<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
or the quarterly period ended JUNE 30, 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 August 6, 1999
- --------------------------------------- -----------------------------------
Common Stock, par value $.10 per share 7,323,211
<PAGE> 2
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks (non-interest bearing) $ 7,898 $ 7,497
Money market funds and overnight investments 6,994 4,542
-------- --------
Cash and cash equivalents 14,892 12,039
Investment and mortgage-backed securities available for sale (amortized cost of
$90,019 at June 30, 1999 and $102,055 at December 31, 1998) 90,711 103,294
Other investments (fair value of $7,034 at June 30, 1999 and December 31, 1998) 6,794 6,544
Loans held for sale 1,472 1,192
Loans 272,832 266,475
Allowance for loan losses (4,172) (4,023)
-------- --------
Net loans 268,660 262,452
Banking premises and equipment, net 5,085 5,004
Accrued interest receivable 2,535 2,803
Real estate acquired by foreclosure 1,336 1,450
Other assets 2,275 2,287
-------- --------
Total assets $393,760 $397,065
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $349,311 $347,012
Borrowed funds 7,256 7,674
Escrow deposits of borrowers 1,063 1,065
Accrued interest payable 509 589
Accrued expenses and other liabilities 1,167 804
-------- --------
Total liabilities 359,306 357,144
-------- --------
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 June 30, 1999 and December 31, 1998
Outstanding - 7,323,211 shares at June 30, 1999 and 7,826,691 shares at
December 31, 1998 809 809
Additional paid-in capital 35,627 35,710
Retained earnings 3,960 4,516
Treasury stock, at cost, 771,203 shares at June 30, 1999 and 267,723 shares at
December 31, 1998 (6,387) (1,913)
-------- --------
34,009 39,122
Unrealized gain on securities available for sale, net of income taxes 445 799
-------- --------
Total stockholders' equity 34,454 39,921
-------- --------
Total liabilities and stockholders' equity $393,760 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1999 1998 1999 1998
(Dollars in thousands, except per-share data)
Interest and dividend income:
<S> <C> <C> <C> <C>
Interest on loans $5,595 $5,619 $11,112 $11,146
Interest and dividends on investments 1,286 1,257 2,551 2,460
Interest on mortgage-backed securities 287 462 614 974
------ ------ ------- -------
Total interest and dividend income 7,168 7,338 14,277 14,580
------ ------ ------- -------
Interest expense:
Interest on deposits 2,797 2,887 5,677 5,766
Interest on borrowed funds 77 54 151 84
------ ------ ------- -------
Total interest expense 2,874 2,941 5,828 5,850
------ ------ ------- -------
Net interest income 4,294 4,397 8,449 8,730
Provision for (recovery of) loan losses 36 (50) 33 (68)
------ ------ ------- -------
Net interest income after provision for (recovery of)
loan losses 4,258 4,447 8,416 8,798
------ ------ ------- -------
Non-interest income:
Customer service fees 248 234 460 426
Gains on sales of investment securities, net -- 179 -- 188
Gains on sales of mortgage loans 82 79 153 131
Other (19) 1 (17) 3
------ ------ ------- -------
Total non-interest income 311 493 596 748
------ ------ ------- -------
Income before non-interest expense and income taxes 4,569 4,940 9,012 9,546
------ ------ ------- -------
Non-interest expense:
Salaries and employee benefits 1,562 1,477 3,091 2,890
Office occupancy and equipment 259 296 534 601
Professional services 74 60 113 91
Marketing 73 87 105 127
Real estate operations (10) 1 (10) 26
Outside data processing expense 123 125 234 250
Other 440 438 856 862
------ ------ ------- -------
Total non-interest expenses 2,521 2,484 4,923 4,847
------ ------ ------- -------
Income before income taxes 2,048 2,456 4,089 4,699
Income tax expense 715 837 1,435 1,602
------ ------ ------- -------
Net income $1,333 $1,619 $ 2,654 $ 3,097
====== ====== ======= =======
Basic earnings per share $ 0.18 $ 0.21 $ 0.35 $ 0.40
======== ====== ======= =======
Diluted earnings per share $ 0.18 $ 0.20 $ 0.34 $ 0.38
======== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 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 .................................. $3,097 -- -- 3,097 -- -- 3,097
Other comprehensive income (loss):
Unrealized loss on securities available
for sale, net of taxes .................. (388)
Less: Reclassification adjustment for
securities gains, net tax expense of $63,
included in net income .................. 125
------
Total other comprehensive income (loss). (263) -- -- -- (263) -- (263)
------
Comprehensive income .......................... $2,834
======
Dividends paid ................................ -- -- (4,247) -- -- (4,247)
Tax benefit of stock options exercised ........ -- 61 -- -- -- 61
Issuance of 260,405 common shares
for exercise of options ...................... 29 925 -- -- 38 992
---- ------ ------ ------ ------- -------
Balance at June 30, 1998 ......................... 809 35,710 3,132 1,153 (1,136) 39,668
Comprehensive income:
Net income .................................. $2,807 -- -- 2,807 -- -- 2,807
Other comprehensive income (loss):
Unrealized loss on securities available
for sale, net of taxes .................. (351)
Less: Reclassification adjustment for
securities gains, net tax expense of $3,
included in net income .................. (3)
------
Total other comprehensive income......... (354) -- -- -- (354) -- (354)
------
Comprehensive income .......................... $2,453
======
Purchase of treasury stock (102,523 shares) .. -- -- -- -- (928) (928)
Dividends paid ................................ -- -- (1,423) -- -- (1,423)
Issuance of 25,815 shares for exercise
of options ................................... -- -- -- -- 151 151
---- ------ ------ ------ ------- -------
Balance at December 31, 1998 ..................... 809 35,710 4,516 799 (1,913) 39,921
Comprehensive income:
Net income .................................. $2,654 -- -- 2,654 -- -- 2,654
Other comprehensive income (loss):
Unrealized loss on securities available
for sale, net of taxes .................. (354)
Less: Reclassification adjustment for
securities gains, net tax expense of $0,
included in net income .................. --
------
Total other comprehensive income ....... (354) -- -- -- (354) -- (354)
------
Comprehensive income .......................... $2,300
======
Dividends paid ................................ -- -- (3,210) -- -- (3,210)
Purchase of treasury stock (523,400 shares) .. -- -- -- -- (4,634) (4,634)
Issuance of 19,920 shares for exercise
of options ................................... -- (83) -- -- 160 77
---- ------- ------- ------- ------- -------
Balance at June 30, 1999 ......................... $809 $35,627 $ 3,960 $ 445 ($6,387) $34,454
==== ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
------- -------
(In thousands)
Cash flows from operating activities:
<S> <C> <C>
Net Income $ 2,654 $ 3,097
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for (recovery of) loan losses 33 (68)
Depreciation and amortization 247 306
Deferred income tax expense 21 135
Amortization of premiums and discounts 347 136
(Gains) on sales of investment securities -- (188)
(Gains) on sales of mortgage loans (153) (131)
(Gains) on sale of real estate acquired by foreclosure (11) (17)
(Increase) in loans held for sale (280) (668)
Decrease in accrued interest receivable 268 69
(Increase) decrease in other assets 183 (104)
(Decrease) in accrued interest payable (80) (184)
Increase in other liabilities and escrow deposits 361 209
------- -------
Net cash provided by operating activities 3,590 2,592
------- -------
Cash flows from investing activities:
Purchase of investment securities (10,554) (23,486)
Proceeds from sales of investment securities available for sale -- 2,525
Proceeds from maturities of investment securities 18,123 19,372
Proceeds from payments of mortgage-backed securities 3,871 5,191
Proceeds from sales of real estate acquired by foreclosure 64 450
Net (increase) in loans (6,027) (5,149)
Purchases of premises and equipment (328) (471)
------- -------
Net cash provided by (used in) investing activities 5,149 (1,568)
------- -------
Cash flows from financing activities:
Net increase in deposits 2,299 5,001
Proceeds from Federal Home Loan Bank advances -- 2,000
Net increase (decrease) in other borrowed funds (418) 478
Dividends paid (3,210) (4,247)
Purchase of treasury stock (4,634) --
Stock options exercised 77 992
------- -------
Net cash provided by (used in) financing activities (5,886) 4,224
------- -------
Net increase in cash and cash equivalents 2,853 5,248
Cash and cash equivalents at beginning of period 12,039 13,479
------- -------
Cash and cash equivalents at end of period $14,892 $18,727
------- -------
Cash paid during the period for:
Interest $ 5,908 $ 6,034
Income taxes $ 1,275 $ 1,725
</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 six months
ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 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 $1,333 $1,619 7,356 7,856 $0.18 $0.21
Effect of dilutive
stock options -- -- 188 322 -- 0.01
------ ------ ------ ------ ----- -----
Dilutive EPS $1,333 $1,619 7,544 8,178 $0.18 $0.20
====== ====== ====== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 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 $2,654 $3,097 7,513 7,747 $0.35 $0.40
Effect of dilutive
stock options -- -- 199 425 0.01 0.02
------ ------ ------ ------ ----- -----
Dilutive EPS $2,654 $3,097 7,712 8,172 $0.34 $0.38
====== ====== ====== ====== ===== =====
</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
six-month periods ended June 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1999
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $4,688 $2,408 $ 72 -- $ 7,168
Interest income-internal -- 2,182 10 $(2,192) --
Fee and other income 67 186 58 -- 311
Net income 1,010 641 (318) -- 1,333
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1998
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $4,479 $2,715 $144 -- $ 7,338
Interest income-internal -- 2,237 4 $(2,241) --
Fee and other income 45 195 253 -- 493
Net income 1,043 556 (20) -- 1,619
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30, 1999
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $9,234 $4,921 $ 122 -- $14,277
Interest income-internal -- 4,319 20 $(4,339) --
Fee and other income 99 372 125 -- 596
Net income 2,040 1,275 (661) -- 2,654
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30, 1998
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $8,732 $5,604 $244 -- $14,580
Interest income-internal -- 4,317 10 $(4,327) --
Fee and other income 62 373 313 -- 748
Net income 1,894 1,229 (26) -- 3,097
</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; 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 six months ended
June 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 six months ended June 30, 1998 (the "1998 period") primarily due to
decreased spreads due to a highly competitive commercial lending environment and
generally lower interest rates during the 1999 period than during the 1998
period. 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 earnings.
Real estate acquired by foreclosure decreased to $1.3 million at June 30,
1999 from $1.5 million at December 31, 1998. Nonperforming loans decreased by
$194,000 to $444,000 during the 1999 period. Management continues to monitor
these nonperforming asset portfolios closely. If conditions in the
Massachusetts' real estate market become unstable and values deteriorate, the
amount of nonaccrual loans and real estate acquired through foreclosure would be
expected to increase, resulting in lower interest income and increased loan
losses, which could require additional loan 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.
4
<PAGE> 10
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 June 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 replaces 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 June 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. 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
5
<PAGE> 11
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>
JUNE 30, 1999
-------------
0-3 3-6 6-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS
------ ------ ------ ----- -----
(Dollars in Thousands)
INTEREST SENSITIVE ASSETS:
<S> <C> <C> <C> <C> <C>
Investment securities ...................... $ 28,957 $ 10,368 $ 21,963 $ 24,719 $ --
Loans held for sale ........................ 1,472 -- -- -- --
Adjustable-rate loans ...................... 87,864 19,083 27,194 88,167 6,706
Fixed-rate loans ........................... 3,933 4,510 3,120 24,953 6,858
Mortgage-backed securities ................. 1,335 6,049 4,286 3,167 1,276
-------- -------- -------- -------- -------
Total interest sensitive assets ......... 123,561 40,010 56,563 141,006 14,840
-------- -------- -------- -------- -------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts .................................. 18,689 18,690 -- -- --
Time deposits .............................. 36,867 21,812 46,768 47,055 2
Other deposits (a) ......................... 10,594 10,930 22,547 84,152 10,105
Borrowings ................................. 4,585 -- -- 33 2,638
-------- -------- -------- -------- -------
Total interest sensitive liabilities .... 70,735 51,432 69,315 131,240 12,745
-------- -------- -------- -------- -------
Excess (deficiency) of interest sensitive
assets over interest sensitive
liabilities ............................... $ 52,826 $(11,422) $(12,752) $ 9,766 $ 2,095
======== ======== ======== ======== =======
Excess of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities ..... $ 52,826 $ 41,404 $ 28,652 $ 38,418 $40,513
======== ======== ======== ======== =======
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ............ 174.7% 133.9% 115.0% 111.9% 112.1%
======== ======== ======== ======== =======
Cumulative excess as a
percentage of total assets ................ 13.4% 2.9% 7.3% 9.8% 10.3%
======== ======== ======== ======== =======
</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 June 30, 1999.
During 1999, the primary sources of liquidity for the Bank were $13.5
million in loan sales, proceeds from maturities of investment securities of
$18.1 million and proceeds from paydowns of mortgage-backed securities of $3.9
million. Primary uses of funds were $42.4 million in residential, commercial
real estate and commercial loan originations and $10.6 million to purchase
investment securities. At June 30, 1999, the Bank had $7.0 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 June 30, 1999:
<TABLE>
<CAPTION>
WITHIN ONE YEAR (IN THOUSANDS)
---------------
<S> <C> <C>
Less than 3 months.................................................... $ 9,099
3 to 6 months......................................................... 2,650
6 to 12 months........................................................ 6,950
-------
18,699
More than 12 months................................................... 7,489
-------
$26,188
=======
</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 June 30, 1999 was $34.5 million, a decrease
of $5.4 million from $39.9 million at December 31, 1998. This decrease was
primarily the results of a $4.6 million increase in treasury stock due to the
Corporation's stock repurchase program and $3.2 million of dividends paid to
shareholders. Included in stockholders' equity at June 30, 1999 is an unrealized
gain on securities available for sale, which increased stockholders' equity, of
$445,000 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 8.75% at June 30, 1999 compared to 10.05% at December 31, 1998.
At June 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.
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
7
<PAGE> 13
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 June 30, 1999, the FRB leverage capital ratio was 8.77%
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 June 30, 1999, the
Bank's leverage capital ratio, under FDIC guidelines, was 8.42% 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 11.27% and 10.87%, respectively, at June
30, 1999 compared to 12.71% and 11.68% at December 31, 1998, thus exceeding
their risk-based capital requirements.
As of June 30, 1999, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 10.87%, 9.63%, and
8.42%, 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 is on schedule to meet 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 has been completed. 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 is in process. 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-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
8
<PAGE> 14
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 June 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 and commercial construction loans.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of investment securities and mortgage-backed
securities available for sale, and other investments, decreased to $97.5 million
at June 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 and repurchase
the Corporation's common stock. Mortgage-backed securities decreased to $16.3
million at June 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.
INVESTMENTS AT JUNE 30, 1999 ARE AS FOLLOWS:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ -----
(IN THOUSANDS)
AVAILABLE-FOR-SALE
<S> <C> <C> <C> <C>
Fixed income mutual funds ........................ $28,706 $ 166 $ (94) $28,778
FNMA mortgage-backed securities .................. 11,221 298 (3) 11,516
GNMA mortgage-backed securities .................. 4,892 -- (86) 4,806
U.S. Government and related
obligations ..................................... 4,507 2 (6) 4,503
Corporate notes .................................. 33,383 3 (74) 33,312
Preferred stock .................................. 7,310 486 -- 7,796
------- ------ ----- -------
90,019 955 (263) 90,711
------- ------ ----- -------
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
------- ------ ----- -------
$96,813 $1,195 $(263) $97,745
======= ====== ===== =======
</TABLE>
9
<PAGE> 15
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $6.6 million during the 1999
period to $274.3 million at June 30, 1999. This increase is the result of
increases in commercial construction and commercial loans. Due to the decline in
interest rates, the adjustable-rate residential loan portfolio has decreased
significantly due to refinancing into fixed-rate loans. Commercial real estate,
commercial construction and commercial loans typically earn higher yields than
residential mortgage loans, but usually carry higher risk due to loan size.
The following table sets forth the classification of the Corporation's
loans as of June 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Residential mortgages................................ $ 42,283 $ 45,658
Commercial real estate............................... 161,023 163,154
Commercial construction ............................. 17,022 13,620
Commercial loans..................................... 30,936 23,726
Consumer loans....................................... 21,568 20,317
-------- --------
$272,832 $266,475
======== ========
</TABLE>
Residential mortgage loan originations during the 1999 period were $19.8
million compared to $21.4 million in the 1998 period. The Corporation originated
$13.7 million in fixed-rate loans during the 1999 period compared to $19.7
million during the 1998 period. Adjustable-rate loans totaling $6.1 million were
originated during the 1999 period compared to $1.7 million during the 1998
period. The Corporation sold loans totaling $13.5 million during the 1999 period
compared to $17.2 million sold in the 1998 period. At June 30, 1999, the
Corporation held $1.5 million 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
June 30, 1999 there were four loans considered impaired and accruing totaling
$1,040,000 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 $444,000 at June 30, 1999 compared to $638,000 at
December 31, 1998. Included in nonperforming loans are two loans considered
impaired and nonaccruing in the amount of $393,000 at June 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.
10
<PAGE> 16
The table below details nonperforming loans at:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accruing loans 90 days or more in arrears $ -- $163
Nonaccrual loans ........................ 444 475
---- ----
Total nonperforming loans ............... $444 $638
==== ====
Percentage of nonperforming loans to:
Total loans ............................. 0.16% 0.24%
==== ====
Total assets ............................ 0.11% 0.16%
==== ====
</TABLE>
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure totaled $1.3 million at June 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>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Nonperforming loans ............... $ 444 $ 638
Real estate acquired by
foreclosure .................... 1,336 1,450
------ ------
Total nonperforming assets ........ $1,780 $2,088
====== ======
Total nonperforming assets as a
percentage of total assets ..... 0.5% 0.5%
</TABLE>
11
<PAGE> 17
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses
for the six months ended June 30, 1999 and June 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 ......................................... 6 57
------ ------
18 57
------ ------
Loan recoveries:
Residential mortgage ................................... 16 8
Commercial mortgage and construction ................... 75 40
Commercial loans ....................................... 25 20
Consumer loans ......................................... 18 14
------ ------
134 82
------ ------
Net recoveries ............................................. (116) (25)
------ ------
Provision for (recovery of) loan losses (credited)
to income ................................................ 33 (68)
------ ------
Balance at end of period ................................... $4,172 $4,023
====== ======
Allowance to total loans at end of period .................. 1.53% 1.64%
====== ======
Allowance to nonperforming loans at end of period .......... 939.6% 568.2%
====== ======
Allocation of ending balance:
Residential mortgage ................................... $ 481 $ 695
Commercial mortgage and construction ................... 3,054 2,786
Commercial loans ....................................... 443 311
Consumer loans ......................................... 194 231
------ ------
$4,172 $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 $1,039,000 is measured using the present value method
and $393,000 using the fair value method, is $221,000.
12
<PAGE> 18
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 June 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 June 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 $349.3 million at June 30, 1999 from $347.0 million
at December 31, 1998. This increase took place primarily in demand and money
market deposits and was partially offset by decreases in NOW and time deposit
accounts.
Federal Home Loan Bank of Boston advances were $2,671,000 at June 30, 1999
and December 31, 1998. Securities sold under agreement to repurchase were $4.6
million at June 30, 1999 and $5.0 million at December 31, 1998.
13
<PAGE> 19
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
THREE MONTHS ENDED JUNE 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 $1.6 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 interest rates
during the 1999 quarter as compared to during the 1998 quarter. Income before
taxes was $2.0 million in the 1999 quarter compared to $2.5 million in the 1998
quarter.
Net interest income for the 1999 and 1998 quarters was $4.3 million and
$4.4 million, respectively. The weighted average interest rate spread for the
1999 quarter was 4.38% compared to 4.70% for the 1998 quarter. The net yield on
average earning assets was 4.62% for the 1999 quarter and 4.99% for the 1998
quarter. The return on average assets and the return on average stockholders'
equity were 1.37% and 15.23%, respectively, for the 1999 quarter compared to
1.75% and 16.33%, 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 remained $5.6
million for the 1999 and the 1998 quarters, respectively. The average loan yield
decreased to 8.36% for the 1999 quarter from 9.17% 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 $1.3 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 5.70% for the 1999 quarter from 6.00% for the 1998
quarter. Mortgage-backed securities income decreased to $287,000 in the 1999
quarter from $462,000 in the 1998 quarter primarily due to a decrease in the
average amount of mortgage-backed securities held due to paydowns and a decrease
in the average yield to 6.76% for the 1999 quarter compared to 7.16% in the 1998
quarter.
INTEREST EXPENSE
Interest on deposits decreased to $2.8 million for the 1999 quarter from
$2.9 for the 1998 quarter. The average cost of deposits decreased to 3.27% for
the 1999 quarter from 3.58% for the 1998 quarter. Interest on borrowed funds and
escrow deposits of borrowers increased to $77,000 from $54,000 for the 1999 and
1998 quarters, respectively. This increase is primarily related to an increase
in borrowed funds. The average cost of borrowings was 3.52% for the 1999 quarter
and 3.71% for the 1998 quarter.
NON-INTEREST INCOME
Total non-interest income for the 1999 quarter was $311,000 compared to
$493,000 for the 1998 quarter. The gain from the sale of mortgage loans was
$82,000 in the 1999 quarter compared to $79,000 in the 1998 quarter. There were
no sales of investment securities in the 1999 quarter. The gain from the sale of
investment securities was $179,000 for the 1998 quarter.
NON-INTEREST EXPENSE
Total non-interest expense remained $2.5 million in the 1998 and 1997
quarters, respectively. Salary and employee benefits increased to $1.6 million
in the 1999 quarter from $1.5 million in the 1998 quarter. This increase is
mainly due to increased staffing in the Corporate Banking Business as the
Corporation continues to expand this business.
INCOME TAX EXPENSE
Income tax expense for the 1999 quarter decreased to $715,000 from $837,000
for the 1998 quarter relative to lower pretax income.
14
<PAGE> 20
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1998
GENERAL
The Corporation recorded a profit for the 1999 period of $2.7 million
compared to a profit for the 1998 quarter of $3.1 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. Income before taxes was
$4.1 million in the 1999 period compared to $4.7 million in the 1998 period.
Net interest income for the 1999 and 1998 periods were $8.4 million and
$8.7 million, respectively. The weighted average interest rate spread for the
1999 period was 4.30% compared to 4.72% for the 1998 period. The net yield on
average earning assets was 4.54% for the 1999 period and 4.97% for the 1998
period. The return on average assets and the return on average stockholders'
equity were 1.36% and 14.44%, respectively, for the 1999 period compared to
1.67% and 15.53%, respectively, for the 1998 period.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income decreased to $14.3 million for the 1999
period from $14.6 million for the 1998 period. Interest on loans remained $11.1
million for the 1999 and 1998 periods, respectively. Average loans outstanding
increased during the 1999 period while the average loan yield decreased to 8.37%
for the 1999 period compared to 9.17% for the 1998 period. Interest and
dividends on investments was $2.6 and $2.5 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 5.68% for the 1999 period from 6.10% for the 1998
period. Mortgage-backed securities income decreased to $614,000 in the 1999
period from $974,000 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 6.82% for the 1999 period compared to 7.16% in the 1998
period.
INTEREST EXPENSE
Interest on deposits decreased to $5.7 million for the 1999 period from
$5.8 million for the 1998 period. This decrease was related to a decrease in the
average cost of deposits to 3.34% for the 1999 period from 3.58% for the 1998
period despite an increase in average total deposits outstanding. Interest on
borrowed funds and escrow deposits of borrowers increased to $151,000 in the
1999 period from $84,000 for the 1998 period. This increase is primarily related
to an increase in borrowed funds and the average cost of borrowings increasing
to 3.61% for the 1999 period from 3.32% for the 1998 period.
NON-INTEREST INCOME
Total non-interest income for the 1999 period was $596,000 compared to
$748,000 for the 1998 period. The gain from the sale of mortgage loans was
$153,000 in the 1999 period compared to $131,000 in the 1998 period. There were
no gains from the sale of investment securities for the 1999 period compared to
$188,000 in the 1998 period.
NON-INTEREST EXPENSE
Total non-interest expense was $4.9 million in the 1999 period and $4.8
million in the 1998 period. Salary and employee benefits were $3.1 million in
the 1999 period and $2.9 million for the 1998 period, respectively. This
increase is mainly due to an increase in the staffing of the Corporate Banking
Business as the Corporation continues to expand this business.
INCOME TAX EXPENSE
Income tax expense for the 1999 period was $1.4 million compared to $1.6
million for the 1998 period. This decrease is relative to the decrease in pretax
income in the 1999 period.
15
<PAGE> 21
WARREN BANCORP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ANNUAL MEETING - MAY 5, 1999
A. ELECTION OF DIRECTORS
TERM TO EXPIRE IN 2002
TOTAL VOTE FOR TOTAL VOTE WITHHELD
EACH DIRECTOR FROM EACH DIRECTOR
Peter V. Bent 6,454,501 91,498
Paul J. Curtin 6,472,433 73,566
Stephen R. Howe 6,474,417 71,582
Arthur E. McCarthy 6,474,933 71,066
John D. Smidt 6,473,933 72,066
OTHER DIRECTORS
TERM TO EXPIRE IN 2000 TERM TO EXPIRE IN 2001
Stephen J. Connolly, IV Francis L. Conway
Robert R. Fanning, Jr. Arthur E. Holden
John C. Jeffers Stephen G. Kasnet
Paul M. Peduto Linda Lerner
John R. Putney Arthur J. Pappathanasi
George W. Phillips
John H. Womack
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
27.1 Financial Data Schedule - 1999
REPORTS ON FORM 8-K - On April 26, 1999 the Corporation filed a
current report on Form 8-K regarding the renewal of the Corporation's
Shareholder Rights Plan on April 21, 1999.
16
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARREN BANCORP, INC.
DATE: August 13, 1999 By: /s/ John R. Putney
-----------------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: August 13, 1999 By: /s/ Paul M. Peduto
-----------------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,898
<INT-BEARING-DEPOSITS> 6,994
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 90,711
<INVESTMENTS-CARRYING> 6,794
<INVESTMENTS-MARKET> 7,034
<LOANS> 272,832
<ALLOWANCE> 4,172
<TOTAL-ASSETS> 393,760
<DEPOSITS> 349,311
<SHORT-TERM> 4,585
<LIABILITIES-OTHER> 2,671
<LONG-TERM> 0
0
0
<COMMON> 809
<OTHER-SE> 33,645
<TOTAL-LIABILITIES-AND-EQUITY> 393,760
<INTEREST-LOAN> 5,595
<INTEREST-INVEST> 1,573
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,168
<INTEREST-DEPOSIT> 2,797
<INTEREST-EXPENSE> 2,874
<INTEREST-INCOME-NET> 4,294
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,521
<INCOME-PRETAX> 2,048
<INCOME-PRE-EXTRAORDINARY> 2,048
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,323
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
<YIELD-ACTUAL> 4.62
<LOANS-NON> 444
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,040
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,023
<CHARGE-OFFS> 18
<RECOVERIES> 134
<ALLOWANCE-CLOSE> 4,172
<ALLOWANCE-DOMESTIC> 4,172
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
