<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000 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 May 9, 2000
- -------------------------------------- -----------------------------------
Common Stock, par value $.10 per share 7,319,071
<PAGE> 2
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------ --------------------
<S> <C> <C>
ASSETS
Cash and due from banks (non-interest bearing) $ 10,206 $ 9,251
Money market funds and overnight investments 8,181 12,205
------------------ --------------------
Cash and cash equivalents 18,387 21,456
Investment and mortgage-backed securities available for sale (amortized cost of
$75,250 at March 31, 2000, $75,367 at December 31, 1999) 74,939 75,363
Other investments (fair value of $7,034 at March 31, 2000 and December 31, 1999) 6,794 6,794
Loans held for sale 966 1,816
Loans 309,388 291,014
Allowance for loan losses (4,396) (4,271)
------------------ --------------------
Net loans 304,992 286,743
Banking premises and equipment, net 5,267 5,051
Accrued interest receivable 2,537 2,613
Other assets 2,521 2,411
------------------ --------------------
Total assets $416,403 $402,247
================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $369,557 $355,534
Borrowed funds 7,217 7,510
Escrow deposits of borrowers 1,273 1,132
Accrued interest payable 493 512
Accrued expenses and other liabilities 1,841 1,915
------------------ --------------------
Total liabilities 380,381 366,603
------------------ --------------------
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 March 31, 2000 and December 31, 1999
Outstanding - 7,312,051 shares at March 31, 2000, 7,333,211
shares at December 31, 1999 809 809
Additional paid-in capital 35,825 35,841
Retained earnings 6,050 5,305
Treasury stock, at cost, 782,363 shares at March 31, 2000 and 761,203 shares at
December 31, 1999 (6,455) (6,304)
------------------ --------------------
36,229 35,651
Unrealized (loss) on securities available for sale, net of income taxes (207) (7)
------------------ --------------------
Total stockholders' equity 36,022 35,644
------------------ --------------------
Total liabilities and stockholders' equity $416,403 $402,247
================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------------
2000 1999
---- ----
(Dollars in thousands, except per-share data)
<S> <C> <C>
Interest and dividend income:
Interest on loans $6,294 $5,517
Interest and dividends on investments 1,264 1,265
Interest on mortgage-backed securities 237 327
--------------- --------------
Total interest and dividend income 7,795 7,109
--------------- --------------
Interest expense:
Interest on deposits 2,994 2,880
Interest on borrowed funds 79 74
--------------- --------------
Total interest expense 3,073 2,954
--------------- --------------
Net interest income 4,722 4,155
Provision for (recovery of) loan losses 114 (3)
--------------- --------------
Net interest income after provision for (recovery of)
loan losses 4,608 4,158
--------------- --------------
Non-interest income:
Customer service fees 256 212
Gains on sales of mortgage loans 40 71
Other 2 2
--------------- --------------
Total non-interest income 298 285
--------------- --------------
Income before non-interest expense and income taxes 4,906 4,443
--------------- --------------
Non-interest expense:
Salaries and employee benefits 1,736 1,529
Office occupancy and equipment 299 275
Professional services 40 39
Marketing 77 32
Outside data processing expense 129 111
Other 457 416
--------------- --------------
Total non-interest expenses 2,738 2,402
--------------- --------------
Income before income taxes 2,168 2,041
Income tax expense 692 720
--------------- --------------
Net income $1,476 $1,321
=============== ==============
Basic and diluted earnings per share $ 0.20 $ 0.17
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
<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, 1998 $ 809 $ 35,710 $ 4,516 $ 799 $ (1,913) $ 39,921
Comprehensive income:
Net income $ 1,321 -- -- 1,321 -- -- 1,321
Other comprehensive
income (loss):
Unrealized loss on
securities available
for sale, net of taxes (38) -- -- -- (38) -- (38)
--------
Comprehensive income $ 1,283
========
Dividends paid -- -- (696) -- -- (696)
Purchase of treasury stock
(405,400 shares) -- -- -- -- (3,618) (3,618)
Issuance of 15,160 shares
for exercise of options -- (63) -- -- 120 57
-------- -------- -------- -------- -------- --------
Balance at March 31, 1999 $ 809 $ 35,647 $ 5,141 $ 761 $ (5,411) $ 36,947
Comprehensive income:
Net income $ 4,143 -- -- 4,143 -- -- 4,143
Other comprehensive
income (loss):
Unrealized loss on
securities available
for sale, net of taxes (768) -- -- -- (768) -- (768)
--------
Comprehensive income $ 3,375
========
Purchase of treasury stock
(118,000 shares) -- -- -- -- (1,016) (1,016)
Dividends paid -- -- (3,979) -- -- (3,979)
Tax benefit of stock options
exercised -- 246 -- -- -- 246
Issuance of 14,760 shares
for exercise of options -- (52) -- -- 123 71
-------- -------- -------- -------- -------- --------
Balance at December 31, 1999 809 35,841 5,305 (7) (6,304) 35,644
Comprehensive income:
Net income $ 1,476 -- -- 1,476 -- -- 1,476
Other comprehensive
income (loss):
Unrealized loss on
securities available
for sale, net of taxes (200) -- -- -- (200) -- (200)
--------
Comprehensive income $ 1,276
========
Dividends paid -- -- (731) -- -- (731)
Purchase of treasury stock
(25,000 shares) -- -- -- -- (183) (183)
Issuance of 3,840 shares
for exercise of options -- (16) -- -- 32 16
-------- -------- -------- -------- -------- --------
Balance at March 31, 2000 $ 809 $ 35,825 $ 6,050 $ (207) $ (6,455) $ 36,022
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
WARREN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,476 $ 1,321
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) loan losses 114 (3)
Depreciation and amortization 122 123
Deferred income taxes (benefit) 1 (21)
Amortization of premiums, fees and discounts 34 178
(Gains) on sales of mortgage loans (40) (71)
Decrease in loans held for sale 850 31
(Increase) decrease in accrued interest receivable 76 (2)
(Increase) decrease in other assets (4) 210
(Decrease) in accrued interest payable (19) (55)
Increase in other liabilities and escrow deposits 67 829
--------- --------
Net cash provided by operating activities 2,677 2,540
--------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale (10,273) (8,281)
Proceeds from maturities of investment securities available for sale 9,610 9,000
Proceeds from payments of mortgage-backed securities
available for sale 746 2,419
Net (increase) decrease in loans (18,323) 2,938
Purchases of premises and equipment (338) (132)
--------- --------
Net cash provided by (used in) investing activities $(18,578) $ 5,944
--------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 14,023 (3,208)
Net (decrease) in other borrowed funds (293) (1,191)
Dividends paid (731) (696)
Purchase of treasury stock (183) (3,618)
Stock options exercised 16 57
--------- --------
Net cash provided by (used in) financing activities 12,832 (8,656)
Net (decrease) in cash and cash equivalents (3,069) (172)
Cash and cash equivalents at beginning of year 21,456 12,039
--------- --------
Cash and cash equivalents at end of period $ 18,387 $11,867
========= ========
Cash paid during the period for:
Interest $ 3,092 $ 3,009
Income taxes $ 314 $ 145
</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, 1999. 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 ended March
31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE
--------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------
(In thousands, except per-share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,476 $1,321 7,314 7,673 $ 0.20 $ 0.17
Effect of dilutive
stock options -- 101 191 -- --
------ ------ ------ ------ ------ -------
Dilutive EPS $1,476 $1,321 7,415 7,864 $ 0.20 $ 0.17
====== ====== ====== ====== ====== =======
</TABLE>
BUSINESS SEGMENTS
For internal reporting, planning and business purposes, the Corporation
segments its operations into distinct business groups. An individual business
group's profit contribution to the Corporation as a whole is determined based
upon the Corporation's profitability reporting system which assigns capital and
other balance sheet items and income statement items to each of the business
groups. This segmentation mirrors the Corporation's organizational structure.
Management accounting policies are in place for assigning revenues and expenses
that are not directly incurred by the business groups, such as overhead, the
results of asset allocations, and transfer revenues and expenses. Accordingly,
the Corporation's business-segment operating results will differ with other
similar information published by other financial institutions. In addition,
management accounting concepts are periodically refined and results may change
to reflect these refinements.
For purposes of this disclosure, operating segments are defined as
components of an enterprise that 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. This disclosure has no effect on
the Corporation's primary financial statements.
1
<PAGE> 7
The Corporation has identified its reportable operating business
segments as the Corporate Banking Business and the Personal Banking Business. A
description of each reportable business segment is discussed below:
CORPORATE BANKING
The Corporate Banking Business provides services to business customers
in the Corporation's market area. These services include, but are not limited
to, commercial real estate and construction loans, asset-based financing and
cash management/deposit services. It services all loans in its business.
PERSONAL BANKING
The Personal Banking Group provides services to consumers in the
Corporation's market area through its branch and ATM network. These services
include, but are not limited to, home equity loans, installment loans, safe
deposit boxes and an array of deposit services. This business purchases
adjustable-rate mortgage loans from another business group and services all
loans in its business.
Non-reportable operating segments of the Corporation's operations that
do not meet the qualitative and quantitative thresholds requiring disclosure are
included in the Other category in the disclosure of business segments below.
Revenues in these segments consist mainly of interest income on investments and
gains on sales of mortgage loans and securities.
Specific reportable segment information as of and for the quarters
ended March 31, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 2000
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $ 5,091 $ 2,637 $ 67 $ 7,795
Interest income-internal -- 2,455 18 $(2,473) --
Fee and other income 48 211 39 298
Net income 990 736 (250) 1,476
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1999
CORPORATE PERSONAL WARREN BANCORP
BANKING BANKING OTHER ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income-external $ 4,546 $ 2,513 $ 50 $ 7,109
Interest income-internal -- 2,137 10 $(2,147) --
Fee and other income 32 186 67 285
Net income 1,030 634 (343) 1,321
</TABLE>
2
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995. The words "believe," "expect," "anticipate," "intend,"
"estimate," "plan," "assume" and other similar expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which are in some cases beyond the control of
the Corporation and may cause the actual results, performance or achievements of
the Corporation to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include, but are not
limited to, the following: interest rates may increase, adversely affecting the
ability of borrowers to repay adjustable-rate loans and the Corporation's
earnings and income which derive in significant part from loans to borrowers;
unemployment in the Corporation's market area may increase, adversely affecting
the ability of individual borrowers to repay loans; property values may decline,
adversely affecting the ability of borrowers to repay loans and the value of
real estate securing repayment of loans; and general economic and market
conditions in the Corporation's market area may decline, adversely affecting the
ability of borrowers to repay loans, the value of real estate securing repayment
of loans and the Corporation's ability to make profitable loans. Any of the
above may also result in lower interest income, increased loan losses,
additional charge-offs and writedowns and higher operating expenses. 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 months ended
March 31, 2000 (the "2000 quarter") reflect the operations of its only
subsidiary, Warren Five Cents Savings Bank (the "Bank"). The Bank, which is
wholly owned by the Corporation, operates as a community bank and is in the
business of making individual and commercial loans to customers in its market
area.
The Corporation recorded an increased profit for the 2000 quarter as
compared to the three months ended March 31, 1999 (the "1999 quarter") primarily
due to increased spreads, due to generally higher interest rates than in the
1999 quarter, increased asset levels and a lower tax rate. When general interest
rates increase, the yield on the Bank's total assets will typically increase
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
increased at the same rate as the Bank's assets. Reductions in general interest
rates may reduce the Bank's rate spread and net yield on average earnings. The
lower tax rate is mainly the result of the formation of a real estate investment
trust in the third quarter of 1999.
Nonperforming loans decreased by $878,000 to $669,000 during the 2000
quarter. Management continues to monitor the nonperforming loan portfolio
closely. If conditions in the Massachusetts' real estate market become unstable
and values deteriorate, the amount of nonaccrual loans and real estate acquired
through foreclosure would be expected to increase, resulting in lower interest
income and increased loan losses, which could require additional loan loss
provisions to be charged to operating income. Moreover, real estate acquired
through foreclosure may give rise to additional charge-offs and writedowns and
higher expenses for property taxes and other carrying costs.
3
<PAGE> 9
SUBSEQUENT EVENTS
On April 19, 2000, the Corporation declared an increase in its
quarterly dividend to 10 1/2 cents ($.105) per share from 10 cents ($.100) per
share and a special dividend of 21 cents ($.21) per share. Both are payable May
15, 2000 to stockholders of record on May 1, 2000.
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 200 basis points, estimated net interest income for
the next 12 months should decline by less than 17%. This policy remained in
effect during the quarter, and in management's opinion there were no material
changes in interest rate risk since December 31, 1999, 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 March 31, 2000. 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 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.
4
<PAGE> 10
INTEREST-RATE SENSITIVITY POSITION
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------
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 ...................... $ 36,403 $ 3,637 $ 11,537 $ 23,716 $ --
Loans held for sale ........................ 966 -- -- -- --
Adjustable-rate loans ...................... 91,351 19,826 28,015 118,316 2,228
Fixed-rate loans ........................... 2,465 668 2,522 32,881 11,040
Mortgage-backed securities ................. 1,143 3,324 4,836 2,992 950
-------- -------- -------- -------- --------
Total interest sensitive assets ......... 132,328 27,455 46,910 177,905 14,218
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Cash manager and passbook plus
accounts .................................. 23,259 23,259 -- -- --
Time deposits .............................. 32,083 32,935 76,454 15,902 --
Other deposits (a) ......................... 11,035 11,037 23,346 85,578 10,094
Borrowings ................................. 4,546 -- -- 33 2,638
-------- -------- -------- -------- --------
Total interest sensitive liabilities .... 70,923 67,231 99,800 101,513 12,732
-------- -------- -------- -------- --------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ..................... $ 61,405 $(39,776) $(52,890) $ 76,392 $ 1,486
======== ======== ======== ======== ========
Excess (deficiency) of cumulative
interest sensitive assets over cumu-
lative interest sensitive liabilities ..... $ 61,405 $ 21,629 $(31,261) $ 45,131 $ 46,617
======== ======== ======== ======== ========
Cumulative interest sensitive assets
as a percentage of cumulative
interest sensitive liabilities ............ 186.6% 115.7% 86.9% 113.3% 113.2%
======== ======== ======== ======== ========
Cumulative excess (deficiency) as a
percentage of total assets ................ 14.7% 5.2% (7.5)% 10.8% 11.2%
======== ======== ======== ======== ========
</TABLE>
- --------
(a) Other deposits consist of regular savings and N.O.W. accounts.
5
<PAGE> 11
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 2000 quarter, 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 March 31, 2000.
During the 2000 quarter, the primary sources of liquidity were $14.0
million increase in deposits, loan paydowns and amortization of $23.8 million
and proceeds from maturities of investment securities of $9.6 million. Primary
uses of funds were $44.5 million in residential, commercial real estate and
commercial loan originations and $10.3 million to purchase investment
securities. At March 31, 2000, the Bank had $8.2 million in overnight
investments.
The primary source of liquidity for the Corporation is dividends from
the Bank. Dividends paid and, when applicable, stock repurchases by the
Corporation are the primary use of this liquidity.
From time to time, the Bank has obtained time deposits in denominations
of $100,000 and over. The following table summarizes maturities of time deposits
of $100,000 or more outstanding at March 31, 2000:
Within One Year (IN THOUSANDS)
---------------
Less than 3 months.......................... $ 6,609
3 to 6 months............................... 8,401
6 to 12 months.............................. 10,600
--------
25,610
More than 12 months......................... 2,197
--------
$ 27,807
========
CAPITAL ADEQUACY
Total stockholders' equity at March 31, 2000 was $36.0 million, an
increase of $400,000 from $35.6 million at December 31, 1999. Included in
stockholders' equity at March 31, 2000 is an unrealized loss on securities
available for sale, which decreased stockholders' equity, of $207,000 as
compared to an unrealized loss at December 31, 1999 of $7,000. 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 8.65% at March 31, 2000 compared to 8.86% at December 31, 1999.
At March 31, 2000, neither the Federal Reserve Board ("FRB") nor the
FDIC permitted the unrealized gain or loss to be used in their calculations of
Tier I capital, except for unrealized losses on marketable equity securities.
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
6
<PAGE> 12
evaluates their condition. The FRB may require a higher capital ratio. At March
31, 2000, the FRB leverage capital ratio was 8.91% compared to 9.46% at December
31, 1999.
The FDIC's leverage capital-to-assets ratio guidelines are
substantially similar to those adopted by the FRB and described above. At March
31, 2000, the Bank's leverage capital ratio, under FDIC guidelines, was 8.60%
compared to 8.72% at December 31, 1999.
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 11.48% and 11.11%,
respectively, at March 31, 2000 compared to 11.99% and 11.33% at December 31,
1999, thus exceeding their risk-based capital requirements.
As of March 31, 1999, the Bank's total risk-based capital ratio, Tier I
risk-based capital ratio and leverage capital ratio were 11.11%, 9.87%, and
8.60%, respectively. Based on these capital ratios, the Bank is considered to be
"well capitalized."
FINANCIAL CONDITION
The Corporation's total assets increased to $416.4 million at March 31,
2000 from $402.2 million at December 31, 1999. Increases occurred in residential
mortgage, commercial real estate and commercial loans and cash and cash
equivalents with decreases in investments and mortgage-backed securities
available for sale.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments, consisting of investment securities and mortgage-backed
securities available for sale, and other investments, decreased to $81.7 million
at March 31, 2000 from $82.2 million at December 31, 1999. A majority of this
decrease was from the maturity of corporate notes. Mortgage-backed securities
decreased to $13.3 million at March 31, 2000 from $20.4 million at December 31,
1999 due to principal paydowns. Future increases in interest rates could reduce
the value of these investments.
7
<PAGE> 13
INVESTMENTS AT MARCH 31, 2000 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 $ 15 $ (261) $ 28,460
FNMA mortgage-backed securities........ 9,192 211 (1) 9,402
GNMA mortgage-backed securities........ 4,053 -- (182) 3,871
U.S. Government and related
obligations........................... 4,988 1 (4) 4,985
Corporate notes........................ 21,001 -- (55) 20,946
Preferred stock........................ 7,310 92 (127) 7,275
-------- -------- -------- --------
75,250 319 (630) 74,939
-------- -------- -------- --------
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
-------- -------- -------- --------
$ 82,044 $ 559 $ (630) $ 81,973
======== ======== ======== ========
</TABLE>
LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale increased by $17.5 million during the
2000 quarter to $310.4 million at March 31, 2000. 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 March 31, 2000 and December 31, 1999 (in thousands):
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
Residential mortgages..................... $ 59,885 $ 52,209
Commercial real estate.................... 175,186 167,221
Commercial construction .................. 17,213 19,590
Commercial loans.......................... 34,227 29,446
Consumer loans............................ 22,877 22,548
--------- ---------
$ 309,388 $ 291,014
========= =========
Residential mortgage loan originations during the 2000 quarter were
$13.6 million compared to $8.5 million in the 1999 quarter. The Corporation
originated $3.1 million in fixed-rate loans during the 2000 quarter compared to
$6.1 million during the 1999 quarter. Adjustable-rate loans totaling $10.5
million were originated during the 2000 quarter compared to $2.4 million during
the 1999 quarter. The Corporation sold loans totaling $3.1 million during the
2000 quarter compared to $6.2 million sold in the 1999 quarter. At March 31,
2000, the Corporation held $966,000 of fixed-rate residential mortgage loans for
sale compared to $1.8 million at December 31, 1999. The increase in
adjustable-rate loan originations and decrease in fixed-rate loan originations
is a result of consumer preferences for adjustable-rate loans in a higher
interest-rate
8
<PAGE> 14
environment. Total originations increased mainly as a result of an increased
staff making residential mortgage loans.
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
March 31, 2000 there was one loan considered impaired and performing totaling
$431,000 compared to none considered impaired and performing at December 31,
1999.
Loans past due 90 days or more, or past due less than 90 days but in
nonaccrual status were $669,000 at March 31, 2000 compared to $1.5 million at
December 31, 1999. Included in nonperforming loans is one loan considered
impaired and nonperforming in the amount of $589,000 at March 31, 2000. There
was one loan considered impaired and nonperforming at December 31, 1999 in the
amount of $329,000. Accrual of interest on loans is discontinued either when a
reasonable doubt exists as to that the full, timely collection of principal or
interest or when the loans become contractually past due by ninety days or more,
unless they are adequately secured and are in the process of collection.
When a loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed against current period interest income.
Income on such loans is recognized to the extent that cash is received and where
the ultimate collection of principal and interest is probable. Following
collection procedures, the Corporation generally institutes appropriate action
to foreclose the property or acquire it by deed in lieu of foreclosure.
The table below details nonperforming loans at:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accruing loans 90 days or more in arrears............ $593 $ 633
Nonaccrual loans..................................... 76 914
---- ------
Total nonperforming loans............................ $669 $1,547
==== ======
Percentage of nonperforming loans to:
Total loans.......................................... 0.22% 0.53%
==== ======
Total assets......................................... 0.16% 0.38%
==== ======
</TABLE>
In summary, nonperforming assets are as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming loans.................................. $ 669 $1,547
Real estate acquired by foreclosure.................. 0 0
------ ------
Total nonperforming assets........................... $ 669 $1,547
====== ======
Total nonperforming assets as a
percentage of total assets........................... 0.16% 0.38%
====== ======
</TABLE>
9
<PAGE> 15
ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan
losses for the three months ended March 31, 2000 and March 31, 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period ................................ $ 4,271 $ 4,023
------- -------
Losses charged to the allowance:
Residential mortgage ...................................... -- --
Commercial mortgage and construction ...................... -- --
Commercial loans .......................................... -- --
Consumer loans ............................................ 5 1
------- -------
5 1
------- -------
Loan recoveries:
Residential mortgage ...................................... -- --
Commercial mortgage and construction ...................... -- 67
Commercial loans .......................................... 3 7
Consumer loans ............................................ 13 13
------- -------
16 87
------- -------
Net charge-offs ............................................... (11) (86)
------- -------
Provision for (recovery of) loan losses (credited) to income .. 114 (3)
------- -------
Balance at end of period ...................................... $ 4,396 $ 4,106
======= =======
Allowance to total loans at end of period ..................... 1.42% 1.56%
======= =======
Allowance to nonperforming loans at end of period ............. 657.1% 803.5%
======= =======
Allocation of ending balance:
Residential mortgage ...................................... $ 564 $ 585
Commercial mortgage and construction ...................... 3,118 2,929
Commercial loans .......................................... 503 399
Consumer loans ............................................ 211 193
------- -------
$ 4,396 $ 4,106
======= =======
</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 $1.1 million of
impaired loans, all of which is measured using the fair value method, is
$125,000.
10
<PAGE> 16
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 March 31, 2000, 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 March 31, 2000 and December 31, 1999 are
$1.7 million and $1.6 million, respectively, of deferred income taxes
receivable.
LIABILITIES
Deposits increased to $369.6 million at March 31, 2000 from $355.5
million at December 31, 1999.
The following table sets forth the classification of the Corporation's
deposits as of March 31, 2000 and December 31, 1999 (in thousands):
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
Noninterest bearing..................... $ 24,575 $ 19,019
NOW..................................... 39,932 36,784
Money market............................ 46,518 37,235
Savings................................. 101,158 99,909
Time.................................... 157,374 162,587
--------- --------
$ 369,557 $355,534
========= ========
Federal Home Loan Bank of Boston advances were $2.7 million at March
31, 2000 and December 31, 1999. Securities sold under agreement to repurchase
were $4.5 million at March 31, 2000 and $4.8 million at December 31, 1999.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1999
GENERAL
The Corporation recorded a profit for the 2000 quarter of $1.5 million
compared to a profit for the 1999 quarter of $1.3 million. The increase in the
2000 quarter profit is primarily due to increased spreads, due to generally
higher interest rates as compared to the 1999 quarter, increased asset levels
and a lower tax rate.
Net interest income for the 2000 and 1999 quarters was $4.7 million and
$4.2 million, respectively. The weighted average interest rate spread for the
2000 quarter was 4.61% compared to 4.22% for the 1999 quarter. The net yield on
average earning assets was 4.84% for the 2000 quarter and 4.46% for the 1999
quarter. The return on average assets and the return on average stockholders'
equity were 1.46% and 16.62%, respectively, for the 2000 quarter compared to
1.34% and 13.72%, respectively, for the 1999 quarter.
11
<PAGE> 17
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased to $7.8 million for the
2000 quarter from $7.1 million for the 1999 quarter. Interest on loans increased
to $6.3 million for the 2000 quarter from $5.5 million for the 1999 quarter. The
average loan yield increased to 8.59% for the 2000 quarter from 8.38% for the
1999 quarter and average loans outstanding increased during the 2000 quarter as
compared to the 1999 quarter. Interest and dividends on investments was $1.3
million for both the 2000 and 1999 quarters. The average amount of investments
held decreased while the average yield on investments increased to 6.02% for the
2000 quarter from 5.67% for the 1999 quarter. Mortgage-backed securities income
decreased to $237,000 in the 2000 quarter from $327,000 in the 1999 quarter
primarily due to a decrease in the average amount of mortgage-backed securities
held due to paydowns.
INTEREST EXPENSE
Interest on deposits increased to $3.0 million for the 2000 quarter
from $2.9 million for the 1999 quarter. Although the average balance of deposits
increased in the 2000 quarter, the average cost of deposits decreased to 3.35%
for the 2000 quarter from 3.41% for the 1999 quarter. Interest on borrowed funds
and escrow deposits of borrowers increased to $79,000 from $74,000 for the 2000
and 1999 quarters, respectively.
NON-INTEREST INCOME
Total non-interest income for the 2000 quarter was $298,000 compared to
$285,000 for the 1999 quarter. The gain from the sale of mortgage loans was
$40,000 in the 2000 quarter compared to $71,000 in the 1999 quarter. Because the
Corporation typically keeps adjustable-rate loans in portfolio and sells
fixed-rate loans that it originates, and because fewer fixed-rate loans were
originated in the 2000 quarter, gains on sale of mortgage loans decreased.
NON-INTEREST EXPENSE
Total non-interest expense increased to $2.7 million in the 2000
quarter from $2.4 million in the 1999 quarter. Salaries and benefits increased
due to increases in compensation and benefits for existing staff as well as
additions to staff. Marketing costs increased with additional emphasis being
given to the Corporation's marketing and sales efforts.
INCOME TAX EXPENSE
The Coporation's tax rate decreased to 31.9% in the 2000 quarter from
35.3% in the 1999 quarter mainly due to the establishment of a real estate
investment trust during the third quarter of 1999.
12
<PAGE> 18
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 - 2000
13
<PAGE> 19
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: May 9, 2000 By: /s/ John R. Putney
---------------------------------
John R. Putney
President and
Chief Executive Officer
DATE: May 9, 2000 By: /s/ Paul M. Peduto
---------------------------------
Paul M. Peduto
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
2000 BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 10,206
<INT-BEARING-DEPOSITS> 8,181
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,939
<INVESTMENTS-CARRYING> 6,794
<INVESTMENTS-MARKET> 7,034
<LOANS> 310,354
<ALLOWANCE> 4,396
<TOTAL-ASSETS> 416,403
<DEPOSITS> 369,557
<SHORT-TERM> 4,546
<LIABILITIES-OTHER> 6,278
<LONG-TERM> 0
0
0
<COMMON> 809
<OTHER-SE> 35,213
<TOTAL-LIABILITIES-AND-EQUITY> 416,403
<INTEREST-LOAN> 6,294
<INTEREST-INVEST> 1,501
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,795
<INTEREST-DEPOSIT> 2,294
<INTEREST-EXPENSE> 3,073
<INTEREST-INCOME-NET> 4,722
<LOAN-LOSSES> 114
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,738
<INCOME-PRETAX> 2,168
<INCOME-PRE-EXTRAORDINARY> 2,168
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,476
<EPS-BASIC> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 4.84
<LOANS-NON> 76
<LOANS-PAST> 593
<LOANS-TROUBLED> 431
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,271
<CHARGE-OFFS> 5
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 4,396
<ALLOWANCE-DOMESTIC> 4,396
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
