<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
or the quarterly period ended September 30, 1999 or
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________________ to ___________________
Commission File No. 0-17222
WARREN BANCORP, INC.
(Exact Name of registrant as specified in the charter)
MASSACHUSETTS 04-3024165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 MAIN STREET, PEABODY, MASSACHUSETTS 01960
(Address of principal executive offices) (Zip Code)
(978) 531-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirement for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 8, 1999
- --------------------------------------- -------------------------------
Common Stock, par value $.10 per share 7,327,771
<PAGE> 2
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks (non-interest bearing) $ 7,038 $ 7,497
Money market funds and overnight investments 13,434 4,542
--------- ---------
Cash and cash equivalents 20,472 12,039
Investment and mortgage-backed securities available for sale (amortized cost of
$79,352 at September 30, 1999 and $102,055 at December 31, 1998) 79,823 103,294
Other investments (fair value of $7,034 at September 30, 1999 and
$6,784 at December 31, 1998) 6,794 6,544
Loans held for sale 989 1,192
Loans 280,071 266,475
Allowance for loan losses (4,204) (4,023)
--------- ---------
Net loans 275,867 262,452
Banking premises and equipment, net 5,083 5,004
Accrued interest receivable 2,410 2,803
Real estate acquired by foreclosure 72 1,450
Other assets 2,278 2,287
--------- ---------
Total assets $ 386,994 $ 390,521
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 348,027 $ 347,012
Borrowed funds 7,854 7,674
Escrow deposits of borrowers 1,132 1,065
Accrued interest payable 494 589
Accrued expenses and other liabilities 1,414 804
--------- ---------
Total liabilities 358,921 357,144
--------- ---------
Stockholders' equity:
Preferred stock, $.10 par value; Authorized - 10,000,000 shares;
Issued and outstanding - none -- --
Common stock, $.10 par value; Authorized - 20,000,000 shares;
Issued - 8,094,414 shares at September 30, 1999 and December 31, 1998
Outstanding - 7,326,811 shares at September 30, 1999 and 7,826,691 shares at
December 31, 1998 809 809
Additional paid-in capital 35,624 35,710
Retained earnings 4,490 4,516
Treasury stock, at cost, 767,603 shares at September 30, 1999 and 267,723 shares at
December 31, 1998 (6,357) (1,913)
--------- ---------
34,566 39,122
Unrealized gain on securities available for sale, net of income taxes 301 799
--------- ---------
Total stockholders' equity 34,867 39,921
--------- ---------
Total liabilities and stockholders' equity $ 393,788 $ 397,065
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands, except per-share data)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans $ 5,713 $ 5,642 $ 16,825 $ 16,788
Interest and dividends on investments 1,213 1,279 3,764 3,739
Interest on mortgage-backed securities 271 423 885 1,397
------- ------- -------- --------
Total interest and dividend income 7,197 7,344 21,474 21,924
------- ------- -------- --------
Interest expense:
Interest on deposits 2,865 3,023 8,542 8,789
Interest on borrowed funds 84 70 235 154
------- ------- -------- --------
Total interest expense 2,949 3,093 8,777 8,943
------- ------- -------- --------
Net interest income 4,248 4,251 12,697 12,981
Provision for (recovery of) loan losses 36 (22) 69 (90)
------- ------- -------- --------
Net interest income after provision for or recovery of
loan losses 4,212 4,273 12,628 13,071
------- ------- -------- --------
Non-interest income:
Customer service fees 240 209 700 635
Gains on sales of investment securities, net 17 -- 17 188
Gains on sales of mortgage loans 43 112 196 243
Other 1 9 (16) 12
------- ------- -------- --------
Total non-interest income 301 330 897 1,078
------- ------- -------- --------
Income before non-interest expense and income taxes 4,513 4,603 13,525 14,149
------- ------- -------- --------
Non-interest expense:
Salaries and employee benefits 1,702 1,513 4,793 4,403
Office occupancy and equipment 262 291 796 892
Professional services 56 53 169 144
Marketing 35 62 140 189
Real estate operations (68) 14 (78) 40
Outside data processing expense 120 135 354 385
Other 464 415 1,320 1,277
------- ------- -------- --------
Subtotal operating expenses 2,571 2,483 7,494 7,330
Expenses for formation of Warren Real Estate
Investment Corporation 87 -- 87 --
------- ------- -------- --------
Total non-interest expenses 2,658 2,483 7,581 7,330
------- ------- -------- --------
Income before income taxes 1,855 2,120 5,944 6,819
Income tax expense 593 725 2,028 2,327
------- ------- -------- --------
Net income $ 1,262 $ 1,395 $ 3,916 $ 4,492
======= ======= ======== ========
Basic earnings per share $ 0.17 $ 0.18 $ 0.53 $ 0.58
======= ======= ======== ========
Diluted earnings per share $ 0.17 $ 0.17 $ 0.51 $ 0.55
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 3,916 $ 4,492
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for (recovery of) loan losses 69 (90)
Depreciation and amortization 369 461
Deferred income tax expense 69 238
Amortization of premiums and discounts 487 259
(Gains) on sales of investment securities (17) (188)
(Gains) on sales of mortgage loans (196) (243)
(Gains) on sale of real estate acquired by foreclosure (30) (17)
(Increase) decrease in loans held for sale 203 (499)
(Increase) decrease in accrued interest receivable 393 (147)
(Increase) decrease in other assets 209 (44)
(Decrease) in accrued interest payable (95) (231)
Increase in other liabilities and escrow deposits 690 373
-------- --------
Net cash provided by operating activities 6,067 4,364
-------- --------
Cash flows from investing activities:
Purchase of investment securities (11,560) (36,945)
Proceeds from sales of investment securities available for sale 17 2,525
Proceeds from maturities of investment securities 28,663 28,122
Proceeds from payments of mortgage-backed securities 4,864 7,435
Proceeds from sales of real estate acquired by foreclosure 91 547
Net (increase) in loans (11,971) (16,169)
Purchases of premises and equipment (448) (611)
-------- --------
Net cash provided by (used in) investing activities 9,656 (15,096)
-------- --------
Cash flows from financing activities:
Net increase in deposits 1,015 8,138
Proceeds from Federal Home Loan Bank advances -- 2,000
Net increase in other borrowed funds 180 1,876
Dividends paid (3,942) (4,959)
Purchase of treasury stock (4,634) --
Stock options exercised 91 1,018
-------- --------
Net cash provided by (used in) financing activities (7,290) 8,073
-------- --------
Net increase (decrease) in cash and cash equivalents 8,433 (2,659)
Cash and cash equivalents at beginning of period 12,039 13,479
-------- --------
Cash and cash equivalents at end of period $ 20,472 $ 10,820
-------- --------
Cash paid during the period for:
Interest $ 8,872 $ 9,214
Income taxes $ 1,580 $ 2,243
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
------------- ------ ---------- -------- ------------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $780 $34,724 $4,282 $1,416 ($1,174) $40,028
Comprehensive income:
Net income ....................................... $4,492 - - 4,492 - - 4,492
Other comprehensive income (loss):
Unrealized loss on securities available
for sale, net of taxes ....................... (88)
Less: Reclassification adjustment for
securities gains, net tax expense of $63,
included in net income ....................... 125
------
' Total other comprehensive (loss) .......... 37 - - - 37 - 37
------
Comprehensive income ............................... $4,529
======
Tax benefit of stock options exercised ............. - 77 - - - 77
Dividends paid ..................................... - - (4,959) - - (4,959)
Issuance of 272,545 common shares
for exercise of options .......................... 29 916 - - 73 1,018
---- ------- ------ ------ ------- -------
Balance at September 30, 1998 ........................ 809 35,717 3,815 1,453 (1,101) 40,693
Comprehensive income:
Net income ....................................... $1,412 - - 1,412 - - 1,412
Other comprehensive income (loss):
Unrealized loss on securities available
for sale, net of taxes ....................... (651)
Less: Reclassification adjustment for
securities gains, net tax expense of $3,
included in net income ....................... (3)
------
Total other comprehensive income .......... (654) - - - (654) - (654)
------
Comprehensive income ............................... $ 758
======
Purchase of treasury stock (102,523 shares) ....... - - - - (928) (928)
Tax benefit of stock options exercised ............. - 29 - - - 29
Dividends paid ..................................... - - (711) - - (711)
Issuance of 13,675 shares for exercise
of options ....................................... - (36) - - 116 80
---- ------- ------ ------ ------- -------
Balance at December 31, 1998 .......................... 809 35,710 4,516 799 (1,913) 39,921
Comprehensive income:
Net income ....................................... $3,916 - - 3,916 - - 3,916
Other comprehensive income (loss):
Unrealized loss on securities available
for sale, net of taxes ....................... (498)
Less: Reclassification adjustment for
securities gains, net tax expense of $0,
included in net income ....................... -
------
' Total other comprehensive (loss) .......... (498) - - - (498) - (498)
------
Comprehensive income ............................... $3,418
======
Tax benefit of stock options exercised ............. - 13 - - - 13
Dividends paid ..................................... - - (3,942) - - (3,942)
Purchase of treasury stock (523,400 shares) ....... - - - - (4,634) (4,634)
Issuance of 23,520 shares for exercise
of options ....................................... - (99) - - 190 91
---- ------- ------ ------ ------- -------
Balance at September 30, 1999 ........................ $809 $35,624 $4,490 $ 301 ($6,357) $34,867
==== ======= ====== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
WARREN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated financial statements of Warren Bancorp, Inc. (the
"Corporation") presented herein should be read in conjunction with the
consolidated financial statements of the Corporation as of and for the year
ended December 31, 1998. The accompanying consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to those
rules and regulations, but the Corporation believes that the disclosures are
adequate to make the information presented not misleading. In the opinion of
management, the consolidated financial statements reflect all adjustments
necessary for a fair presentation of the results for the interim periods
presented. Certain amounts have been reclassified to conform with the 1999
presentation.
EARNINGS PER SHARE
The components of basic and diluted EPS for the quarters and nine months
ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
-------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
-------------------------------------------------------------------------------------
(In thousands, except per-share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,262 $1,395 7,324 7,909 $0.17 $0.18
Effect of dilutive
stock options -- -- 214 276 -- (0.01)
------ ------ ----- ----- ----- -----
Dilutive EPS $1,262 $1,395 7,538 8,185 $0.17 $0.17
====== ====== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
--------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
--------------------------------------------------------------------------------------
(In thousands, except per-share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $3,916 $4,492 7,449 7,802 $0.53 $0.58
Effect of dilutive
stock options -- -- 199 370 (0.02) (0.03)
------ ------ ----- ----- ----- -----
Dilutive EPS $3,916 $4,492 7,648 8,172 $0.51 $0.55
====== ====== ===== ===== ===== =====
</TABLE>
1
<PAGE> 7
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.
The Corporation follows the provisions of 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 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.
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 Business 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.
2
<PAGE> 8
Specific reportable segment information as of and for the quarters and
nine-month periods ended September 30, 1999 and 1998 is as follows (in
thousands):
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $4,832 $2,341 $ 24 -- $7,197
Interest income-internal -- 2,310 7 $(2,317) --
Fee and other income 24 218 59 -- 301
Net income 1,011 629 (378) -- 1,262
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $4,631 $2,571 $142 -- $7,344
Interest income-internal -- 2,045 29 $(2,074) --
Fee and other income 26 185 119 -- 330
Net income 952 405 38 -- 1,395
</TABLE>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $14,066 $7,262 $ 146 -- $21,474
Interest income-internal -- 6,629 27 $(6,656) --
Fee and other income 123 590 184 -- 897
Net income 3,051 1,904 (1,039) -- 3,916
</TABLE>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $13,363 $8,175 $386 -- $21,924
Interest income-internal -- 6,362 39 $(6,401) --
Fee and other income 88 558 432 -- 1,078
Net income 2,846 1,634 12 -- 4,492
</TABLE>
3
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995. The words "believe," "expect," "anticipate," "intend,"
"estimate," "plan," "assume" and other similar expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which are in some cases beyond the control of
the Corporation and may cause the actual results, performance or achievements of
the Corporation to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include, but are not
limited to, the following: interest rates may increase, adversely affecting the
ability of borrowers to repay adjustable-rate loans and the Corporation's
earnings and income which derive in significant part from loans to borrowers;
unemployment in the Corporation's market area may increase, adversely affecting
the ability of individual borrowers to repay loans; property values may decline,
adversely affecting the ability of borrowers to repay loans and the value of
real estate securing repayment of loans; failure to realize the expected tax
benefits from the newly formed Warren Real Estate Investment Corporation and
higher-than-expected expenses related to its formation; 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 Form 10-Q.
GENERAL
Warren Bancorp, Inc.'s operating results for the three and nine months
ended September 30, 1999 (the "1999 quarter" and "1999 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 1999 period as compared
to the nine months ended September 30, 1998 (the "1998 period") primarily due to
decreased spreads due to a highly competitive commercial lending environment,
lower levels of stockholders' equity, which caries no interest expense, in the
1999 quarter as compared to the 1998 quarter due to the stock buyback program in
1999, and lower yields on assets in the 1999 quarter than in the 1998 quarter as
general interest rates began to fall in the 1998 quarter and have increased
during 1999 only back to levels at the beginning of the 1998 quarter. When
general interest rates decrease, the yield on the Bank's total assets will
typically decrease more than its cost of 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 interest rates 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 earning assets.
Real estate acquired by foreclosure decreased to $72,000 at September 30,
1999 from $1.5 million at December 31, 1998. The decrease was mainly due to the
sale of a parcel of land that the Corporation had held in its Real Estate Owned
portfolio since 1991. This property had a book value of $1.2 million. The Bank
financed a portion of the sales price for the buyer, and the resulting
performing loan is reflected on the balance sheet at September 30, 1999.
Nonperforming loans increased to $1.3 million at September 30, 1999 from
$638,000 at December 31, 1998. Management continues to monitor these
nonperforming asset portfolios closely. If conditions in the Massachusetts' real
estate market become unstable and values deteriorate, the amount of nonaccrual
loans and real estate acquired through foreclosure would be expected to
increase, resulting in lower interest income and increased loan losses,
4
<PAGE> 10
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.
On January 20, 1999, the Board of Directors authorized a new common stock
repurchase program which allows the repurchase of shares up to approximately 5%
of the 7,721,000 shares outstanding on that date. As of September 30, 1999, the
Corporation had repurchased approximately 400,000 shares.
On April 22, 1999 the Corporation adopted a new Shareholder Rights Plan
(the "Plan") which replaced its recently expired Plan. The Plan is designed to
enhance the Corporation's ability to protect shareholder interests and to ensure
that shareholders receive fair treatment in the event any coercive takeover
attempt of the Corporation is made in the future, and is intended to provide the
Corporation with sufficient time to consider any and all alternatives to such
action. The Plan was not adopted in response to any takeover attempt, and the
Corporation is not aware of any such attempt.
In connection with the adoption of the Plan, the Board of Directors (the
"Board") declared a dividend distribution of one preferred stock purchase right
for each outstanding share of common stock to shareholders of record as of April
22, 1999. Initially, these rights will not be exercisable and will trade with
the shares of The Corporation's common stock. Under the Plan, the rights
generally become exercisable if a person becomes an "acquiring person" by
acquiring 15% or more of the common stock of the Corporation, if a person who
owns 10% or more of the common stock of the Corporation is determined to be an
"adverse person" by the Board of Directors, or if a person commences a tender
offer that would results in that person owning 15% or more of the common stock
of the Corporation. In the event that a person becomes an "acquiring person" or
is declared an "adverse person" by the Board, each holder of a right (other than
the acquiring person or the adverse person) would be entitled to acquire such
number of shares of preferred stock which are equivalent to the Corporation's
common stock having a value of twice the exercise price of the right. If the
Corporation is acquired in a merger or other business combination transaction
after any such event, each holder of a right would then be entitled to purchase,
at the then-current exercise price, shares of the acquiring company's common
stock having a value of twice the exercise price of the right.
ASSET/LIABILITY MANAGEMENT
A primary objective of the Corporation's asset/liability management policy
is to manage interest-rate risk over time to achieve a prudent level of net
interest income in changing interest-rate environments. Management's strategies
are intended to be responsive to changes in interest rates and to recognize
market demands for particular types of deposit and loan products. These
strategies are overseen by an internal Asset/Liability Management Committee and
by the Bank's Board of Directors, and the risks are managed with techniques such
as simulation analysis, which measures the effect on net interest income of
possible changes in interest rates, and "gap" analysis, using models similar to
the one shown on the following page.
The Corporation uses simulation analysis to measure exposure of net
interest income to changes in interest rates over a one-year period. This period
is measured because the Corporation is most vulnerable to changes in short-term
(one year and under) rates. Simulation analysis involves projecting future
interest income and expense under various rate scenarios. The Corporation's
policy on interest-rate risk specifies that if short-term interest rates were to
shift immediately up or down 100 basis points, estimated net interest income for
the next 12 months should decline by less than 13%. This policy remained in
effect during the period, and in management's opinion there were no material
changes in interest rate risk since December 31, 1998, the date as of which the
simulation analysis was performed. Certain shortcomings are inherent in a
simulation analysis. Estimates of customer behavior to changing interest rates
may differ significantly from actual. Areas of these estimates include loan
prepayment speeds, shifting between adjustable-rate and fixed-rate loans, and
activity within different categories of deposit products. Also, the ability of
some borrowers to repay their adjustable-rate loans may decrease in the event of
interest-rate increases.
The following table summarizes the Corporation's interest-rate sensitivity
position as of September 30, 1999. 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.
5
<PAGE> 11
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.
The following types of deposit accounts are assumed to have effective maturities
as follows based on their past retention characteristics: NOW accounts-up to
five years; cash manager and passbook plus accounts-up to six months; and
regular savings accounts-up to greater than five years. None of these assets is
considered a trading asset.
INTEREST-RATE SENSITIVITY POSITION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------------------------
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 ......................... $ 35,166 $ 9,697 $ 9,204 $ 28,706 $ --
Loans held for sale ........................... 989 -- -- -- --
Adjustable-rate loans ......................... 89,918 10,821 33,155 96,051 6,736
Fixed-rate loans .............................. 6,018 1,195 2,439 26,437 6,044
Mortgage-backed securities .................... 1,957 2,579 6,036 3,362 1,186
-------- -------- -------- -------- -------
Total interest sensitive assets ............ 134,048 24,292 50,834 154,556 13,966
-------- -------- -------- -------- -------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts ..................................... 17,707 17,706 -- -- --
Time deposits ................................. 23,822 28,547 52,118 54,266 --
Other deposits (a) ............................ 10,493 10,493 22,363 83,974 10,046
Borrowings .................................... 5,183 -- -- 33 2,638
-------- -------- -------- -------- -------
Total interest sensitive liabilities ....... 57,205 56,746 74,481 138,273 12,684
-------- -------- -------- -------- -------
Excess (deficiency) of interest sensitive
assets over interest sensitive
liabilities .................................. $ 76,843 $(32,454) $(23,647) $ 16,283 $ 1,282
======== ======== ======== ======== =======
Excess of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities ........ $ 76,843 $ 44,389 $ 20,742 $ 37,025 $38,307
======== ======== ======== ======== =======
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ............... 234.3% 139.0% 111.0% 111.3% 111.3%
======== ======== ======== ======== =======
Cumulative excess as a
percentage of total assets ................... 19.5% 11.3% 5.3% 9.4% 9.7%
======== ======== ======== ======== =======
</TABLE>
- ----------
(a) Other deposits consist of regular savings and N.O.W. accounts.
6
<PAGE> 12
Interest-rate sensitivity statistics are static measures that do not
necessarily take into consideration external factors which might affect the
sensitivity of assets and liabilities and consequently cannot be used alone to
predict the operating results of a financial institution in a changing
environment. However, these measurements do reflect major trends and thus the
Corporation's sensitivity to interest rates changes over time.
LIQUIDITY
The Bank seeks to ensure sufficient liquidity is available to meet cash
requirements while earning a return on liquid assets. The Bank uses its
liquidity primarily to fund loan and investment commitments, to supplement
deposit flows and to meet operating expenses. The primary sources of liquidity
are interest and amortization from loans, mortgage-backed securities and
investments, sales and maturities of investments, loan sales, deposits and
Federal Home Loan Bank of Boston ("FHLBB") advances, which include a $15 million
overnight line of credit. The Bank also has access to the Federal Reserve Bank's
discount window and may borrow from the Depositors Insurance Fund Liquidity
Fund. During the 1999 period, the Bank did not use the Federal Reserve Bank
discount window and did not borrow from the Depositors Insurance Fund Liquidity
Fund.
The Bank also uses the longer term borrowings facilities within its total
available credit line with the FHLBB. Advances from the FHLBB, none of which
were from the overnight facility, were $2,671,000 at September 30, 1999.
During 1999, the primary sources of liquidity for the Bank were $18.3
million in loan sales, proceeds from maturities of investment securities of
$28.7 million and proceeds from paydowns of mortgage-backed securities of $4.9
million. Primary uses of funds were $102.8 million in residential, commercial
real estate and commercial loan originations and $11.6 million to purchase
investment securities. At September 30, 1999, the Bank had $13.4 million in
overnight investments.
From time to time, the Bank has obtained time deposits in denominations of
$100,000 and over. The following table summarizes maturities of time deposits of
$100,000 or more outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Within One Year (IN THOUSANDS)
---------------
<S> <C>
Less than 3 months................................... $ 3,971
3 to 6 months........................................ 5,008
6 to 12 months....................................... 10,291
-------
19,270
More than 12 months.................................. 8,623
-------
$27,893
=======
</TABLE>
The primary source of liquidity for Warren Bancorp, Inc. (the bank holding
company) is dividends from the Bank. The primary uses of this liquidity are
dividends paid and stock repurchases.
CAPITAL ADEQUACY
Total stockholders' equity at September 30, 1999 was $34.9 million, a
decrease of $5.0 million from $39.9 million at December 31, 1998. This decrease
was primarily the result of a $4.4 million increase in treasury stock due to the
Corporation's stock repurchase program and $3.9 million of dividends paid to
shareholders. Included in stockholders' equity at September 30, 1999 is an
unrealized gain on securities available for sale, which increased stockholders'
equity, of $301,000 as compared to an unrealized gain at December 31, 1998 of
$799,000. 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 8.85% at September 30, 1999 compared to 10.05% at
December 31, 1998.
At September 30, 1999, neither the Federal Reserve Board ("FRB") nor the
FDIC permitted the unrealized gain or loss to be used in their calculation of
Tier I capital.
7
<PAGE> 13
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
September 30, 1999, the FRB leverage capital ratio was 8.79% compared to 10.10%
at December 31, 1998.
The FDIC's leverage capital-to-assets ratio guidelines are substantially
similar to those adopted by the FRB and described above. At September 30, 1999,
the Bank's leverage capital ratio, under FDIC guidelines, was 8.44% compared to
9.20% at December 31, 1998.
The FRB and the FDIC have also imposed risk-based capital requirements on
the Corporation and the Bank, respectively, which give different risk weightings
to assets and to off-balance sheet assets such as loan commitments and loans
sold with recourse. Both the FRB and FDIC guidelines require the Corporation and
the Bank to have an 8.00% risk-based capital ratio. The Corporation's and the
Bank's risk-based capital ratios were 11.45% and 11.04%, respectively, at
September 30, 1999 compared to 12.71% and 11.68% at December 31, 1998, thus
exceeding their risk-based capital requirements.
As of September 30, 1999, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 11.04%, 9.80%, and
8.44%, respectively. Based on these capital ratios, the Bank is considered to be
"well capitalized."
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 to date has met the timetable established to complete this effort.
As part of the Corporation's contract with its outside data processing
service provider, 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. 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. The provider
met its schedule and testing by the Corporation's employees has produced
satisfactory results.
Test plans for systems not provided by the data service provider are also
complete. As these systems were identified, test scripts were developed on an
individual basis. The testing phase began on October 16, 1998 and was completed
by May 31, 1999 as scheduled. Test results on these systems were also found to
be satisfactory.
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 now complete. 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 is taking place
in 1999 that includes 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 continues. A
contingency plan has been developed in the event that the Corporation's third
party vendors do not remediate their own year-2000 issues. 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-
8
<PAGE> 14
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.
FINANCIAL CONDITION
The Corporation's total assets decreased to $393.8 million at September 30,
1999 from $397.1 million at December 31, 1998. Decreases occurred in residential
mortgages and investments available for sale and were partially offset by
increases in commercial, commercial real estate, commercial construction loans
and overnight investments.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of investment securities and mortgage-backed
securities available for sale, and other investments, decreased to $86.6 million
at September 30, 1999 from $109.8 million at December 31, 1998. A majority of
this decrease was from the maturity of corporate notes. The proceeds from the
maturity of these investments were used principally to fund loans, repurchase
the Corporation's common stock and increase overnight investments to provide
liquidity to address certain year-2000 issues as part of the Corporation's
year-2000 contingency plan. Mortgage-backed securities decreased to $15.3
million at September 30, 1999 from $20.4 million at December 31, 1998 due to
principal paydowns. Future increases in interest rates could reduce the value of
these investments.
9
<PAGE> 15
INVESTMENTS AT SEPTEMBER 30, 1999 ARE AS FOLLOWS:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
Fixed income mutual funds .................. $28,706 $ 90 $ (132) $28,664
FNMA mortgage-backed securities ............ 10,475 282 (2) 10,755
GNMA mortgage-backed securities ............ 4,645 -- (129) 4,516
U.S. Government and related
obligations ............................... 3,010 -- (9) 3,001
Corporate notes ............................ 25,205 -- (56) 25,149
Preferred stock ............................ 7,311 427 -- 7,738
------- ------ ------- -------
79,352 799 (328) 79,823
------- ------ ------- -------
OTHER
Foreign government bonds and
notes .................................... 1,000 -- -- 1,000
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
------- ------ -------- -------
6,794 240 -- 7,034
------- ------ -------- -------
$86,146 $1,039 $ (328) $86,857
======= ====== ======== =======
</TABLE>
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $13.4 million during the 1999
period to $281.1 million at September 30, 1999. This increase is the result of
increases in commercial real estate, commercial construction and commercial
loans. Due to the lower level of interest rates experienced in the fourth
quarter of 1998 and in the first half of the 1999 period as compared to the
first half of the 1998 period, the adjustable-rate residential loan portfolio
has decreased since December 31, 1998 by $1.2 million due to refinancing into
fixed-rate loans. Since June 30, 1999 these prepayments have slowed and the
balance of the adjustable-rate residential loan portfolio has stabilized.
Commercial real estate, commercial construction and commercial loans typically
earn higher yields than residential mortgage loans, but usually carry higher
risk due to loan size.
The following table sets forth the classification of the Corporation's
loans as of September 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Residential mortgages.............. $ 42,822 $ 45,658
Commercial real estate............. 167,435 163,154
Commercial construction ........... 16,755 13,620
Commercial loans................... 31,147 23,726
Consumer loans..................... 21,912 20,317
-------- --------
$280,091 $266,475
======== ========
</TABLE>
Residential mortgage loan originations during the 1999 period were $30.8
million compared to $32.7 million in the 1998 period. The Corporation originated
$19.4 million in fixed-rate loans during the 1999 period compared to $27.3
million during the 1998 period. Adjustable-rate loans totaling $11.4 million
were
10
<PAGE> 16
originated during the 1999 period compared to $5.4 million during the 1998
period. The Corporation sold loans totaling $18.3 million during the 1999 period
compared to $17.2 million sold in the 1998 period. At September 30, 1999, the
Corporation held $989,000 of fixed-rate residential mortgage loans for sale
compared to $1.2 million at December 31, 1998.
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 ninety days.
Impaired loans are analyzed and categorized by level of credit risk and
collectibility in order to determine their related allowance for loan losses. At
September 30, 1999 there were two loans considered impaired and accruing
totaling $188,000 compared to four loans considered impaired and accruing
totaling $710,000 at December 31, 1998.
Loans past due 90 days or more, or past due less than 90 days but in
nonaccrual status were $1,257,000 at September 30, 1999 compared to $638,000 at
December 31, 1998. Included in nonperforming loans are six loans considered
impaired and nonaccruing in the amount of $1,257,000 at September 30, 1999.
There were no loans considered impaired and nonaccruing at December 31, 1998.
Accrual of interest on loans is discontinued either when a reasonable doubt
exists as to that the full, timely collection of principal or interest or when
the loans become contractually past due by ninety days or more, unless they are
adequately secured and are in the process of collection.
When a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income. Income on
such loans is recognized to the extent that cash is received and where the
ultimate collection of principal and interest is probable. Following collection
procedures, the Corporation generally institutes appropriate action to foreclose
the property or acquire it by deed in lieu of foreclosure.
11
<PAGE> 17
The table below details nonperforming loans at:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accruing loans 90 days or more in arrears ....... $ -- $163
Nonaccrual loans ................................ 1,257 475
------ ----
Total nonperforming loans ....................... $1,257 $638
====== ====
Percentage of nonperforming loans to:
Total loans ..................................... 0.45% 0.24%
====== ====
Total assets .................................... 0.32% 0.16%
====== ====
</TABLE>
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure totaled $72,000 at September 30, 1999
and $1.5 million at December 31, 1998. Real estate acquired by foreclosure is
reflected at the lower of the carrying value of the loans or the net carrying
value of the property less estimated cost of disposition. These properties
consist mainly of land. 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.
In summary, nonperforming assets are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Nonperforming loans............................. $1,257 $ 638
Real estate acquired by foreclosure............. 72 1,450
------ ------
Total nonperforming assets...................... $1,329 $2,088
====== ======
Total nonperforming assets as a
percentage of total assets................... 0.33% 0.52%
</TABLE>
12
<PAGE> 18
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses
for the nine months ended September 30, 1999 and September 30, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period .................................... $ 4,023 $ 4,066
------- -------
Losses charged to the allowance:
Residential mortgage .......................................... 12 --
Commercial mortgage and construction .......................... -- --
Commercial loans .............................................. -- --
Consumer loans ................................................ 44 63
------- -------
56 63
------- -------
Loan recoveries:
Residential mortgage .......................................... 23 10
Commercial mortgage and construction .......................... 80 62
Commercial loans .............................................. 42 21
Consumer loans ................................................ 23 17
------- -------
168 110
------- -------
Net recoveries .................................................... (112) (47)
------- -------
Provision for (recovery of) loan losses (credited) to income ...... 69 (90)
------- -------
Balance at end of period .......................................... $ 4,204 $ 4,023
======= =======
Allowance to total loans at end of period ......................... 1.50% 1.56%
======= =======
Allowance to nonperforming loans at end of period ................. 334.4% 367.4%
======= =======
Allocation of ending balance:
Residential mortgage .......................................... $ 423 $ 626
Commercial mortgage and construction .......................... 3,118 2,932
Commercial loans .............................................. 455 264
Consumer loans ................................................ 208 201
------- -------
$ 4,204 $ 4,023
======= =======
</TABLE>
Notwithstanding the foregoing allocations, the entire allowance for loan
losses is available to absorb charge-offs in any category of loans. Loan losses
are charged against the allowance when management believes that the
collectibility of the loan principal is doubtful.
Balances in the allowance for loan losses are determined on a periodic
basis by management and the Loan Committee of the Board of Directors with
assistance from an independent credit review consulting firm. Loan loss
allocations are based on the conditions of each loan, whether performing or
non-performing, including collectibility, collateral adequacy and the general
condition of the borrowers, economic conditions, delinquency statistics, market
area activity, the risk factors associated with each of the various loan
categories and the borrower's adherence to the original terms of the loan.
Individual loans, including loans considered impaired, are analyzed and
categorized by level of credit risk and collectibility. 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 $1.4 million of
impaired loans, of which $188,000 is measured using the present value method and
$1,257,000 using the fair value method, is $193,000.
13
<PAGE> 19
The required allowance for loan losses could increase in future periods if
the condition of the loan portfolio deteriorates or if the balance of the
portfolio increases. Such an increase in the allowance could require additional
provisions for loan losses to be charged to income.
LEGAL AND OFF-BALANCE SHEET RISKS
Various legal claims arise from time to time in the course of business of
the Corporation and its subsidiaries. At September 30, 1999, there were no legal
claims against the Corporation or its subsidiaries.
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations of interest rates.
These financial instruments include commitments to originate loans, unused lines
of credit, standby letters of credit, recourse arrangements on sold assets and
forward commitments to sell loans. The financial instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
OTHER ASSETS
Included in other assets at September 30, 1999 and December 31, 1998 are
$1.6 million and $1.4 million, respectively, of deferred income taxes
receivable. Also included in other assets at December 31, 1998 was a current
income tax receivable of $139,000.
LIABILITIES
Deposits increased to $348.0 million at September 30, 1999 from $347.0
million at December 31, 1998. This increase took place primarily in time and
money market deposits and was partially offset by decreases in NOW and demand
deposit accounts.
Federal Home Loan Bank of Boston advances were $2,671,000 at September 30,
1999 and December 31, 1998. Securities sold under agreement to repurchase were
$5.2 million at September 30, 1999 and $5.0 million at December 31, 1998.
14
<PAGE> 20
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998
GENERAL
The Corporation recorded a profit for the 1999 quarter of $1.3 million
compared to a profit for the 1998 quarter of $1.4 million. The decrease in the
1999 quarter profit is primarily due to decreased spreads due to a highly
competitive commercial lending environment and generally lower yield on assets
during the 1999 quarter as compared to during the 1998 quarter as general
interest rates began to fall in the 1998 quarter and have increased during 1999
only back to levels at the beginning of the 1998 quarter. The Corporation also
had lower levels of stockholders' equity, which carries no interest expense, in
the 1999 third quarter than in the 1998 quarter due to the stock buyback program
in 1999. Income before taxes was $1.9 million in the 1999 quarter compared to
$2.1 million in the 1998 quarter.
Net interest income for the 1999 and 1998 quarters was $4.2 million and
$4.3 million, respectively. The weighted average interest rate spread for the
1999 quarter was 4.34% compared to 4.47% for the 1998 quarter. The net yield on
average earning assets was 4.51% for the 1999 quarter and 4.70% for the 1998
quarter. The return on average assets and the return on average stockholders'
equity were 1.28% and 14.66%, respectively, for the 1999 quarter compared to
1.47% and 13.97%, respectively, for the 1998 quarter.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income decreased to $7.2 million for the 1999
quarter from $7.3 million for the 1998 quarter. Interest on loans increased to
$5.7 million for the 1999 quarter from $5.6 million for the 1998 quarter. The
average loan yield decreased to 8.33% for the 1999 quarter from 8.91% for the
1998 quarter while average loans outstanding increased during the 1999 quarter
as compared to the 1998 quarter. Interest and dividends on investments was $1.2
and $1.3 million for the 1999 and 1998 quarters, respectively. An increase in
the average amount of investments held during the 1999 quarter was offset by a
decrease in the average yield on investments to 5.54% for the 1999 quarter from
5.94% for the 1998 quarter. Mortgage-backed securities income decreased to
$271,000 in the 1999 quarter from $423,000 in the 1998 quarter primarily due to
a decrease in the average amount of mortgage-backed securities due to paydowns
and a decrease in the average yield to 6.87% for the 1999 quarter compared to
7.17% in the 1998 quarter.
INTEREST EXPENSE
Interest on deposits decreased to $2.9 million for the 1999 quarter from
$3.0 for the 1998 quarter. The average cost of deposits decreased to 3.26% for
the 1999 quarter from 3.61% for the 1998 quarter. Interest on borrowed funds and
escrow deposits of borrowers increased to $84,000 from $70,000 for the 1999 and
1998 quarters, respectively. This increase is primarily related to an increase
in borrowed funds in the form of customer repurchase agreements. The average
cost of borrowings was 3.66% for the 1999 quarter and 3.84% for the 1998
quarter.
NON-INTEREST INCOME
Total non-interest income for the 1999 quarter was $301,000 compared to
$330,000 for the 1998 quarter. The gain from the sale of mortgage loans was
$43,000 in the 1999 quarter compared to $112,000 in the 1998 quarter. The gain
from the sale of investment securities was $17,000 for the 1999 quarter. There
were no sales of investment securities in the 1998 quarter.
NON-INTEREST EXPENSE
Total non-interest expense increased to $2.7 million in the 1999 quarter
from $2.5 million in the 1998 quarter. Salary and employee benefits increased to
$1.7 million in the 1999 quarter from $1.5 million in the 1998 quarter due to
increases in salaries mainly from Bankwide salary increases and increased
staffing in the Corporate Banking and Residential Mortgage Origination
Businesses as the Corporation continues to expand these businesses. Real estate
operations expense was a credit of $68,000 in the 1999 quarter compared to an
expense of $14,000 in the 1998 quarter due to the reimbursement of expenses
incurred in prior years. During the 1999 quarter the Corporation formed Warren
Real Estate Investment Corporation, a real estate investment trust, and incurred
$87,000 in formation expenses. During the 1999 fourth quarter the Corporation
expects
15
<PAGE> 21
to incur additional formation expenses of approximately $100,000. Due to the
formation of Warren Real Estate Investment Corporation, the Corporation saved
approximately $53,000 in taxes in the 1999 quarter and expects to save another
$55,000 in the fourth quarter of 1999. The Corporation anticipates tax savings
of over $200,000 per year in subsequent years from the operation of Warren Real
Estate Investment Corporation, subject to its level of pre-tax earnings.
INCOME TAX EXPENSE
Income tax expense for the 1999 quarter decreased to $593,000 from $725,000
for the 1998 quarter due to lower pretax income and due to the formation of
Warren Real Estate Investment Corporation, a real estate investment trust, which
reduced the Corporation's income tax expense by approximately $53,000 in the
1999 quarter. See "Non-Interest Expense" above for further discussion of Warren
Real Estate Investment Corporation.
16
<PAGE> 22
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
GENERAL
The Corporation recorded a profit for the 1999 period of $3.9 million
compared to a profit for the 1998 quarter of $4.5 million. The decrease in the
1999 period profit is primarily due to decreased spreads due to a highly
competitive commercial lending environment and generally lower interest rates
during the 1999 period as compared to the 1998 period as well as lower levels of
capital, which carries no interest expense, in the 1999 period than in the 1998
period due to the stock buyback program in 1999. Income before taxes was $5.9
million in the 1999 period compared to $6.8 million in the 1998 period.
Net interest income for the 1999 and 1998 periods were $12.7 million and
$13.0 million, respectively. The weighted average interest rate spread for the
1999 period was 4.30% compared to 4.63% for the 1998 period. The net yield on
average earning assets was 4.54% for the 1999 period and 4.88% for the 1998
period. The return on average assets and the return on average stockholders'
equity were 1.34% and 14.48%, respectively, for the 1999 period compared to
1.60% and 14.83%, respectively, for the 1998 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income decreased to $21.5 million for the 1999
period from $21.9 million for the 1998 period. Interest on loans remained $16.8
million for the 1999 and 1998 periods. Average loans outstanding increased
during the 1999 period while the average loan yield decreased to 8.34% for the
1999 period compared to 9.10% for the 1998 period. Interest and dividends on
investments was $3.8 and $3.7 million for the 1999 and 1998 periods,
respectively. This increase is attributed to an increase in the average amount
of investments held during the 1999 period partially offset by a decrease in the
average yield to 5.62% for the 1999 period from 6.01% for the 1998 period.
Mortgage-backed securities income decreased to $885,000 in the 1999 period from
$1,397,000 in the 1998 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 6.84% for the 1999 period compared to 7.16% in the 1998 period.
INTEREST EXPENSE
Interest on deposits decreased to $8.5 million for the 1999 period from
$8.8 million for the 1998 period. This decrease was related to a decrease in the
average cost of deposits to 3.31% for the 1999 period from 3.52% for the 1998
period despite an increase in average total deposits outstanding. Interest on
borrowed funds and escrow deposits of borrowers increased to $235,000 in the
1999 period from $154,000 for the 1998 period. This increase is primarily
related to an increase in borrowed funds in the form of customer repurchase
agreements and the average cost of borrowings increasing to 3.62% for the 1999
period from 3.49% for the 1998 period.
NON-INTEREST INCOME
Total non-interest income for the 1999 period was $897,000 compared to
$1,078,000 for the 1998 period. The gain from the sale of mortgage loans was
$196,000 in the 1999 period compared to $243,000 in the 1998 period. Gains from
the sale of investment securities for the 1999 period were $17,000 compared to
$188,000 in the 1998 period.
NON-INTEREST EXPENSE
Total non-interest expense was $7.6 million in the 1999 period and $7.3
million in the 1998 period. Salary and employee benefits were $4.8 million in
the 1999 period and $4.4 million for the 1998 period, respectively. This
increase is mainly due to an increase in the staffing of the Corporate Banking
and Residential Mortgage Origination Businesses as the Corporation continues to
expand these businesses, and Bankwide salary increases. Real estate operations
expense was a credit of $78,000 in the 1999 period compared to an expense of
$40,000 in the 1998 period due to the reimbursement of expenses incurred in
prior years. During the 1999 period the Corporation formed Warren Real Estate
Investment Corporation, a
17
<PAGE> 23
real estate investment trust, and incurred $87,000 in formation expenses. During
the 1999 fourth quarter the Corporation expects to incur additional formation
expenses of approximately $100,000.
INCOME TAX EXPENSE
Income tax expense for the 1999 period was $2.0 million compared to $2.3
million for the 1998 period. This decrease is due to the decrease in pretax
income in the 1999 period and due to the formation of Warren Real Estate
Investment Corporation, a real estate investment trust which has reduced the
Corporation's income tax expense by approximately $53,000 in the 1999 period.
See "Non-Interest Expense" in "Results of Operations - For the Three Months
Ended September 30, 1999 Compared to the Three Months Ended September 30, 1998"
above for further discussion of Warren Real Estate Investment Corporation.
18
<PAGE> 24
WARREN BANCORP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
27.1 Financial Data Schedule - 1999
19
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARREN BANCORP, INC.
DATE: November 10, 1999 By: /s/ John R. Putney
------------------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: November 10, 1999 By: /s/ Paul M. Peduto
------------------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEP. 30,
1999 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,038
<INT-BEARING-DEPOSITS> 13,434
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,823
<INVESTMENTS-CARRYING> 6,794
<INVESTMENTS-MARKET> 7,034
<LOANS> 280,071
<ALLOWANCE> 4,204
<TOTAL-ASSETS> 393,788
<DEPOSITS> 348,027
<SHORT-TERM> 5,183
<LIABILITIES-OTHER> 2,671
<LONG-TERM> 0
0
0
<COMMON> 809
<OTHER-SE> 34,058
<TOTAL-LIABILITIES-AND-EQUITY> 393,760
<INTEREST-LOAN> 5,713
<INTEREST-INVEST> 1,484
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,197
<INTEREST-DEPOSIT> 2,865
<INTEREST-EXPENSE> 2,949
<INTEREST-INCOME-NET> 4,248
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 2,658
<INCOME-PRETAX> 1,855
<INCOME-PRE-EXTRAORDINARY> 1,855
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,262
<EPS-BASIC> $0.17
<EPS-DILUTED> $0.17
<YIELD-ACTUAL> 4.51
<LOANS-NON> 1,257
<LOANS-PAST> 0
<LOANS-TROUBLED> 188
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,023
<CHARGE-OFFS> 56
<RECOVERIES> 168
<ALLOWANCE-CLOSE> 4,204
<ALLOWANCE-DOMESTIC> 4,204
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
