 Yes
West Peabody
Russell and Lowell Street ....... 1971 Leased 2003 No*
South Peabody
Lynn Street ..................... 1979 Owned -- --
Beverly
175 Cabot Street ................ 1867 Owned -- --
North Beverly
55 Dodge Street ................. 1968 Leased 2006 No
</TABLE>
* BANK HAS OPTION TO PURCHASE
16
<PAGE> 17
OTHER ASSETS
Included in other assets at December 31, 1998 and December 31, 1997 are
$1,388,000 and $742,000, respectively, of deferred income taxes receivable. Also
included in other assets was a current income tax receivable of $139,000 at
December 31, 1998 compared to $547,000 at December 31, 1997.
LIABILITIES
Year-end deposit levels increased to $347.0 million at December 31,
1998 from $325.3 million at December 31, 1997. This increase took place
primarily in time, NOW, and money market deposits and was partially offset by a
decrease in regular savings and non-interest bearing deposits.
AVERAGE DEPOSITS. The following table presents the average balance and
average cost of the Corporation's deposits for the years ended December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
AMOUNT COST AMOUNT COST AMOUNT COST
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing.......... $ 15,508 -% $ 15,977 -% $ 15,211 -%
NOW accounts.................. 35,496 0.70 32,242 0.76 31,366 0.96
Savings....................... 130,370 2.66 129,585 2.60 132,130 2.52
Time.......................... 148,437 5.47 139,507 5.48 134,091 5.60
-------- -------- --------
Total deposits.......... $329,811 3.59% $317,311 3.54% $312,798 3.56%
======== ======== ========
</TABLE>
Federal Home Loan Bank of Boston advances were $2,671,000 at December
31, 1998 and $671,000 at December 31, 1997. Securities sold under agreement to
repurchase were $5.0 million at December 31, 1998 and $2.2 million at December
31, 1997.
17
<PAGE> 18
INCOME YIELD AND COST OF FUNDS ANALYSIS. The table below sets forth
information concerning the Corporation's average balances, interest income and
expense, and yield information for the three years shown. Average loan balances
include nonaccruing loans. The yields on investments are calculated on a fully
taxable-equivalent basis using a federal tax rate of 34%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans ................. $250,992 $22,434 8.94% $229,889 $21,248 9.24% $220,847 $20,237 9.17%
Investments ........... 86,417 5,048 6.02 76,476 4,499 6.13 71,325 4,311 6.25
Mortgage-backed
securities ........... 24,781 1,771 7.15 38,159 2,792 7.32 45,327 3,233 7.13
-------- ------- -------- ------- -------- -------
Total interest-
earning assets ... 362,190 29,253 8.12% 344,524 28,539 8.34% 337,499 27,781 8.28%
Non-interest earning
assets ................ 14,777 15,130 15,212
-------- -------- --------
Total assets ............ $376,967 $359,654 $352,711
======== ======== ========
Interest-bearing
liabilities:
Deposits .............. $314,303 11,833 3.76% $301,334 11,258 3.74% $297,587 11,147 3.75%
Borrowings ............ 6,203 227 3.66 4,525 146 3.23 6,690 322 4.80
-------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities . 320,506 12,060 3.76 305,589 11,404 3.73 304,277 11,469 3.77
Non-interest bearing
deposits .............. 15,508 15,977 15,211
-------- -------- --------
Total deposits and
borrowed funds ........ 336,014 3.59 321,836 3.54 319,488 3.59
Non-interest bearing
liabilities ........... 1,029 463 936
Stockholders' equity .... 39,924 37,355 32,287
-------- -------- --------
Total liabilities
and stockholders'
equity ............ $376,967 $359,654 $352,711
======== ======== ========
Net interest income ..... $17,193 $17,135 $16,312
======= ======= =======
Weighted average
rate spread ........... 4.53% 4.80% 4.69%
Net yield on average
earning assets ........ 4.79% 5.03% 4.88%
</TABLE>
18
<PAGE> 19
RATE/VOLUME ANALYSIS. The following table sets forth information
concerning the Bank's interest and dividend income, interest expense and net
interest income changes for the years listed.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
--------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------------------- ----------------------------------
DUE TO DUE TO
--------------------------------- ----------------------------------
AVERAGE AVERAGE
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------ ---- ------ ----- ------ ---- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Investments .................. $ 609 $ (81) $ 21 $ 549 $ 312 $(115) $ (9) $ 188
Mortgage-backed securities ... (978) (65) 22 (1,021) (510) 83 (14) (441)
Loans ........................ 1,950 (700) (64) 1,186 829 175 7 1,011
------ ----- ---- ------- ----- ----- ---- ------
Total interest and dividend
income ................. 1,581 (846) (21) 714 631 143 (16) 758
Interest expense:
Deposits:
N.O.W ....................... 25 (18) (2) 5 9 (64) (2) (57)
Savings ..................... 20 81 (2) 102 (64) 98 (2)
32
Time ........................ 489 (20) (1) 468 304 (162) (7) 135
Borrowings ................... 54 20 7 81 (104) (105) 34 (175)
------ ----- ---- ------- ----- ----- ---- ------
Total interest expense ... 588 (63) 5 656 145 (233) 23 (65)
------ ----- ---- ------- ----- ----- ---- ------
Net interest income ............ $ 993 $(909) $(26) $ 58 $ 486 $ 376 $(39) $ 823
====== ===== ==== ======= ===== ===== ==== ======
</TABLE>
BUSINESS SEGMENTS
For internal reporting, planning and business purposes, the Corporation
segments its operations into distinct business groups. An individual business
group's profit contribution to the Corporation as a whole is determined based
upon the Corporation's profitability reporting system which assigns capital and
other balance sheet items and income statement items to each of the business
groups. This segmentation mirrors the Corporation's organizational structure.
Management accounting policies are in place for assigning revenues and expenses
that are not directly incurred by the business groups, such as overhead, the
results of asset allocations, and transfer revenues and expenses. Accordingly,
the Corporation's business-segment operating results will differ with other
similar information published by other financial institutions. In addition,
management accounting concepts are periodically refined and results may change
to reflect these refinements.
On January 1 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
operating segments of a business enterprise. The new rules establish revised
standards for public companies relating to the reporting of financial and
descriptive information about their operating segments in financial statements.
Operating segments are components of an enterprise which are evaluated regularly
by the chief operating decision maker in deciding how to allocate resources and
assess performance. The Corporation's chief operating decision maker is the
President and Chief Executive Officer of the Corporation. The adoption of SFAS
No. 131 had no effect on the Corporation's primary financial statements, but did
result in the disclosure of segment information contained herein.
19
<PAGE> 20
The Corporation has identified its reportable operating business
segments as the Corporate Banking Business and the Personal Banking Business. A
description of each reportable business segment is discussed below:
CORPORATE BANKING
The Corporate Banking Business provides services to business customers
in the Corporation's market area. These services include, but are not limited
to, commercial real estate and construction loans, asset-based financing and
cash management/deposit services. It services all loans in its business.
PERSONAL BANKING
The Personal Banking Group provides services to consumers in the
Corporation's market area through its branch and ATM network. These services
include, but are not limited to, home equity loans, installment loans, safe
deposit boxes and an array of deposit services. This business purchases
adjustable-rate mortgage loans from another business group and services all
loans in its business.
Non-reportable operating segments of the Corporation's operations that
do not meet the qualitative and quantitative thresholds requiring disclosure are
included in the Other category in the disclosure of business segments below.
Revenues in these segments consist mainly of interest income on investments and
gains on sales of mortgage loans and securities.
Specific reportable segment information as of and for the years ended
December 31, 1998, 1997 and 1996 is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income - external $ 18,029 $ 10,756 $ 468 $ 29,253
Interest income - internal - 8,746 12 $(8,758) -
Interest expense - external 1,037 10,923 100 12,060
Interest expense - internal 8,454 761 (457) (8,758) -
Fee and other income 171 763 509 1,443
Income tax expense
(benefit) 2,569 787 (632) 2,724
Net income 3,848 1,939 117 5,904
Total assets 221,900 162,500 12,700 397,100
Total loans 200,400 66,100 1,200 267,700
Total deposits 37,300 307,700 2,000 347,000
</TABLE>
20
<PAGE> 21
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income - external $ 15,101 $ 12,913 $ 525 $ 28,539
Interest income - internal - 7,248 25 $(7,273) -
Interest expense - external 665 10,595 144 11,404
Interest expense - internal 7,128 300 (155) (7,273) -
Fee and other income 134 2,354* 851 3,339
Income tax expense
(benefit) 2,377 2,067 (796) 3,648
Net income 3,476 3,832 (23) 7,285
Total assets 186,100 169,700 15,200 371,000
Total loans 167,900 73,100 1,000 242,000
Total deposits 28,600 294,700 2,000 325,300
</TABLE>
* Includes a gain on sale of mortgage servicing rights of $1,436,000.
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income - external $ 12,906 $ 14,310 $ 565 $ 27,781
Interest income - internal - 6,780 (45) $(6,735) -
Interest expense - external 488 10,639 342 11,469
Interest expense - internal 6,409 900 (574) (6,735) -
Fee and other income 185 808 1,156 2,149
Income tax expense
(benefit) 1,622 1,835 (1,489) 1,968
Net income 2,494 2,851 1,264 6,609
Total assets 151,600 193,400 14,000 359,000
Total loans 135,300 88,400 2,100 225,800
Total deposits 21,000 293,900 1,500 316,400
</TABLE>
21
<PAGE> 22
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
GENERAL
The Corporation recorded a profit for the 1998 period of $5.9 million
compared to a profit for the 1997 period of $7.3 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 periods was $17.2 million and
$17.1 million, respectively. The weighted average interest-rate spread for the
1998 period was 4.53% compared to 4.80% for the 1997 period. The net yield on
average earning assets was 4.79% for the 1998 period and 5.03% for the 1997
period. The return on average assets and the return on average stockholders'
equity were 1.57% and 14.79%, respectively, for the 1998 period compared to
2.02% and 19.50%, respectively, for the 1997 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $29.3 million for the
1998 period from $28.5 million for the 1997 period. Interest on loans increased
to $22.4 million for the 1998 period from $21.2 million for the 1997 period due
to average loans outstanding increasing in the 1998 period despite a decrease in
the average loan yield to 8.94% for the 1998 period compared to 9.24% for the
1997 period. Interest and dividends on investments was $5.0 and $4.5 million for
the 1998 and 1997 periods, respectively. This increase is attributable to an
increase in the average amount of investments held partially offset by a
decrease in the average yield on investments to 6.02% for the 1998 period from
6.13% for the 1997 period. Mortgage-backed securities income decreased to $1.8
million in the 1998 period from $2.8 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 7.15% for the 1998 period
compared to 7.32% in the 1997 period.
INTEREST EXPENSE
Interest on deposits increased to $11.8 million for the 1998 period
from $11.3 million for the 1997 period. This increase was related to an increase
in the average cost of deposits to 3.76% for the 1998 period from 3.74% for the
1997 period and an increase in average total deposits outstanding. Interest on
borrowed funds and escrow deposits of borrowers increased to $227,000 in the
1998 period from $146,000 for the 1997 period. This increase is primarily
related to an increase in borrowed funds and the average cost of borrowings
increasing to 3.66% for the 1998 period from 3.23% for the 1997 period.
NON-INTEREST INCOME
Total non-interest income for the 1998 period was $1.4 million compared
to $3.3 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
$538,000 gain from the Bank's termination of its defined-benefit pension plan.
The gain from the sale of mortgage loans was $343,000 in the 1998 period
compared to $181,000 in the 1997 period. Loan servicing fees were $20,000 for
the 1998 period compared to $129,000 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
$140,000 in the 1997 period.
22
<PAGE> 23
NON-INTEREST EXPENSE
Total non-interest expense was $10.1 million in the 1998 period and
$9.9 million in the 1997 period. Salary and employee benefits was $6.0 million
in the 1998 period and $5.8 million for the 1997 period. Real estate operations
expense decreased to $65,000 in the 1998 period compared to $409,000 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 expense to
$287,000 in the 1998 period from $241,000 in the 1997 period were incurred.
Other expenses increased to $1.9 million in the 1998 period from $1.6 million in
the 1997 period.
INCOME TAX EXPENSE
Income tax expense for the 1998 period was $2.7 million compared to
$3.6 million for the 1997 period. During the 1998 period the Corporation
recorded a benefit of $200,000 as a result of a settlement with the IRS in
certain tax matters. As a result of certain capital gains 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.
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
GENERAL
The Corporation recorded a profit for the 1997 period of $7.3 million
compared to a profit for the 1996 period of $6.6 million, primarily due to gains
from the sales of rights to service mortgage loans, a gain from the termination
of pension plan, an increase in net interest income and a decrease in the
provision for loan loss to a recovery. Income before taxes was $10.9 million for
the 1997 period compared to $8.6 million in the 1996 period.
Net interest income for the 1997 period was $17.1 million compared to
$16.3 million for the 1996 period. The weighted average interest rate spread for
the 1997 period was 4.80% compared to 4.69% for the 1996 period. The net yield
on average earning assets was 5.03% for the 1997 period and 4.88% for the 1996
period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $28.5 million for the
1997 period from $27.8 million for the 1996 period. Interest on loans increased
to $21.2 million for the 1997 period from $20.2 million for the 1996 period.
This increase is primarily the result of a higher volume of loans outstanding
during the 1997 period and from an increase in average loan yield to 9.24% for
the 1997 period from 9.17% for the 1996 period. Interest and dividends on
investments was $4.5 million for the 1997 period and $4.3 million for the 1996
period. The average amount of investments held increased and the average yield
on investments decreased to 6.13% for the 1997 period from 6.25% for the 1996
period. Mortgage-backed securities income was $2.8 million for the 1997 period
and $3.2 million for the 1996 period, the decrease primarily due to a decrease
in the average amount of mortgage-backed securities held.
INTEREST EXPENSE
Interest on deposits increased to $11.3 million in the 1997 period from
$11.1 million for the 1996 period. This increase was primarily related to an
increase in average interest-bearing deposits outstanding during the 1997
period. Interest on borrowed funds decreased to $146,000 from $322,000 for the
1996 period. This decrease is primarily related to a decrease in borrowed funds.
23
<PAGE> 24
NON-INTEREST INCOME
Total non-interest income for the 1997 period was $3.3 million compared
to $2.2 million for the 1996 period. The gains from the sales of mortgage
servicing rights, noted above, were $1.4 million for the 1997 period. The gain
from termination of pension plan, also noted above, was $538,000 in the 1997
period. The gains from the sales of mortgage loans were $181,000 in the 1997
period compared to $318,000 in the 1996 period. Loan servicing fees were
$129,000 for the 1997 period compared to $613,000 in the 1996 period. This
decrease is mainly due to the sales of the above-mentioned mortgage-servicing
rights. The gains from the sales of investment securities were $140,000 for the
1997 period compared to $250,000 in the 1996 period.
NON-INTEREST EXPENSE
Total non-interest expense increased to $9.9 million in the 1997 period
from $9.8 million in the 1996 period. This increase is primarily attributed to
an increase in real estate operations expense to $409,000 in the 1997 period
from $180,000 in the 1996 period mainly due to a writedown in the value of real
estate owned through foreclosure.
INCOME TAX EXPENSE
Income tax expense for the 1997 period was $3.6 million compared to
$2.0 million for the 1996 period. As a result of certain capital gains 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. In the 1996
period the Corporation recognized a tax credit of $400,000 in connection with an
IRS audit and a one-time tax benefit of $885,000 based on the Corporation's
analysis of the "Fresh Start" provision of the Small Business Job Protection Act
of 1996.
BUSINESS
GENERAL
THE CORPORATION. Warren Bancorp, Inc. is a business corporation
organized under the General Laws of the Commonwealth of Massachusetts. The only
office of the Corporation, and its principal place of business, is located at 10
Main Street, Peabody, Massachusetts 01960. The Corporation's telephone number is
(978) 531-7400.
The Corporation is a bank holding company which owns all of the
outstanding common stock of its only subsidiary, Warren Five Cents Savings Bank.
The Corporation charges fees to the Bank for providing certain administrative
services for the Bank. Such fees are charged on a cost basis.
THE BANK. The Bank, a wholly owned subsidiary of the Corporation, is a
Massachusetts-chartered savings bank incorporated in 1854. The Bank conducts its
business from four banking offices in Peabody and two banking offices in
Beverly.
The Bank is engaged principally in the business of attracting retail
and wholesale deposits from the general public and investing those deposits in
various types of residential and commercial mortgages, consumer and commercial
loans, and various securities. The Bank offers a wide variety of deposit, loan
and investment products and services to individuals and commercial customers.
The Bank has been a member of the FDIC since 1983. The Bank's deposits
are insured by the FDIC up to FDIC limits (generally $100,000 per depositor) and
by the Depositors Insurance Fund (the "DIF") for the portion of deposits in
excess of that insured by the FDIC. The Bank is also a member of the Federal
Home Loan Bank ("FHLB") system.
24
<PAGE> 25
MARKET AREA
The Corporation's primary business and market area are the same as the
Bank's business and market area. The Bank's primary market area is centered in
Peabody (where its main office is located) and Beverly, Massachusetts, both
approximately 18 miles north of Boston, and includes the other cities and towns
of Essex County, Massachusetts. However, the Bank will make loans and provide
services to customers throughout eastern Massachusetts and parts of southern New
Hampshire. The population of Essex County increased to 690,000 in 1997 from
670,000 in 1990, and median family income in 1996 was $58,700. In addition, the
unemployment rate in December 1998 in the Boston labor market was 2.6% compared
to 2.9% in Massachusetts and 4.7% in the United States. This compares to 3.2%,
3.9% and 4.7% in December 1997 for the Boston labor market, Massachusetts and
the United States, respectively.
COMPETITION
The primary business of the Corporation is currently the ongoing
business of the Bank. Therefore, the competitive conditions faced by the
Corporation are the same as those faced by the Bank.
The Bank faces competition in its market area both in originating loans
and attracting deposits. Competition in originating loans comes primarily from
thrift institutions, commercial banks, mortgage companies and consumer finance
companies. Within the Bank's market area and surrounding communities, there are
many competing commercial banks and thrift institutions. Further, there are
numerous mortgage companies from Essex County and metropolitan Boston with
offices in the area or calling officers soliciting in the area. The Bank
competes for loans principally on the basis of interest rates and repricing
terms, loan fees, the types of loans originated and the quality of service
provided to borrowers. Management believes that through the Bank's various loan
programs, it can compete for most types of loans in this market area.
In attracting deposits, the Bank's primary competitors are thrift
institutions, commercial banks, money market funds, credit unions and the
capital markets. Competition for deposits comes not only from local
institutions, but from those located in the Boston metropolitan market, through
branching networks, proximity to the work place and the general reach of the
mass media (particularly newspapers and the internet). The Bank competes for
deposits primarily on the basis of interest rate paid, scope of services
provided, convenience and quality of customer service. In order to appeal to
customers and attract depositors, the Bank plans to continue to offer a wide
range of high quality customer services, professional staff, and convenient
offices and hours, in addition to paying competitive rates on deposits.
REGULATION
Both the Corporation and the Bank are regulated under federal and state
statutes and regulations. The following summaries of the statutes and
regulations affecting banks and bank holding companies do not purport to be
complete. Such summaries are qualified in their entirety by reference to such
statutes and regulations.
WARREN BANCORP, INC.
FEDERAL LAW
FEDERAL RESERVE BOARD. The Corporation is registered as a bank holding
company under the Federal Bank Holding Company Act of 1956, as amended ("BHCA"),
and is required to file with the Federal Reserve Board ("FRB") annual and
periodic reports and such other information as the FRB may require. The
Corporation is subject to limitations on the scope of its activities and to
continuing regulation, supervision and examination by the FRB under the BHCA and
related federal statutes.
25
<PAGE> 26
The FRB has adopted risk-based and leverage capital guidelines for bank
holding companies. A discussion of these guidelines and the Corporation's
capital requirements and capital position is given in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the heading
"Capital Adequacy."
MASSACHUSETTS LAW
As a Massachusetts corporation, the Corporation must comply with the
General Laws of the Commonwealth of Massachusetts and is subject to corporate
regulation by the Massachusetts Secretary of State.
WARREN FIVE CENTS SAVINGS BANK
As a Massachusetts-chartered, FDIC-insured savings bank, the Bank is
subject to regulation, examination and supervision by the FDIC and the
Commissioner of Banks of the Commonwealth of Massachusetts.
FEDERAL LAW
FEDERAL RESERVE BOARD. The FRB has established regulations that require
FDIC-insured savings banks to maintain non-earning reserves against certain
deposit accounts.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC insures the Bank's
deposit accounts up to a maximum of $100,000 per separately insured account;
therefore, the Bank is subject to regulation, supervision and reporting
requirements of the FDIC. The FDIC has adopted a regulation that defines and
sets the minimum requirements for capital adequacy. Under this regulation,
insured state banks, such as the Bank, are required to maintain a "leverage"
ratio of total capital to total assets and a risk-based capital-to-assets ratio
that are substantially the same as the Federal Reserve guidelines noted above. A
discussion of these guidelines and the Bank's capital requirements and capital
position is given in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the heading "Capital Adequacy."
STATE LAW
MASSACHUSETTS COMMISSIONER OF BANKS. The Bank is subject to regulation
and examination by the Commissioner. Massachusetts statutes and regulations
govern, among other things, investment powers, lending powers, deposit
activities, borrowings, maintenance of surplus reserve accounts, distribution of
earnings and payment of dividends. The Bank is also subject to regulatory
provisions covering such matters as issuance of capital stock, branching, and
mergers and consolidations.
DEPOSITORS INSURANCE FUND. Deposit accounts that are not covered by
federal insurance are insured by the DIF, a corporation created by the
Massachusetts Legislature for the purpose of insuring the deposits of savings
banks not covered by federal deposit insurance. All Massachusetts-chartered
savings banks, including the Bank, are required to be members of the DIF.
EMPLOYEES
At the present time, the Corporation does not have any employees other
than its officers, who are compensated by the Bank. The Corporation may utilize
the support staff of the Bank from time to time without the payment of any fees
to the Bank. If the Corporation expands the scope or size of its financial
services business, or acquires or pursues other lines of business, it may hire
additional employees.
26
<PAGE> 27
At December 31, 1998, the Bank had 149 employees, 34 of whom were
part-time. None of the employees of the Bank are represented by a collective
bargaining group, and management considers its relations and communications with
employees to be satisfactory.
BANK SUBSIDIARIES AND OTHER ACTIVITIES
The Bank has five wholly owned subsidiaries. Those with significant
activity include:
Northbank Realty, Inc., a Massachusetts corporation incorporated in
1976, owns the Bank's South Peabody branch office and land which it leases to
the Bank.
Warren Securities Corporation II, a Massachusetts corporation
incorporated in 1997, owns investment securities which it received as an equity
contribution from the Bank.
SAVINGS BANK LIFE INSURANCE
The Bank acts as an issuing agent for Savings Bank Life Insurance
Company of Massachusetts and earns commissions for selling life insurance and
annuities.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
There were no changes in or disagreements with accountants regarding
accounting principles or financial disclosure.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
Information pertaining to directors and executive officers is set forth
under "Election of a Class of Directors" and "Executive Officers" in the Proxy
Statement for the Annual Meeting of the Corporation to be held on May 5, 1999
and is incorporated herein by reference.
EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under
"Executive Compensation" in the Proxy Statement for the Annual Meeting of the
Corporation to be held on May 5, 1999 and is incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of management and
beneficial owners of more than five percent of the Corporation's common stock is
set forth under "Beneficial Ownership of Common Stock" in the Proxy Statement
for the Annual Meeting of the Corporation to be held on May 5, 1999 and is
incorporated herein by reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related
transactions is set forth under "Certain Relationships and Related Transactions"
in the Proxy Statement for the Annual Meeting of the Corporation to be held on
May 5, 1999 and is incorporated herein by reference.
27
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS OF
WARREN BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Reports of Independent Public Accountants....................................... 29-30
Consolidated Balance Sheets at December 31, 1998 and December 31, 1997.......... 31
Consolidated Statements of Operations for the year ended
December 31, 1998, 1997 and 1996.............................................. 32
Consolidated Statements of Changes in Stockholders' Equity for the year ended
December 31, 1998, 1997 and 1996.............................................. 34
Consolidated Statements of Cash Flows for the year ended
December 31, 1998, 1997 and 1996.............................................. 34
Notes to Consolidated Financial Statements...................................... 35-69
</TABLE>
28
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Warren Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Warren Bancorp,
Inc. and subsidiaries (collectively, the Corporation) as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express and opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Warren Bancorp, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 19, 1999
29
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Warren Bancorp, Inc.:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows for the year ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Warren Bancorp, Inc. and subsidiaries for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
January 23, 1997
30
<PAGE> 31
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks (non-interest bearing) (note 11) $7,497 $7,191
Money market funds and overnight investments (note 2) 4,542 6,288
Investment and mortgage-backed securities available for sale (amortized cost of
$102,055 at December 31, 1998, and $99,496 at December 31, 1997) (notes 2 and 7) 103,294 101,698
Other investments (fair value of $6,784 at December 31, 1998 and $6,534 at
December 31, 1997) (note 2) 6,544 6,294
Loans held for sale 1,192 1,031
Loans (notes 3 and 11) 266,475 240,763
Allowance for loan losses (note 3) (4,023) (4,066)
-------- --------
Net loans 262,452 236,697
Banking premises and equipment, net (note 4) 5,004 4,785
Accrued interest receivable 2,803 2,790
Real estate acquired by foreclosure 1,450 2,010
Other assets (notes 3 and 8) 2,287 2,209
-------- --------
Total assets $397,065 $370,993
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6) $347,012 $325,293
Borrowed funds (note 7) 7,674 2,926
Escrow deposits of borrowers 1,065 1,005
Accrued interest payable 589 812
Accrued expenses and other liabilities (note 8) 804 929
-------- --------
Total liabilities 357,144 330,965
-------- --------
Commitments and contingencies (notes 4 and 11)
Stockholders' equity: (notes 9 and 10)
Preferred stock, $.10 par value; Authorized - 10,000,000 shares;
Issued and outstanding - none - -
Common stock $.10 par value; Authorized - 20,000,000 shares;
Issued - 8,094,414 shares at December 31, 1998 and 7,808,194 shares at
December 31, 1997
Outstanding - 7,826,691 shares at December 31, 1998 and 7,612,194 shares at
December 31, 1997 809 780
Additional paid-in capital 35,710 34,724
Retained earnings 4,516 4,282
Treasury stock, at cost, 267,723 shares at December 31, 1998 and 196,000 shares at
December 31, 1997 (1,913) (1,174)
-------- --------
39,122 38,612
Unrealized gain on securities available for sale, net of income taxes(note 2) 799 1,416
-------- --------
Total stockholders' equity 39,921 40,028
-------- --------
Total liabilities and stockholders' equity $397,065 $370,993
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
---- ---- ----
(In thousands, except per-share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans $22,434 $21,248 $20,237
Interest and dividends on investments 5,048 4,499 4,311
Interest on mortgage-backed securities 1,771 2,792 3,233
------- ------- -------
Total interest and dividend income 29,253 28,539 27,781
------- ------- -------
Interest expense:
Interest on deposits 11,833 11,258 11,147
Interest on borrowed funds 227 146 322
------- ------- -------
Total interest expense 12,060 11,404 11,469
------- ------- -------
Net interest income 17,193 17,135 16,312
Provision for (recovery of) loan losses (note 3) (91) (316) 116
------- ------- -------
Net interest income after provision for (recovery of)
loan losses 17,284 17,451 16,196
------- ------- -------
Non-interest income:
Loan servicing fees 20 129 613
Customer service fees 879 906 987
Gains on sales of investment securities, net (note 2) 188 140 250
Write-down of securities due to other-than-temporary
decline in value (note 2) - - (25)
Gains on sales of mortgage servicing rights - 1,436 -
Gains on sales of mortgage loans 343 181 318
Gain from termination of pension plan (note 10) - 538 -
Other 13 9 6
------- ------- -------
Total non-interest income 1,443 3,339 2,149
------- ------- -------
Non-interest expenses:
Salaries and employee benefits (note 10) 5,999 5,753 5,992
Office occupancy and equipment 1,178 1,147 1,080
Professional services 219 234 315
Marketing 287 241 201
Real estate operations 65 409 180
Outside data processing 491 488 436
Other 1,860 1,585 1,564
------- ------- -------
Total non-interest expenses 10,099 9,857 9,768
------- ------- -------
Income before income taxes 8,628 10,993 8,577
Income tax expense (note 8) 2,724 3,648 1,968
------- ------- -------
Net income $5,904 $7,285 $6,609
======= ======= =======
Basic earnings per share (note 5) $0.75 $0.96 $0.90
======= ======= =======
Diluted earnings per share (note 5) $0.72 $0.91 $0.84
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
<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, 1995 $728 $33,547 $(4,401) $1,364 $ - $31,238
Comprehensive income:
Net income $6,609 - - 6,609 - - 6,609
------
Other comprehensive income:
Unrealized loss on securities
available for sale, net of taxes (789)
Less: Reclassification adjustment for
securities gains, net of tax expense of $87
included in net income 163
------
Total other comprehensive income (626) - - - (626) - (626)
------
Comprehensive income $5,983
======
Purchase of treasury stock (196,000 shares) - - - - - (1,174) (1,174)
Dividends paid - - - (1,948) - - (1,948)
Issuance of 244,050 shares for exercise
of options 24 322 - - - 346
------ ------ ------ ------ ------ ------
Balance at December 31,1996 752 33,869 260 738 (1,174) 34,445
Comprehensive income:
Net income $7,285 - - 7,285 - - 7,285
------
Other comprehensive income:
Unrealized gain on securities
for sale, net of taxes 587
Less: Reclassification adjustment for
securities gains, net of tax expense of $49,
included in net income 91
------
Total other comprehensive income 678 - - 678 - 678
------
Comprehensive income $7,963
======
Dividends paid - - (3,263) - - (3,263)
Tax benefit of stock options exercised - 144 - - - 144
Issuance of 289,060 shares for exercise
of options 28 711 - - - 739
------ ------ ------ ------ ------ ------
Balance at December 31, 1997 780 34,724 4,282 1,416 (1,174) 40,028
Comprehensive income:
Net income $5,904 - - 5,904 - - 5,904
------
Other comprehensive income:
Unrealized loss on securities
available for sale, net of taxes (739)
Less: Reclassification adjustment for
securities gains, net of tax expense of $66,
included in net income 122
------
Total other comprehensive income (617) - - - (617) - (617)
Comprehensive income $5,287
------
Purchase of treasury stock (102,523 shares) - - - - (928) (928)
Dividends paid - - (5,670) - - (5,670)
Tax benefit of stock options exercised - 106 - - - 106
Issuance of 286,220 common shares
for exercise of options 29 880 - - 189 1,098
------ ------ ------ ------ ------ ------
Balance at December 31, 1998 $809 $35,710 $4,516 $799 $(1,913) $39,921
====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
33
<PAGE> 34
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net income $5,904 $7,285 $6,609
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) loan losses (91) (316) 116
Depreciation and amortization 594 592 570
Deferred income tax (benefit) (291) (210) (391)
Amortization of premiums, fees and discounts 680 420 54
(Gains) on sale of investment securities (188) (140) (250)
Write-down of securities due to other-than-temporary decline in
value - - 25
(Gains) on sales of mortgage loans (343) (181) (318)
Write-down of real estate acquired by foreclosure - 210 138
(Gains) on sale of real estate acquired by foreclosure (18) (2) (139)
(Increase) decrease in loans held for sale (161) 1,972 (194)
(Increase) in accrued interest receivable (13) (130) (261)
(Increase) decrease in other assets 560 1,697 (217)
Increase (decrease) in accrued interest payable (223) 180 44
Increase (decrease) in other liabilities and escrow deposits (65) (650) 774
-------- -------- --------
Net cash provided by operating activities 6,345 10,727 6,560
-------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in money market funds and overnight
investments 1,746 445 (1,433)
Purchase of investment securities available for sale (52,957) (55,112) (46,347)
Purchase of mortgage-backed securities available for sale - - (1,911)
Proceeds from sales of investment securities available for sale 2,796 8,987 14,308
Proceeds from maturities of investment securities available for sale 37,127 38,274 26,802
Proceeds from sales of mortgage-backed securities available for sale - 5,721 -
Proceeds from payments of mortgage-backed securities available for sale 9,732 8,443 10,381
Proceeds from sales of real estate acquired by foreclosure 735 574 1,579
Net (increase) in loans (25,432) (20,352) (8,835)
Purchase of premises and equipment (813) (773) (417)
-------- -------- --------
Net cash (used in) investing activities $(27,066) $(13,793) $(5,873)
Cash flows from financing activities:
Net increase in deposits 21,719 8,927 1,516
Proceeds from Federal Home Loan Bank advances 2,000 630 1,045
Principal payments on Federal Home Loan Bank advances - (2,674) (4,133)
Net increase in other borrowed funds 2,808 43 647
Dividends paid (5,670) (3,263) (1,948)
Purchase of treasury stock (928) - (1,174)
Stock options exercised 1,098 739 346
--------- --------- ---------
Net cash provided by (used in) financing activities 21,027 4,402 (3,701)
--------- --------- ---------
Net increase (decrease) in cash and due from banks 306 1,336 (3,014)
Cash and due from banks at beginning of year 7,191 5,855 8,869
--------- --------- ---------
Cash and due from banks at end of year $7,497 $7,191 $5,855
========= ========= =========
Cash paid during the year for:
Interest $12,283 $11,224 $11,425
Income taxes $2,733 $3,924 $2,568
Supplemental noncash investing and financing activities:
Foreclosures on real estate $158 $602 $719
Securitization of loans to mortgage-backed securities $- $1,903 $2,171
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The accounting and reporting policies of Warren Bancorp, Inc. (the
"Corporation") conform to generally accepted accounting principles and to
general practices within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the balance
sheets and income and expense for the periods. Actual results could differ from
those estimates.
Material estimates that are susceptible to change relate to the
determination of the allowance for loan losses, the valuation of real estate
acquired by foreclosure and the realizability of the deferred tax asset. In
connection with the determination of the allowance for loan losses and the
carrying value of real estate acquired by foreclosure, management obtains
independent appraisals for significant properties as deemed necessary.
A substantial portion of the Corporation's loans are secured by real
estate in markets primarily in Massachusetts. All of the real estate acquired by
foreclosure is located in the same markets. Accordingly, the ultimate
collectibility of a substantial portion of the Corporation's loan portfolio and
the recovery of all the real estate acquired by foreclosure is susceptible to
changing conditions in these markets.
The following is a summary of the more significant accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, Warren Five Cents Savings Bank (the
"Bank"), and the Bank's wholly owned subsidiaries, Northbank Realty, Inc.,
Northbank Financial Corporation, Hannah Investments, Inc., Warren Securities
Corporation II and Peabody Development Corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain amounts
for 1997 and 1996 have been reclassified to conform with the 1998 presentation.
Share data has been retroactively restated to reflect the effect of a 2-for-1
stock split which occurred on May 12, 1998.
LOANS HELD FOR SALE AND SALES OF LOANS
Loans held for sale are stated at the lower of aggregate cost or fair
value. The fair value of loans held for sale is estimated based on outstanding
investor commitments or, in the absence of such commitments, current investor
yield requirements. Net unrealized losses, if any, are provided for in a
valuation allowance by charges to operations.
35
<PAGE> 36
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
In years prior to 1997, the Corporation retained servicing on
residential mortgages sold. On January 1, 1996 the Corporation adopted Statement
of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights and recognized as separate assets from the related loans the
rights to service mortgage loans for others, either through acquisition of those
rights or from the sale or securitization of loans with the servicing rights
retained on those loans, based on their relative fair values. To determine the
fair value of the servicing rights created, the Corporation used the market
prices under comparable servicing sale contracts, when available, or
alternatively used a valuation model that calculated the present value of future
cash flows to determine the fair value of the servicing rights. In using this
valuation method, the Corporation incorporated assumptions that market
participants would use in estimating future net servicing income, which includes
estimates of the cost of the servicing loans, a discount rate, ancillary income,
prepayment speeds, and default rates. Originated mortgage loan servicing rights
were amortized as a reduction of loan servicing fee income in proportion to and
over the period of estimated net servicing income.
On a quarterly basis, the Corporation assessed the carrying values of
originated and purchased mortgage loan servicing rights for impairment based on
the fair value of such rights. The fair value was estimated using market prices
when available, or alternatively, using the valuation model referred to above
with current assumptions. Any impairment was recognized as a charge to earnings
through a valuation allowance. The risk characteristics of the underlying loans
used to measure impairment of originated and purchased mortgage loan servicing
rights included loan type, interest rate, loan origination date and term to
maturity.
36
<PAGE> 37
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
When loans are sold, a gain or loss is recognized to the extent that
the sale proceeds exceed or are less than their carrying values. Gains and
losses are determined using the specific identification method. In years prior
to 1997, the Corporation retained servicing on residential mortgage loans sold,
and gains and losses resulting from the sale of loans with servicing retained
were adjusted to recognize the present value of differences between the weighted
average interest rate on the loans sold, adjusted for a normal servicing fee and
guaranty fees, and the agreed yield to the buyer. The resulting excess mortgage
servicing rights were amortized as a reduction of servicing fee income, using
the effective interest method over the estimated remaining lives of the loans.
Actual prepayment experience was reviewed periodically and adjustments were made
when appropriate.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Debt securities that the Corporation has the positive intent and
ability to hold to maturity and non-marketable equity securities are classified
as other investments and reported at amortized cost; debt and equity securities
that are bought and held principally for the purpose of selling in the near term
are classified as trading and reported at fair value, with unrealized gains and
losses included in earnings; and debt and equity securities not classified as
either other or trading are classified as available for sale and reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity, net of income taxes. After
mortgage loans are converted to mortgage-backed securities, they are subject to
these same classification provisions. The Corporation classifies its investment
and mortgage-backed securities into two categories: available for sale and
other; the Corporation has no securities held for trading.
Premium and discounts on investment and mortgage-backed securities are
amortized or accreted into income by use of the effective interest method. If a
decline in fair value below the amortized cost basis of an investment or
mortgage-backed security is judged to be other than temporary, the cost basis of
the investment is written down to fair value as a new cost basis and the amount
of the write-down is included as a charge against earnings. Gains and losses on
the sale of investment and mortgage-backed securities are recognized at the time
of sale on a specific identification basis.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is available for future credit losses
inherent in the loan portfolio. Additions to the allowance are charged to
earnings. Loan losses are charged against the allowance when management believes
that the collectibility of the loan principal is doubtful. Recoveries on loans
previously charged off are credited to the allowance.
The allowance is an amount management believes will be adequate to
absorb loan losses based on evaluations of known and inherent risks in the
portfolio, changes in the nature of the loan portfolio, overall portfolio
quality, specific problem loans, prior loss experience and current and
anticipated economic conditions that may affect the borrowers' ability to pay.
Impaired loans are analyzed and categorized by level of credit risk and
collectibility in order to determine their related allowance for loan losses.
37
<PAGE> 38
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Management believes that the allowance for loan losses is adequate, and
it is assisted by an independent credit review consulting firm in making that
determination. Balances in the allowance for loan losses are determined on a
periodic basis by management and the Loan Committee of the Board of Directors
with assistance from the independent credit review consulting firm. Loan loss
allocations are based on the conditions of each loan, whether performing or
nonperforming, including collectibility, collateral adequacy and the general
condition of the borrowers, economic conditions, delinquency statistics, market
area activity, the risk factors associated with each of the various loan
categories and the borrower's adherence to the original terms of the loan.
The associated provision for loan losses is the amount required to
bring the allowance for loan losses to the balance considered necessary by
management at the end of the period after accounting for the effect of loan
charge-offs (which decrease the allowance) and loan-loss recoveries (which
increase the allowance) during the period. In addition, various regulatory
agencies, as part of their examination process, periodically review the
Corporation's allowance for loan losses. Such agencies may require the
Corporation to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
IMPAIRED AND NONACCRUAL LOANS
The Corporation accounts for impaired loans at the present value of the
expected future cash flows discounted at the loans' effective interest rates or
the fair value of collateral for collateral-dependent loans. When the measure of
the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through the allowance for loan losses. Loans are deemed
by the Corporation to be impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect all amounts due
according to the contractual terms of the original loan agreement. Generally,
nonaccruing loans are deemed impaired. Large groups of homogeneous loans, such
as smaller balance residential mortgage and consumer installment loans, are
collectively evaluated for impairment. Typically, the minimum delay in receiving
payments according to the contractual terms of the loan that can occur before a
loan is considered impaired is ninety days.
Nonaccrual loans, which may include impaired loans, are loans on which
the accrual of interest has been discontinued. Accrual of interest income on
loans is discontinued either when a reasonable doubt exists as to the full,
timely collection of principal or interest or when the loans become
contractually past due by ninety days or more, unless they are adequately
secured and are in the process of collection. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is reversed
against current period interest income. Income on such loans is recognized to
the extent that cash is received and where the ultimate collection of principal
and interest is probable. Loans are removed from nonaccrual when they become
less than ninety days past due and when concern no longer exists as to the
collectibility of principal or interest or when they are adequately secured and
are in the process of collection.
38
<PAGE> 39
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
LOAN FEES
Loan origination fees and certain direct incremental loan origination
costs are deferred and amortized over the life of the related loans as yield
adjustments using primarily the effective interest method. When the loans are
sold or paid off, the unamortized fees and costs are recognized as income or
expense.
BANKING PREMISES AND EQUIPMENT
Banking premises, equipment and leasehold improvements are stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization are computed principally on the straight-line method over the
estimated useful lives of the assets or the terms of leases, if shorter. The
Corporation periodically assesses the realizability of its long-lived assets in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. Based on its review, the
Corporation does not believe that any material impairment of its long-lived
assets has occurred.
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure is comprised of properties acquired
through foreclosure proceedings, acceptance of a deed in lieu of foreclosure or
by taking possession of collateral and is recorded and subsequently carried at
the lower of the carrying value of the loan or the fair value of the property
received, less estimated costs of disposition. Loan losses arising from the
acquisition of such properties are charged against the allowance for loan
losses. Operating expenses and any subsequent write-downs are charged to real
estate operations.
PENSION BENEFITS
The Corporation's policy is to record net periodic pension cost on an
actuarially determined basis.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
39
<PAGE> 40
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and was applied prospectively. However, SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of SFAS No. 125," requires
the deferral of implementation as it relates to repurchase agreements,
dollar-rolls, securities lending and similar transactions until after December
31, 1997. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS No. 127 in 1998 did
not have an impact on the Corporation's financial position, results of
operations or liquidity.
COMPREHENSIVE INCOME
In 1998, the Corporation adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. Pursuant to this rule, the "Consolidated
Statements of Changes in Stockholders' Equity" now includes a new measure called
"Comprehensive Income", which includes net income as well as certain items that
are reported separately as other comprehensive income. Currently, the
Corporation's only component of Other Comprehensive Income is its unrealized
gains (losses) on securities available for sale.
FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Corporation adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" in 1998. The provisions of this Statement
require disclosure of financial and descriptive information about an
enterprise's operating segments. The Statement defines an operating segment as a
component of an enterprise that engages in business activities that generate
revenue and expense. A segment is further defined as a business component for
which separate financial information is available and whose operating results
are reviewed by the chief operating decision-maker in performance assessment and
resource allocation. Because the Corporation is managed using distinct operating
segments, this statement is effective and has been adopted for the Corporation's
financial statements in 1998.
NEW PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
40
<PAGE> 41
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The statement requires that changes in the derivative's fair value be recognized
unless specific hedge accounting criteria are met. This statement is effective
for fiscal years beginning after June 15, 1999, and earlier adoption is
permitted. Management does not expect adoption of this statement to have a
material effect on the Corporation's financial position, results of operations
or liquidity.
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities at December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Money market funds and overnight
investments.............................. $ 4,542 $ - $ - $ 4,542
----------- ---------- --------- ----------
AVAILABLE FOR SALE
Fixed income mutual funds................... 28,706 590 - 29,296
FNMA mortgage-backed securities............. 14,454 418 (1) 14,871
GNMA mortgage-backed securities............. 5,534 28 (3) 5,559
U.S. Government and related
obligations................................ 2,510 13 - 2,523
Corporate notes............................. 43,541 39 (41) 43,539
Preferred stock............................. 7,310 248 (52) 7,506
----------- ---------- --------- ----------
102,055 1,336 (97) 103,294
----------- ---------- --------- ----------
OTHER
Foreign government bonds
held to maturity........................... 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
----------- ---------- --------- ----------
$ 113,141 $ 1,576 $ (97) $ 114,620
=========== ========== ========= ==========
</TABLE>
41
<PAGE> 42
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Money market funds and overnight
investments.............................. $ 6,288 $ - $ - $ 6,288
----------- ---------- --------- ----------
AVAILABLE FOR SALE
Fixed income mutual funds................... 19,009 578 (1) 19,586
FNMA mortgage-backed securities............. 22,537 881 - 23,418
GNMA mortgage-backed securities............. 7,209 - (48) 7,161
U.S. Government and related
obligations................................ 10,536 4 (4) 10,536
Corporate notes............................. 32,286 5 (49) 32,242
Preferred stock............................. 7,901 772 - 8,673
Common stock................................ 18 64 - 82
----------- ---------- --------- ----------
99,496 2,304 (102) 101,698
----------- ---------- --------- ----------
OTHER
Foreign government bonds
held to maturity........................... 500 - - 500
Stock in Federal Home Loan Bank
of Boston................................. 4,110 - - 4,110
Stock in Depositors Insurance Fund
Liquidity Fund............................ 108 - - 108
Stock in Savings Bank Life Insurance
Company of Massachusetts ................. 1,576 240 - 1,816
----------- ---------- --------- ----------
6,294 240 - 6,534
----------- ---------- --------- ----------
$ 112,078 $ 2,544 $ (102) $ 114,520
=========== ========== ========= ==========
</TABLE>
In 1997, proceeds from sales of mortgage-backed securities amounted to
$5,721,000 and realized losses on such sales were $98,000. There were no sales
of mortgage-backed securities in 1998 and 1996 and there were no sales of other
types of debt securities in 1998, 1997 and 1996.
Proceeds from the sales of equity securities were $2,796,000,
$8,987,000 and $14,301,000 in 1998, 1997 and 1996, respectively. Realized gains
on sales of equity securities were $188,000, $217,000 and $405,000 in 1998, 1997
and 1996, respectively. Realized losses on sales of equity
42
<PAGE> 43
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED)
securities were $155,000 in 1996. There were no realized losses on sales of
equity securities in 1998 or 1997.
Writedowns due to impairment in value of investment securities were
$25,000 in 1996.
Mortgage-backed securities with an amortized cost and fair value of
$4,256,000 and $4,372,000, respectively, at December 31, 1998 and $6,751,000 and
$7,021,000, respectively, at December 31, 1997 were pledged to secure securities
sold under agreements to repurchase.
The following table presents a maturity distribution of the amortized
cost and fair value of the debt securities portfolio as of December 31, 1998.
Adjustable-rate mortgage-backed securities are shown as if the entire balance
came due on the repricing date. Estimates are made of fixed-rate,
mortgage-backed security amortization and prepayments.
<TABLE>
<CAPTION>
AFTER AFTER
ONE FIVE
BUT BUT
WITHIN WITHIN WITHIN AFTER
ONE FIVE TEN TEN
YEAR YEARS YEARS YEARS TOTAL
---- ----- ----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Amortized cost......................... $57,394 $11,933 $1,254 $ - $70,581
======= ======= ====== ======== =======
Fair value............................. $57,780 $11,994 $1,260 $ - $71,034
======= ======= ====== ======== =======
OTHER (HELD TO MATURITY)
Amortized cost......................... $ - $250 $250 $250 $750
==== ==== ==== ==== ====
Fair value............................. $ - $250 $250 $250 $750
==== ==== ==== ==== ====
</TABLE>
The Bank, as a member of the Federal Home Loan Bank of Boston
("FHLBB"), is required to invest in $100 par value stock in the amount of one
percent of its outstanding home loans or 1/20th of its outstanding advances from
the FHLBB, whichever is higher. As and when such stock is redeemed, the Bank
would receive from the FHLBB an amount equal to the par value of the stock.
43
<PAGE> 44
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(3) LOANS
Loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Residential mortgage:
Adjustable-rate ........................ $ 40,895 $ 46,255
Fixed-rate ............................. 4,763 6,452
--------- ---------
45,658 52,707
--------- ---------
Commercial mortgage:
Adjustable-rate ........................ 136,637 111,971
Fixed-rate ............................. 26,517 13,861
Construction adjustable-rate ........... 13,620 19,739
--------- ---------
176,774 145,571
--------- ---------
Commercial loans ........................... 23,726 22,259
--------- ---------
Consumer loans:
Home equity ............................ 17,064 16,196
Other .................................. 3,253 4,030
--------- ---------
20,317 20,226
--------- ---------
Total loans ............................ 266,475 240,763
Allowance for loan losses .................. (4,023) (4,066)
--------- ---------
Net loans ........................ $ 262,452 $ 236,697
========= =========
</TABLE>
Changes in the allowance for loan losses for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year .................. $ 4,066 $ 4,533 $ 4,533
Provision for (recovery of) loan losses charged
(credited) to expense ........................ (91) (316) 116
Loans charged off ............................. (98) (608) (456)
Loan recoveries ............................... 146 457 340
------- ------- -------
Balance at end of year ........................ $ 4,023 $ 4,066 $ 4,533
======= ======= =======
</TABLE>
44
<PAGE> 45
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(3) LOANS - (CONTINUED)
The allowance for loan losses attributable to $710,000 of impaired
loans, of which $454,000 is measured using the present value method and $256,000
using the fair value of collateral method, is $118,000.
At December 31, 1998 and 1997, the Corporation had net deferred loan
fees of $120,000 and $149,000, respectively, reflected as a reduction of the
appropriate loan categories.
On January 31, 1997, the Corporation sold its rights to service
approximately $209 million of residential mortgage loans representing over 95%
of the portfolio of loans serviced for others. At December 31, 1998, 1997 and
1996 the Corporation serviced residential loans for investors of approximately
$3,580,000, $3,983,000 and $214,528,000, respectively, which are not reflected
in the accompanying consolidated financial statements because they are not
assets of the Corporation. At December 31, 1998 no formal recourse provisions
exist in connection with such servicing.
Nonaccruing loans amounted to $475,000, $347,000 and $2,712,000 at
December 31, 1998, 1997 and 1996, respectively. Interest income of approximately
$48,000, $21,000 and $161,000 would have been recorded in 1998, 1997 and 1996,
respectively, on these nonaccrual loans if these loans had been on a current
basis in accordance with their original terms. Interest income actually recorded
on these nonaccrual loans amounted to $22,000, $1,000 and $38,000 in 1998, 1997
and 1996, respectively. Of those nonaccruing loans at December 31, 1998 none
were considered impaired compared to $201,000 considered impaired at December
31, 1997.
At December 31, 1998 and 1997, there were $710,000 and $720,000,
respectively, of additional loans considered impaired and performing. The
Corporation would have recorded additional interest income of approximately
$21,000 and $18,000 had these loans performed under their original terms.
Interest income actually recorded on these loans amounted to $59,000 and $85,000
as of December 31, 1998 and 1997, respectively.
During 1998 and 1997, the average recorded investment in impaired loans
was $905,000 and $1.9 million, respectively.
Gains on sales of mortgage loans of $343,000 and $181,000 were realized
during the 1998 and 1997 periods, respectively, from the sale of $34.3 million
and $24.4 million of residential mortgage loans.
The Corporation's lending activities are conducted throughout eastern
Massachusetts with emphasis in Essex County, Massachusetts and contiguous
counties, including those in southern New Hampshire. From time to time loans
will be made outside of this area. The Bank makes single family, condominium and
multi-family residential loans; commercial real estate, commercial construction
and commercial loans; and a variety of consumer loans. Most loans made by the
Bank are collateralized by
45
<PAGE> 46
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(3) LOANS - (CONTINUED)
real estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity and real estate values within the
borrower's geographic area. The ability and willingness of commercial real
estate and commercial borrowers to honor their repayment commitments is
generally dependent on the health of the real estate economic sector and the
general economy in the borrower's geographic area.
In the ordinary course of business, the Bank has made loans to
executive officers and directors of the Corporation and its subsidiaries and to
affiliates of the executive officers and directors at substantially the same
terms, including interest and collateral, as those prevailing at the time for
comparable transactions with unrelated borrowers. The aggregate amount of these
loans at December 31, 1998 was $10,247,000. Activity in these loans during the
year ended December 31, 1998 included loan additions of $7,912,000 and loan
repayments of $3,746,000. The balance of these loans at December 31, 1997 was
$6,081,000.
(4) BANKING PREMISES AND EQUIPMENT
Banking premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land...................................................... $ 1,186 $ 1,186
Buildings................................................. 4,627 4,505
Equipment................................................. 4,543 3,863
Leasehold improvements.................................... 1,261 1,251
------- -------
11,617 10,805
Accumulated depreciation and amortization................. (6,613) (6,020)
------- -------
$ 5,004 $ 4,785
======= =======
</TABLE>
Depreciation and amortization expense related to the Corporation's
premises and equipment were $594,000, $592,000, and $570,000 in 1998, 1997 and
1996, respectively.
At December 31, 1998, the Bank is obligated under noncancelable
operating leases for premises and outside data processing for minimum payments
in future periods as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MINIMUM PAYMENTS
- ----------------------- ----------------
(IN THOUSANDS)
<S> <C>
1999..................................... $ 632
2000..................................... 603
2001..................................... 600
2002..................................... 612
2003..................................... 513
Thereafter............................... 240
------
$3,200
======
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996
amounted to approximately $137,000, $138,000 and $111,000, respectively. Outside
data processing expense for the years ended December 31, 1998, 1997 and 1996
amounted to $491,000, $488,000 and $436,000, respectively.
46
<PAGE> 47
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(5) EARNINGS PER SHARE
The Corporation follows the provisions of SFAS No. 128, "Earnings Per
Share." The components of basic and diluted EPS for the years ended 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
---------------------------- -------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS ................. $5,904 $7,285 $6,609 7,823 7,570 7,342 $ 0.75 $ 0.96 $ 0.90
Effect of dilutive
stock options .......... -- -- -- 329 404 490 0.03 0.05 0.06
------ ------ ------ ------ ------ ------ -------- -------- --------
Diluted EPS ............... $5,904 $7,285 $6,609 8,152 7,974 7,832 $ 0.72 $ 0.91 $ 0.84
====== ====== ====== ====== ====== ====== ======== ======== ========
</TABLE>
(6) DEPOSITS
Deposits at December 31 are summarized as follows:
1998 1997
-------- -------
(IN THOUSANDS)
Non-interest bearing ............................... $ 17,472 $ 16,269
-------- --------
Savings deposits:
Regular savings and club accounts .............. 100,918 100,377
NOW accounts ................................... 40,791 33,787
Cash Manager and Passbook Plus accounts ........ 34,127 29,236
-------- --------
Total savings deposits ......................... 175,836 163,400
Time deposits .................................. 153,704 145,624
-------- --------
Total deposits .............................. $347,012 $325,293
======== ========
Contractual maturities of time deposits at December 31, 1998 are as follows:
(IN THOUSANDS)
Within one year.................................................. $ 100,418
From one to two years............................................ 37,388
From two to five years........................................... 15,896
After five years................................................. 2
---------
$153,704
=========
47
<PAGE> 48
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(6) DEPOSITS - (CONTINUED)
The aggregate amount of individual time deposits with a minimum
denomination of $100,000 or more was $24,335,000 and $21,585,000 at December 31,
1998 and 1997, respectively. Interest expense related to such deposits was
approximately $1,166,000 in 1998 and $1,010,000 in 1997 and $926,000 in 1996.
(7) BORROWED FUNDS
Borrowed funds at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities sold under agreements
to repurchase maturing in January,
1999 and January, 1998, at December
31, 1998 and 1997, respectively ...... $5,003 3.00% $2,255 3.00%
Advances from the Federal Home Loan Bank,
3.07% to 6.03% at December 31, 1998
and 3.07% to 6.00% at December
31, 1997, maturing through 2011 ...... 2,671 5.96 671 5.74
------ ------
Total borrowed funds ............. $7,674 4.03% $2,926 3.63%
====== ======
</TABLE>
Mortgage-backed securities, with a total amortized cost of $4,256,000
and $6,751,000 were pledged as collateral to secure agreements to repurchase at
December 31, 1998 and 1997, respectively. The fair value of the collateral was
$4,372,000 and $7,021,000 at December 31, 1998 and 1997, respectively.
The following table sets forth information for securities sold under
agreement to repurchase for the years ended December 31, 1998, 1997 and 1996
(dollars in thousands):
1998 1997 1996
------ ------ ------
Highest month end balance ........... $5,003 $3,652 $2,212
Weighted average balance outstanding
during the year .................. 3,405 2,282 1,664
Average interest rate during the year 3.00% 3.00% 3.00%
48
<PAGE> 49
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(7) BORROWED FUNDS - (CONTINUED)
A summary of Federal Home Loan Bank of Boston advances at December 31
by year of maturity follows (dollars in thousands):
1998 1997
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY IN: AMOUNT RATE AMOUNT RATE
------ ------ ------ --------
2001 $ 14 3.78% $ 14 3.78%
2003 19 3.07 19 3.07
2005 2,000 6.03 -- --
2009 450 6.00 450 6.00
2011 188 5.54 188 5.54
------ ------
$2,671 5.96% $ 671 5.74%
====== ======
The following table sets forth information for Federal Home Loan Bank
advances for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
Highest month end balance ................. $2,671 $2,715 $5,822
Weighted average balance outstanding during
the year .............................. 2,019 989 3,208
Average interest rate during the year ..... 6.02% 7.01% 7.95%
49
<PAGE> 50
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(8) INCOME TAXES
The components of income tax expense for the years ended December 31,
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal ........................................................................... $ 2,584 $ 3,198 $ 1,693
State ............................................................................. 431 660 666
------- ------- -------
3,015 3,858 2,359
------- ------- -------
Deferred:
Federal ........................................................................... (216) 133 (155)
State ............................................................................. (66) (58) (260)
Increase (decrease) in beginning-of-the-year balance
of valuation allowance for deferred tax assets ................................ (9) (285) 24
------- ------- -------
(291) (210) (391)
------- ------- -------
$ 2,724 $ 3,648 $ 1,968
======= ======= =======
</TABLE>
A reconciliation of income tax expense attributable to operations with
Federal income taxes at the statutory rate of 34% for the years ended December
31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense at
statutory rate ........................................................................ $ 2,933 $ 3,716 $ 2,916
Items affecting income tax expense:
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated to
income tax expense ................................................................. (10) (285) 24
Dividends received deduction ......................................................... (116) (134) (139)
State income taxes, net of Federal income
tax benefit, before change in valuation
allowance ........................................................................... 241 384 268
Other ................................................................................ (124) (33) 184
Bad debts ............................................................................ -- -- (885)
Tax audit settlement ................................................................ (200) -- (400)
------- ------- -------
Income tax expense ............................................................... $ 2,724 $ 3,648 $ 1,968
======= ======= =======
</TABLE>
50
<PAGE> 51
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(8) INCOME TAXES - (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss and other carryforwards.......................... $ 11 $ 13
Allowance for loan losses........................................... 1,949 2,153
Valuation adjustments on real estate owned.......................... 131 152
Valuation adjustments on securities................................. 360 372
Deferred loan fees.................................................. 61 81
Deferred compensation............................................... 181 60
Cash versus accrual adjustments..................................... 235 350
Depreciation of banking premises and equipment...................... 107 143
Basis difference on REO............................................. - 213
Other............................................................... 88 -
----- -----
Total gross deferred tax assets.................................. 3,123 3,537
Less valuation allowance...................................... (52) (62)
----- -----
Net deferred tax assets...................................... 3,071 3,475
----- -----
Deferred tax liabilities:
Purchase accounting adjustments..................................... 668 688
Gain on distribution of SBLI stock.................................. - 550
Accounting for partnership interests................................ 509 512
Unrealized gains on debt and equity securities
available for sale............................................... 439 785
Other.............................................................. 67 198
----- -----
Total gross deferred tax liabilities......................... 1,683 2,733
----- -----
Net deferred tax asset....................................... $1,388 $ 742
====== ======
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the gross deferred tax asset will not be realized. Management
has established a valuation allowance principally for the state tax effects of
the valuation adjustments on securities
The Corporation has certain tax bad debt reserves which will not be
subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the tax bad debt reserves
continues to be subject to a provision of the current law that requires
recapture
51
<PAGE> 52
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(8) INCOME TAXES - (CONTINUED)
in the case of certain excess distributions to shareholders. The tax effect of
the tax bad debt reserves subject to recapture in the case of certain excess
distributions is approximately $885,000.
(9) STOCKHOLDERS' EQUITY
CAPITAL ADEQUACY
The Corporation is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The Federal Reserve Board's ("FRB") leverage capital-to-assets
guidelines require the strongest and most highly rated bank holding companies to
maintain a 3.00% ratio of Tier I capital to average consolidated assets. All
other bank holding companies are required to maintain at least 4.00% to 5.00%
depending on how the FRB evaluates their condition. The FRB may require a higher
capital ratio. The FDIC's leverage capital-to-assets ratio guidelines on the
Bank are substantively similar to those adopted by the FRB described above.
The FRB and the FDIC have also imposed risk-based capital requirements
on the Corporation and the Bank, respectively, which give different risk
weightings to assets and to off-balance sheet assets such as loan commitments
and loans sold with recourse. Both the FRB and FDIC guidelines require the
Corporation and the Bank to have a 4.00% Tier I risk-based capital ratio and an
8.00% total risk-based capital ratio. At December 31, 1998, neither the FRB nor
the FDIC permitted the unrealized gain on marketable securities available for
sale to be used in their calculation of regulatory capital.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes would cause a change in the Bank's
categorization.
52
<PAGE> 53
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(9) STOCKHOLDERS' EQUITY - (CONTINUED)
The Corporation's and the Bank's actual regulatory capital amounts (for
purposes of computing the ratios) and ratios at December 31, 1998 and 1997 are
presented in the following table (dollars in thousands):.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY ACTION PROVISIONS
--------------------- ---------------------- --------------------
REGULATORY CAPITAL REGULATORY CAPITAL REGULATORY CAPITAL
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1998
- ----
WARREN BANCORP, INC.
Leverage capital $39,122 10.10% $11,615 3.0% N/A N/A
Tier I risk-based capital 39,122 11.52% 13,579 4.0% N/A N/A
Total risk-based capital 43,145 12.71% 30,974 8.0% N/A N/A
WARREN FIVE CENTS SAVINGS BANK
Leverage capital 35,635 9.20% 11,615 3.0% $19,359 5.0%
Tier I risk-based capital 35,635 10.50% 13,579 4.0% 20,368 6.0%
Total risk-based capital 39,658 11.68% 27,157 8.0% 33,947 10.0%
1997
- ----
WARREN BANCORP, INC.
Leverage capital $38,612 10.58% $14,600 4.0% N/A N/A
Tier I risk-based capital 38,612 12.90% 11,977 4.0% N/A N/A
Total risk-based capital 42,379 14.15% 23,955 8.0% N/A N/A
WARREN FIVE CENTS SAVINGS BANK
Leverage capital 33,655 9.22% 10,951 3.0% $18,250 5.0%
Tier I risk-based capital 33,655 11.29% 11,926 4.0% 17,889 6.0%
Total risk-based capital 37,386 12.54% 23,852 8.0% 29,816 10.0%
</TABLE>
53
<PAGE> 54
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(9) STOCKHOLDERS' EQUITY - (CONTINUED)
PREFERRED STOCK PURCHASE RIGHTS
In April 1989, the Board of Directors declared a dividend distribution
of one Preferred Stock Purchase Right for each outstanding share of the
Corporation's common stock. These rights, which expire in 1999, entitle their
holders to purchase from the Corporation one one-hundredth of a share (a "unit")
of Series A Junior Participating Cumulative Preferred Stock, par value $0.10 per
share, ("preferred stock") at a cash exercise price of $35 per unit, subject to
adjustment. The rights will trade separately from the common stock and will
become exercisable when a person or group has acquired 20% or more of the
outstanding common stock, upon a tender offer that would result in a person or
group acquiring 20% or more of the outstanding common stock, or upon the
declaration by the Board of Directors that any person is an "adverse person"
holding 10% or more of the outstanding stock.
In the event a person or group acquires 20% or more of the outstanding
common stock or the Board of Directors declares a person an "adverse person",
each right would entitle its holder (except if the holder is a person or group
described above) to receive upon exercise sufficient units of preferred stock to
equal a value of two times the exercise price of the purchase right. In the
event the Corporation is acquired in a merger or other business combination
transaction or if 50% or more of the Corporation's assets or earning power is
sold, each holder may receive upon exercise common stock of the acquiring
company with a value equal to two times the exercise price of the right.
The rights are redeemable by the Board of Directors at a price of $.02
per right any time before a person or group acquires 20% or more of the
outstanding common stock or the Board of Directors declares a person is an
"adverse person".
RETAINED EARNINGS
At the time of the Bank's conversion from mutual to stock form of ownership
in 1986, the Bank established a liquidation account for the benefit of eligible
account holders who continue to maintain their accounts in the Bank after the
Conversion. Liquidation subaccounts totaling $12,340,000 were established for
each such eligible account holder equal to such holder's proportionate share of
total qualifying deposits on February 28, 1986. After the acquisition of Beverly
Savings Bank ("Beverly"), the Bank established a separate liquidation account
for the benefit of eligible account holders of Beverly who continue to maintain
their account after Beverly's conversion from mutual to stock form of ownership
and the subsequent Beverly acquisition, and subaccounts for each such holder
based on such holder's proportionate share of Beverly's total qualifying assets
on April 30, 1986. The balance in the two liquidation accounts at December 31,
1998, the latest measurement date, was $1,682,000 (unaudited). Both liquidation
accounts will be reduced to the extent that eligible account holders have
reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in his liquidation subaccount. In the event
of a complete liquidation of the Bank, and in only such event, each eligible
account holder will be entitled to receive a distribution from the liquidation
accounts equal to the current adjusted qualifying balance of his subaccount, to
the extent of the Bank's assets remaining after payment of all prior claims.
The Bank may not declare or pay a dividend to the holding company if
the effect thereof would reduce capital below regulatory minimums or otherwise
violate banking regulations.
54
<PAGE> 55
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(10) EMPLOYEE BENEFITS
401(K) SAVINGS PLAN
The Bank provides a 401(k) Savings Plan for the benefit of its
employees. Under this defined-contribution plan, the Corporation contributes 3%
of each eligible employee's W-2 compensation to his or her 401(k) account. In
addition, the Corporation matches employee contributions, up to 8% of the
employee's compensation, at a rate of 25%. The Corporation may also make a
profit-sharing distribution to employees' 401(k) accounts. The plan is
administered by a third party. Contribution rates are subject to change.
The Corporation's contributions to the plan charged to operations were
as follows (in thousands):
1998 1997 1996
---- ---- ----
Employer contribution ................... $138 $136 $136
Employer match .......................... 46 58 60
Profit sharing distribution ............. -- -- 159
---- ---- ----
$184 $194 $355
==== ==== ====
One of the investment alternatives for the plan's participants is
Warren Bancorp, Inc. common stock. In that regard, the Corporation reserved
270,000 shares of authorized but unissued shares for issuance thereunder.
TERMINATION OF PENSION PLAN
As of October 1, 1997, the Bank terminated its defined-benefit,
non-contributory pension plan administered by the Savings Bank Employees
Retirement Association ("SBERA"). In conjunction with the 401(k) Savings Plan,
the Corporation restructured the pension plan and, effective September 30, 1993,
stopped providing new pension benefits for employee services after that date.
Net pension expense for the plan years ended December 31 includes the
following:
1997* 1996
----- -----
(IN THOUSANDS)
Current period service costs ..................................$ -- $ --
Interest costs on projected benefit obligations ............... 154 229
Return on plan assets ......................................... (366) (745)
Net amortization and deferral ................................. (77) 260
Provision for Federal excise tax .............................. 43 38
----- -----
Net periodic pension (income) ..............................$(246) $(218)
===== =====
* Through October 1, 1997, the date the plan was terminated.
The key assumptions used in the development of the actuarially
determined pension data for 1997 and 1996 were a discount rate of 7.50% and
7.00%, respectively and an expected long-term rate of return on plan assets of
8.75% for both years.
55
<PAGE> 56
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(10) EMPLOYEE BENEFITS - (CONTINUED)
To terminate the plan, SBERA made distributions to participants
computed using interest-rate and actuarial assumptions prescribed by the Pension
Benefit Guarantee Corporation. Net proceeds to the Corporation after
distributions to participants were $2,547,000. The Corporation set aside 25% of
these proceeds, or $637,000, into the 401(k) plan for the benefit of current
employees to be distributed into employees' individual 401(k) accounts on
January of 1998, 1999 and 2000 as a special profit-sharing distribution. The
Corporation also paid a federal excise tax of $382,000 in conjunction with the
termination of the plan.
The gain on termination of pension plan of $538,000 is computed as
follows (in thousands):
<TABLE>
<S> <C> <C>
Total pension asset after distribution to participants ........ $ 2,547
25% setaside for current employees ............................ (637)
-------
Net .................................................. $ 1,910
20% federal excise tax ........................................ (382)
-------
Net .................................................. $ 1,528
Prepaid pension cost at date of termination ................... $ 1,153
Accrued federal excise tax liability at date of termination.... (173)
-------
Net prepaid pension asset ............................ (980)
Costs associated with termination ............................. (10)
-------
Net gain on termination of pension plan .............. $ 538
=======
</TABLE>
SUPPLEMENTAL RETIREMENT ARRANGEMENT
Effective July 1, 1995, the Bank established a supplemental retirement
benefit arrangement for the former Chief Executive Officer. The expense to
maintain that arrangement amounted to $176,000 in 1998, $168,000 in 1997 and
$164,000 in 1996. Included in the accompanying balance sheets are accrued
expenses of $241,000, and $234,000 at December 31, 1998 and 1997, respectively.
The arrangement is being partially funded by a life insurance policy.
DIRECTORS' DEFERRED COMPENSATION PLAN
The Corporation has established an unfunded deferred compensation plan
for its directors who are considered non-employees of the Corporation. Any
non-employee director may elect to defer earned fees to future years and earn
interest on the unfunded balance which is based on a comparable investment term
and rate of interest. This election may be terminated at the written request of
the director at any time. The deferred compensation expense attributed to the
directors for the years ended December 31, 1998, 1997 and 1996 totaled $44,000,
$40,000 and $35,000, respectively, and the accrued expense included in the
accompanying balance sheets for December 31, 1998 and 1997 were $196,000 and
$146,000, respectively.
STOCK OPTION PLAN
The Corporation instituted four stock option plans, one each in 1986,
1991, 1995 and 1998 (the "Option Plans"), for the benefit of officers and
directors and reserved 600,000 shares (adjusted for two-for-one common stock
split) of authorized but unissued common stock for each plan for issuance
thereunder. The terms of the Option Plans are similar and provide for options to
be granted at the fair
56
<PAGE> 57
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(10) EMPLOYEE BENEFITS - (CONTINUED)
market value of the common stock on the date of grant. Options granted expire
from seven to ten years after the date of grant.
As permitted under SFAS 123, the Corporation continues to apply APB
Opinion No. 25 and related interpretations in accounting for the Option Plans;
therefore, no compensation cost has been recognized.
Under SFAS No. 123, the Corporation's net income and earnings per share would
have been reduced to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income:
As reported........ $5,904,000 $7,285,000 $6,609,000
Pro-forma.......... $5,272,000 $7,013,000 $6,450,000
Basic earnings per share:
As reported......... $0.75 $0.96 $0.90
Pro-forma........... $0.67 $0.93 $0.88
Diluted earnings per share:
As reported......... $0.72 $0.91 $0.84
Pro-forma........... $0.65 $0.88 $0.82
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 2.80%, 3.72% and 3.61%; expected volatility of 44%, 34% and 38%; risk-free
interest rates of 5.6%, 6.6% and 6.6%; and expected lives of six years for 1998,
1997 and 1996. The weighted average grant-date fair value per share of stock
options issued in 1998, 1997 and 1996 were $5.47, $2.27 and $1.43, respectively.
57
<PAGE> 58
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(10) EMPLOYEE BENEFITS - (CONTINUED)
Changes in options outstanding during 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
EXERCISE PRICE PRICE PER
SHARES RANGE PER SHARE SHARE
------ --------------- -----
<S> <C> <C> <C>
Outstanding, December 31, 1995 .. 1,123,480 $0.25 to $5.125 $ 2.86
(695,786 shares exercisable)
Granted during 1996 ............. 191,100 $6.1875 to $7.5625 $ 6.26
Exercised during 1996 ........... (244,050) $0.25 to $4.094 $ 1.42
Canceled during 1996 ............ (37,180) $1.8125 to $6.1875 $ 4.42
---------
Outstanding, December 31, 1996 .. 1,033,350 $0.50 to $7.5625 $ 3.75
(650,570 shares exercisable)
Granted during 1997 ............. 205,000 $7.5625 to $7.875 $ 7.87
Exercised during 1997 ........... (289,060) $0.50 to $6.1875 $ 2.55
Canceled during 1997 ............ (11,080) $4.00 to $7.875 $ 5.47
---------
Outstanding, December 31, 1997 .. 938,210 $0.50 to $7.875 $ 5.00
(564,350 shares exercisable)
Granted during 1998 ............. 202,500 $11.875 to $14.375 $12.81
Exercised during 1998 ........... (317,020) $0.50 to $7.875 $ 3.46
Canceled during 1998 ............ (35,440) $4.00 to $12.375 $ 6.48
---------
Outstanding, December 31, 1998 .. 788,250 $3.3125 to $14.375 $ 7.50
=========
(427,670 shares exercisable)
</TABLE>
The following table summarizes information about the options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
- ------ ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$0 - $5 249,250 5.48 $ 3.90 220,150 $ 3.87
5 - 10 344,140 7.18 7.11 167,460 6.94
10 - 15 194,860 6.58 12.81 40,060 12.80
------- -------
Total 788,250 6.49 7.50 427,670 5.91
======= =======
</TABLE>
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES
The Corporation is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations of interest rates.
These financial instruments include commitments to originate loans, unused lines
of credit, standby letters of credit, recourse arrangements on sold assets and
forward
58
<PAGE> 59
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES - (CONTINUED)
commitments to sell loans. The financial instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional amounts
of these instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for loan
commitments, standby letters of credit and recourse arrangements is represented
by the contractual amount of these instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. For forward commitments to sell loans, the
contract or notional amounts do not represent exposure to credit loss. The
Corporation controls the credit risk on its forward commitments through credit
approvals, limits and monitoring procedures.
Financial instruments with off-balance sheet risk at December 31 are as
follows:
<TABLE>
<CAPTION>
CONTRACT
AMOUNT
------------------
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
Financial Instruments Whose Contract Amounts Represent
Credit Risk:
Commitments to originate loans .................... $21,682 $ 7,672
Unused lines of credit ............................ 32,992 26,450
Standby letters of credit ......................... 1,809 1,836
Unadvanced portions of construction loans ......... 12,958 16,974
Loans sold with recourse .......................... 1,439 2,217
Financial Instruments Whose Contract Amounts
Exceed the Amount of Credit Risk:
Forward commitments to sell loans ................. $ 3,352 $ 3,795
</TABLE>
Commitments to originate loans, unused lines of credit, and unadvanced
portions of construction loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower. Collateral held varies but may include single family houses,
inventory, property, plant and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance by a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements, bond financing, and similar transactions. The credit risk
59
<PAGE> 60
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND
CONTINGENT LIABILITIES - (CONTINUED)
involved in issuing letters of credit is essentially the same as that in
extending loan facilities to customers.
Forward commitments to sell loans are contracts which the Corporation
enters into for the purpose of reducing the interest rate risk associated with
originating loans for sale. In order to fulfill a forward commitment, the
Corporation typically receives cash to be exchanged for the loans at a specified
price at a future date agreed to by both parties. Risk may arise from the
possible inability of the Corporation to deliver the loans specified on the
commitment. Unrealized gains and losses on contracts used to hedge the
Corporation's closed loans and pipeline of loans expected to close are
considered in determining the lower of cost or market value of loans held for
sale.
A portion of the Bank's loans were sold with recourse in the event of
default by the borrower. These transactions were recorded as a sale of assets
for financial reporting purposes.
As a nonmember of the Federal Reserve System, the Corporation is
required to maintain certain reserves of vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement included
in cash and due from banks was $1.7 million at December 31, 1998.
There are no legal claims against the Corporation arising in the normal
course of business at December 31, 1998.
(12) WARREN BANCORP, INC. (PARENT COMPANY ONLY)
The condensed information of Warren Bancorp, Inc. is as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS: AT DECEMBER 31,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash.................................................................................... $ 3,599 $ 5,013
Investment in subsidiary................................................................ 36,434 35,071
Other assets............................................................................ - 101
-------- --------
Total assets....................................................................... $40,033 $40,185
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses..................................................................... $ 112 $ 157
-------- --------
Total liabilities................................................................ 112 157
Stockholders' equity.................................................................... 39,921 40,028
-------- --------
Total liabilities and stockholders' equity....................................... $40,033 $40,185
======== ========
</TABLE>
60
<PAGE> 61
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(12) WARREN BANCORP, INC. (PARENT COMPANY ONLY) - (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS: YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividend income from subsidiary..................................... $3,900 $6,296 $3,850
Interest............................................................ 210 13 -
Management fees..................................................... 196 81 89
------ ------ ------
Total operating income....................................... 4,306 6,390 3,939
Expenses:
Other expenses..................................................... (196) (81) (89)
Income tax expense................................................. (81) (21) (13)
Equity in undistributed net income of subsidiary....................... 1,875 997 2,772
------ ------ ------
Net income............................................................. $5,904 $7,285 $6,609
====== ====== ======
</TABLE>
The parent-company-only statements of changes in stockholders' equity
are identical to the consolidated statement of changes in stockholders' equity
for the three year period ended December 31, 1998 and therefore are not
reprinted here.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 5,904 $ 7,285 $ 6,609
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Bank
subsidiary.................................................... (1,875) (997) (2,772)
Decrease in other assets......................................... 101 14 12
Increase (decrease) in liabilities (44) 4 (11)
------- ------- -------
Net cash provided by operating activities 4,086 6,306 3,838
------- ------- -------
Cash flows from investing activities:
Capital contribution to subsidiary - - -
------- ------- -------
Net cash (used in) investing activities - - -
------- ------- -------
Cash flows from financing activities:
Dividends paid...................................................... (5,670) (3,263) (1,948)
Purchase of treasury stock.......................................... (928) - (1,174)
Stock options exercised............................................. 1,098 739 346
------- ------- -------
Net cash (used in) financing activities...................... (5,500) (2,524) (2,776)
------- ------- -------
(Decrease)increase in cash and cash equivalents........................ (1,414) 3,782 1,062
Cash and cash equivalents at beginning of year......................... 5,013 1,231 169
------- ------- -------
Cash and cash equivalents at end of year............................... $ 3,599 $ 5,013 $ 1,231
======= ======= =======
</TABLE>
61
<PAGE> 62
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1998
-----------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
-------- --------- ---- -----
(TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income .......... $ 7,329 $ 7,344 $ 7,338 $ 7,242
Interest expense ...................... 3,117 3,093 2,941 2,909
------- ------- ------- -------
Net interest income ................ 4,212 4,251 4,397 4,333
Provision for (recovery of) loan losses (1) (22) (50) (18)
------- ------- ------- -------
Net interest income after provision
for loan losses .................. 4,213 4,273 4,447 4,351
Non-interest income ................... 365 330 493 255
Non-interest expense .................. 2,769 2,483 2,484 2,363
------- ------- ------- -------
Income before income taxes ......... 1,809 2,120 2,456 2,243
Income tax expense (benefit) (1) ...... 397 725 837 765
------- ------- ------- -------
Net income .................. $ 1,412 $ 1,395 $ 1,619 $ 1,478
======= ======= ======= =======
Basic earnings per share: ............. $ 0.18 $ 0.18 $ 0.21 $ 0.19
======= ======= ======= =======
Diluted earnings per share: ........... $ 0.17 $ 0.17 $ 0.20 $ 0.18
======= ======= ======= =======
</TABLE>
(1) Includes income tax benefit of $200,000 for the three months ended
December 31, 1998.
62
<PAGE> 63
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1997
-----------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
-------- --------- ------- -------
(TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income .......... $ 7,317 $ 7,121 $ 7,180 $ 6,921
Interest expense ...................... 2,938 2,870 2,789 2,807
------- ------- ------- -------
Net interest income ................ 4,379 4,251 4,391 4,114
Provision for (recovery of) loan losses 48 (126) (198) (40)
------- ------- ------- -------
Net interest income after provision
for loan losses .................. 4,331 4,377 4,589 4,154
Non-interest income (1) ............... 385 760 228 1,966
Non-interest expense (2) .............. 2,463 2,272 2,374 2,748
------- ------- ------- -------
Income before income taxes ......... 2,253 2,865 2,443 3,372
Income tax expense .................... 760 1,161 819 908
------- ------- ------- -------
Net income .................. $ 1,493 $ 1,704 $ 1,624 $ 2,464
======= ======= ======= =======
Basic earnings per share: ............. $ 0.20 $ 0.23 $ 0.22 $ 0.34
======= ======= ======= =======
Diluted earnings per share: ........... $ 0.18 $ 0.22 $ 0.21 $ 0.32
======= ======= ======= =======
</TABLE>
- -------
(1) Non-interest income includes gains (loss) on sale mortgage servicing rights,
$1,462,000, $(55,000), $29,000 and none for the three months ended March 31,
1997, June 30, 1997, September 30, 1997 and December 31, 1997, respectively.
Gains on sales of investment securities, net, were $99,000, $21,000 and $20,000
for the three months ended March 31, 1997, September 30, 1997 and December 31,
1997, respectively. Gains from termination of pension plan were $457,000 and
$81,000 for the three months ended September 30, 1997 and December 31, 1997,
respectively.
(2) Non-interest expense includes real estate operations expense of $343,000,
$30,000, $17,000 and $19,000 for the three months ended March 31, 1997, June 30,
1997, September 30, 1997 and December 31, 1997, respectively.
Basic and diluted earnings per share may not accumulate to annual amounts due to
changes in average common shares and common-equivalent shares outstanding during
the year and rounding.
63
<PAGE> 64
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation estimates the fair value of its financial instruments
at a discrete point in time based on relevant market information and information
about the financial instruments. Because no active market exists for a portion
of those financial instruments, fair value estimates are based on judgment
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
CASH AND DUE FROM BANKS, ACCRUED INTEREST RECEIVABLE, ACCRUED INTEREST PAYABLE
AND OTHER BORROWED FUNDS
Cash and due from banks, accrued interest receivable, accrued interest
payable, and other borrowed funds are short-term in nature and are not subject
to material interest rate changes which would result in a material difference
between fair value and book value. In addition, an adjustment to fair value for
credit risk is not considered necessary because of the current financial status
of the various counterparties. The book value of these financial instruments is
representative of their fair value.
INVESTMENT SECURITIES
U.S. Treasury and Government Agency securities, mortgage-backed
securities, money market funds and overnight investments, fixed income mutual
funds and common and preferred stock are actively traded in a secondary market.
Published investment securities market values are used as fair value for most of
these securities. Refer to Note 2 for the fair value of these securities. Stock
in the Federal Home Loan Bank and the Depositors Insurance Fund Liquidity Fund
are not traded in a secondary market. Based upon the characteristics of these
securities, however, book value is a reasonable estimate of fair value. The fair
value of stock in SBLI is based upon its most recent appraisal.
LOANS
Fair value of loans is estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as residential
mortgage, commercial real estate, commercial, and consumer.
The fair value of fixed-rate residential mortgage loans is primarily
based upon secondary market rates for mortgage-backed securities consisting of
mortgages similar in nature to the loans included in the Bank's residential
mortgage loan portfolio. The fair value of all other types of loans is estimated
by discounting contractual cash flows using estimated market discount rates
which reflect the interest rate and credit risk inherent in the loans. The
discount rate used in the fair value estimation reflects rates that are
available to customers who meet the Bank's underwriting standards.
64
<PAGE> 65
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
Management has made estimates of fair value of loans that it believes
are reasonable. However, because there is no market for many of the types of
loans, management has no basis to determine whether the fair value presented
would be indicative of the value negotiated in an actual sale.
DEPOSIT LIABILITIES AND ESCROW DEPOSITS OF BORROWERS
The fair value of deposits with no stated maturity such as savings
deposits, non-interest deposits and escrow deposits of borrowers is equal to the
book value of these accounts. The fair value of time deposits (including
retirement time deposits) is based upon the discounted value of contractual cash
flows. The discount rate has been estimated using the rates offered for deposits
of a similar remaining maturity as of December 31, 1998 and 1997. Early
withdrawal assumptions, based on the Bank's experience, do not materially affect
the estimation of fair value.
FEDERAL HOME LOAN BANK ADVANCES
The fair value of Federal Home Loan Bank advances is based upon the
discounted value of contractual cash flows. The discount rate is estimated using
the rates for advances of a similar remaining maturity as of December 31, 1998
and 1997.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the Corporation's commitments to extend credit is
estimated using fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties'
credit standing. The fair value of the Corporation's commitments to sell loans
is based on current market prices. At December 31, 1998 and 1997, management has
estimated the fair values of these financial instruments to be immaterial.
65
<PAGE> 66
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The estimated fair values of the Corporation's financial instruments at
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks ........ $ 7,497 $ 7,497 $ 7,191 $ 7,191
Money market funds and overnight
investments ................. 4,542 4,542 6,288 6,288
Investment securities .......... 103,294 103,294 101,698 101,698
Loans held for sale ............ 1,192 1,192 1,031 1,041
Loans, net ..................... 261,932 263,527 236,697 239,508
Other investments .............. 6,544 6,784 6,294 6,534
Financial liabilities:
Non-time deposits .............. 193,308 193,308 179,669 179,669
Time deposits .................. 153,704 154,770 145,624 145,900
FHLB borrowings ................ 2,671 2,698 671 652
Repurchase agreements .......... 5,003 5,003 2,255 2,255
</TABLE>
(15) BUSINESS SEGMENTS
For internal reporting, planning and business purposes, the Corporation
segments its operations into distinct business groups. An individual business
group's profit contribution to the Corporation as a whole is determined based
upon the Corporation's profitability reporting system which assigns capital and
other balance sheet items and income statement items to each of the business
groups. This segmentation mirrors the Corporation's organizational structure.
Management accounting policies are in place for assigning revenues and expenses
that are not directly incurred by the business groups, such as overhead, the
results of asset allocations, and transfer revenues and expenses. Accordingly,
the Corporation's business-segment operating results will differ with other
similar information published by other financial institutions. In addition,
management accounting concepts are periodically refined and results may change
to reflect these refinements.
On January 1 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for reporting operating segments of a business enterprise. The new rules
establish revised standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. Operating segments are components of an enterprise which
are evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Corporation's chief
operating decision maker is the President and Chief Executive Officer of the
Corporation. The adoption of SFAS No. 131 had no effect on the Corporation's
primary financial statements, but did result in the disclosure of segment
information contained herein.
66
<PAGE> 67
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(15) BUSINESS SEGMENTS - (CONTINUED)
The Corporation has identified its reportable operating business
segments as the Corporate Banking Business and the Personal Banking Business. A
description of each reportable business segment is discussed below:
CORPORATE BANKING
The Corporate Banking Business provides services to business customers
in the Corporation's market area. These services include, but are not limited
to, commercial real estate and construction loans, asset-based financing and
cash management/deposit services. It services all loans in its business.
PERSONAL BANKING
The Personal Banking Group provides services to consumers in the
Corporation's market area through its branch and ATM network. These services
include, but are not limited to, home equity loans, installment loans, safe
deposit boxes and an array of deposit services. This business purchases
adjustable-rate mortgage loans from another business group and services all
loans in its business.
Non-reportable operating segments of the Corporation's operations that
do not meet the qualitative and quantitative thresholds requiring disclosure are
included in the Other category in the disclosure of business segments below.
Revenues in these segments consist mainly of interest income on investments and
gains on sales of mortgage loans and securities.
67
<PAGE> 68
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(15) BUSINESS SEGMENTS - (CONTINUED)
Specific reportable segment information as of and for the years ended
December 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income - external $ 18,029 $ 10,756 $ 468 $ 29,253
Interest income - internal -- 8,746 12 $ (8,758) --
Interest expense - external 1,037 10,923 100 12,060
Interest expense - internal 8,454 761 (457) (8,758) --
Fee and other income ...... 171 763 509 1,443
Income tax expense
(benefit) ............... 2,569 787 (632) 2,724
Net income ................ 3,848 1,939 117 5,904
Total assets .............. 221,900 162,500 12,700 397,100
Total loans ............... 200,400 66,100 1,200 267,700
Total deposits ............ 37,300 307,700 2,000 347,000
</TABLE>
68
<PAGE> 69
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
(15) BUSINESS SEGMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income - external $ 15,101 $ 12,913 $ 525 $ 28,539
Interest income - internal -- 7,248 25 $ (7,273) --
Interest expense - external 665 10,595 144 11,404
Interest expense - internal 7,128 300 (155) (7,273) --
Fee and other income ...... 134 2,354* 851 3,339
Income tax expense
(benefit) ............... 2,377 2,067 (796) 3,648
Net income ................ 3,476 3,832 (23) 7,285
Total assets .............. 186,100 169,700 15,200 371,000
Total loans ............... 167,900 73,100 1,000 242,000
Total deposits ............ 28,600 294,700 2,000 325,300
</TABLE>
* Includes a gain on sale of mortgage servicing rights of $1,436,000.
69
<PAGE> 70
<TABLE>
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<S> <C>
(a)(1) -- Financial Statements. Included in Item 8.
(a)(2) -- Exhibits
3.1 -- Articles of Organization of Warren Bancorp, Inc. (6)
3.2 -- By-laws of Warren Bancorp, Inc., (6)
4.1 -- Form of Stock Certificate of Warren Bancorp, Inc. (7)
10.1 -- Warren Bancorp, Inc. 1986 Incentive and Nonqualified Stock Option
Plan, as amended. (4)
10.2 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings
Bank and Paul M. Peduto. (3)
10.3 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings
Bank and Leo C. Donahue. (3)
10.4 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Paul M. Peduto. (1)
10.5 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Leo C. Donahue, Jr. (1)
10.6 -- Beverly Savings Bank 1986 Incentive and Nonqualified Stock Option Plan, as amended. (2)
10.7 -- Beverly Savings Bank 1986 Nonemployees Nonqualified Stock Option Plan, as amended (2)
10.8 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings
Bank and John R. Putney. (3)
10.9 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and John R. Putney. (3)
10.10 -- Warren Bancorp, Inc. 1991 Incentive and Nonqualified Stock Option Plan, as amended. (2)
10.11 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Mark J. Terry (8)
10.12 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings
Bank and Mark J. Terry. (8)
10.13 -- Warren Bancorp, Inc. 1995 Incentive and Nonqualified Stock Option Plan (5)
10.14 -- Executive Supplemental Retirement Agreement among Warren Bancorp, Inc.,
Warren Five Cents Savings Bank and George W. Phillips. (7)
10.15 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and George W. Phillips (7)
10.16 -- Employment Agreement between Warren Five Cents Savings Bank and John R. Putney (8)
10.17 -- Consulting Agreement between Warren Bancorp, Inc. and George W. Phillips (8)
10.18 -- Warren Bancorp, Inc. 1998 Incentive and Nonqualified Stock Option Plan (9)
21.1 -- List of Subsidiaries of Warren Bancorp, Inc. (8)
23.1 -- Consent of Independent Public Accountants. (10)
23.2 -- Consent of Independent Public Accountants. (10)
27.1 -- Financial Data Schedule - 1998 (10)
27.2 -- Financial Data Schedule - 1997 (Restated) (10)
27.3 -- Financial Data Schedule - 1996 (Restated) (10)
(b) Reports on Form 8-K. None.
</TABLE>
- -----------------
(1) Previously filed as an exhibit to the Corporation's Registration Statement
on Form S-4 filed with the Securities and Exchange Commission on March 15,
1988 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Corporation's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on June 13,
1995 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K with the Securities and Exchange Commission on March 31, 1990 and
incorporated herein by reference.
(4) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1991
and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registration Statement on Form S-8
filed with the Securities and Exchange Commission on May 3, 1995 and
incorporated herein by reference.
(6) Previously filed as an exhibit to the Corporation's Current Report on Form
8-K filed with the Securities and Exchange Commission on May 9, 1995 and
incorporated herein by reference.
(7) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1996
and incorporated herein by reference.
(8) Previously filed as an exhibit to the Corporation's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1997
and incorporated herein by reference.
(9) Previously filed as an exhibit to the Corporation's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on June 11,
1998 and incorporated herein by reference.
(10) Filed herewith.
70
<PAGE> 71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly created this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Peabody, Commonwealth of Massachusetts, on March 17, 1999.
WARREN BANCORP, INC.
By: /s/ Stephen G. Kasnet
------------------------------
STEPHEN G. KASNET
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ John R. Putney President and Chief Executive Officer; March 17, 1999
- -------------------------------- Director (Principal Executive Officer)
JOHN R. PUTNEY
/s/ Paul M. Peduto Treasurer; Director (Principal Financial Officer March 17, 1999
- -------------------------------- and Principal Accounting Officer)
PAUL M. PEDUTO
Director March , 1999
- --------------------------------
PETER V. BENT
Director March , 1999
- --------------------------------
STEPHEN J. CONNOLLY, IV
/s/ Francis L. Conway Director March 17, 1999
- --------------------------------
FRANCIS L. CONWAY
/s/ Paul J. Curtin Director March 17, 1999
- --------------------------------
PAUL J. CURTIN
/s/ Robert R. Fanning, Jr. Director March 17, 1999
- --------------------------------
ROBERT R. FANNING, JR.
/s/ Arthur E. Holden Director March 17, 1999
- --------------------------------
ARTHUR E. HOLDEN
/s/ Stephen R. Howe Director March 17, 1999
- --------------------------------
STEPHEN R. HOWE
/s/ John C. Jeffers Director March 17, 1999
- --------------------------------
JOHN C. JEFFERS
/s/ Stephen G. Kasnet Director March 17, 1999
- --------------------------------
STEPHEN G. KASNET
/s/ Linda Lerner Director March 17, 1999
- --------------------------------
LINDA LERNER
Director March , 1999
- --------------------------------
ARTHUR E. MCCARTHY
Director March , 1999
- --------------------------------
ARTHUR J. PAPPATHANASI
/s/ George W. Phillips Director March 17, 1999
- --------------------------------
GEORGE W. PHILLIPS
/s/ John D. Smidt Director March 17, 1999
- --------------------------------
JOHN D. SMIDT
/s/ John H. Womack Director March 17, 1999
- --------------------------------
JOHN H. WOMACK
</TABLE>
71
<PAGE> 72
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders of Warren Bancorp, Inc. will be held at the
King's Grant Inn, Route 128, Danvers, Massachusetts, on Wednesday, May 5, 1999,
at 10:00 a.m. A formal notice of the meeting, together with a proxy statement
and proxy form, is being mailed to shareholders with this annual report.
- --------------------------------------------------------------------------------
FORM 10-K AND OTHER REPORTS
Additional copies of this Annual Report to Shareholders, which contains the
Corporation's annual report to the Securities and Exchange Commission on Form
10-K (without exhibits), a copy of the exhibits to the Annual Report on Form
10-K and copies of quarterly reports may be obtained without charge by writing:
Warren Bancorp, Inc., Shareholder Relations, 10 Main Street, Post Office Box
6159, Peabody, Massachusetts 01960.
- -------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
<TABLE>
<CAPTION>
INDEPENDENT PUBLIC
SHAREHOLDER RELATIONS TRANSFER AGENT & REGISTRAR ACCOUNTANTS
<S> <C> <C>
Paul M. Peduto, Treasurer Registrar and Transfer Company Arthur Andersen LLP
Warren Bancorp, Inc. 10 Commerce Drive 225 Franklin Street
10 Main Street Cranford, NJ 07016-3572 Boston, MA 02110-2812
Post Office Box 6159
Peabody, Massachusetts 01960
(978) 531-7400
</TABLE>
- -------------------------------------------------------------------------------
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded over the counter and is quoted by the
Nasdaq National Market under the symbol WRNB. The following table sets forth the
high and low closing prices for the common stock of the Corporation during the
two-year period ended December 31, 1998. All prices set forth below are based
upon information provided by Nasdaq Stock Market.
COMMON STOCK
----------------------
HIGH LOW
---- ---
1998 4th Quarter.......................... $10.00 $8.75
3rd Quarter.......................... 13.38 8.75
2nd Quarter.......................... 14.38 12.00
1st Quarter.......................... 12.63 10.50
1997 4th Quarter.......................... $12.07 $9.63
3rd Quarter.......................... 9.84 8.63
2nd Quarter.......................... 9.50 7.50
1st Quarter.......................... 8.13 7.38
As of March 1, 1999, the Corporation had approximately 650 stockholders of
record who held 7,674,691 shares of common stock. The number of shareholders
indicated does not reflect the number of persons or entities who hold their
common stock in nominee names through various brokerage firms or other entities.
72
<PAGE> 73
SHAREHOLDER INFORMATION - (CONTINUED)
- --------------------------------------------------------------------------------
Dividends were paid by the Corporation during 1998 and 1997 as follows
and those prior to the third quarter of 1998 have been retroactively restated to
reflect the 2-for-1 stock split which occurred on May 12, 1998:
PAYMENT DIVIDEND
DATE PER SHARE
---- ---------
1998 4th Quarter................. November 16, 1998 $.090
3rd Quarter................. August 10, 1998 .090
2nd Quarter*................ May 11, 1998 .475
1st Quarter................. February 17, 1998 .065
* Includes special dividend of $.385 per share.
1997 4th Quarter................. November 10, 1997 $.065
3rd Quarter................. August 11, 1997 .065
2nd Quarter*................ May 12, 1997 .250
1st Quarter................. February 4, 1997 .055
* Includes special dividend of $.185 per share.
73
<PAGE> 74
CORPORATE INFORMATION
WARREN BANCORP, INC. AND WARREN FIVE CENTS SAVINGS BANK
AS OF MARCH 9, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL OFFICERS
DIRECTORS WARREN BANCORP, INC
<S> <C> <C>
PETER V. BENT (2)(6) LINDA LERNER (2)(4)(6) .
Owner/Manager, Retired
Brown's Yacht Yard STEPHEN G. KASNET
ARTHUR E. MCCARTHY (1)(3) Chairman of the Board
STEPHEN J. CONNOLLY, IV (3)(4) Vice President &
President, Managing Director, JOHN R. PUTNEY
Connolly Brothers, Inc. Tucker Anthony, Inc. President and
Construction Company Chief Executive Officer
ARTHUR J. PAPPATHANASI (2)(6)
FRANCIS L. CONWAY (2) President & PAUL M. PEDUTO
President & Treasurer, Chief Executive Officer, Treasurer
F.L. Conway & Sons, Inc. West Lynn Creamery, Inc. and
Richdale Dairy Stores, Inc. SUSAN G. OUELLETTE
PAUL J. CURTIN (1)(4) Clerk
Certified Public Accountant PAUL M. PEDUTO
Treasurer, WARREN FIVE CENTS SAVINGS BANK
ROBERT R. FANNING, JR. (1)(2)(6) Warren Bancorp, Inc., and
President & Executive Vice President, STEPHEN G. KASNET
Chief Executive Officer, Chief Financial Officer and Treasurer, Chairman of the Board
Northeast Health Warren Five Cents Savings Bank
Systems, Inc. and JOHN R. PUTNEY
Beverly Hospital Corporation GEORGE W. PHILLIPS (5)(6) President and
Retired Chief Executive Officer
ARTHUR E. HOLDEN (1)(3)
President JOHN R. PUTNEY PAUL M. PEDUTO
Holden Oil, Inc. President & Executive Vice President,
Chief Executive Officer, Chief Financial Officer and Treasurer
STEPHEN R. HOWE (2)(4)(6) Warren Bancorp, Inc. and
Certified Public Accountant Warren Five Cents Savings Bank LEO C. DONAHUE
Senior Vice President for
JOHN C. JEFFERS (2)(4) JOHN D. SMIDT (4) Personal Banking
Vice President, President & Treasurer,
Jeffers Millwork John Smidt Co., Inc. MARK J. TERRY
Senior Vice President for
STEPHEN G. KASNET (1)(3)(4) JOHN H. WOMACK (4) Corporate Banking and
President, President, Senior Lending Officer
Pioneer Real Estate Advisors, Inc. TJM Enterprise, Inc.
Chairman of the Board, SUSAN G. OUELLETTE
Warren Bancorp, Inc. and Clerk
Warren Five Cents Savings Bank
(1) Executive Committee
(2) Finance, Audit and Compliance Committee
(3) Nominating Committee
(4) Loan Committee (Warren Five Cents Savings Bank)
(5) Director of Warren Bancorp, Inc. only
(6) Strategic Planning Committee
</TABLE>
74
<PAGE> 75
WARREN FIVE CENTS SAVINGS BANK
AS OF MARCH 9, 1999
- --------------------------------------------------------------------------------
VICE PRESIDENTS OTHER OFFICERS
JEFFREY O. BREWER WILLIAM H. ANDERSON
KERIN E. DEEDY PATRICIA M. F. BATES
KENNETH R. DILLON CAROL M. BRUNTON
COLLEEN M. GOLDEN DIANE M. GIAMBERARDINO
NICHOLAS P. HELIDES SHERRY M. O'CONNELL
BARBARA L. KELLY LINDA A. PALMER
SUZANNA R. LEVINE ELAINE M. WALKER
WILLIAM F. LINDQUIST, III
MITCHELL MARCUS
ARTHUR T. McCARTHY
FRANK P. ROMANO
ASSISTANT VICE PRESIDENTS
PATRICIA A. ACQUAVIVA
MEGAN T. CARLTON
RUTH M. DAY
CYNTHIA J. GOLDSMITH
KAREN A. GRINDROD
CYNTHIA J. HICKEY
WILLIAM J. KELL
MARIA C. LIMA
ELEANOR M. MANNING
PAUL A. NUCCIO
MARGARET M. PEDRO
JOAN C. WILLIAMS
75
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K, into the Bank's previously
filed registration statements on Form S-8, File Nos. 33-278999, 33-71240,
33-47899, 33-94104 and 333-56625.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 26, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Warren Bancorp, Inc.:
We consent to the incorporation by reference in the Registration Statements,
(Nos. 33-27899, 33-47899, 33-94104, 33-71240 and 333-56625) on Form S-8 of
Warren Bancorp, Inc., of our report dated January 23, 1997, relating to the
consolidated statements of operations, changes in stockholders' equity and cash
flows of Warren Bancorp, Inc. for the year ended December 31, 1996, which report
appears in the December 31, 1998 annual report on Form 10K of Warren Bancorp,
Inc.
KPMG LLP
Boston Massachusetts
March 22, 1999
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0
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0
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<INTEREST-TOTAL> 28,539
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<INCOME-PRETAX> 10,933
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<EXCHANGE-RATE> 1
<CASH> 5,855
<INT-BEARING-DEPOSITS> 6,733
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 104,937
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<INVESTMENTS-MARKET> 6,918
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0
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</TABLE>
