-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N/FwZ+E6WFUXg/KkfuaqqAgmFdij9E0EJHNHGxqkSUK8eu8WYnqxj5yQGlTzusjP eMyCZzHlqMbnOGYiqV5UPw== 0000950135-98-002006.txt : 19980331 0000950135-98-002006.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950135-98-002006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARREN BANCORP INC CENTRAL INDEX KEY: 0000830750 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 043024165 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17222 FILM NUMBER: 98578487 BUSINESS ADDRESS: STREET 1: 10 MAIN ST CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 5085317400 MAIL ADDRESS: STREET 1: 10 MAIN STREET STREET 2: PO BOX 6159 CITY: PEABODY STATE: MA ZIP: 01961-6159 FORMER COMPANY: FORMER CONFORMED NAME: NORTHBANC CORP DATE OF NAME CHANGE: 19880503 10-K 1 WARREN BANCORP, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K [X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-17222 WARREN BANCORP, INC. (Exact Name of registrant as specified in the charter) ------------------ MASSACHUSETTS 04-3024165 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 MAIN STREET 01960 PEABODY, MASSACHUSETTS (Zip Code) (Address of principal executive offices) (978) 531-7400 (Registrant's telephone number, including area code) -------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $0.10 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirement for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant based on the closing sale price for the registrant's common stock on March 1, 1998, as reported by NASDAQ was $76,404,114. The number of shares of the registrant's common stock outstanding as of March 1, 1998 was 3,816,992. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 6, 1998 are incorporated by reference into the Annual Report as portions of Part III of Form 10-K. 6 2 CROSS REFERENCE SHEET OF INFORMATION REQUIRED BY ITEMS IN FORM 10-K
Page ---- Item 1. Business................................................................................................. 25-28 Item 2. Properties............................................................................................... 19 Item 3. Legal Proceedings........................................................................................ 19 Item 4. Submission of Matters to a Vote of Security Holders...................................................... 28 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 73 Item 6. Selected Financial Data.................................................................................. 2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................................ 8-25 Item 8. Financial Statements and Supplementary Data.............................................................. 30-70 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.............................................................................................. 28 Item 10. Directors and Executive Officers of the Corporation...................................................... 29 Item 11. Executive Compensation................................................................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 29 Item 13. Certain Relationships and Related Transactions........................................................... 29 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 71 STATISTICAL DISCLOSURE FOR BANK HOLDING COMPANIES (2) Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential................................................................................ 21-22 (3) Investment Portfolio...................................................................................... 14 (4) Loan Portfolio............................................................................................ 15 (5) Summary of Loan Loss Experience........................................................................... 18 (6) Deposits.................................................................................................. 20 (7) Return on Equity and Assets............................................................................... 2 (8) Short-Term Borrowings .................................................................................... 51
7 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Annual Report, including Form 10-K, constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate," "intend," "estimate," "plan," "assume" and other similar expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the control of the Corporation and may cause the actual results, performance or achievements of the Corporation to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the following: interest rates may increase, adversely affecting the ability of borrowers to repay adjustable-rate loans and the Corporation's earnings and income which derive in significant part from loans to borrowers; unemployment in the Corporation's market area may increase, adversely affecting the ability of individual borrowers to repay loans; property values may decline, adversely affecting the ability of borrowers to repay loans and the value of real estate securing repayment of loans; and general economic and market conditions in the Corporation's market area may decline, adversely affecting the ability of borrowers to repay loans, the value of real estate securing repayment of loans and the Corporation's ability to make profitable loans. Any of the above may also result in lower interest income, increased loan losses, additional charge-offs and writedowns and higher operating expenses. These and other factors that might cause differences between actual and anticipated results, performance and achievements are discussed in greater detail in this Annual Report, including Form 10-K, under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business". Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the audited financial statements and notes thereto appearing elsewhere in this report. GENERAL Warren Bancorp, Inc.'s (the "Corporation") operating results for the year ending December 31, 1997 (the "1997 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 an increased profit for the 1997 period primarily due to gains from sales of rights to service residential mortgage loans, a gain resulting from the termination of its defined-benefit pension plan, an increase in net interest income and a decrease in the provision for loan loss to a recovery compared to the year ended December 31, 1996 (the "1996 period"). On January 31, 1997, the Corporation sold its rights to service approximately $209 million of residential mortgage loans representing over 95% of its portfolio of loans serviced for others. The Corporation received net proceeds of $2.6 million. Certain assets and expenses totaling $1.2 million consisting mainly of capitalized mortgage-servicing rights and capitalized excess service fees, were charged against this gain resulting in a pre-tax gain of $1.4 million. Please see "Loans and Loans Held-for-Sale," and "Other Assets and "Non-Interest Income" under "Results of Operations-1997 Compared to 1996," in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion. Also, during the 1997 period the Bank terminated its defined-benefit pension plan resulting in a pre-income tax gain of $538,000 from excess plan assets reverting back to the Bank. Please see "Non-interest Income" under "Results of Operations-1997 Compared to 1996," for further discussion on this item. Stockholders' equity increased in 1997 due to profits and to an increase in the unrealized gain on securities available for sale, net of income taxes. These increases were partially offset by the payment of dividends. The increase in the unrealized gain was primarily the result of decreased interest 8 4 rates during the 1997 period. Future increases in interest rates could reduce the value of the securities portfolio and stockholders' equity. Real estate acquired by foreclosure decreased by $220,000 to $2.0 million at December 31, 1997 and nonperforming loans decreased by $2.4 million to $347,000 during the 1997 period from December 31, 1996. Management continues to monitor those nonperforming asset portfolios closely. If conditions in the Massachusetts real estate market become unstable and values deteriorate, the amount of nonaccrual loans and real estate acquired through foreclosure would be expected to increase, resulting in lower interest income and increased loan losses, which could require additional loan loss provisions to be charged to operating income. Moreover, real estate acquired through foreclosure may give rise to additional charge-offs and writedowns and higher expenses for property taxes and other carrying costs. In 1997, the Corporation paid regular quarterly dividends totaling $.50 per share and paid a special dividend of $.37 per share. The Board of Directors has authorized management to repurchase up to 225,000 shares of its common shares in the open market. The repurchase program commenced on April 22, 1996 and may be discontinued at any time. Through December 31, 1997, the Corporation had purchased 98,000 shares at a total cost of $1.2 million. The Corporation did not repurchase any shares in 1997. The 127,000 remaining authorized shares represent approximately 3% of the outstanding shares. REGULATORY PROCEEDINGS There were no regulatory proceedings in 1997. In February 1995, the FDIC and the Massachusetts Commissioner of Banks (the "Commissioner") terminated the Cease and Desist Order (the "Order") which the Bank had consented to in December 1991 and had been in effect since that time. The Order was replaced by informal supervisory arrangements set forth in resolutions of the Bank's Board of Directors adopted in February 1995. In the fourth quarter of 1995, the Bank was informed by the FDIC and the Commissioner that the Board resolutions were no longer necessary, and the Bank's Board of Directors dissolved those resolutions. YEAR 2000 The Corporation has developed plans to address the possible exposures related to the impact on its computer systems and key service providers of the year 2000. In 1998, the Corporation will either renew its contract with its current outside data processing service provider or convert to a new service provider. In either case, the data service provider will ensure year-2000 compliance, and the costs related to that aspect of the year-2000 effort are the responsibility of the provider. Management will ensure that the service provider has the financial resources to complete the effort. As part of its 1998 business plan, the Corporation will upgrade its personal computers and related software, all of which will be year-2000 certified upon purchase. Because the Corporation is updating systems as part of its ongoing operations and the hardware and software upgrades are a necessary result of that effort, management estimates that the incremental costs incurred by the Corporation for year-2000 compliance will not be material. 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. Failure of such third parties of the Corporation to adequately address their respective year-2000 issues could have a material adverse effect on the Corporation's financial condition and results of operation. 9 5 ASSET/LIABILITY MANAGEMENT A primary objective of the Corporation's asset/liability management policy is to manage the Corporation's prevalent market risk, 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 specify 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%. The following table reflects the Corporation's estimated exposure as a percentage of estimated net interest income for the next 12 months, assuming an immediate shift in short-term interest rates: Estimated increase (decrease) in Rate change (basis points) net interest income -------------------------- ------------------- +100 4.2% -100 (4.4)% Certain shortcomings are inherent in a simulation analysis. Estimates of customer behavior to changing interest rates may differ significantly from actual. Areas of these estimates include loan prepayment speeds, shifting between adjustable-rate and fixed-rate loans, and activity within different categories of deposit products. Also, the ability of some borrowers to repay their adjustable-rate loans may decrease in the event of interest-rate increases. The following table summarizes the Corporation's interest-rate sensitivity position as of December 31, 1997. Assets and liabilities are classified as interest-rate sensitive if they have a remaining term to maturity of 0-12 months or are subject to interest-rate adjustments within those time periods. Adjustable-rate loans and mortgage-backed securities are shown as if the entire balance came due on the repricing date. Nonaccruing loans are not included in this analysis due to their status as non-earning assets. Estimates of fixed-rate loan and fixed-rate mortgage-backed security amortization and prepayments are included with rate sensitive assets. Because regular savings and N.O.W. accounts may be withdrawn at any time and are subject to interest-rate adjustments at anytime, they are presented in the table below based on an assumed maturity of six months. None of these assets is considered a trading asset. 10 6 INTEREST-RATE SENSITIVITY POSITION
DECEMBER 31, 1997 ----------------- WITHIN ONE YEAR --------------------------------------------------------------- 0-3 3-6 6-12 1-5 OVER 5 MONTHS MONTHS MONTHS YEARS YEARS ------ ------ ------ ----- ----- (Dollars in Thousands) INTEREST SENSITIVE ASSETS: Investment securities ................. $ 28,306 $ 9,291 $ 18,206 $24,824 $ -- Loans held for sale ................... 1,031 -- -- -- -- Adjustable-rate loans ................. 71,430 29,648 58,477 47,388 -- Fixed-rate loans ...................... 6,369 1,995 4,697 12,771 7,641 Mortgage-backed securities ............ 1,736 3,821 14,774 7,035 2,380 --------- --------- -------- ------- ------- Total interest sensitive assets .... 108,872 44,755 96,154 92,018 10,021 --------- --------- -------- ------- ------- INTEREST SENSITIVE LIABILITIES: Cash manager and passbook plus accounts ............................. 15,922 13,314 -- -- -- Time deposits ......................... 43,263 28,544 30,310 43,498 9 Other deposits(a) ..................... 66,640 67,430 94 -- -- Borrowings ............................ 2,255 -- -- 14 657 --------- --------- -------- ------- ------- Total interest sensitive liabilities ...................... 128,080 109,288 30,404 43,512 666 --------- --------- -------- ------- ------- Excess (deficiency) of interest sensitive assets over interest sensitive liabilities ................ $ (19,208) $ (64,533) $ 65,750 $48,506 $ 9,355 ========= ========= ======== ======= ======= Excess (deficiency) of cumulative interest sensitive assets over cumu- lative interest sensitive liabilities ........................ $ (19,208) $ (83,741) $(17,991) $30,515 $39,870 ========= ========= ======== ======= ======= Cumulative interest sensitive assets as a percentage of cumulative interest sensitive liabilities ....... 85.0% 64.7% 93.3% 109.8% 112.8% ========= ========= ======== ======= ======= Cumulative excess (deficiency) as a percentage of total assets ........... (5.2)% (22.6)% (4.8)% 8.2% 10.7% ========= ========= ======== ======= =======
- ---------- (a) Other deposits consist of regular savings, club and N.O.W. accounts. Interest-rate sensitivity statistics are static measures that do not necessarily take into consideration external factors which might affect the sensitivity of assets and liabilities and consequently cannot be used alone to predict the operating results of a financial institution in a changing environment. However, these measurements do reflect major trends and thus the Corporation's sensitivity to interest rate changes over time. LIQUIDITY The Bank seeks to ensure that sufficient liquidity is available to meet cash requirements while earning a return on liquid assets. The Bank uses its liquidity primarily to fund loan and investment commitments, to supplement deposit flows and to meet operating expenses. The primary sources of liquidity are interest and amortization from loans, mortgage-backed securities and investments, sales and maturities of investments, loan sales, deposits and Federal Home Loan Bank of Boston ("FHLBB") advances, which include a $15 million overnight line of credit. The Bank also has access to the Federal Reserve Bank's discount window and may borrow from the Depositors Insurance Fund Liquidity Fund. 11 7 During 1997, the Bank did not use the Federal Reserve Bank discount window and did not borrow from the Depositors Insurance Fund Liquidity Fund. The Bank also uses the longer term borrowing facilities within its total available credit line with the FHLBB. Advances from the FHLBB, other than the overnight facility, were $671,000 at December 31, 1997 compared to $2.7 million at December 31, 1996. During 1997, the primary sources of liquidity were $24.4 million in loan sales, proceeds from sales and maturities of investments of $47.3 million, proceeds from the sales of rights to service mortgage loans of $2.6 million and proceeds from sale and paydowns of mortgage-backed securities of $14.2 million. Primary uses of funds were $94.7 million in residential, commercial real estate and commercial loan originations, $55.1 million to purchase investment securities and $2.0 million to pay down Federal Home Loan Bank advances. At December 31, 1997, the Bank had $6.3 million in money market funds and overnight investments. The primary source of liquidity for the Corporation is dividends from the Bank. Dividends paid by the Corporation are the primary uses of this liquidity. From time to time, the Bank has obtained time deposits in denominations of $100,000 and over. The following table summarizes maturities of time deposits of $100,000 or more outstanding at December 31, 1997:
Within one year: (IN THOUSANDS) Less than 3 months ....................... $ 7,123 3 to 6 months ............................ 3,409 6 to 12 months ........................... 4,416 ------- 14,948 More than one year ........................... 6,637 ------- $21,585 =======
CAPITAL ADEQUACY Total stockholders' equity at December 31, 1997 was $40.0 million, an increase of $5.6 million from $34.4 million at the end of 1996. Included in stockholders' equity is an unrealized gain on securities available for sale, which increased stockholders' equity, of $1,416,000 as compared to an unrealized gain at December 31, 1996 of $738,000. This favorable change in the fair value of securities available for sale was due mainly to decreased interest rates during the 1997 period. Future interest-rate increases could reduce the fair value of these securities and reduce stockholders' equity. As a percentage of total assets, stockholders' equity was 10.79% at December 31, 1997 compared to 9.60% at December 31, 1996. At December 31, 1997, 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. In addition, they require the recognition of unrealized losses on marketable equity securities as a reduction of Tier I capital. At December 31, 1997, net of applicable income taxes, the unrealized gain on securities available for sale was $1,416,000, of which the unrealized loss on marketable equity securities was zero. The FRB's leverage capital-to-assets guidelines require the strongest and most highly rated bank holding companies to maintain at least a 3.00% ratio of Tier I capital to average consolidated assets. All other bank holding companies are required to maintain at least 4.00% to 5.00%, depending on how the FRB evaluates their condition. The FRB may require a higher capital ratio. At December 31, 1997, the FRB leverage capital ratio was 10.58% compared to 9.48% at December 31, 1996. The FDIC's leverage capital-to-assets ratio guidelines are substantially similar to those adopted by the FRB and described above. At December 31, 1997, the Bank's leverage capital ratio, under FDIC guidelines, was 9.22% compared to 9.14% at December 31, 1996. 12 8 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% total risk-based capital ratio. The Corporation's and the Bank's total risk-based capital ratios were 14.15% and 12.54%, respectively, at December 31, 1997 compared to 14.72% and 14.28%, respectively, at December 31, 1996 for both the Corporation and the Bank, thus exceeding their risk-based capital requirements. As of December 31, 1997, the Bank's total risk-based capital ratio, Tier I risk-based capital ratio and leverage capital ratio were 12.54%, 11.29%, and 9.22%, respectively. Based on these capital ratios, the Bank is considered to be "well capitalized." FINANCIAL CONDITION The Corporation's total assets increased to $371.0 million at December 31, 1997 from $359.0 million at December 31, 1996. Increases occurred in cash and due from banks, commercial loans and commercial real estate loans and were partially offset by decreases in residential mortgage loans, money market funds and overnight investments, and investments and mortgage-backed securities available for sale and from the elimination of certain "other" assets related to the sale of the rights to service residential mortgage loans consisting mainly of capitalized mortgage-servicing rights and capitalized excess servicing fees. INVESTMENTS AND MORTGAGE-BACKED SECURITIES Investments, consisting of money market funds and overnight investments, investment securities and mortgage-backed securities available for sale, and other investments, decreased to $114.3 million at December 31, 1997 from $118.3 million at December 31, 1996. A majority of this decrease was from the sale of mortgage-backed securities, maturities of U.S. Treasury and U.S. Government Agency obligations and paydowns of mortgage-backed securities. This decrease was partially offset by additional purchases of corporate notes. Mortgage-backed securities decreased to $29.7 million at December 31, 1997 from $42.7 million at December 31, 1996 due to sales and paydowns of the underlying loans partially offset by the securitization of $1.9 million of loans into mortgage-backed securities. The increase in the fair value of these investments was primarily due to the decrease in interest rates during 1997. Increases in interest rates could reduce the value of these investments. 13 9 INVESTMENTS. Certain information regarding the Corporation's investments as of December 31 is presented below (in thousands):
1997 1996 ---- ---- Amortized Cost: Money market funds and overnight investments........................ $ 6,288 $ 6,733 U.S. Treasury and U.S. Government Agency obligations available for sale................................... 10,536 24,636 Foreign government bond held to maturity............................ 500 500 Fixed-income mutual funds available for sale........................ 19,009 18,990 Mortgage-backed securities available for sale....................... 29,746 42,234 Corporate notes available for sale.................................. 32,286 10,000 Common and preferred stock available for sale....................... 7,919 7,942 Other investments................................................... 5,794 6,178 -------- -------- Total amortized cost................................................... 112,078 117,213 Unrealized gain on investment securities available for sale.................................................. 2,202 1,135 -------- ------- Total carrying value................................................... $114,280 $118,348 ======== ======== Total fair value of investment securities.............................. $114,520 $118,588 ======== ========
The following table presents the maturity distribution of the investment securities portfolio and the weighted average yield for each type and range of maturity as of December 31, 1997. Adjustable-rate mortgage-backed securities are shown as if the entire balance came due on the repricing date. Estimates are made of fixed-rate mortgage-backed security amortization and prepayments (dollars in thousands).
WITHIN ONE TO FIVE TO OVER ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL --------- ---------- --------- --------- ----- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Money market funds and overnight investments..... $ 6,288 5.64% $ -- -- % $ -- -- % $ -- -- % $ 6,288 5.64% U.S. Treasury and agency obligations available for sale................. $ 8,006 5.77 2,530 5.49 -- -- -- -- 10,536 5.70 Mortgage-backed securities available for sale........ 20,330 7.70 7,035 7.03 2,363 6.14 18 6.14 29,746 7.42 Corporate notes available for sale........ 29,250 5.88 3,036 5.99 -- -- -- -- 32,286 5.89 Foreign government bonds held to maturity.......... 250 7.50 -- -- 250 7.80 -- -- 500 7.65 ------- -------- ------ ----- -------- $64,124 6.41% $ 12,601 6.47% $2,613 6.30% $ 18 6.14% $ 79,356 6.43% ======= ======== ====== ===== ========
At December 31, 1997, the Corporation did not hold securities of any single issuer, excluding U.S. Treasury and U.S. Government Agency obligations and FHLB of Boston stock, that exceeded ten percent of stockholders' equity at December 31, 1997. LOANS AND LOANS HELD FOR SALE Loans and loans held for sale increased by $16.0 million during the 1997 period to $241.8 million at December 31, 1997. This increase is primarily the result of increased commercial, commercial construction and commercial real estate loans partially offset by loan paydowns and payoffs in residential mortgage loans and the securitization of $1.9 million of residential mortgage loans into mortgage-backed securities. Commercial, commercial construction and commercial loans typically earn higher yields than residential mortgage loans, but usually carry higher risk due to loan size. 14 10 The following table sets forth the classification of the Corporation's loans as of December 31 (in thousands):
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Residential mortgages.................. $ 52,707 $ 66,654 $ 85,276 $104,724 $110,373 Commercial real estate................. 125,832 107,428 94,341 83,846 73,707 Commercial construction ............... 19,739 10,742 6,254 3,914 1,129 Commercial loans....................... 22,259 16,458 8,490 4,964 4,936 Consumer loans......................... 20,226 21,564 22,331 25,065 28,218 -------- -------- -------- -------- -------- $240,763 $222,846 $216,692 $222,513 $218,363 ======== ======== ======== ======== ========
Balances in residential mortgage loans are decreasing mainly as a result of loan paydowns and securitization of adjustable-rate mortgage loans. Balances in commercial real estate, commercial construction, and commercial loans are increasing mainly due to the Corporation's increasing emphasis on corporate lending. Residential mortgage loan originations decreased during 1997 to $32.0 million from $37.9 million in 1996. The Corporation originated $17.3 million in fixed-rate loans during 1997 compared to $24.2 million during 1996. Adjustable-rate loans totaling $14.7 million were originated during 1997 compared to $13.7 million during 1996. The Corporation sold or securitized loans totaling $26.3 million during 1997 compared to $32.3 million in 1996. At year-end 1997, the Corporation held $1.0 million of fixed-rate residential mortgage loans for sale compared to $3.0 million at year-end 1996. The following table sets forth a maturity distribution of the Corporation's commercial real estate, commercial construction, and commercial loans as of December 31, 1997. For purposes of compiling this table, fixed rate loans are treated as if the entire balance were due on the last contractual payment date. Adjustable-rate loans are shown at the adjustment period date. Based on experience with such loans, partial or full repayment of a portion of the Corporation's commercial real estate loans prior to contractual maturity can be expected.
WITHIN ONE TO OVER TOTAL ONE YEAR FIVE YEARS FIVE YEARS GROSS LOANS -------- ---------- ---------- ----------- (IN THOUSANDS) Commercial real estate............................... $ 89,287 $35,872 $ 673 $125,832 Commercial construction.............................. 3,954 14,418 1,367 19,739 Commercial loans..................................... 20,301 1,944 14 22,259 -------- ------- -------- --------- Total........................................... $113,542 $52,234 $ 2,054 $167,830 ======== ======= ======== ======== Loans with adjustable rate........................... $41,535 $ 1,367 Loans with fixed rate................................ 10,699 687 ------- -------- $52,234 $ 2,054 ======= ========
On January 31, 1997, the Corporation sold its rights to service approximately $209 million of residential mortgage loans representing over 95% of the portfolio of loans serviced for others. Included in the sale were all mortgage servicing rights, the balance of which was charged against the total proceeds on the date of the sale. In the future, the Corporation intends to sell servicing released all residential fixed-rate mortgage loans it originates. 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 15 11 considered to be 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 December 31, 1997, there were four loans considered impaired and accruing interest totaling $720,000. Loans past due 90 days or more, or past due less than 90 days but in a nonaccrual status, decreased to $347,000 at December 31, 1997 compared to $2.7 million at December 31, 1996. Included in these nonperforming loans are two loans considered impaired in the amount of $201,000 at December 31, 1997. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of principal or interest or when the loans become contractually past due by 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 December 31 (dollars in thousands):
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Accruing loans 90 days or more past due .......................... $ -- $ -- $ 155 $ 89 $ 156 Nonaccrual loans .................... 347 2,712 4,084 3,244 1,731 ------- ------- ------ ------ ------ Total nonperforming loans ........... $ 347 $ 2,712 $4,239 $3,333 $1,887 ======= ======= ====== ====== ====== Percentage of nonperforming loans to: Total loans ......................... 0.14% 1.22% 1.96% 1.50% 0.86% ======= ======= ====== ====== ====== Total assets ........................ 0.09% 0.76% 1.19% 0.96% 0.48% ======= ======= ====== ====== ======
The decrease in nonaccrual loans between December 31, 1997 and December 31, 1996, was mainly in commercial real estate and residential mortgage loans. In addition, at December 31, 1997 and 1996, the Corporation had $1,213,000 and $784,000, respectively, of loans past due 60 to 89 days and still accruing interest not included above. These loans are closely monitored by management and they are considered in reviews of the adequacy of the loan loss reserve. The Corporation's lending activities are conducted throughout eastern Massachusetts with emphasis in Essex County, Massachusetts and contiguous counties, including those in southern New Hampshire, although from time to time loans will be made outside of this area. The Bank makes single family, residential construction, condominium and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. Most loans granted by the Bank are collateralized by real estate. The ability and willingness of the single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity and real estate values within the borrower's geographic area. The ability and willingness of commercial real estate and commercial loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate economic sector and the general economy in the borrower's geographic area. REAL ESTATE ACQUIRED BY FORECLOSURE Real estate acquired by foreclosure totaled $2.0 million at December 31, 1997 compared to $2.2 million at December 31, 1996. Real estate acquired by foreclosure is reflected at the lower of the carrying value of the loan or the net carrying value of the property less estimated cost of disposition. These properties consist mainly of land and single family and multi-family dwellings. 16 12 The Corporation had a write-down of $208,000 on real estate acquired by foreclosure, net of gains on sale, in the 1997 period compared to a net gain of $1,000 on the sale of real estate acquired by foreclosure in the 1996 period. Unstable conditions in the Massachusetts real estate market could result in losses and writedowns as the Corporation reduces the book value of real estate to reflect likely realizable values. In summary, nonperforming assets are as follows (in thousands):
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Nonperforming loans.................... $ 347 $ 2,712 $ 4,239 $ 3,333 $ 1,887 Loans foreclosed in sub- stance*............................... - - - 1,454 3,180 Real estate acquired by foreclosure........................... 2,010 2,230 3,092 6,900 11,790 -------- -------- -------- -------- ------ Total nonperforming assets............. $ 2,357 $ 4,942 $ 7,331 $ 11,687 $ 16,857 ======== ======== ======== ======== ========
* Reported with loans after December 31, 1994, and with real estate acquired by foreclosure for the two years prior. Prior-year balances have not been restated since management has deemed the reclassification to have an immaterial effect on the financial statements. 17 13 ALLOWANCE FOR LOAN LOSSES The following table presents the activity in the allowance for loan losses for the years ended December 31:
ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance at beginning of period ..................... $ 4,533 $ 4,533 $ 4,789 $ 5,942 $ 6,136 ------- ------- ------- ------- ------- Losses charged to the allowance: Commercial ..................................... -- -- -- (108) (45) Commercial mortgage ............................ (344) (143) (113) (647) (631) Residential mortgage ........................... (241) (280) (472) (561) (784) Consumer loans ................................. (23) (33) (31) (16) (66) ------- ------- ------- ------- ------- (608) (456) (616) (1,332) (1,526) ------- ------- ------- ------- ------- Loan recoveries: Commercial ..................................... 116 61 79 94 40 Commercial mortgage and construction ............................... 248 233 255 276 24 Residential mortgage ........................... 75 30 161 85 229 Consumer loans ................................. 18 16 19 11 16 ------- ------- ------- ------- ------- 457 340 514 466 309 ------- ------- ------- ------- ------- Net charge-offs ................................ (151) (116) (102) (866) (1,217) Provision for (recovery of) loan losses charged (credited) to expense ..................................... (316) 116 (154) (287) 1,023 ------- ------- ------- ------- ------- Balance at end of period ........................... $ 4,066 $ 4,533 $ 4,533 $ 4,789 $ 5,942 ======= ======= ======= ======= ======= Allowance to total loans at end of period ............................... 1.69% 2.03% 2.09% 2.15% 2.72% ======= ======= ======= ======= ======= Allowance to nonperforming loans at end of period ......................... 1,171.8% 167.1% 106.9% 143.7% 314.9% ======= ======= ======= ======= ======= Net charge-offs to average loans outstanding .............................. .07% .05% .27% .39% .49% ======= ======= ======= ======= ======= Allocation of ending balance: Commercial ..................................... $ 295 $ 218 $ 116 $ 202 $ 529 Commercial mortgage ............................ 2,752 3,099 2,940 2,854 3,227 Residential mortgage ........................... 727 936 1,237 1,441 1,829 Consumer loans ................................. 292 280 240 292 357 ------- ------- ------- ------- ------- $ 4,066 $ 4,533 $ 4,533 $ 4,789 $ 5,942 ======= ======= ======= ======= ======= Percentage of loans in each category to total loans: Commercial ..................................... 9.2% 7.4% 3.9% 2.2% 2.3% Commercial mortgage ............................ 60.5 53.0 46.4 39.4 34.3 Residential mortgage ........................... 21.9 29.9 39.4 47.1 50.5 Consumer loans ................................. 8.4 9.7 10.3 11.3 12.9 ------- ------- ------- ------- ------- 100.0% 100.0% 100.0% 100.0% 100.0% ======= ======= ======= ======= =======
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. 18 14 Balances in the allowance for loan losses are determined on a periodic basis by management and the Loan Committee of the Board of Directors with assistance from an independent credit review consulting firm. Loan loss allocations are based on the conditions of each loan, whether performing or nonperforming, including collectibility, collateral adequacy and the general condition of the borrowers, economic conditions, delinquency statistics, market area activity, the risk factors associated with each of the various loan categories and the borrower's adherence to the original terms of the loan. Individual loans, including loans considered impaired, are analyzed and categorized by level of credit risk and collectibility. 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 $921,000 of impaired loans, of which $461,000 is measured using the present value method and $460,000 using the fair market method, is $179,000. LEGAL AND OFF-BALANCE SHEET RISKS Various legal claims arise from time to time in the course of business of the Corporation and its subsidiaries. At December 31, 1997 there were no legal claims against the Corporation. The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations of interest rates. These financial instruments include commitments to originate loans, unused lines of credit, standby letters of credit, recourse arrangements on sold assets and forward commitments to sell loans. The financial instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. (See note 11 in the Notes to Consolidated Financial Statements.) PROPERTIES The Bank operates a main office and three additional banking offices in Peabody and two banking offices in Beverly. At December 31, 1997, management believes that the Bank's existing properties are adequate for the conduct of its business. The following table sets forth certain information relating to the Bank's offices as of December 31, 1997:
OWNED LEASE LEASE YEAR OR EXPIRATION RENEWAL OFFICE LOCATION OPENED LEASED DATE OPTION --------------- ------ ------ ---- ------ Peabody Square 10 Main Street................................ 1854 Owned -- -- Northshore Shopping Center...................... 1958 Leased 2000 Yes West Peabody Russell and Lowell Street..................... 1971 Leased 2003 No* South Peabody Lynn Street................................... 1979 Owned -- -- Beverly 175 Cabot Street.............................. 1867 Owned -- -- North Beverly 55 Dodge Street............................... 1968 Leased 2006 No
* BANK HAS OPTION TO PURCHASE. 19 15 OTHER ASSETS Included in other assets at December 31, 1997 and December 31, 1996 are $742,000 and $980,000, respectively, of deferred income taxes receivable. Also included in other assets was a current income tax receivable of $547,000 at December 31, 1997 compared to $278,000 at December 31, 1996. A noted previously, on January 31, 1997, the Bank sold its rights to service approximately $209 million of residential mortgage loans. In that regard the entire balance of mortgage-servicing rights and capitalized excess servicing fees were charged against the gain from the sale of mortgage-servicing rights. These assets were included in other assets at December 31, 1996 and had balances of $682,000 and $344,000, respectively. Also noted previously, the Bank liquidated its pension plan in October of 1997. At December 31, 1996 other assets included a prepaid pension asset of $864,000 that was charged against the gain. LIABILITIES Year-end deposit levels increased to $325.3 million at December 31, 1997 from $316.4 million at December 31, 1996. This increase took place primarily in time, NOW, and money market deposits and was partially offset by a decrease in regular savings and non-interest bearing deposits. AVERAGE DEPOSITS. The following table presents the average balance and average cost of the Corporation's deposits for the years ended December 31 (dollars in thousands):
1997 1996 1995 ---- ---- ---- AMOUNT COST AMOUNT COST AMOUNT COST ------ ---- ------ ---- ------ ---- Non-interest bearing.......... $ 15,977 --% $ 15,211 --% $ 13,279 --% NOW accounts.................. 32,242 0.76 31,366 0.96 29,352 0.96 Savings....................... 129,585 2.60 132,130 2.52 143,727 2.61 Time.......................... 139,507 5.48 134,091 5.60 126,234 5.62 --------- --------- --------- Total deposits.......... $ 317,311 3.54% $ 312,798 3.56% $ 312,592 3.56% ========= ========= =========
Federal Home Loan Bank of Boston advances were $671,000 at December 31, 1997 and $2.7 million at December 31, 1996. Securities sold under agreement to repurchase were $2.2 million at December 31, 1997 and 1996. 20 16 INCOME YIELD AND COST OF FUNDS ANALYSIS. The table below sets forth information concerning the Corporation's average balances, interest income and expense, and yield information for the three years shown. Average loan balances include nonaccruing loans. The yields on investments are calculated on a fully taxable-equivalent basis using a federal tax rate of 34%.
YEAR ENDED DECEMBER 31, ------------------- --- 1997 1996 1995 ------------------------- ------------------------- -------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ---- ------- -------- ---- ------- -------- ---- (DOLLARS IN THOUSANDS) Loans.................. $229,889 $21,248 9.24% $220,847 $20,237 9.17% $223,314 $20,383 9.13% Investments............ 76,476 4,499 6.13 71,325 4,311 6.25 57,363 3,683 6.42 Mortgage-backed securities............ 38,159 2,792 7.32 45,327 3,233 7.13 52,070 3,684 7.08 -------- ------- -------- ------- -------- ------- Total interest- earning assets.... 344,524 28,539 8.34% 337,499 27,781 8.28% 332,747 27,750 8.34% Non-interest earning assets................. 15,130 15,212 16,825 -------- -------- -------- Total assets............. $359,654 $352,711 $349,572 ======== ======== ======== Interest-bearing liabilities: Deposits............... $301,334 11,258 3.74% $297,587 11,147 3.75% $299,313 11,093 3.72% Borrowings............. 4,525 146 3.23 6,690 322 4.80 8,073 515 6.38 -------- ------ -------- ------ -------- ------ Total interest- bearing liabilities.. 305,859 11,404 3.73 304,277 11,469 3.77 307,386 11,608 3.79 Non-interest bearing deposits............... 15,977 15,211 13,279 -------- ------- ------- Total deposits and borrowed funds......... 321,836 3.54 319,488 3.59 320,665 3.63 Non-interest bearing liabilities............ 463 936 1,026 Stockholders' equity..... 37,355 32,287 27,881 -------- -------- -------- Total liabilities and stockholders' equity............. $359,654 $352,711 $349,572 ======== ======== ======== Net interest income...... $17,135 $16,312 $16,142 ======= ======= ======= Weighted average rate spread............ 4.80% 4.69% 4.71% Net yield on average earning assets......... 5.03% 4.88% 4.84%
21 17 RATE/VOLUME ANALYSIS. The following table sets forth information concerning the Bank's interest and dividend income, interest expense and net interest income changes for the years listed.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1997 COMPARED TO 1996 1996 COMPARED TO 1995 --------------------- --------------------- INCREASE (DECREASE) INCREASE (DECREASE) ------------------- ------------------- DUE TO DUE TO ------ ------ AVERAGE AVERAGE RATE/ RATE/ VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL ------ ---- ------ ----- ------ ---- ------ ----- (IN THOUSANDS) Interest and dividend income: Investments .................. $ 312 $(115) $ (9) $ 188 $ 896 $ (70) $(52) $ 774 Mortgage-backed securities ... (510) 83 (14) (441) (477) 30 (4) (451) Loans ........................ 829 175 7 1,011 (225) 80 (1) (146) ----- ----- ---- ------- ----- ----- ---- ----- Total interest and dividend income ................. 631 143 (16) 758 194 40 (57) 177 Interest expense: Deposits: N.O.W ....................... 9 (64) (2) (57) 18 1 0 19 Savings ..................... (64) 98 (2) 32 (303) (131) 11 (423) Time ........................ 304 (162) (7) 135 439 18 1 458 Borrowings ................... (104) (105) 34 (175) (88) (128) 23 (193) ----- ----- ---- ------- ----- ----- ---- ----- Total interest expense ... 145 (233) 23 (65) 66 (240) 35 (139) ----- ----- ---- ------- ----- ----- ---- ----- Net interest income ............ $ 486 $ 376 $(39) $ 823 $ 128 $ 280 $(92) $ 316 ===== ===== ==== ======= ===== ===== ==== =====
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996 GENERAL The Corporation recorded a profit for the 1997 period of $7.3 million compared to a net profit for the 1996 period of $6.6 million, primarily due to gains from the sales of rights to service mortgage loans, a gain from the termination of pension plan, an increase in net interest income and a decrease in the provision for loan loss to a recovery. Income before taxes was $10.9 million for the 1997 period compared to $8.6 million in the 1996 period. Net interest income for the 1997 period was $17.1 million compared to $16.3 million for the 1996 period. The weighted average interest rate spread for the 1997 period was 4.80% compared to 4.69% for the 1996 period. The net yield on average earning assets was 5.03% for the 1997 period and 4.88% for the 1996 period. 22 18 INTEREST AND DIVIDEND INCOME Total interest and dividend income increased to $28.5 million for the 1997 period from $27.8 million for the 1996 period. Interest on loans increased to $21.2 million for the 1997 period from $20.2 million for the 1996 period. This increase is primarily the result of a higher volume of loans outstanding during the 1997 period and from an increase in average loan yield to 9.24% for the 1997 period from 9.17% for the 1996 period. Interest and dividends on investments was $4.5 million for the 1997 period and $4.3 million for the 1996 period. The average amount of investments held increased and the average yield on investments decreased to 6.13% for the 1997 period from 6.25% for the 1996 period. Mortgage-backed securities income was $2.8 million for the 1997 period and $3.2 million for the 1996 period, the decrease primarily due to a decrease in the average amount of mortgage-backed securities held. INTEREST EXPENSE Interest on deposits increased to $11.3 million in the 1997 period from $11.1 million for the 1996 period. This increase was primarily related to an increase in average interest-bearing deposits outstanding during the 1997 period. Interest on borrowed funds decreased to $146,000 from $322,000 for the 1996 period. This decrease is primarily related to a decrease in borrowed funds. NON-INTEREST INCOME Total non-interest income for the 1997 period was $3.3 million compared to $2.2 million for the 1996 period. The gains from the sales of mortgage servicing rights, noted above, were $1.4 million for the 1997 period. The gain from termination of pension plan, also noted above, was $538,000 in the 1997 period. The gains from the sales of mortgage loans were $181,000 in the 1997 period compared to $318,000 in the 1996 period. Loan servicing fees were $129,000 for the 1997 period compared to $613,000 in the 1996 period. This decrease is mainly due to the sales of the above-mentioned mortgage-servicing rights. The gains from the sales of investment securities were $140,000 for the 1997 period compared to $250,000 in the 1996 period. NON-INTEREST EXPENSE Total non-interest expense increased to $9.9 million in the 1997 period from $9.8 million in the 1996 period. This increase is primarily attributed to an increase in real estate operations expense to $409,000 in the 1997 period from $180,000 in the 1996 period mainly due to a writedown in the value of real estate owned through foreclosure. INCOME TAX EXPENSE Income tax expense for the 1997 period was $3.6 million compared to $2.0 million for the 1996 period. In the 1996 period the Corporation recognized a tax credit of $400,000 in connection with an IRS audit and a one-time tax benefit of $885,000 based on the Corporation's analysis of the "Fresh Start" provision of the Small Business Job Protection Act of 1996. Also, depending on the outcome of certain tax rulings by federal and state taxing authorities over the next one-to-two years not specific to Warren Bancorp, the Corporation may have the ability to record additional tax credits of up to an estimated $470,000 in future periods. The deferred income tax valuation allowance at December 31, 1997 and 1996 was $62,000 and $347,000, respectively. The net deferred tax asset at December 31, 1997 and 1996 was $742,000 and $980,000, respectively. Management believes it is more likely than not that sufficient taxable income will be generated to fully realize the deferred income tax asset. For further information, see note 8 of the Notes to the Consolidated Financial Statements. 23 19 RESULTS OF OPERATIONS - 1996 COMPARED TO 1995 GENERAL The Corporation recorded a net profit for 1996 of $6.6 million compared to a net profit for 1995 of $5.4 million. The increase is primarily due to gains on the sale of investment securities, lower deposit insurance and decreased real estate operations expense as well as the recognition of a one-time tax benefit of $885,000. Income before taxes was $8.6 million for 1996 compared to $7.3 million for 1995. Net interest income for 1996 was $16.3 million compared to $16.1 million for 1995. The weighted average interest rate spread for 1996 was 4.69% compared to 4.71% for 1995. The net yield on average earning assets was 4.88% for 1996 compared to 4.84% for 1995. INTEREST AND DIVIDEND INCOME Total interest and dividend income remained at $27.8 million for 1996 and 1995. Interest and fees on loans decreased to $20.2 million in 1996 from $20.4 million for 1995. This decrease is primarily the result of decreased average loan volume despite an increase in average loan yields to 9.17% for 1996 from 9.13% for 1995. Interest and dividends on investments increased to $4.3 million in 1996 from $3.7 million in 1995. This increase is attributed to increases in the average amount of investments held despite a decrease in the average yield on investments to 6.25% for 1996 from 6.42% for 1995. Mortgage-backed securities income decreased to $3.2 million from $3.7 million despite an increase in average yield to 7.13% for 1996 compared to 7.08% for 1995 due mainly to a decrease in the average amount of mortgage-backed securities held. INTEREST EXPENSE Interest on deposits remained at $11.1 million in 1996 and 1995. The average cost of deposits increased to 3.75% for 1996 from 3.72% for 1995. This is the result of a shift to higher-cost time deposits from lower-cost savings, NOW and money market deposits during 1996. Interest on borrowed funds decreased to $322,000 in 1996 from $515,000 in 1995. This decrease is primarily related to a decrease in the average cost of borrowings to 4.80% in 1996 from 6.38% in 1995 and a decrease in average borrowings during 1996. NON-INTEREST INCOME Total non-interest income for 1996 was $2.2 million compared to $2.0 million for 1995. The gains from the sales of investment securities were $250,000 for 1996 compared to losses of $20,000 for 1995. On December 31, 1995, the Corporation took a charge to earnings of $321,000 based on a determination that the unrealized loss on its investment in adjustable-rate preferred stocks at December 31, 1995 was other than temporary. The Corporation recorded gains on sales of mortgage loans and mortgage-servicing rights of $318,000 in 1996 compared to $630,000 to in 1995. Included in the 1995 gains was a $359,000 gain from the sale of mortgage servicing rights on $31.5 million of residential mortgage loans compared to zero in 1996. Loan servicing fee income was $613,000 in 1996 compared to $660,000 in 1995. NON-INTEREST EXPENSE Total non-interest expense decreased to $9.8 million in 1996 from $11.0 million in 1995. This decrease is primarily attributed to a decrease in deposit insurance, professional services and real estate operations expenses. Real estate operations expense was $180,000 in 1996 compared to $1.3 million in 1995 which included a write-down on real estate acquired by foreclosure of $902,000 in 1995 versus a net gain on sale of real estate acquired by foreclosure of $1,000 in 1996. Salary expense increased to $6.0 million in 1996 from $5.6 million in 1995 due mainly to salary increases and higher discretionary bonus payments in 1996. Deposit insurance expense 24 20 was a negative expense of $83,000 in 1996 compared to an expense of $384,000 in 1995 due to a reduction in the premium the FDIC charges the Bank for deposit insurance and an $87,000 refund in 1996 compared to an $81,000 refund in 1995 from the Depositors Insurance Fund, a Massachusetts insurance fund which insures deposits in excess of the FDIC limit. INCOME TAX EXPENSE Total income tax expense remained at $2.0 million in 1996 and 1995 despite having pre-tax income of $8.6 million in 1996 versus $7.3 million in 1995. In connection with an audit by the IRS and a review of certain tax and related matters, the Corporation recorded a $400,000 income tax credit in the first quarter of 1996 which is included in income tax expense. The credit is mainly the result of two changes required by the audit. First, the IRS required the Corporation to reduce its tax-return bad-debt deduction in prior years due to loss carrybacks the Corporation had taken. Although that requirement in itself had no financial statement effect on income, it enabled the Corporation to increase its dividend-received deduction in the year of the change, thus providing tax-return and financial statement benefit. Second, the IRS required the Corporation to shift tax-return loan chargeoffs from one tax period to other tax periods. For federal-tax purposes, these shifts had no financial statement effect on income. For state-tax purposes, the shift sheltered income which had been taxed in prior years, thus providing tax-return and financial-statement benefit. In addition, the Corporation recognized a one-time tax benefit of $885,000 based on its analysis of the "Fresh Start" provision of the Small Business Job Protection Act of 1996. BUSINESS GENERAL THE CORPORATION. Warren Bancorp, Inc. is a business corporation organized under the General Laws of the Commonwealth of Massachusetts. The only office of the Corporation, and its principal place of business, is located at 10 Main Street, Peabody, Massachusetts 01960. The Corporation's telephone number is (978) 531-7400. The Corporation is a bank holding company which owns all of the outstanding common stock of its only subsidiary, Warren Five Cents Savings Bank. The Corporation charges fees to the Bank for providing certain administrative services for the Bank. Such fees are charged on a cost basis. THE BANK. The Bank, a wholly owned subsidiary of the Corporation, is a Massachusetts-chartered savings bank incorporated in 1854. The Bank conducts its business from four banking offices in Peabody and two banking offices in Beverly. The Bank is engaged principally in the business of attracting retail and wholesale deposits from the general public and investing those deposits in various types of residential and commercial mortgages, consumer and commercial loans, and various securities. The Bank offers a wide variety of deposit, loan and investment products and services to individuals and commercial customers. The Bank has been a member of the FDIC since 1983. The Bank's deposits are insured by the FDIC up to FDIC limits (generally $100,000 per depositor) and by the Depositors Insurance Fund (the "DIF") for the portion of deposits in excess of that insured by the FDIC. The Bank is also a member of the Federal Home Loan Bank ("FHLB") system. MARKET AREA The Corporation's primary business and market area are the same as the Bank's business and market area. The Bank's primary market area is centered in Peabody (where its main office is located) and Beverly, Massachusetts, both approximately 18 miles north of Boston, and 25 21 includes the other cities and towns of Essex County, Massachusetts. However, the Bank will make loans and provide services to customers throughout eastern Massachusetts and parts of southern New Hampshire. The population of Essex County increased to 680,000 in 1996 from 670,000 in 1990, and median family income in 1996 was $58,700. In addition, the unemployment rate in December 1997 in the Boston labor market was 3.2% compared to 3.9% in Massachusetts and 4.7% in the United States. This compares to 3.2%, 3.9% and 5.3% in December 1996 for the Boston labor market, Massachusetts and the United States, respectively. COMPETITION The primary business of the Corporation is currently the ongoing business of the Bank. Therefore, the competitive conditions faced by the Corporation are the same as those faced by the Bank. The Bank faces competition in its market area both in originating loans and attracting deposits. Competition in originating loans comes primarily from thrift institutions, commercial banks, mortgage companies and consumer finance companies. Within the Bank's market area and surrounding communities, there are many competing commercial banks and thrift institutions. Further, there are numerous mortgage companies from Essex County and metropolitan Boston with offices in the area or calling officers soliciting in the area. The Bank competes for loans principally on the basis of interest rates and repricing terms, loan fees, the types of loans originated and the quality of service provided to borrowers. Management believes that through the Bank's various loan programs, it can compete for most types of loans in this market area. In attracting deposits, the Bank's primary competitors are thrift institutions, commercial banks, money market funds, credit unions and the capital markets. Competition for deposits comes not only from local institutions, but from those located in the Boston metropolitan market, through branching networks, proximity to the work place and the general reach of the mass media (particularly newspapers). The Bank competes for deposits primarily on the basis of interest rate paid, scope of services provided, convenience and quality of customer service. In order to appeal to customers and attract depositors, the Bank plans to continue to offer a wide range of high quality customer services, professional staff, and convenient offices and hours, in addition to paying competitive rates on deposits. REGULATION Both the Corporation and the Bank are regulated under federal and state statutes and regulations. The following summaries of the statutes and regulations affecting banks and bank holding companies do not purport to be complete. Such summaries are qualified in their entirety by reference to such statutes and regulations. 26 22 WARREN BANCORP, INC. FEDERAL LAW FEDERAL RESERVE BOARD. The Corporation is registered as a bank holding company under the Federal Bank Holding Company Act of 1956, as amended ("BHCA"), and is required to file with the Federal Reserve Board ("FRB") annual and periodic reports and such other information as the FRB may require. The Corporation is subject to limitations on the scope of its activities and to continuing regulation, supervision and examination by the FRB under the BHCA and related federal statutes. The FRB has adopted risk-based and leverage capital guidelines for bank holding companies. A discussion of these guidelines and the Corporation's capital requirements and capital position is given in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Capital Adequacy." MASSACHUSETTS LAW As a Massachusetts corporation, the Corporation must comply with the General Laws of the Commonwealth of Massachusetts and is subject to corporate regulation by the Massachusetts Secretary of State. WARREN FIVE CENTS SAVINGS BANK As a Massachusetts-chartered, FDIC-insured savings bank, the Bank is subject to regulation, examination and supervision by the FDIC and the Commissioner of Banks of the Commonwealth of Massachusetts. FEDERAL LAW FEDERAL RESERVE BOARD. The FRB has established regulations that require FDIC-insured savings banks to maintain non-earning reserves against certain deposit accounts. FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC insures the Bank's deposit accounts up to a maximum of $100,000 per separately insured account; therefore, the Bank is subject to regulation, supervision and reporting requirements of the FDIC. The FDIC has adopted a regulation that defines and sets the minimum requirements for capital adequacy. Under this regulation, insured state banks, such as the Bank, are required to maintain a "leverage" ratio of total capital to total assets and a risk-based capital-to-assets ratio that are substantially the same as the Federal Reserve guidelines noted above. A discussion of these guidelines and the Bank's capital requirements and capital position is given in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Capital Adequacy." STATE LAW MASSACHUSETTS COMMISSIONER OF BANKS. The Bank is subject to regulation and examination by the Commissioner. Massachusetts statutes and regulations govern, among other things, investment powers, lending powers, deposit activities, borrowings, maintenance of surplus reserve accounts, distribution of earnings and payment of dividends. The Bank is also subject to regulatory provisions covering such matters as issuance of capital stock, branching, and mergers and consolidations. DEPOSITORS INSURANCE FUND. Deposit accounts that are not covered by federal insurance are insured by the DIF, a corporation created by the Massachusetts Legislature for the purpose of insuring the deposits of savings banks not covered by federal deposit insurance. All 27 23 Massachusetts-chartered savings banks, including the Bank, are required to be members of the DIF. EMPLOYEES At the present time, the Corporation does not have any employees other than its officers, who are compensated by the Bank. The Corporation may utilize the support staff of the Bank from time to time without the payment of any fees to the Bank. If the Corporation expands the scope or size of its financial services business, or acquires or pursues other lines of business, it may hire additional employees. At December 31, 1997, the Bank had 155 employees, 37 of whom were part-time. None of the employees of the Bank are represented by a collective bargaining group, and management considers its relations and communications with employees to be satisfactory. BANK SUBSIDIARIES AND OTHER ACTIVITIES The Bank has six wholly owned subsidiaries. Those with significant activity include: Northbank Realty, Inc., a Massachusetts corporation incorporated in 1976, owns the Bank's South Peabody branch office and land which it leases to the Bank. Warren Securities Corporation II, a Massachusetts corporation incorporated in 1997, owns investment securities which it received as an equity contribution from the Bank. SAVINGS BANK LIFE INSURANCE The Bank acts as an issuing agent for Savings Bank Life Insurance Company of Massachusetts and earns commissions for selling life insurance and annuities. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES On August 20, 1997, the Corporation's Board of Directors retained Arthur Andersen LLP as its independent public accountants and dismissed the Corporation's former independent public accountants effective September 1, 1997. There were no disagreements with the former auditors on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure at the time of the change or with respect to the Corporation's financial statements for fiscal years 1995 and 1996, which, if not resolved to the former auditors' satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their reports. Prior to retaining Arthur Andersen LLP, the Corporation had not consulted with Arthur Andersen LLP regarding accounting principles. In addition, there were no disagreements with the current independent public accountants on matters of accounting principles or financial statement disclosure. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1998. 28 24 DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION Information pertaining to directors and executive officers is set forth under "Election of a Class of Directors" and "Executive Officers" in the Proxy Statement for the Annual Meeting of the Corporation to be held on May 6, 1998 and is incorporated herein by reference. EXECUTIVE COMPENSATION Information pertaining to executive compensation is set forth under "Executive Compensation" in the Proxy Statement for the Annual Meeting of the Corporation to be held on May 6, 1998 and is incorporated herein by reference. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining to security ownership of management and beneficial owners of more than five percent of the Corporation's common stock is set forth under "Beneficial Ownership of Common Stock" in the Proxy Statement for the Annual Meeting of the Corporation to be held on May 6, 1998 and is incorporated herein by reference. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information pertaining to certain relationships and related transactions is set forth under "Certain Relationships and Related Transactions" in the Proxy Statement for the Annual Meeting of the Corporation to be held on May 6, 1998 and is incorporated herein by reference. 29 25 INDEX TO FINANCIAL STATEMENTS OF WARREN BANCORP, INC. AND SUBSIDIARIES
PAGES ----- Reports of Independent Public Accountants............................................................31-32 Consolidated Balance Sheets at December 31, 1997 and December 31, 1996............................... 33 Consolidated Statements of Operations for the year ended December 31, 1997, 1996 and 1995................................................................... 34 Consolidated Statements of Changes in Stockholders' Equity for the year ended December 31, 1997, 1996 and 1995................................................................... 35 Consolidated Statements of Cash Flows for the year ended December 31, 1997, 1996 and 1995...................................................................36-37 Notes to Consolidated Financial Statements...........................................................38-70
30 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Warren Bancorp, Inc.: We have audited the accompanying consolidated balance sheet of Warren Bancorp, Inc. and subsidiaries (collectively, the Corporation) as of December 31, 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Warren Bancorp, Inc. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts January 20, 1998 31 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Warren Bancorp, Inc.: We have audited the accompanying consolidated balance sheet of Warren Bancorp, Inc. and subsidiaries as of December 31, 1996 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Warren Bancorp, Inc. and subsidiaries as of December 31, 1996 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Boston, Massachusetts January 23, 1997 32 28 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, December 31, 1997 1996 ---- ---- A S S E T S Cash and due from banks (non-interest bearing) (note 11) ............................... $ 7,191 $ 5,855 Money market funds and overnight investments (note 2) .................................. 6,288 6,733 Investment and mortgage-backed securities available for sale (amortized cost of $99,496 at December 31, 1997 and $103,802 at December 31, 1996) (notes 2 and 7).............. 101,698 104,937 Other investments (fair value of $6,534 at December 31, 1997 and $6,918 at December 31, 1996) (note 2) ...................................................... 6,294 6,678 Loans held for sale .................................................................... 1,031 3,003 Loans (notes 3 and 11) ................................................................. 240,763 222,846 Allowance for loan losses (note 3) ..................................................... (4,066) (4,533) --------- --------- Net loans ........................................................................... 236,697 218,313 Banking premises and equipment, net (note 4) ........................................... 4,785 4,604 Accrued interest receivable ............................................................ 2,790 2,660 Real estate acquired by foreclosure .................................................... 2,010 2,230 Other assets (notes 3 and 8) ........................................................... 2,209 3,941 --------- --------- Total assets ........................................................................ $ 370,993 $ 358,954 ========= ========= L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y Liabilities: Deposits (note 6) ................................................................... $ 325,293 $ 316,366 Borrowed funds (note 7) ............................................................. 2,926 4,927 Escrow deposits of borrowers ........................................................ 1,005 1,108 Accrued interest payable ............................................................ 812 632 Accrued expenses and other liabilities (note 8) ..................................... 929 1,476 --------- --------- Total liabilities ................................................................. 330,965 324,509 --------- --------- Commitments and contingencies (notes 4 and 11) Stockholders' equity: (notes 9 and 10) Preferred stock, $.10 par value; Authorized - 10,000,000 shares; Issued and outstanding - none ..................................................... -- -- Common stock, $.10 par value; Authorized - 20,000,000 shares; Issued - 3,904,097 shares at December 31, 1997 and 3,759,567 shares at December 31, 1996 ........................................................... Outstanding - 3,806,097 shares at December 31, 1997 and 3,661,567 shares at December 31, 1996 ............................................................... 390 376 Additional paid-in capital .......................................................... 35,114 34,245 Retained earnings ................................................................... 4,282 260 Treasury stock, at cost, 98,000 shares at December 31, 1997 and 1996 ................ (1,174) (1,174) --------- --------- 38,612 33,707 Net unrealized gain on securities available for sale, net of taxes (note 2).......... 1,416 738 --------- --------- Total stockholders' equity ....................................................... 40,028 34,445 --------- --------- Total liabilities and stockholders' equity ....................................... $ 370,993 $ 358,954 ========= =========
See accompanying notes to consolidated financial statements. 33 29 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- (In thousands, except per-share data) Interest and dividend income: Interest on loans ........................................................... $ 21,248 $ 20,237 $ 20,383 Interest and dividends on investments ....................................... 4,499 4,311 3,683 Interest on mortgage-backed securities ...................................... 2,792 3,233 3,684 -------- -------- -------- Total interest and dividend income ....................................... 28,539 27,781 27,750 -------- -------- -------- Interest expense: Interest on deposits ........................................................ 11,258 11,147 11,093 Interest on borrowed funds .................................................. 146 322 515 -------- -------- -------- Total interest expense ................................................... 11,404 11,469 11,608 -------- -------- -------- Net interest income ...................................................... 17,135 16,312 16,142 Provision for (recovery of) loan losses (note 3)................................ (316) 116 (154) -------- -------- -------- Net interest income after provision for (recovery of) loan losses ........................................................... 17,451 16,196 16,296 -------- -------- -------- Non-interest income: Loan servicing fees ......................................................... 129 613 660 Customer service fees ....................................................... 906 987 1,017 Gains (losses) on sales of investment securities, net (note 2)............... 140 250 (20) Write-down of securities due to other-than-temporary decline in value (note 2) ................................................ -- (25) (364) Gains on sales of mortgage servicing rights.................................. 1,436 -- -- Gains on sales of mortgage loans ............................................ 181 318 630 Gain from termination of pension plan (note 10).............................. 538 -- -- Other ....................................................................... 9 6 126 -------- -------- -------- Total non-interest income ................................................ 3,339 2,149 2,049 -------- -------- -------- Non-interest expenses: Salaries and employee benefits (note 10) ................................... 5,753 5,992 5,577 Office occupancy and equipment .............................................. 1,147 1,080 1,079 Professional services ....................................................... 234 315 475 Marketing ................................................................... 241 201 132 Deposit insurance ........................................................... (39) (83) 384 Real estate operations ...................................................... 409 180 1,305 Outside data processing expense ............................................. 488 436 426 Other ....................................................................... 1,624 1,647 1,625 -------- -------- -------- Total non-interest expenses .............................................. 9,857 9,768 11,003 -------- -------- -------- Income before income taxes .............................................. 10,933 8,577 7,342 Income tax expense (note 8) .................................................... 3,648 1,968 1,960 -------- -------- -------- Net income .............................................................. $ 7,285 $ 6,609 $ 5,382 ======== ======== ======== Basic earnings per share (note 5) ........................................ $ 1.92 $ 1.80 $ 1.50 ======== ======== ======== Diluted earnings per share (note 5) ...................................... $ 1.83 $ 1.69 $ 1.40 ======== ======== ========
See accompanying notes to consolidated financial statements. 34 30 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
UNREALIZED RETAINED GAIN (LOSS) ON ADDITIONAL EARNINGS SECURITIES COMMON PAID-IN (ACCUMULATED AVAILABLE FOR TREASURY STOCK CAPITAL DEFICIT) SALE, NET STOCK TOTAL ------ ---------- ------------ -------------- -------- -------- (DOLLARS IN THOUSANDS) Balance at December 31, 1994 ........ $354 $33,759 ($8,702) ($1,616) $ -- $ 23,795 Net income ....................... -- -- 5,382 -- -- 5,382 Issuance of 92,797 shares for exercise of options and 401(k) benefit plan .................... 10 152 -- -- -- 162 Dividends paid ................... -- -- (1,081) -- (1,081) Change in unrealized loss on securities available for sale, net of taxes .................... -- -- 2,980 -- 2,980 ---- ------- ------- ------- -------- -------- Balance at December 31, 1995 ........ 364 33,911 (4,401) 1,364 -- 31,238 Net income ....................... -- -- 6,609 -- 6,609 Issuance of 122,025 shares for exercise of options.............. 12 334 -- -- -- 346 Dividends paid ................... -- -- (1,948) -- (1,948) Purchase of treasury stock (98,000 shares) ................. -- -- -- -- (1,174) (1,174) Change in unrealized gain on securities available for sale, net of taxes .................... -- -- -- (626) -- (626) ---- ------- ------- ------- -------- -------- Balance at December 31, 1996 ........ 376 34,245 260 738 (1,174) 34,445 Net income ....................... -- -- 7,285 -- -- 7,285 Issuance of 144,530 shares for exercise of options.............. 14 725 -- -- -- 739 Tax benefit of stock options exercised ...................... -- 144 -- -- -- 144 Dividends paid ................... -- -- (3,263) -- -- (3,263) Change in unrealized gain on securities available for sale, net of taxes .................... -- -- -- 678 -- 678 ---- ------- ------- ------- -------- -------- Balance at December 31, 1997......... $390 $35,114 $ 4,282 $ 1,416 ($ 1,174) $ 40,028 ==== ======= ======= ======= ======== ========
See accompanying notes to consolidated financial statements. 35 31 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Cash flows from operating activities: Net Income .................................................................. $ 7,285 $ 6,609 $ 5,382 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (recovery of) loan losses ................................... (316) 116 (154) Depreciation and amortization ............................................. 592 570 578 Tax benefit of stock options exercised .................................... 144 -- -- Deferred income tax expense (benefit) .................................... (210) (391) 617 Amortization (accretion) of premiums, fees and discounts .................. 420 54 (119) (Gains) losses on sale of investment securities ........................... (140) (250) 20 Write-down of securities due to other-than-temporary decline in value ................................................................... -- 25 364 (Gains) on sales of mortgage loans ........................................ (181) (318) (630) Write-down of real estate acquired by foreclosure ......................... 210 138 983 (Gains) on sale of real estate acquired by foreclosure .................... (2) (139) (81) (Increase) decrease in loans held for sale ................................ 1,972 (194) (2,185) (Increase) in accrued interest receivable ................................. (130) (261) (252) (Increase) decrease in other assets ....................................... 1,553 (217) (1,261) Increase in accrued interest payable ...................................... 180 44 25 Increase (decrease) in other liabilities and escrow deposits .............. (650) 774 (406) -------- -------- -------- Net cash provided by operating activities ............................. 10,727 6,560 2,881 -------- -------- -------- Cash flows from investing activities: Net (increase) decrease in money market funds and overnight investments ................................................................ 445 (1,433) (3,300) Purchase of investment securities available for sale ........................ (55,112) (46,347) (26,885) Purchase of mortgage-backed securities available for sale ................... -- (1,911) -- Proceeds from sales of investment securities available for sale ............. 8,987 14,308 13,274 Proceeds from maturities of investment securities available for sale ........ 38,274 26,802 -- Proceeds from sales of mortgage-backed securities available for sale ........ 5,721 -- -- Proceeds from payments of mortgage-backed securities available for sale ........................................................ 8,443 10,381 12,386 Proceeds from sales of real estate acquired by foreclosure .................. 574 1,579 4,684 Capital expenditures for real estate acquired by foreclosure ................ -- -- (71) Net (increase) in loans ..................................................... (20,352) (8,835) (1,645) Purchases of premises and equipment ......................................... (773) (417) (320) -------- -------- -------- Net cash (used in) investing activities ............................... $(13,793) $ (5,873) $ (1,877) -------- -------- --------
36 32 WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS-Continued
Year ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Cash flows from financing activities: (In thousands) Net increase (decrease) in deposits ....................... $ 8,927 $ 1,516 $ (213) Proceeds from Federal Home Loan Bank advances ............. 630 1,045 826 Principal payments on Federal Home Loan Bank advances ..... (2,674) (4,133) (773) Net increase in other borrowed funds ...................... 43 647 713 Dividends paid ............................................ (3,263) (1,948) (1,081) Purchases of treasury stock ............................... -- (1,174) -- Proceeds from issuance of common stock .................... 739 346 162 -------- -------- -------- Net cash provided by (used in) financing activities 4,402 (3,701) (366) -------- -------- -------- Net increase (decrease) in cash and due from banks ........ 1,336 (3,014) 638 Cash and due from banks at beginning of year .............. 5,855 8,869 8,231 -------- -------- -------- Cash and due from banks at end of year .................... $ 7,191 $ 5,855 $ 8,869 ======== ======== ======== Cash paid during the year for: Interest .............................................. $ 11,224 $ 11,425 $ 11,583 Income taxes .......................................... $ 3,924 $ 2,568 $ 2,731 Supplemental noncash investing and financing activities: Foreclosures on real estate ............................ $ 602 $ 719 $ 1,046 Securitization of loans to mortgage-backed securities .. $ 1,903 $ 2,171 $ 7,859
See accompanying notes to consolidated financial statements. 37 33 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The accounting and reporting policies of Warren Bancorp, Inc. (the "Corporation") conform to generally accepted accounting principles and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and income and expense for the periods. Actual results could differ from those estimates. Material estimates that are susceptible to change relate to the determination of the allowance for loan losses, the valuation of real estate acquired by foreclosure and the realizability of the deferred tax asset. In connection with the determination of the allowance for loan losses and the carrying value of real estate acquired by foreclosure, management obtains independent appraisals for significant properties as deemed necessary. A substantial portion of the Corporation's loans are secured by real estate in markets primarily in Massachusetts. All of the real estate acquired by foreclosure is located in the same markets. Accordingly, the ultimate collectibility of a substantial portion of the Corporation's loan portfolio and the recovery of all the real estate acquired by foreclosure is susceptible to changing conditions in these markets. The following is a summary of the more significant accounting policies. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, Warren Five Cents Savings Bank (the "Bank"), and the Bank's wholly owned subsidiaries, The Warren Mortgage Company, Inc., Northbank Realty, Inc., Northbank Financial Corporation, Hannah Investments, Inc., Warren Mortgage Corporation Two, Warren Securities Corporation II and Peabody Development Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts for 1996 and 1995 have been reclassified to conform with the 1997 presentation. LOANS HELD FOR SALE AND SALES OF LOANS Loans held for sale are stated at the lower of aggregate cost or fair value. The fair value of loans held for sale is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Net unrealized losses, if any, are provided for in a valuation allowance by charges to operations. 38 34 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) In years prior to 1997, the Corporation retained servicing on residential mortgages sold. On January 1, 1996 the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights and recognized as separate assets from the related loans the rights to service mortgage loans for others, either through acquisition of those rights or from the sale or securitization of loans with the servicing rights retained on those loans, based on their relative fair values. To determine the fair value of the servicing rights created, the Corporation used the market prices under comparable servicing sale contracts, when available, or alternatively used a valuation model that calculated the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Corporation incorporated assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of the servicing loans, a discount rate, ancillary income, prepayment speeds, and default rates. Originated mortgage loan servicing rights were amortized as a reduction of loan servicing fee income in proportion to and over the period of estimated net servicing income. On a quarterly basis, the Corporation assessed the carrying values of originated and purchased mortgage loan servicing rights for impairment based on the fair value of such rights. The fair value was estimated using market prices when available, or alternatively, using the valuation model referred to above with current assumptions. Any impairment was recognized as a charge to earnings through a valuation allowance. The risk characteristics of the underlying loans used to measure impairment of originated and purchased mortgage loan servicing rights included loan type, interest rate, loan origination date and term to maturity. 39 35 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) When loans are sold, a gain or loss is recognized to the extent that the sale proceeds exceed or are less than their carrying values. Gains and losses are determined using the specific identification method. In years prior to 1997, the Corporation retained servicing on residential and mortgage loans sold, and gains and losses resulting from the sale of loans with servicing retained were adjusted to recognize the present value of differences between the weighted average interest rate on the loans sold, adjusted for a normal servicing fee and guaranty fees, and the agreed yield to the buyer. The resulting excess mortgage servicing rights were amortized as a reduction of servicing fee income, using the effective interest method over the estimated remaining lives of the loans. Actual prepayment experience was reviewed periodically and adjustments were made when appropriate. INVESTMENT AND MORTGAGE-BACKED SECURITIES Debt securities that the Corporation has the positive intent and ability to hold to maturity and non-marketable equity securities are classified as other investments and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either other or trading are classified as available for sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of income taxes. After mortgage loans are converted to mortgage-backed securities, they are subject to these same classification provisions. The Corporation classifies its investment and mortgage-backed securities into two categories: available for sale and other; the Corporation has no securities held for trading. Premium and discounts on investment and mortgage-backed securities are amortized or accreted into income by use of the effective interest method. If a decline in fair value below the amortized cost basis of an investment or mortgage-backed security is judged to be other than temporary, the cost basis of the investment is written down to fair value as a new cost basis and the amount of the write-down is included as a charge against earnings. Gains and losses on the sale of investment and mortgage-backed securities are recognized at the time of sale on a specific identification basis. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is available for future credit losses inherent in the loan portfolio. Additions to the allowance are charged to earnings. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is doubtful. Recoveries on loans previously charged off are credited to the allowance. The allowance is an amount management believes will be adequate to absorb loan losses based on evaluations of known and inherent risks in the portfolio, changes in the nature of the loan portfolio, overall portfolio quality, specific problem loans, prior loss experience and current and anticipated economic conditions that may affect the borrowers' ability to pay. Impaired loans are analyzed and categorized by level of credit risk and collectibility in order to determine their related allowance for loan losses. 40 36 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) Management believes that the allowance for loan losses is adequate, and it is assisted by an independent credit review consulting firm in making that determination. Balances in the allowance for loan losses are determined on a periodic basis by management and the Loan Committee of the Board of Directors with assistance from the independent credit review consulting firm. Loan loss allocations are based on the conditions of each loan, whether performing or nonperforming, including collectibility, collateral adequacy and the general condition of the borrowers, economic conditions, delinquency statistics, market area activity, the risk factors associated with each of the various loan categories and the borrower's adherence to the original terms of the loan. The associated provision for loan losses is the amount required to bring the allowance for loan losses to the balance considered necessary by management at the end of the period after accounting for the effect of loan charge-offs (which decrease the allowance) and loan-loss recoveries (which increase the allowance) during the period. In addition, various regulatory agencies, as part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. IMPAIRED AND NONACCRUAL LOANS The Corporation accounts for impaired loans at the present value of the expected future cash flows discounted at the loans' effective interest rates or the fair value of collateral for collateral-dependent loans. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the allowance for loan losses. Loans are deemed by the Corporation to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Generally, nonaccruing loans are deemed impaired. Large groups of homogeneous loans, such as smaller balance residential mortgage and consumer installment loans, are collectively evaluated for impairment. Typically, the minimum delay in receiving payments according to the contractual terms of the loan that can occur before a loan is considered impaired is ninety days. Nonaccrual loans, which may include impaired loans, are loans on which the accrual of interest has been discontinued. Accrual of interest income on loans is discontinued either when a reasonable doubt exists as to the full, timely collection of principal or interest or when the loans become contractually past due by ninety days or more, unless they are adequately secured and are in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is recognized to the extent that cash is received and where the ultimate collection of principal and interest is probable. Loans are removed from nonaccrual when they become less than ninety days past due and when concern no longer exists as to the collectibility of principal or interest or when they are adequately secured and are in the process of collection. 41 37 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) LOAN FEES Loan origination fees and certain direct incremental loan origination costs are deferred and amortized over the life of the related loans as yield adjustments using primarily the effective interest method. When the loans are sold or paid off, the unamortized fees and costs are recognized as income or expense. BANKING PREMISES AND EQUIPMENT Banking premises, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed principally on the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. REAL ESTATE ACQUIRED BY FORECLOSURE Real estate acquired by foreclosure is comprised of properties acquired through foreclosure proceedings, acceptance of a deed in lieu of foreclosure or by taking possession of collateral and is recorded and subsequently carried at the lower of the carrying value of the loan or the fair value of the property received, less estimated costs of disposition. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Operating expenses and any subsequent write-downs are charged to real estate operations. The Corporation periodically assesses the realizability of its long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Based on its review, the Corporation does not believe that any material impairment of its long-lived assets has occurred. PENSION BENEFITS The Corporation's policy is to record net periodic pension cost on an actuarially determined basis. INCOME TAXES Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 42 38 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) EARNINGS PER SHARE In 1997, the Corporation adopted the provisions of SFAS No. 128, Earnings Per Share. This statement revises the standards for computing and presenting earning per share ("EPS") and applies to entities with publicly held common stock or potential common stock. This statement replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerators and denominators of the basic and diluted EPS computations. This statement also requires a restatement of all prior-period EPS data presented. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," requires the deferral of implementation as it relates to repurchase agreements, dollar-rolls, securities lending and similar transactions until after December 31, 1997. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Management of the Corporation does not expect that adoption of SFAS No. 127 will have a material impact on the Corporation's financial position, results of operations, or liquidity. COMPREHENSIVE INCOME SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. This statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This statement is effective for the Corporation's fiscal year ended December 31, 1998. Reclassification of financial statements for earlier periods provided for comparative purposes is required. 43 39 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (2) INVESTMENT AND MORTGAGE-BACKED SECURITIES Investment and mortgage-backed securities at December 31, 1997 and 1996 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- (IN THOUSANDS) 1997 - ---- Money market funds and overnight investments ..................... $ 6,288 $ -- $ -- $ 6,288 -------- ------- --------- -------- AVAILABLE FOR SALE Fixed income mutual funds .......... 19,009 578 (1) 19,586 FNMA mortgage-backed securities .... 22,537 881 -- 23,418 GNMA mortgage-backed securities .... 7,209 -- (48) 7,161 U.S. Government and related obligations ....................... 10,536 4 (4) 10,536 Corporate notes .................... 32,286 5 (49) 32,242 Preferred stock .................... 7,901 772 -- 8,673 Common stock ....................... 18 64 -- 82 -------- ------- --------- -------- 99,496 2,304 (102) 101,698 -------- ------- --------- -------- OTHER Foreign government bonds held to maturity .................. 500 -- -- 500 Stock in Federal Home Loan Bank of Boston ........................ 4,110 -- -- 4,110 Stock in Depositors Insurance Fund Liquidity Fund ................... 108 -- -- 108 Stock in Savings Bank Life Insurance Company of Massachusetts ......... 1,576 240 -- 1,816 -------- ------- --------- -------- 6,294 240 -- 6,534 -------- ------- --------- -------- $112,078 $ 2,544 $ (102) $114,520 ======== ======= ========= ========
44 40 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED)
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- (IN THOUSANDS) 1996 - ---- Money market funds and overnight investments ..................... $ 6,733 $ -- $ -- $ 6,733 -------- ------- --------- -------- AVAILABLE FOR SALE Fixed income mutual funds .......... 18,990 530 -- 19,520 FNMA mortgage-backed securities .... 27,234 887 -- 28,121 GNMA mortgage-backed securities .... 15,000 -- (391) 14,609 U.S. Government and related obligations ....................... 24,636 10 (35) 24,611 Corporate notes .................... 10,000 3 (3) 10,000 Preferred stock .................... 7,924 122 (8) 8,038 Common stock warrants .............. 18 20 -- 38 -------- ------- --------- -------- 103,802 1,572 (437) 104,937 -------- ------- --------- -------- OTHER Foreign government bonds held to maturity .................. 500 -- -- 500 Stock in Federal Home Loan Bank of Boston ........................ 4,110 -- -- 4,110 Stock in Depositors Insurance Fund Liquidity Fund .................... 108 -- -- 108 Advances to Thrift Institution Fund for Economic Development ......... 384 -- -- 384 Stock in Savings Bank Life Insurance Company of Massachusetts ......... 1,576 240 -- 1,816 -------- ------- --------- -------- 6,678 240 -- 6,918 -------- ------- --------- -------- $117,213 $ 1,812 $ (437) $118,588 ======== ======= ========= ========
In 1997 proceeds from sales of mortgage-backed securities amounted to $5,721,000 and realized losses on such sales were $98,000. There were no sales of mortgage-backed securities in 1997 and 1996. There were no sales of other types of debt securities in 1997 and 1996. In 1995 proceeds from sales of other debt securities were $7,547,000 and realized losses were $24,000. 45 41 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (2) INVESTMENT AND MORTGAGE-BACKED SECURITIES - (CONTINUED) Proceeds from the sales of equity securities were $8,987,000, $14,301,000 and $1,596,000 in 1997, 1996 and 1995, respectively. Realized gains on sales of equity securities were $217,000, $405,000 and $4,000 in 1997, 1996 and 1995, respectively. Realized losses on sales of equity securities were $155,000 in 1996. There were no realized losses on sales of equity securities in 1997 and 1995. Writedowns due to impairment in value of investment securities were $25,000 and $364,000 in 1996 and 1995, respectively. Mortgage-backed securities with an amortized cost and market value of $6,751,000 and $7,021,000, respectively, at December 31, 1997 and $2,487,000 and $2,427,000, respectively, at December 31, 1996 were pledged to secure securities sold under agreements to repurchase. The following table presents a maturity distribution of the amortized cost and fair value of the debt securities portfolio as of December 31, 1997. Adjustable-rate mortgage-backed securities are shown as if the entire balance came due on the repricing date. Estimates are made of fixed-rate, mortgage-backed security amortization and prepayments.
AFTER AFTER ONE FIVE BUT BUT WITHIN WITHIN WITHIN AFTER ONE FIVE TEN TEN YEAR YEARS YEARS YEARS TOTAL ---- ----- ----- ----- ----- (IN THOUSANDS) AVAILABLE FOR SALE - ------------------ Amortized cost ......... $63,874 $ 12,601 $2,363 $ 18 $78,856 ======= ======== ====== ======== ======= Fair Value ............. $62,104 $ 15,105 $2,416 $ 20 $79,645 ======= ======== ====== ======== ======= OTHER (HELD TO MATURITY) Amortized cost ......... $ 250 $ -- $ 250 $ -- $ 500 ======= ======== ====== ======== ======= Fair Value ............. $ 250 $ -- $ 250 $ -- $ 500 ======= ======== ====== ======== =======
The Bank, as a member of the Federal Home Loan Bank of Boston ("FHLBB"), is required to invest in $100 par value stock in the amount of one percent of its outstanding home loans or 1/20th of its outstanding advances from the FHLBB, whichever is higher. As and when such stock is redeemed, the Bank would receive from the FHLBB an amount equal to the par value of the stock. 46 42 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (3) LOANS Loans at December 31 are summarized as follows:
1997 1996 --------- --------- Residential mortgage: (IN THOUSANDS) Adjustable-rate ............ $ 46,255 $ 59,706 Fixed-rate ................. 6,452 6,948 --------- --------- 52,707 66,654 --------- --------- Commercial mortgage: Adjustable-rate ............ 111,971 90,782 Fixed-rate ................. 13,861 16,646 Construction adjustable-rate.......... 19,739 10,742 --------- --------- 145,571 118,170 --------- --------- Commercial loans ............... 22,259 16,458 --------- --------- Consumer loans: Home equity ................ 16,196 16,921 Other ...................... 4,030 4,643 --------- --------- 20,226 21,564 --------- --------- Total loans ................ 240,763 222,846 Allowance for loan losses ...... (4,066) (4,533) --------- --------- Net loans ............ $ 236,697 $ 218,313 ========= =========
Changes in the allowance for loan losses for the years ended December 31 are as follows:
1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Balance at beginning of year ............................................... $ 4,533 $ 4,533 $ 4,789 Provision for (recovery of) loan losses charged (credited) to expense ..................................................... (316) 116 (154) Loans charged off .......................................................... (608) (456) (616) Loan recoveries ............................................................ 457 340 514 ------- ------- ------- Balance at end of year ..................................................... $ 4,066 $ 4,533 $ 4,533 ======= ======= =======
47 43 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (3) LOANS - (CONTINUED) The allowance for loan losses attributable to $921,000 of impaired loans, of which $460,000 is measured using the present value method and $461,000 using the fair value of collateral method, is $179,000. At December 31, 1997 and 1996, the Corporation had net deferred loan fees of $149,000 and $105,000, respectively, reflected as a reduction of the appropriate loan categories. On January 31, 1997, the Corporation sold its rights to service approximately $209 million of residential mortgage loans representing over 95% of the portfolio of loans serviced for others. At December 31, 1997, 1996 and 1995 the Corporation serviced residential loans for investors of approximately $3,983,000, $214,528,000 and $220,428,000, respectively, which are not reflected in the accompanying consolidated financial statements because they are not assets of the Corporation. At December 31, 1997 no formal recourse provisions exist in connection with such servicing. Loans on nonaccrual amounted to $347,000, $2,712,000 and $4,084,000 at December 31, 1997, 1996 and 1995, respectively. Interest income of approximately $21,000, $161,000 and $326,000 would have been recorded in 1997, 1996 and 1995, respectively, on these nonaccrual loans if these loans had been on a current basis in accordance with their original terms. Interest income actually recorded on these nonaccrual loans amounted to $1,000, $38,000 and $162,000 in 1997, 1996 and 1995, respectively. Of those loans on nonaccrual at December 31, 1997, $201,000 was considered impaired compared to $1.9 million at December 31, 1996. At December 31, 1997 and 1996, there were $720,000 and $1.4 million, respectively, of additional loans considered impaired and performing. The Corporation would have recorded additional interest income of approximately $18,000 and $17,000 had these loans performed under their original terms. Interest income actually recorded on these loans amounted to $85,000 and $110,000 as of December 31, 1997 and 1996, respectively. During 1997 and 1996, the average recorded investment in impaired loans was $1.9 million and $2.7 million, respectively. During 1997, the Corporation did not capitalized mortgage-servicing rights from loans sold due to the above-mentioned mortgage-servicing-rights sale. During 1996, $344,000 was capitalized and included in other assets. The balance of capitalized mortgage-servicing rights, net of a valuation allowance, at December 31, 1996 was $682,000 and is included in other assets. Due to the sale of mortgage servicing rights, capitalized mortgage servicing rights were zero at December 31, 1997. Gains on sales of mortgage loans of $181,000 and $318,000 were realized during the 1997 and 1996 periods, respectively, from the sale of $24.4 and $30.2 million of residential mortgage loans. The Corporation's lending activities are conducted throughout eastern Massachusetts with emphasis in Essex County, Massachusetts and contiguous counties, including those in southern New Hampshire. From time to time loans will be made outside of this area. The Bank makes single family, condominium and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. Most loans made by the Bank are collateralized by real 48 44 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (3) LOANS - (CONTINUED) estate. The ability and willingness of the single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity and real estate values within the borrower's geographic area. The ability and willingness of commercial real estate and commercial borrowers to honor their repayment commitments is generally dependent on the health of the real estate economic sector and the general economy in the borrower's geographic area. In the ordinary course of business, the Bank has made loans to executive officers and directors of the Corporation and its subsidiaries and to affiliates of the executive officers and directors at substantially the same terms, including interest and collateral, as those prevailing at the time for comparable transactions with unrelated borrowers. The aggregate amount of these loans at December 31, 1997 was $6,081,000. Activity in these loans during the year ended December 31, 1997 included loan additions of $2,670,000 and loan repayments of $549,000. The balance of these loans at December 31, 1996 was $3,960,000. (4) BANKING PREMISES AND EQUIPMENT Banking premises and equipment at December 31 are as follows:
1997 1996 ---- ---- (IN THOUSANDS) Land...................................................... $ 1,186 $ 1,186 Buildings................................................. 4,505 3,925 Equipment................................................. 3,863 3,698 Leasehold improvements.................................... 1,251 1,235 ------- ------- 10,805 10,044 Accumulated depreciation and amortization................. (6,020) (5,440) ------- ------- $ 4,785 $ 4,604 ======= =======
Depreciation and amortization expense related to the Corporation's premises and equipment were $592,000, $570,000, and $578,000 in 1997, 1996 and 1995, respectively. At December 31, 1997, the Bank is obligated, under noncancelable operating leases for premises, for minimum rentals in future periods as follows:
YEAR ENDED DECEMBER 31, MINIMUM RENTALS - ----------------------- --------------- (IN THOUSANDS) 1998.............................................. $130 1999.............................................. 120 2000.............................................. 90 2001.............................................. 89 2002.............................................. 89 Thereafter........................................ 327 ---- $845 ====
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to approximately $138,000, $111,000 and $111,000, respectively. 49 45 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (5) EARNINGS PER SHARE In 1998, the Corporation adopted the provisions of SFAS No. 128, "Earnings Per Share." Prior year 1996 and 1995 earnings-per-share data have been restated to conform to SFAS No. 128. The components of basic and diluted EPS for the years ended 1997, 1996 and 1995 are as follows:
NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE --------------------------------------------------------------------------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 --------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) Basic EPS................ $7,285 $6,609 $5,382 3,785 3,671 3,585 $1.92 $1.80 $1.50 Effect of dilutive stock options......... -- -- -- 202 245 252 0.09 0.11 0.10 ------ ------ ------ ----- ----- ----- ----- ----- ----- Diluted EPS.............. $7,285 $6,609 $5,382 3,987 3,916 3,837 $1.83 $1.69 $1.40 ====== ====== ====== ===== ===== ===== ===== ===== =====
Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. The effect of this accounting change on previously reported EPS data is as follows:
1996 1995 ---- ---- Per Share Amounts: Primary EPS as previously reported................. $1.67 $1.39 Effect of SFAS No. 128............................. 0.13 0.11 ----- ----- Basic EPS as restated.............................. $1.80 $1.50 ===== =====
(6) DEPOSITS Deposits at December 31 are summarized as follows:
1997 1996 -------- -------- (IN THOUSANDS) Non-interest bearing ........................................ $ 16,269 $ 17,002 -------- -------- Savings deposits: Regular savings and club accounts ....................... 100,377 106,092 NOW accounts ............................................ 33,787 31,943 Cash Manager and Passbook Plus accounts ................. 29,236 24,065 -------- -------- Total savings deposits .................................. 163,400 162,100 Time deposits ............................................... 145,624 137,264 -------- -------- Total deposits .......................................... $325,293 $316,366 ======== ========
Contractual maturities of time deposits at December 31, 1997 follow:
(IN THOUSANDS) Within one year............................................. $ 102,117 From one to two years....................................... 24,994 From two to five years...................................... 18,504 After five years............................................ 9 ------------ $145,624 ============
50 46 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (6) DEPOSITS - (CONTINUED) The aggregate amount of individual time deposits with a minimum denomination of $100,000 or more was $21,585,000 and $16,717,000 at December 31, 1997 and 1996, respectively. Interest expense related to such deposits was approximately $1,010,000 in 1997 and $926,000 in 1996 and $1,036,000 in 1995. (7) BORROWED FUNDS Borrowed funds at December 31 are summarized as follows:
1997 1996 ------------------------ ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE -------- -------- ------ -------- (DOLLARS IN THOUSANDS) Securities sold under agreements to repurchase maturing in January, 1998 and January, 1997, at December 31, 1997 and 1996, respectively................... $ 2,255 3.00% $2,212 3.00% Advances from the Federal Home Loan Bank, 3.07% to 6.00% at December 31, 1997 and 3.07% to 8.10% at December 31, 1996, maturing through 2011...................................... 671 5.74 2,715 7.47 -------- ------- Total borrowed funds.......................... $ 2,926 3.63% $ 4,927 5.46% ======== =======
Mortgage-backed securities, with a total amortized cost of $6,751,000 and $2,487,000 were pledged as collateral to secure agreements to repurchase at December 31, 1997 and 1996, respectively. The fair value of the collateral was $7,021,000 and $2,427,000 at December 31, 1997 and 1996, respectively. The following table sets forth information for securities sold under agreement to repurchase for the years ended December 31, 1997, 1996 and 1995 (dollars in thousands):
1997 1996 1995 ------ ------ ------ Highest month end balance ........... $3,652 $2,212 $1,774 Weighted average balance outstanding during the year .................. 2,282 1,664 1,171 Average interest rate during the year .................. 3.00% 3.00% 3.00%
51 47 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (7) BORROWED FUNDS - (CONTINUED) A summary of Federal Home Loan Bank of Boston advances at December 31 by year of maturity follows (dollars in thousands):
1997 1996 ------------------------------- ------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE MATURITY IN: AMOUNT RATE AMOUNT RATE ------ ---- ------ ---- 1997 $ -- --% $2,044 8.03% 2001 14 3.78 14 3.78 2003 19 3.07 19 3.07 2009 450 6.00 450 6.00 2011 188 5.54 188 5.54 ----- ------ $ 671 5.74% $2,715 7.47% ===== ======
The following table sets forth information for Federal Home Loan Bank advances for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- (DOLLARS IN THOUSANDS) Highest month end balance......................................... $2,715 $5,822 $5,803 Weighted average balance outstanding during the year...................................................... 989 3,208 5,627 Average interest rate during the year............................. 7.01% 7.95% 8.34%
52 48 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (8) INCOME TAXES The components of income tax expense for the years ended December 31, were as follows:
1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Current: Federal .................................................................... $ 3,198 $ 1,693 $ 1,140 State ...................................................................... 660 666 203 ------- ------- ------- 3,858 2,359 1,343 ------- ------- ------- Deferred: Federal .................................................................... 133 (155) 1,143 State ...................................................................... (58) (260) 310 Increase (decrease) in beginning-of-the-year balance of valuation allowance for deferred tax assets ......................... (285) 24 (836) ------- ------- ------- (210) (391) 617 ------- ------- ------- $ 3,648 $ 1,968 $ 1,960 ======= ======= =======
A reconciliation of income tax expense attributable to operations with Federal income taxes at the statutory rate of 34% for the years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Computed "expected" tax expense at statutory rate .............................................................. $ 3,716 $ 2,916 $ 2,496 Items affecting income tax expense: Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense ....................................................... (285) 24 (836) Dividends received deduction ............................................... (134) (139) (54) State income taxes, net of Federal income tax benefit, before change in valuation allowance ................................................................. 384 268 339 Adjustment to beginning deferred tax asset ................................. -- 20 -- Other ...................................................................... (33) 164 15 Bad debts .................................................................. -- (885) -- Tax audit settlement ...................................................... -- (400) -- ------- ------- ------- Income tax expense ..................................................... $ 3,648 $ 1,968 $ 1,960 ======= ======= =======
53 49 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (8) INCOME TAXES - (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ------- ------- (IN THOUSANDS) Deferred tax assets: Net operating loss and other carryforwards .......................... $ 13 $ 15 Capital loss carryforward ........................................... -- 63 Allowance for loan losses ........................................... 2,153 2,660 Valuation adjustments on real estate owned .......................... 152 66 Valuation adjustments on securities ................................. 372 632 Deferred loan fees .................................................. 81 61 Deferred directors' fees ............................................ 60 41 Cash versus accrual adjustments ..................................... 350 252 Depreciation of banking premises and equipment ...................... 143 142 Basis difference on REO ............................................. 213 198 ------- ------- Total gross deferred tax assets .................................. 3,537 4,130 Less valuation allowance ...................................... (62) (347) ------- ------- Net deferred tax assets ...................................... 3,475 3,783 ------- ------- Deferred tax liabilities: Deferred loan sale premium .......................................... -- 308 Purchase accounting adjustments ..................................... 688 711 Gain on distribution of SBLI stock .................................. 550 550 Accounting for partnership interests ................................ 512 509 Unrealized gains on debt and equity securities available for sale ............................................... 785 397 Prepaid retirement .................................................. -- 301 Other ............................................................... 198 27 ------- ------- Total gross deferred tax liabilities ......................... 2,733 2,803 ------- ------- Net deferred tax asset ....................................... $ 742 $ 980 ======= =======
A valuation allowance is provided when it is more likely than not that some portion of the gross deferred tax asset will not be realized. Management has established a valuation allowance principally for the state tax effects of the valuation adjustments on securities. The Corporation has certain tax bad debt reserves which will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the tax bad debt reserves continues to be subject to a provision of the current law that requires recapture 54 50 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (8) INCOME TAXES - (CONTINUED) in the case of certain excess distributions to shareholders. The tax effect of the tax bad debt reserves subject to recapture in the case of certain excess distributions is approximately $885,000. (9) STOCKHOLDERS' EQUITY CAPITAL ADEQUACY The Corporation is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Federal Reserve Board's ("FRB") leverage capital-to-assets guidelines require the strongest and most highly rated bank holding companies to maintain a 3.00% ratio of Tier I capital to average consolidated assets. All other bank holding companies are required to maintain at least 4.00% to 5.00% depending on how the FRB evaluates their condition. The FRB may require a higher capital ratio. The FDIC's leverage capital-to-assets ratio guidelines on the Bank are substantively similar to those adopted by the FRB described above. The FRB and the FDIC have also imposed risk-based capital requirements on the Corporation and the Bank, respectively, which give different risk weightings to assets and to off-balance sheet assets such as loan commitments and loans sold with recourse. Both the FRB and FDIC guidelines require the Corporation and the Bank to have a 4.00% Tier I risk-based capital ratio and an 8.00% total risk-based capital ratio. At December 31, 1997, neither the FRB nor the FDIC permitted the unrealized gain on marketable securities available for sale to be used in their calculation of regulatory capital. As of December 31, 1997, the most recent notification from the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would cause a change in the Bank's categorization. 55 51 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (9) STOCKHOLDERS' EQUITY - (CONTINUED) The Corporation's and the Bank's actual regulatory capital amounts (for purposes of computing the ratios) and ratios at December 31, 1997 and 1996 are presented in the following table (dollars in thousands):.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY ACTION PROVISIONS ------ -------- ----------------- REGULATORY CAPITAL REGULATORY CAPITAL REGULATORY CAPITAL CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO ------- ----- ------- ----- ------- ----- 1997 - ---- WARREN BANCORP, INC. Leverage capital $38,612 10.58% $14,600 4.0% N/A N/A Tier I Risk-based capital 38,612 12.90% 11,977 4.0% N/A N/A Total Risk-based capital 42,379 14.15% 23,955 8.0% N/A N/A WARREN FIVE CENTS SAVINGS BANK Leverage capital 33,655 9.22% 10,951 3.0% $18,250 5.0% Tier I Risk-based capital 33,655 11.29% 11,926 4.0% 17,889 6.0% Total Risk-based capital 37,386 12.54% 23,852 8.0% 29,816 10.0% =================================================================================================================================== 1996 - ---- WARREN BANCORP, INC. Leverage capital $33,707 9.48% $14,219 4.0% N/A N/A Tier I Risk-based capital 33,707 13.47% 10,008 4.0% N/A N/A Total Risk-based capital 36,852 14.72% 20,106 8.0% N/A N/A WARREN FIVE CENTS SAVINGS BANK Leverage capital 32,495 9.14% 14,219 4.0% $17,773 5.0% Tier I Risk-based capital 32,495 13.02% 9,985 4.0% 14,977 6.0% Total Risk-based capital 35,633 14.28% 19,969 8.0% 24,962 10.0%
56 52 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (9) STOCKHOLDERS' EQUITY - (CONTINUED) PREFERRED STOCK PURCHASE RIGHTS In April 1989, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right for each outstanding share of the Corporation's common stock. These rights, which expire in 1999, entitle their holders to purchase from the Corporation one one-hundredth of a share (a "unit") of Series A Junior Participating Cumulative Preferred Stock, par value $0.10 per share, ("preferred stock") at a cash exercise price of $35 per unit, subject to adjustment. The rights will trade separately from the common stock and will become exercisable when a person or group has acquired 20% or more of the outstanding common stock, upon a tender offer that would result in a person or group acquiring 20% or more of the outstanding common stock, or upon the declaration by the Board of Directors that any person is an "adverse person" holding 10% or more of the outstanding stock. In the event a person or group acquires 20% or more of the outstanding common stock or the Board of Directors declares a person an "adverse person", each right would entitle its holder (except if the holder is a person or group described above) to receive upon exercise sufficient units of preferred stock to equal a value of two times the exercise price of the purchase right. In the event the Corporation is acquired in a merger or other business combination transaction or if 50% or more of the Corporation's assets or earning power is sold, each holder may receive upon exercise common stock of the acquiring company with a value equal to two times the exercise price of the right. The rights are redeemable by the Board of Directors at a price of $.02 per right any time before a person or group acquires 20% or more of the outstanding common stock or the Board of Directors declares a person is an "adverse person". RETAINED EARNINGS At the time of the Bank's conversion from mutual to stock form of ownership in 1986, the Bank established a liquidation account for the benefit of eligible account holders who continue to maintain their accounts in the Bank after the Conversion. Liquidation subaccounts totaling $12,340,000 were established for each such eligible account holder equal to such holder's proportionate share of total qualifying deposits on February 28, 1986. After the acquisition of Beverly Savings Bank ("Beverly"), the Bank established a separate liquidation account for the benefit of eligible account holders of Beverly who continue to maintain their account after Beverly's conversion from mutual to stock form of ownership and the subsequent Beverly acquisition, and subaccounts for each such holder based on such holder's proportionate share of Beverly's total qualifying assets on April 30, 1986. The balance in the two liquidation accounts at December 31, 1997, the latest measurement date, was $1,970,000 (unaudited). Both liquidation accounts will be reduced to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in his liquidation subaccount. In the event of a complete liquidation of the Bank, and in only such event, each eligible account holder will be entitled to receive a distribution from the liquidation accounts equal to the current adjusted qualifying balance of his subaccount, to the extent of the Bank's assets remaining after payment of all prior claims. The Bank may not declare or pay a dividend to the holding company if the effect thereof would reduce capital below regulatory minimums or otherwise violate banking regulations. 57 53 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (10) EMPLOYEE BENEFITS 401(k) SAVINGS PLAN The Bank provides a 401(k) Savings Plan for the benefit of its employees. Under this defined-contribution plan, the Corporation contributes 3% of each eligible employee's W-2 compensation to his or her 401(k) account. In addition, the Corporation matches employee contributions, up to 8% of the employee's compensation, at a rate of 25%. The Corporation may also make a profit-sharing distribution to employees' 401(k) accounts. The plan is administered by a third party. Contribution rates are subject to change. The Corporation's contributions to the plan charged to operations were as follows (in thousands):
1997 1996 1995 ---- ---- ---- Employer contribution ..... $136 $136 $132 Employer match ............ 58 60 56 Profit sharing distribution ........... -- 159 130 ---- ---- ---- $194 $355 $318 ==== ==== ====
One of the investment alternatives for the plan's participants is Warren Bancorp, Inc. common stock. In that regard, the Corporation reserved 135,000 shares of authorized but unissued shares for issuance thereunder. TERMINATION OF PENSION PLAN As of October 1, 1997, the Bank terminated its defined-benefit, non-contributory pension plan administered by the Savings Bank Employees Retirement Association ("SBERA") . In conjunction with the 401(k) Savings Plan, the Corporation restructured the pension plan and, effective September 30, 1993, stopped providing new pension benefits for employee services after that date. The funded status of the plan and the amounts recognized in the Corporation's financial statements at December 31, 1996, was as follows (in thousands): Actuarial present value of benefit obligations: Vested benefit obligations .......................... $ 2,746 Nonvested benefit obligations ....................... -- ------- Accumulated benefit obligations ..................... 2,746 Additional benefit related to future compensation ... -- ------- Projected benefit obligation ........................ 2,746 Plan assets at fair value, invested primarily in U.S. Government obligations and equity securities ........ 5,587 ------- Plan assets in excess of projected benefit obligation ........................................ 2,841 Unrecognized net gain .................................... (1,853) Unrecognized net asset existing at December 31, 1986 and remaining at year end ......................... (124) ------- Prepaid pension cost .......................... $ 864 =======
58 54 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (10) EMPLOYEE BENEFITS - (CONTINUED) There was no prepaid or accrued pension cost at December 31, 1997. Net pension expense for the plan years ended December 31 includes the following:
1997* 1996 1995 ----- ----- ----- (IN THOUSANDS) Current period service costs ............................................. $-- $-- $-- Interest costs on projected benefit obligations .......................... 154 229 220 Return on plan assets .................................................... (366) (745) (843) Net amortization and deferral ............................................ (77) 260 (411) Provision for Federal excise tax ......................................... 43 38 32 ----- ----- ----- Net periodic pension (income) ......................................... $(246) $(218) $(180) ===== ===== =====
* Through October 1, 1997, the date the plan was terminated. 59 55 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (10) EMPLOYEE BENEFITS - (CONTINUED) The key assumptions used in the development of the actuarially determined pension data for 1997 and 1996 were a discount rate of 7.50% and 7.00%, respectively and an expected long-term rate of return on plan assets of 8.75% for both years To terminate the plan, SBERA made distributions to participants computed using interest-rate and actuarial assumptions prescribed by the Pension Benefit Guarantee Corporation. Net proceeds to the Corporation after distributions to participants were $2,547,000. The Corporation set aside 25% of these proceeds, or $637,000, into the 401(k) plan for the benefit of current employees to be distributed into employees' individual 410(k) accounts on January of 1998, 1999 and 2000 as a special profit-sharing distribution. The Corporation also paid a federal excise tax of $382,000 in conjunction with the termination of the plan. The gain on termination of pension plan of $538,000 is computed as follows (in thousands): Total pension asset after distribution to participants.......................... $2,547 25% setaside for current employees.............................................. (637) ------ Net.................................................................... $1,910 20% federal excise tax.......................................................... (382) ------ Net.................................................................... $1,528 Prepaid pension cost at date of termination..................................... $1,153 Accrued federal excise tax liability at date of termination..................... (173) ------ Net prepaid pension asset.............................................. (980) Costs associated with termination............................................... (10) ------ Net gain on termination of pension plan................................ $ 538 =======
SUPPLEMENTAL RETIREMENT ARRANGEMENT Effective July 1, 1995, the Bank established a supplemental retirement benefit arrangement for the former Chief Executive Officer. The expense to maintain that arrangement amounted to $168,000 in 1997 and $164,000 in 1996. Included in the accompanying balance sheet are accrued expenses of $234,000 and $135,000 at December 31, 1997 and 1996, respectively. The arrangement is being partially funded by a life insurance policy. STOCK OPTION PLAN The Corporation instituted three stock option plans, one each in 1986, 1991 and 1995 (the "Option Plans"), for the benefit of officers and directors and reserved 300,000 shares of authorized but unissued common stock for each plan of issuance thereunder. The terms of the Option Plans are similar and provide for options to be granted at the fair market value of the common stock on the date of grant. Options granted expire ten years after the date for grant. As permitted under SFAS 123, the Corporation continues to apply APB Opinion No. 25 and related interpretations in accounting for the Option Plans; therefore, no compensation cost has been recognized. 60 56 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (10) EMPLOYEE BENEFITS - (CONTINUED) Under SFAS No. 123, the Corporation's net income and earnings per share would have been reduced to the pro-forma amounts indicated below;
1997 1996 1995 ---- ---- ---- Net income: As reported......... $7,285,000 $6,609,000 $5,382,000 Pro-forma.......... . $7,013,000 $6,450,000 $5,281,000 Basic earnings per share: As reported......... $1.92 $1.80 $1.50 Pro-forma........... $1.85 $1.76 $1.47 Diluted earnings per share: As reported......... $1.83 $1.69 $1.40 Pro-forma........... $1.76 $1.65 $1.38
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 3.72%, 3.61% and 4.96%; expected volatility of 34%, 32% and 38%; risk-free interest rates of 6.6%, 6.6% and 6.5%; and expected lives of six years for 1997, 1996 and 1995. The weighted average grant-date fair value per share of stock options issued in 1997, 1996 and 1995 were $4.54, $2.86 and $1.81, respectively. Changes in options outstanding during 1997, 1996 and 1995 were as follows:
AVERAGE EXERCISE EXERCISE PRICE PRICE PER SHARES RANGE PER SHARE SHARE ------ --------------- ----- Outstanding, December 31, 1994................................ 556,600 $0.50 to $ 8.00 $4.61 (317,100 shares exercisable) Granted during 1995........................................... 96,800 $8.1875 to $10.25 $8.30 Exercised during 1995......................................... (90,100) $1.00 to $6.625 $1.65 Canceled during 1995.......................................... (1,560) $3.625 to $6.625 $5.47 -------- Outstanding, December 31, 1995................................ 561,740 $0.50 to $10.25 $5.72 (347,893 shares exercisable) Granted during 1996........................................... 95,550 $12.375 to $15.125 $12.52 Exercised during 1996......................................... (122,025) $ .50 to $8.188 $2.84 Canceled during 1996.......................................... (18,590) $3.625 to $12.375 $8.83 -------- Outstanding, December 31, 1996................................ 516,675 $1.00 to $15.125 $7.50 (330,285 shares exercisable) Granted during 1997........................................... 102,500 $15.125 to $15.75 $15.73 Exercised during 1997......................................... (144,530) $1.00 to $12.375 $5.10 Canceled during 1997.......................................... (5,540) $8.00 to $15.75 $10.93 -------- Outstanding, December 31, 1997................................ 469,105 $1.00 to $15.75 $9.99 ========= (282,175 shares exercisable)
61 57 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (10) EMPLOYEE BENEFITS - (CONTINUED) The following table summarizes information about the options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE ------ ------ ---- ----- ------ ----- $0 - $5 33,820 3.80 $3.08 33,820 $3.08 5 - 10 244,675 5.61 7.67 191,775 7.54 10 - 15 83,910 7.73 12.30 34,080 12.26 16 - 20 106,700 9.33 15.70 22,500 15.68 ------- ------- Total 469,105 6.70 9.99 282,175 8.22 ======= =======
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND CONTINGENT LIABILITIES The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations of interest rates. These financial instruments include commitments to originate loans, unused lines of credit, standby letters of credit, recourse arrangements on sold assets and forward commitments to sell loans. The financial instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward commitments to sell loans, the contract or notional amounts do not represent exposure to credit loss. The Corporation controls the credit risk on its forward commitments through credit approvals, limits and monitoring procedures. 62 58 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND CONTINGENT LIABILITIES - (CONTINUED) Financial instruments with off-balance sheet risk at December 31 are as follows:
CONTRACT AMOUNT --------------------- (IN THOUSANDS) 1997 1996 ---- ---- Financial Instruments Whose Contract Amounts Represent Credit Risk: Commitments to originate loans.............................................. $ 7,672 $ 4,278 Unused lines of credit...................................................... 26,450 25,209 Standby letters of credit................................................... 1,836 1,179 Unadvanced portions of construction loans................................... 16,974 13,307 Loans sold with recourse.................................................... 2,217 2,504 Financial Instruments Whose Contract Amounts Exceed the Amount of Credit Risk: Forward commitments to sell loans........................................... $3,795 $1,526
Commitments to originate loans, unused lines of credit, and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include single family houses, inventory, property, plant and equipment, and income-producing properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that in extending loan facilities to customers. Forward commitments to sell loans are contracts which the Corporation enters into for the purpose of reducing the interest rate risk associated with originating loans for sale. In order to fulfill a forward commitment, the Corporation typically receives cash to be exchanged for the loans at a specified price at a future date agreed to by both parties. Risk may arise from the possible inability of the Corporation to deliver the loans specified on the commitment. Unrealized gains and losses on contracts used to hedge the Corporation's closed loans and pipeline of loans expected to close are considered in determining the lower of cost or market value of loans held for sale. 63 59 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS, AND CONTINGENT LIABILITIES - (CONTINUED) A portion of the Bank's loans were sold with recourse in the event of default by the borrower. These transactions were recorded as a sale of assets for financial reporting purposes. As a nonmember of the Federal Reserve System, the Corporation is required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement included in cash and due from banks was $1.2 million at December 31, 1997. There are no legal claims against the Corporation arising in the normal course of business at December 31, 1997. (12) WARREN BANCORP, INC. (PARENT COMPANY ONLY) The condensed information of Warren Bancorp, Inc. is as follows:
BALANCE SHEETS: AT DECEMBER 31, --------------------- 1997 1996 ---- ---- (IN THOUSANDS) ASSETS Cash.............................................................. $ 5,013 $ 1,231 Investment in subsidiary.......................................... 35,071 33,233 Other assets...................................................... 101 115 --------- --------- Total assets................................................. $ 40,185 $ 34,579 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accrued expenses............................................... $ 157 $ 134 --------- --------- Total liabilities.......................................... 157 134 Stockholders' equity.............................................. 40,028 34,445 --------- --------- Total liabilities and stockholders' equity................. $ 40,185 $ 34,579 ========= =========
64 60 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (12) WARREN BANCORP, INC. (PARENT COMPANY ONLY) - (CONTINUED)
STATEMENTS OF OPERATIONS: YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Income: Dividend income from subsidiary .............................. $ 6,296 $ 3,850 $ 1,081 Interest ..................................................... 13 -- -- Management fees .............................................. 81 89 106 ------- ------- ------- Total operating income ................................ 6,390 3,939 1,187 Expenses: Other expenses .............................................. (81) (89) (106) Income tax expense .......................................... (21) (13) -- Equity in undistributed net income of subsidiary ................ 997 2,772 4,301 ------- ------- ------- Net income ...................................................... $ 7,285 $ 6,609 $ 5,382 ======= ======= =======
The parent-company-only statements of changes in stockholders' equity are identical to the consolidated statement of changes in stockholders' equity for the three year period ended December 31, 1997 and therefore are not reprinted here.
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Cash flows from operating activities: Net income .............................................................. $ 7,285 $ 6,609 $ 5,382 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of Bank subsidiary ........................................................ (997) (2,772) (4,301) (Increase) decrease in other assets .................................. 14 12 (122) Increase (decrease) in liabilities ................................... 4 (11) 147 ------- ------- ------- Net cash provided by operating activities ......................... 6,306 3,838 1,106 ------- ------- ------- Cash flows from investing activities: Capital contribution to subsidiary ...................................... -- -- (23) ------- ------- ------- Net cash (used in) investing activities .......................... -- -- (23) ------- ------- ------- Cash flows from financing activities: Dividends paid .......................................................... (3,263) (1,948) (1,081) Purchase of treasury stock .............................................. -- (1,174) -- Proceeds from issuance of common stock .................................. 739 346 162 ------- ------- ------- Net cash (used in) financing activities .......................... (2,524) (2,776) (919) ------- ------- ------- Increase in cash and cash equivalents ...................................... 3,782 1,062 164 Cash and cash equivalents at beginning of year ............................. 1,231 169 5 ------- ------- ------- Cash and cash equivalents at end of year ................................... $ 5,013 $ 1,231 169 ======= ======= =======
65 61 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED 1997 ----------------------- DECEMBER SEPTEMBER JUNE MARCH 31 30 30 31 -------- -------- ----- ----- (TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA) Interest and dividend income......................... $7,317 $7,121 $7,180 $ 6,921 Interest expense..................................... 2,938 2,870 2,789 2,807 ----- ----- -------- ------- Net interest income............................... 4,379 4,251 4,391 4,114 Provision for (recovery of) loan losses.............. 48 (126) (198) (40) -------- -------- -------- ------- Net interest income after provision for loan losses................................. 4,331 4,377 4,589 4,154 Non-interest income (1)............................. 385 760 228 1,966 Non-interest expense (2)............................ 2,463 2,272 2,374 2,748 -------- -------- -------- ------- Income before income taxes........................ 2,253 2,865 2,443 3,372 Income tax expense................................... 760 1,161 819 908 -------- -------- -------- ------- Net income ................................ $ 1,493 $ 1,704 $ 1,624 $ 2,464 ======== ======== ======== ======= Basic earnings per share:............................ $ 0.39 $ 0.45 $ 0.43 $ 0.67 ======== ======== ======== ======= Diluted earnings per share: ......................... $ 0.37 $ 0.43 $ 0.41 $ 0.63 ======== ======== ======== =======
- ------------- (1) Non-interest income includes gains (loss) on sale mortgage servicing rights, $1,462,000, $(55,000), $29,000 and none for the three months ended March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997, respectively. Gains on sales of investment securities, net, were $99,000, $21,000 and $20,000 for the three months ended March 31, 1997, September 30, 1997 and December 31, 1997, respectively. Gains from termination of pension plan were $457,000 and $81,000 for the three months ended September 30, 1997 and December 31, 1997, respectively. (2) Non-interest expense includes real estate operations expense of $343,000, $30,000, $17,000 and $19,000 for the three months ended March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997, respectively. 66 62 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - (CONTINUED)
THREE MONTHS ENDED 1996 ----------------------- DECEMBER SEPTEMBER JUNE MARCH 31 30 30 31 -------- --------- ----- ------ (TABLE IN THOUSANDS, EXCEPT PER-SHARE DATA) Interest and dividend income......................... $6,939 $ 6,914 $ 6,956 $ 6,972 Interest expense..................................... 2,887 2,386 2,819 2,927 -------- -------- -------- ------- Net interest income............................... 4,052 4,078 4,137 4,045 Provision for (recovery of) loan losses.............. 99 (141) 23 135 -------- -------- -------- ------- Net interest income after provision for loan losses................................. 3,953 4,219 4,114 3,910 Non-interest income (1)............................. 412 563 561 638 Non-interest expense................................. 2,711 2,382 2,298 2,402 -------- -------- -------- ------- Income before income taxes........................ 1,654 2,400 2,377 2,146 Income tax expense (benefit) (2)..................... (297) 821 927 517 -------- -------- -------- ------- Net income ................................ $ 1,951 $ 1,579 $ 1,450 $ 1,629 ======== ======== ======== ======= Basic earnings per share:............................ $ 0.53 $ 0.43 $ 0.39 $ 0.44 ======== ======== ======== ======= Diluted earnings per share: ......................... $ 0.50 $ 0.41 $ 0.37 $ 0.42 ======== ======== ======== =======
- ------------- (1) Non-interest income includes gains on sale of mortgage loans and mortgage servicing rights, net, of $50,000, $132,000, $76,000 and $60,000 for the three months ended March 31, 1996, June 30, 1996, September 30, 1996 and December 31, 1996, respectively. Gains on sales of investment securities, net, were $201,000, $40,000 and $9,000 for the three months ended March 31, 1996, June 30, 1996 and December 31, 1996, respectively. There were no gains or losses on sales of investment securities for the three months ended September 30, 1996. (2) Includes income tax benefits of $400,000 and $760,000 for the three months ended March 31, 1996 and December 31, 1996, respectively. Basic and diluted earnings per share may not accumulate to annual amounts due to changes in average common shares and common-equivalent shares outstanding during the year and rounding. 67 63 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (14) FAIR VALUE OF FINANCIAL INSTRUMENTS The Corporation estimates the fair value of its financial instruments at a discrete point in time based on relevant market information and information about the financial instruments. Because no active market exists for a portion of those financial instruments, fair value estimates are based on judgment regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. CASH AND DUE FROM BANKS, ACCRUED INTEREST RECEIVABLE, ACCRUED INTEREST PAYABLE AND OTHER BORROWED FUNDS Cash and due from banks, accrued interest receivable, accrued interest payable, and other borrowed funds are short-term in nature and are not subject to material interest rate changes which would result in a material difference between fair value and book value. In addition, an adjustment to fair value for credit risk is not considered necessary because of the current financial status of the various counterparties. The book value of these financial instruments is representative of their fair value. INVESTMENT SECURITIES U.S. Treasury and Government Agency securities, mortgage-backed securities, money market funds and overnight investments, fixed income mutual funds and common and preferred stock are actively traded in a secondary market. Published investment securities market values are used as fair value for most of these securities. Refer to Note 2 for the fair value of these securities. Stock in the Federal Home Loan Bank and the Depositors Insurance Fund Liquidity Fund and advances to the Thrift Institution Fund for Economic Development are not traded in a secondary market. Based upon the characteristics of these securities, however, book value is a reasonable estimate of fair value. The fair value of stock in SBLI is based upon its most recent appraisal. LOANS Fair value of loans is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, commercial real estate, commercial, and consumer. The fair value of fixed-rate residential mortgage loans is primarily based upon secondary market rates for mortgage-backed securities consisting of mortgages similar in nature to the loans included in the Bank's residential mortgage loan portfolio. The fair value of all other types of loans is estimated by discounting contractual cash flows using estimated market discount rates which reflect the interest rate and credit risk inherent in the loans. The discount rate used in the fair value estimation reflects rates that are available to customers who meet the Bank's underwriting standards. 68 64 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (14) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED) Management has made estimates of fair value of loans that it believes are reasonable. However, because there is no market for many of the types of loans, management has no basis to determine whether the fair value presented would be indicative of the value negotiated in an actual sale. DEPOSIT LIABILITIES AND ESCROW DEPOSITS OF BORROWERS The fair value of deposits with no stated maturity such as savings deposits, non-interest deposits and escrow deposits of borrowers is equal to the book value of these accounts. The fair value of time deposits (including retirement time deposits) is based upon the discounted value of contractual cash flows. The discount rate has been estimated using the rates offered for deposits of a similar remaining maturity as of December 31, 1997 and 1996. Early withdrawal assumptions, based on the Bank's experience, do not materially affect the estimation of fair value. FEDERAL HOME LOAN BANK ADVANCES The fair value of Federal Home Loan Bank advances is based upon the discounted value of contractual cash flows. The discount rate is estimated using the rates for advances of a similar remaining maturity as of December 31, 1997 and 1996. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The fair value of the Corporation's commitments to extend credit is estimated using fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of the Corporation's commitments to sell loans is based on current market prices. At December 31, 1997 and 1996, management has estimated the fair values of these financial instruments to be immaterial. 69 65 WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995 (14) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED) The estimated fair values of the Corporation's financial instruments at December 31 are as follows (in thousands):
1997 1996 ---- ---- BOOK ESTIMATED BOOK ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE ----- ---------- ----- ---------- Financial assets: Cash and due from banks........................... $ 7,191 $ 7,191 $ 5,855 $ 5,855 Money market funds and overnight investments.................................... 6,288 6,288 6,733 6,733 Investment securities............................. 101,698 101,698 104,937 104,937 Loans held for sale............................... 1,031 1,041 3,003 3,003 Loans, net........................................ 236,697 239,508 218,313 222,100 Other investments................................. 6,294 6,534 6,678 6,918 Financial liabilities: Non-time deposits................................. 179,669 179,669 179,102 179,102 Time deposits..................................... 145,624 145,900 137,264 137,500 FHLB borrowings................................... 671 652 2,715 2,715 Repurchase agreements............................. 2,255 2,255 2,212 2,212
70 66 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Included in Item 8. (a)(2) Financial Statement Schedules. (none) (a)(3) Exhibits 3.1 -- Articles of Organization of Warren Bancorp, Inc. (6) 3.2 -- By-laws of Warren Bancorp, Inc., (6) 4.1 -- Form of Stock Certificate of Warren Bancorp, Inc. (7) 10.1 -- Warren Bancorp, Inc. 1986 Incentive and Nonqualified Stock Option Plan, as amended. (4) 10.2 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings Bank and Paul M. Peduto. (3) 10.3 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings Bank and Leo C. Donahue. (3) 10.4 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Paul M. Peduto. (1) 10.5 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Leo C. Donahue, Jr. (1) 10.6 -- Beverly Savings Bank 1986 Incentive and Nonqualified Stock Option Plan, as amended. (2) 10.7 -- Beverly Savings Bank 1986 Nonemployees Nonqualified Stock Option Plan, as amended (2) 10.8 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings Bank and John R. Putney. (3) 10.9 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and John R. Putney. (3) 10.10 -- Warren Bancorp, Inc. 1991 Incentive and Nonqualified Stock Option Plan, as amended. (2) 10.11 -- Employment Agreement among Warren Bancorp, Inc., Warren Five Cents Savings Bank and George W. Phillips. (7) 10.12 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and Mark J. Terry (8) 10.13 -- Special Termination Agreement among Warren Bancorp, Inc., Warren Five Cents Savings Bank and Mark J. Terry. (8) 10.14 -- Warren Bancorp, Inc. 1995 Incentive and Nonqualified Stock Option Plan (5) 10.15 -- Executive Supplemental Retirement Agreement among Warren Bancorp, Inc., Warren Five Cents Savings Bank and George W. Phillips. (7) 10.16 -- Split-Dollar Agreement between Warren Five Cents Savings Bank and George W. Phillips (7) 10.17 -- Employment Agreement between Warren Five Cents Savings Bank and John R. Putney (8) 10.18 -- Consulting Agreement between Warren Bancorp, Inc. and George W. Phillips (8) 21.1 -- List of Subsidiaries of Warren Bancorp, Inc. (8) 23.1 -- Consent of Independent Public Accountants. (8) 23.2 -- Consent of Independent Public Accountants. (8) (b) Reports on Form 8-K. None. - ----------------- (1) Previously filed as an exhibit to the Corporation's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on March 15, 1988 and incorporated herein by reference. (2) Previously filed as an exhibit to the Corporation's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 13, 1995 and incorporated herein by reference. (3) Previously filed as an exhibit to the Corporation's Annual Report on Form 10-K with the Securities and Exchange Commission on March 31, 1990 and incorporated herein by reference. (4) Previously filed as an exhibit to the Corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1991 and incorporated herein by reference. (5) Previously filed as an exhibit to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 3, 1995 and incorporated herein by reference. (6) Previously filed as an exhibit to the Corporation's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9, 1995. (7) Previously filed as an exhibit to the Corporation's Current Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1996. (8) Filed herewith. 71 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly created this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Peabody, Commonwealth of Massachusetts, on March 18, 1998. WARREN BANCORP, INC. By: /s/ Stephen G. Kasnet -------------------------------- STEPHEN G. KASNET CHAIRMAN OF THE BOARD Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Corporation and in the capacities and on the dates indicated: NAME TITLE DATE ---- ----- ---- /s/ John R. Putney President and Chief Executive March 18, 1998 - ------------------------------- Officer; Director (Principal JOHN R. PUTNEY Executive Officer) /s/ Paul M. Peduto Treasurer; Director March 18, 1998 - ------------------------------- (Principal Financial Officer PAUL M. PEDUTO and Principal Accounting Officer) Director - ------------------------------- PETER V. BENT /s/ Stephen J. Connolly, IV Director March 18, 1998 - ------------------------------- STEPHEN J. CONNOLLY, IV /s/ Francis L. Conway Director March 18, 1998 - ------------------------------- FRANCIS L. CONWAY /s/ Paul J. Curtin Director March 18, 1998 - ------------------------------- PAUL J. CURTIN /s/ Robert R. Fanning, Jr. Director March 18, 1998 - ------------------------------- ROBERT R. FANNING, JR. Director - ------------------------------- ARTHUR E. HOLDEN /s/ Stephen R. Howe Director March 18, 1998 - ------------------------------- STEPHEN R. HOWE /s/ John C. Jeffers Director March 18, 1998 - ------------------------------- JOHN C. JEFFERS /s/ Stephen G. Kasnet Director March 18, 1998 - ------------------------------- STEPHEN G. KASNET /s/ Linda Lerner Director March 18, 1998 - ------------------------------- LINDA LERNER /s/ Arthur E. McCarthy Director March 18, 1998 - ------------------------------- ARTHUR E. MCCARTHY Director - ------------------------------- ARTHUR J. PAPPATHANASI /s/ George W. Phillips Director March 18, 1998 - ------------------------------- GEORGE W. PHILLIPS /s/ John D. Smidt Director March 18, 1998 - ------------------------------- JOHN D. SMIDT Director - ------------------------------- JOHN H. WOMACK 72 68 SHAREHOLDER INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders of Warren Bancorp, Inc. will be held at the King's Grant Inn, Route 128, Danvers, Massachusetts, on Wednesday, May 6, 1998, at 10:00 a.m. A formal notice of the meeting, together with a proxy statement and proxy form, is being mailed to shareholders with this annual report. FORM 10-K AND OTHER REPORTS Additional copies of this Annual Report to Shareholders, which contains the Corporation's annual report to the Securities and Exchange Commission on Form 10-K (without exhibits), a copy of the exhibits to the Annual Report on Form 10-K and copies of quarterly reports may be obtained without charge by writing: Warren Bancorp, Inc., Shareholder Relations, 10 Main Street, Post Office Box 6159, Peabody, Massachusetts 01960. SHAREHOLDER INFORMATION
INDEPENDENT PUBLIC SHAREHOLDER RELATIONS TRANSFER AGENT & REGISTRAR ACCOUNTANTS Paul M. Peduto, Treasurer Registrar and Transfer Company Arthur Andersen LLP Warren Bancorp, Inc. 10 Commerce Drive 225 Franklin Street 10 Main Street Cranford, NJ 07016-3572 Boston, MA 02110-2812 Post Office Box 6159 Peabody, Massachusetts 01960 (978) 531-7400
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Corporation's common stock is traded over the counter and is quoted in the NASDAQ National Market System under the symbol WRNB. The following table sets forth the high and low closing prices for the common stock of the Corporation during the two-year period ended December 31, 1997. All prices set forth below are based upon information provided by NASDAQ.
COMMON STOCK ------------ HIGH LOW ---- --- 1997 4th Quarter.......................................... $24.13 $19.25 3rd Quarter.......................................... 19.68 17.25 2nd Quarter.......................................... 19.00 15.00 1st Quarter.......................................... 16.25 14.75 1996 4th Quarter.......................................... $16.38 $12.75 3rd Quarter.......................................... 13.25 11.88 2nd Quarter.......................................... 13.25 10.50 1st Quarter.......................................... 11.13 10.25
As of March 1, 1998, the Corporation had approximately 663 stockholders of record who held 3,816,992 shares of common stock. The number of shareholders indicated does not reflect the number of persons or entities who hold their common stock in nominee names through various brokerage firms or other entities. 73 69 SHAREHOLDER INFORMATION - (CONTINUED) Dividends were paid by the Corporation during 1997 and 1996 as follows:
PAYMENT DIVIDEND DATE PER SHARE ---- --------- 1997 4th Quarter........................ November 10, 1997 $.13 3rd Quarter................................. August 11, 1997 .13 2nd Quarter*....................... May 12, 1997 .50 1st Quarter................................. February 4, 1997 .11 * Includes special dividend of $.37 per share. 1996 4th Quarter........................ November 13, 1996 $.11 3rd Quarter................................. August 13, 1996 .11 2nd Quarter**...................... May 14, 1996 .21 1st Quarter................................. February 21, 1996 .10 ** Includes special dividend of $.10 per share.
74 70 CORPORATE INFORMATION WARREN BANCORP, INC. AND WARREN FIVE CENTS SAVINGS BANK AS OF MARCH 9, 1998
DIRECTORS PRINCIPAL OFFICERS PETER V. BENT #** LINDA LERNER #+** WARREN BANCORP, INC. Owner/Manager, Retired Brown's Yacht Yard STEPHEN G. KASNET ARTHUR E. MCCARTHY *- Chairman of the Board STEPHEN J. CONNOLLY, IV -+ Vice President & President, Managing Director, JOHN R. PUTNEY Connolly Brothers, Inc. Tucker Anthony, Inc. President and Construction Company Chief Executive Officer ARTHUR J. PAPPATHANASI #** FRANCIS L. CONWAY # President & PAUL M. PEDUTO President & Treasurer, Chief Executive Officer, Treasurer F.L. Conway & Sons, Inc. West Lynn Creamery, Inc. and Richdale Dairy Stores, Inc. SUSAN G. OUELLETTE PAUL J. CURTIN *+ Clerk Certified Public Accountant PAUL M. PEDUTO Treasurer, WARREN FIVE CENTS SAVINGS BANK ROBERT R. FANNING, JR. *#-** Warren Bancorp, Inc., and President & Executive Vice President, STEPHEN G. KASNET Chief Executive Officer, Chief Financial Officer and Treasurer, Chairman of the Board Northeast Health Warren Five Cents Savings Bank Systems, Inc. and JOHN R. PUTNEY Beverly Hospital Corporation GEORGE W. PHILLIPS ++** President and Retired Chief Executive Officer ARTHUR E. HOLDEN *- President, JOHN R. PUTNEY PAUL M. PEDUTO Holden Oil, Inc. President & Executive Vice President, Chief Executive Officer, Chief Financial Officer and Treasurer STEPHEN R. HOWE +#** Warren Bancorp, Inc. and Certified Public Accountant Warren Five Cents Savings Bank LEO C. DONAHUE Senior Vice President for JOHN C. JEFFERS #+ JOHN D. SMIDT + Personal Banking Vice President, President & Treasurer, Jeffers Millwork John Smidt Co., Inc. MARK J. TERRY Senior Vice President for STEPHEN G. KASNET*-+ JOHN H. WOMACK + Corporate Banking and President, President, Senior Lending Officer Pioneer Real Estate Advisors, JJS Services, Inc. Chairman of the Board, SUSAN G. OUELLETTE Warren Bancorp, Inc. and Clerk Warren Five Cents Savings Bank
* Executive Committee # Finance, Audit and Compliance Committee - - Nominating Committee + Loan Committee (Warren Five Cents Savings Bank) ++ Director of Warren Bancorp, Inc. only ** Strategic Planning Committee 75 71 WARREN FIVE CENTS SAVINGS BANK VICE PRESIDENTS OTHER OFFICERS JEFFREY O. BREWER WILLIAM H. ANDERSON NANCY A. CAVANAUGH PATRICIA M. F. BATES KERIN E. DEEDY CAROL M. BRUNTON KENNETH R. DILLON NANCY B. CLAY COLLEEN GOLDEN BARBARA J. DeDONATO MARY C. HELMING PATRICIA R. DiGIOVANNI BARBARA L. KELLY SHERRY M. O'CONNELL SUZANNA R. LEVINE LINDA A. PALMER WILLIAM F. LINDQUIST, III CHERYL L. PRESTON MITCHELL MARCUS ARTHUR T. McCARTHY ASSISTANT VICE PRESIDENTS PATRICIA A. ACQUAVIVA MEGAN T. CARLTON RUTH M. DAY CYNTHIA J. GOLDSMITH KAREN A. GRINDROD CYNTHIA J. HICKEY WILLIAM J. KELL MARIA C. LIMA ELEANOR M. MANNING PAUL A. NUCCIO JEROME J. SALERNO SUSAN S. SHORTSLEEVE JOAN C. WILLIAMS 76 EX-10.12 2 SPLIT DOLLAR AGREEMENT 1 Exhibit 10.12 SPLIT-DOLLAR AGREEMENT This Agreement by and between Mark J. Terry (the "Employee") and WARREN FIVE CENTS SAVINGS BANK (the "Bank") shall be effective as of January 2, 1998. WHEREAS, the Employee is employed by the Bank; and WHEREAS, the Employee wishes to provide life insurance protection for his family in the event of his death, under a policy of life insurance insuring his life (the "Policy"), which is described in Exhibit A attached hereto and by this reference made a part hereof, and which is being issued by the issuer listed in Exhibit A (the "Insurer"); and WHEREAS, the Bank is willing to pay the premiums due on the Policy as an additional employment benefit for the Employee, on the terms and conditions hereinafter set forth; WHEREAS, the Employee is the owner of the Policy and, as such, possesses all incidents of ownership in and to the Policy; and WHEREAS, the Bank wishes to have the Policy collaterally assigned to it by the Employee, in order to secure the repayment of the amounts which it will pay toward the premiums on the Policy; NOW, THEREFORE, in consideration of the premises and of the mutual promises contained herein, the parties hereto agree as follows: 1. Purchase of Policy. The Employee will contemporaneously purchase the Policy from the Insurer; such policy to provide a death benefit to the Employee equal to three times the Employee's base salary (as in effect on the Effective Date and as subsequently adjusted) until the Employee attains age 55 and then a death benefit equal to $100,000 at all times thereafter. Both parties hereto agree that they will take all necessary action to cause the Insurer to issue the Policy and shall take any further action which may be necessary to cause the Policy to conform to the provisions of this Agreement. Both parties hereto agree that the Policy shall be subject to the terms and conditions of this Agreement and of the collateral assignment filed with the Insurer relating to the Policy. 2. Ownership of Policy. The Employee (or Employee's donee, if applicable) shall be the sole and absolute owner of the Policy; the Employee may exercise all ownership rights granted to the owner thereof by the terms of the Policy, except as may be otherwise provided herein. 1 2 3. Payment of Premiums. So long as the Employee is an employee of the Bank, before the end of any grace period provided in the Policy for each premium payment, the Bank shall pay or cause to be paid the full amount of the premium to the Insurer, and shall, upon request, promptly furnish the Employee evidence of timely payment of such premium. The Bank shall annually furnish to the Employee a statement of the amount of income reportable by the Employee for federal and state income tax purposes, as a result of its payment of such premium. 4. Application of Dividends. Any dividend declared on the Policy, if any, shall be applied to purchase paid-up additional insurance on the life of the Employee. The parties hereto agree that the dividend election provisions of the Policy shall conform to the provisions hereof. 5. Collateral Assignment. To secure the repayment to the Bank of an amount equal to the aggregate amount of its premium payments under the Policy, the Employee has contemporaneously with the execution of this Agreement assigned the Policy to the Bank as collateral, by means of the form used by the Insurer for such assignments. The collateral assignment of the Policy to the Bank hereunder shall not be terminated, altered or amended by the Employee without the express written consent of the Bank. Both parties hereby agree to take all action necessary to cause such collateral assignment to conform to the provisions of this Agreement. 6. Transfer of Policy. (a) Except as provided in subsection (b) below and as otherwise provided herein, neither the Employee nor any donee of the Employee's, without the express written consent of the Bank, shall sell, assign, transfer, borrow against, surrender or cancel the Policy, change the beneficiary designation provision thereof, or terminate the dividend election thereof. (b) The Employee shall have the right to absolutely and irrevocably give to a donee, all of his right, title and interest in and to the Policy, subject to the collateral assignment of the Policy to the Bank pursuant hereto. The Employee may exercise this right by executing a written transfer of ownership in the form used by the Insurer for irrevocable gifts of insurance policies, and delivering this form to the Bank. Upon receipt of such form, executed by the Employee and duly accepted by the donee thereof, the Bank shall consent thereto in writing, and shall thereafter treat the Employee's donee as the sole owner of all of the Employee's right, title and interest in and to the Policy, subject to the Bank pursuant hereto. Thereafter, the Employee shall have no right, title or interest in and to the Policy, all such rights being vested in and exercisable only by such donee. 2 3 7. Payment of Benefit. Upon the death of the Employee, the Bank shall have the unqualified right to receive a portion of the death benefit equal to the aggregate amount of its premium payments under the Policy, reduced by any outstanding indebtedness to the Insurer which was incurred by the Bank and secured by the Policy, including any interest due on such indebtedness. The balance of the death benefit provided under the Policy, if any, shall be distributed to the designated beneficiary or the beneficiaries. In no event shall the amount payable to the Bank hereunder exceed the Policy proceeds payable at the death of the Employee. No amount shall be paid from such death benefit to the designated beneficiary or beneficiaries until the full amount due the Bank hereunder has been paid. Both parties hereto agree that the beneficiary designation provision of the Policy shall conform to the provisions hereof. 8. Payment of Cash Surrender Value. Upon the expiration or termination of the Policy prior to the death of the Employee, the Bank shall have the unqualified right to receive a portion of the cash surrender value of the Policy equal to the aggregate amount of its premium payments under the Policy, reduced by any outstanding indebtedness to the Insurer which was incurred by the Bank and secured by the Policy, including any interest due on such indebtedness. The balance of the Policy's cash surrender value, if any, shall be distributed to the Employee or the Employee's donee, if applicable. In no event shall the amount payable to the Bank hereunder exceed the Policy's cash surrender value. No amount shall be paid to the Employee or the Employee's donee, if applicable, until the full amount due the Bank hereunder has been paid. Both parties hereto agree that the Policy shall conform to the provisions hereof. 9. Termination of Agreement. (a) This Agreement shall terminate without notice upon the occurrence of any of the following events: (I) the total cessation of the business of the Bank or (ii) the bankruptcy, receivership or dissolution of the Bank. (b) In addition, the Employee (or the Employee's donee, if applicable) may terminate this Agreement, while no premium under this Policy is overdue, by written notice to the other parties hereto. Such termination shall be effective as of the date of such notice. (c) Upon the termination of the Agreement, the Bank shall have the unqualified right to receive a portion of the cash surrender value of the Policy equal to the aggregate amount of its premium payments under the Policy, reduced by any outstanding indebtedness to the Insurer which was incurred by the Bank and secured by the Policy, including any interest due on such indebtedness. 3 4 10. Release of Collateral Assignment at Termination. Within thirty days after the date of the termination of his employment with the Bank, the Employee (or the Employee's donee, if applicable) shall pay to the Bank an amount in cash equal to the aggregate amount of premiums paid under the Policy by the Bank to date rediced by any, less any outstanding indebtedness to the Insurer secured by the Policy which was incurred by the Bank and remains outstanding as of the date of such termination (including any interest then due with respect to such indebtedness). Upon receipt of such amount, the Bank shall release the collateral assignment of the Policy by the execution and delivery of any appropriate instrument of release. 11. Insurer Not a Party. Subject to the terms and conditions of the Policy, the Insurer shall be fully discharged form its obligations under the Policy by payment of the Policy death benefit to the beneficiary or beneficiaries named in the Policy, subject to the terms and conditions of the Policy. In no event shall the insurer by considered a party to this Agreement, or any modification or amendment hereof. No provisions of this Agreement nor or any modification or amendment hereof shall in any way be construed as enlarging, changing, varying or in any other way affecting the obligations of the Insurer as expressly provided in the Policy, except insofar as the provisions hereof are made a part of the Policy by the collateral assignment executed by the Employee and filed with the Insurer in connection herewith. 12. Administration. The Bank shall make all determinations concerning rights to benefits under this Agreement. Any decision by the Bank denying a claim by the Employee, his donee or his beneficiary, for benefits under this Agreement shall be stated in writing and delivered or mailed to the Employee or such donee or beneficiary. Such decision shall set forth the specific reasons for the denial, written to the best of the Bank's ability in a manner that may be understood without legal or actuarial counsel. 13. Notices. Any notice required or permitted to be given hereunder shall be effective when received and shall be sufficient if in writing and if personally delivered or sent by prepaid cable, telex or registered air mail, return receipt requested, to the party to receive such notice at this address set forth at the end of this Agreement or at such other address as a party may be notice specify to the other. 14. Miscellaneous. To be effective, each modification or amendment to this Agreement must be in writing and signed by both parties hereto. No waiver shall be valid unless in writing and signed by the waiving party. No inaction shall constitute a waiver. Any waiver shall be effective only with respect to past events and shall not constitute a continuing or prospective waiver unless expressly so stated in writing. This Agreement shall be governed by the laws of the Commonwealth of 4 5 Massachusetts as the forum for any litigation between the parties with respect to this Agreement. If any provision or provisions of this Agreement is, or hereafter is adjudged to be, for any reason unenforceable or invalid, it is the specific intent of the parties that the remainder hereof shall subsist and be binding upon each of the parties hereto. This Agreement shall bind and inure to the benefit of the respective assigns, heirs, successors and legal representatives of each of the parties hereto. The headings and captions of this Agreement are for the purpose of reference only and shall not limit or defined any meaning thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in duplicate, as of the day and year first above written. WARREN FIVE CENTS SAVINGS BANK EMPLOYEE By: ____________________________ ____________________________ Title:________________________ ________________________________ ____________________________ Attest Witness (SEAL) 5 6 EXHIBIT A The following life insurance policy is subject to the foregoing Split-Dollar Agreement: Insurer: Royal Maccabees Life Insurance Company Insured: Policy Number: Face Amount: Dividend Option: Date of Issue: 6 EX-10.13 3 SPECIAL TERMINATION AGREEMENT 1 Exhibit 10.13 SPECIAL TERMINATION AGREEMENT AGREEMENT made as of the 2nd day of January, 1998, by and among Warren Bancorp, Inc., a Massachusetts Corporation (the "Company") and its subsidiary, Warren Five Cents Savings Bank, a Massachusetts savings bank with its main office in Peabody, Massachusetts (the "Bank") (the Bank and the Company shall be hereinafter collectively referred to as the "Employers") and Mark J. Terry, an individual presently employed by the Bank as Senior Vice President (the "Executive") in consideration of services performed and to be performed in the future as well as of the mutual promises and covenants herein contained, it is agreed as follows: 1. Purpose. In order to allow the Executive to consider the prospect of a Change in Control (as defined in Section 2) in an objective manner and in consideration of the services to be rendered by the Executive to the Employers and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Employers, the Employers are willing to provide, subject to the terms of this Agreement, certain severance benefits to protect the Executive from the consequences of a Terminating Event (as defined in Section 3) occurring subsequent to a Change in Control. 2. Change in Control. A "Change in Control" shall be deemed to have occurred in either of the following events: (I) if there has occurred a change in control which the Company would be required to report in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission (or any successor Act) which are of similar effect; (ii) when any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company; (iii) the sale, transfer or other disposition of all or substantially all of the assets of the Company to another person or entity; (iv) the election of Directors of the Company equal to one-third or more of the total number of Directors then in office who have not been nominated by the Company's Board of Directors or a committee thereof; or (v) the signing of an agreement, contract or other arrangement providing for any of the transactions described above in this definition of Change in Control; and, in the case of (I), (ii), (iii), (iv), or (v) above, the Board of Directors of the Company has not consented to such event by a two-thirds vote of all of the members of such Board of Directors who were Directors on the date hereof or on the date of any extension hereof, which vote was adopted either prior to such event or within ninety (90) days thereafter. 3. Terminating Event. A "Terminating Event" shall mean (a) termination by either or both of the Employers of the employment of the Executive with either or both of the Employers for any reason other than (i) death, (ii) disability, (iii) deliberate dishonesty of the Executive with respect to either of the Employers or any subsidiary or affiliate of either, or (iv) conviction of the 2 Executive of a crime involving moral turpitude, or (b) resignation of the Executive from the employ of either of the Employers subsequent to the occurrence of any of the following events: (i) A significant change in the nature or scope of the Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or (ii) A reasonable determination by the Executive that, as a result of a Change in Control, the Executive is unable to exercise the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to such Change in Control; or (iii) A decrease in the total annual compensation payable by the Employers to the Executive other than as a result of a decrease in compensation payable to the Executive and to all other executive officers of the Employers on the basis of the Employers' financial performance. 4. Severance Payment. Subject to the provisions of Section 5 below, in the event a Terminating Event occurs within three (3) years after a Change in Control, the Employers shall pay, in one lump-sum payment on the date of termination, to the Executive an aggregate amount equal to (x) three times the "base amount" (as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as from time to time amended (the "Code")) applicable to the Executive, less (y) One Dollar ($1.00). 5. Limitation on Benefits. (a) It is the intention of the Executive and of the Employers that no payments by the Employers to or for the benefit of the Executive under this Agreement shall be non-deductible to the Employers by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement, if by reason of the operation of said Section 280G any such payments when combined with any other payments under any other agreement exceed the amount which can be deducted by the Employers, such payments shall be reduced to the maximum amount which can be deducted by the Employers. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive under this or any other agreement or arrangement between the Executive and the Company, such excess payments shall be refunded to the Employers with interest thereon at the applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be non-deductible to the Employers by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Executive shall determine which method shall be 2 3 followed, provided that if the Executive fails to make such determination within forty-five days after the Employers have sent him written notice of the need for such reduction, the Employers may determine the method of such reduction in their sole discretion. (b) If any dispute between the Employers and the Executive as to any of the amounts to be determined under this Section 5, or the method of calculating such amounts, cannot be resolved by the Employers and the Executive, either the Employers or the Executive after giving three days written notice to the other, may refer the dispute to a partner in the Massachusetts office of a firm of independent certified public accountants selected jointly by the Employers and the Executive. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Employers and the Executive. The Employers shall pay, as they are incurred, the costs of any such determination. 6. Employment Status. This Agreement is not an agreement for the employment of the Executive and shall confer no rights on the Executive except as herein expressly provided. 7. Term. This Agreement shall take effect on the day first above written, and shall terminate upon the earlier of (a) the termination by the Employers of the employment of the Executive because of death, deliberate dishonesty of the Executive with respect to either of the Employers or any subsidiary or affiliate of either, or conviction of the Executive of a crime involving moral turpitude, (b) the resignation or termination of the Executive for any reason prior to a Change in Control, or (c) the resignation of the Executive after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 3(b)(i)-(iii) of this Agreement. 8. Withholding. In making any payments under this Agreement the Employers shall withhold any tax or other amounts required to be withheld by the Employers under applicable law. 9. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Employers, one by the Executive and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the Commonwealth of Massachusetts in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 9. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. This arbitration provision shall not be used for matters of the type referred to in Section 5(b), except to settle the selection of the accounting partner described in said section in the event that the Employers and the Executive cannot agree on the selection. 3 4 10. Assignment. Neither the Employers nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided, however, that the Employers may assign their rights and obligations under this Agreement without the consent of the Executive in the event either of the Employers shall hereafter effect a reorganization, consolidate with or merge into any other person or entity, or transfer all or substantially all of its properties or assets to any other entity or person. This Agreement shall inure to the benefit of and be binding upon the Employers and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Employers of all payments due to the Executive under this Agreement, the Employers shall continue such payments to the Executive's beneficiary designated in writing to the Employers prior to the Executive's death (or to the Executive's estate, if the Executive fails to make such designation). 11. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law; provided, however, that the Employers shall not be obligated to make any payments under this Agreement in the event that doing so would violate any law, regulation, or regulatory directive applicable to the Company or the Bank. 12. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 13. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the last address the Executive maintained in the books and records of the Employers; in the case of the Bank, at its main offices attention of the Clerk; or in the case of the Company, at its main offices attention of the Clerk. 14. Election of Remedies. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not constitute a breach by the Executive of any employment agreement between the Employers and the Executive or a breach of any of the Executive's obligations as an employee of the Employers and shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Employers' benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under any employment agreement the Executive may then have with the Employers, provided, however, that if there is a Terminating Event under Section 3 hereof, the Executive may elect either to receive the severance payment provided under 4 5 Section 4 or such termination benefits as the Executive may have under any such employment agreement, but may not elect to receive both. 15. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by duly authorized representatives of each of the Company and the Bank. 16. Allocation of Obligations Between Employers. The obligations of the Employers under this Agreement are intended to be the joint and several obligations of the Bank and the Company. The Employers shall, as between themselves, allocate these obligations in a manner agreed by them. 17. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. IN WITNESS WHERETO, this Agreement has been executed as a sealed instrument by the Company and the Bank, by their duly authorized officers, and by the Executive, as of the date first above written. WITNESS: ____________________________________ ___________________________________ [Seal] ATTEST: WARREN BANCORP, INC. ____________________________________ By: _____________________________ Title:____________________________ [Seal] ATTEST: WARREN FIVE CENTS SAVINGS BANK ____________________________________ By: ______________________________ Title:____________________________ 5 EX-10.17 4 EMPLOYMENT AGREEMENT 1 Exhibit 10.17 EMPLOYMENT AGREEMENT AGREEMENT entered into this 23rd day of December, 1997, by and between Warren Five Cents Savings Bank, a Massachusetts savings bank with its principal office in Peabody, Massachusetts (hereinafter referred to as the "Bank,"), and John R. Putney, of Beverly, Massachusetts (hereinafter referred to as "Putney"). Whereas, the Bank is a wholly-owned subsidiary of Warren Bancorp, Inc. (the "Company"); and Whereas, the Bank desires to retain the services of Putney as its President and Chief Executive Officer effective January 1, 1998; Whereas, Putney is willing to serve in such capacities. Now therefore, in consideration of the mutual covenants herein expressed, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledge, the parties hereto hereby agree as follows: 1. Employment. The Bank hereby confirms its continued employment of Putney and Putney hereby accepts such continued employment, subject to the terms and conditions set forth in this Agreement. 2. Capacity and Performance. During the term hereof Putney shall serve as the Bank's President and Chief Executive Officer. In addition, Putney shall also serve the Bank or the Company in such additional offices as the Board of Directors of the Bank may reasonably request. During his employment hereunder, Putney shall devote his full business time and his best efforts to the advancement of the interests of the Bank and to the discharge of his responsibilities under this Agreement. However, nothing contained herein shall prohibit Putney from lecturing or serving as an officer or member of any professional association or professional board, or maintaining membership in or participating in private, social or civic endeavors that do not conflict with, interfere with or distract Putney from his employment by the Bank. 3. Term. a. Subject to earlier termination as hereinafter provided, Putney's employment hereunder shall be for an initial two (2) year term commencing on January 1, 1998. b. On January 1, 1999 and on each subsequent January 1 thereafter, this Agreement and all of its terms and conditions shall be automatically extended for an additional one (1) year period unless thirty (30) day's written notice of non- 2 extension is given by either party for any reason whatsoever or for no reason; the intent of this provision being that unless notice of non-extension is given, the remaining term of this Agreement on any January 1 shall be two (2) full years. c. For purposes of this Agreement, a "Non-Hostile Change of Control" shall be deemed to have occurred upon (I) the occurrence of any of the following: (A) a change in control which the Company would be required to report in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission (or any successor regulatory entity) pursuant to the 1934 Act (or any successor Act) which are of similar effect; (B) when any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d03 promulgated under the 1934 Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of Directors of the Company; (C) the sale, transfer or other disposition of all or substantially all of the assets of the Company to another person or entity; (D) the election of Directors of the Company equal to one-third or more of the total number of Directors then in office who have not been nominated by the Company's Board of Directors or a committee thereof; or (E) the signing of an agreement, contract or other arrangement providing for any of the transactions described above; and (ii) the Board of Directors of the Company has consented to such event by a two-thirds vote of all of the members of such Board of Director who were Directors on the date hereof or on the date of any extension hereof. d. In the event of a Non-Hostile Change of Control, the term of this Agreement shall be automatically converted to a term of three (3) years from the date o the consummation of such Non-Hostile Change of Control. On the first anniversary of the date of the consummation of such Non-Hostile Change of Control and each subsequent anniversary thereafter, this Agreement and all of its terms and conditions shall be automatically extended for an additional one (1) year period unless thirty (30) days' written notice of non-extension is given by either party for any reason whatsoever or for any reason; the intent of this provision being that unless notice of non-extension is given, the remaining term of this Agreement on any such anniversary shall be three (3) full years. 4. Compensation. a. For the first year of this Agreement, beginning January 1, 1998, the Bank shall pay Putney a base salary of one hundred eighty-two thousand dollars ($182,000) per year, payable in equal, bi-weekly installments, subject to all federal and state tax withholding. b. The Bank shall consider base salary increases and bonuses for Putney no less frequently than annually, taking into account Putney's performance, 2 3 compensation paid to others in comparable positions, and genera inflation in the national and local economy. c. Putney shall be entitled to participate to the extent determined by the Bank's Board of Directors in any current or future stock option plan or plans which the Bank may establish for its employees. 5. Benefits and Vacation. a. The Bank shall provide Putney with such pension, welfare and other benefits as are provided to other senior executives of the Bank and any other benefits that the parties agree may be necessary or appropriate to Putney's position as President and Chief Executive Officer. Such benefits are currently described on the attached Schedule A. All such benefits shall be reviewed annually during the term of this Agreement and may be increased if determined appropriate by the Bank's Board of Directors. b. Putney shall be entitled to four (4) weeks of paid vacation each year. 6. Reimbursement of Business Expenses. The Bank will reimburse Putney for all reasonable business expenses incurred or paid by him related to his activities on behalf o the Bank as its President and Chief Executive Officer, subject to such reasonable substantiation and documentation as may be required by the Bank. 7. Insurance. The Bank shall cause Putney to be named, if he has not previously been so named, as an additional insured on its general liability insurance and directors' and officers liability insurance policies to the same extent as other senior officers of the Bank are so named. The Bank's obligations under this paragraph 7 shall be subject to Putney's compliance with any conditions of such insurance imposed on the insured or insured persons, not including the obligation to pay premiums. Putney shall promptly notify the Board of Directors of the Bank of any actual or threatened claim arising out of or as a result of his employment by the Bank. 8. Disability. If Putney shall be disabled as defined below, the Board of Directors of the Bank may remove Putney from his positions with the Bank and the Company for the remainder of the term of this Agreement or during the period of such disability. Notwithstanding such removal, the Bank shall continue to pay Putney his full base salary (less any disability pay or sick pay which Putney receives under the Bank's policies) for the remainder of the term of this Agreement. In addition, the Bank shall, during the remaining term of this Agreement, continue to pay premiums for all health and life insurance policies then in force and for all disability insurance policies not then paying benefits, and Putney shall continue to participate in and receive all other 3 4 pension and welfare benefits provided to him prior to his disability. Putney shall be considered disabled hereunder if he is unable to perform the essential functions of President and Chief Executive Officer of the Bank, either with or without reasonable accommodation, due to illness and/or injury and if such inability continues or is reasonably expected to continue for a period of more than 40 consecutive working days. If any questions shall arise as to whether Putney is disabled, Putney may, and at the request of the Bank shall, submit to the Bank a certification in reasonable detail by his physician as to whether Putney is disabled to how long such disability is expected to continue, and such certification shall, for the purposes of this Agreement, be conclusive of the issue. Nothing in this Section shall be construed to constitute a waiver of Putney's rights, if any, under existing law, including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. Section 2601, et seq. And the American with Disabilities Act U.S.C. Section 12101 et seq. 9. Termination by the Bank. a. The Bank may, in its discretion, by majority vote of the Board of Directors, terminate Putney's employment at any time, without cause. b. In the event that the Bank gives timely notice of non-renewal of this Agreement pursuant to paragraph 3(b) or (d), Putney's employment shall be terminated at the expiration of the Agreement's then current term. c. In the event that Putney's employment is terminated by the Bank pursuant to either subparagraph (a) or (b) above, the Bank shall pay Putney upon his termination of employment, as an agreed-upon termination sum, a lump sum payment equal to the unpaid portion of his base salary due for the remainder of the term of this Agreement plus the amount of any bonus specifically determined and approved by the Executive Committee of the Board of Directors but not yet paid. Putney shall not be required to be present at the Bank or to perform any duties for the Bank in order to be entitled to such payment. d. Notwithstanding the foregoing, if Putney's employment is terminated by the Bank because of (i) fraud or other material dishonesty by Putney with respect to the Bank or any of its affiliates, (ii) the commission by or indictment of Putney for a felony, (iii) Putney's material disregard of his duties hereunder, or (iv) his gross negligence or willful misconduct in the performance of those duties, then he shall be entitled to be paid any accrued but unpaid base salary, as of the date of his termination. 10. Termination by Putney for Cause. a. If the nature or scope of Putney's duties, authority, responsibilities, powers, circumstances of employment or functions are changed significantly without his consent from the duties, authorities, responsibilities, powers, circumstances of 4 5 employment or functions normally exercised by or enjoyed by a President and Chief Executive Officer, or if the Bank alters Putney's authority, powers, functions, responsibilities, circumstances of employment, or duties so as to prevent him from performing effectively the duties normally carried out by a President or Chief Executive Officer, then Putney may, at his option, invoke the provisions of this paragraph 10 and terminate this Agreement by delivering notice in writing to the Chairman of the Board of Directors (the "Chairman") at least sixty (60) days prior to the date of termination setting forth the cause for exercising the provisions of this paragraph 10. b. If the Bank does not remedy said cause to Putney's satisfaction before the expiration of said sixty (60) day period, Putney's employment shall be considered terminated under the terms of this paragraph 10 as of the first day following the expiration of said sixty (60) day period, and the Bank shall pay Putney upon such termination of employment as an agreed-upon termination sum, a lump sum payment equal to the unpaid portion of his base salary due for the remainder of the term of this Agreement plus the amount of any bonus specifically determined and approved by the Executive Committee of the Board of Directors but not yet paid. Putney shall not be required to be present at the Bank or to perform any duties for the Bank in order to be entitled to such payment. 11. Termination by Putney Without Cause. Putney shall have the right to terminate this Agreement for any reason other than those described in paragraph 10 above upon ninety (90) days' written notice to the Bank. At the end of such ninety (90) day period the rights, duties and obligations hereunder of both parties to this Agreement shall cease, provided, however, that the Bank shall be obligated to pay to Putney any accrued but unpaid base salary as of the date of his termination plus the amount of any bonus specifically determined and approved by the Executive committee of the Board of Directors but not yet paid. 12. Termination Due to Putney's Death. This Agreement shall be terminated upon the death of Putney and the rights, duties and obligations hereunder of both parties to this Agreement shall thereupon cease, provided, however, that the Bank shall pay to Putney's estate any accrued but unpaid base salary, as of the date of his death plus the amount of any bonus specifically determined and approved by the Executive Committee of the Board of Directors but not yet paid. 13. Effect on Special Termination Agreement. Reference is hereby maid to that certain Special Termination Agreement made as of May 17, 1989 by and among Warren Bancorp, Inc., a Delaware corporation, the Bank, and Putney(the "Special Termination Agreement"). Subject to Section 14 herein, the terms of this Agreement are not meant to supercede or conflict in any way with any of the terms of the Special Termination Agreement. 5 6 14. Limitation on Termination Payments. a. Reference is hereby made to Section 4999 and Section 180G of the Internal Revenue Code, relating to certain parachute payments. It is the intention of Putney and of the Bank that if Putney receives or becomes entitled to any payments hereunder which would subject Putney to any tax under Section 4999 or any successor section (such tax hereinafter referred to as the "Section 4999 Tax," and such payments hereinafter referred to as "Parachute Payments"), Putney shall not bear the financial burden of the Section 4999 Tax resulting from Parachute Payments which are less than five hundred forty six thousand dollars ($546,000.00), i.e., three times his beginning salary hereunder. Accordingly, if a Parachute Payment is made to Putney, the Bank shall pay to Putney, as an additional amount due hereunder, that amount which, after subtracting (i) the Section 4999 Tax on such additional amount, and (ii) Putney's ordinary federal and state income taxes and employment taxes on such additional amount, will equal the difference between the Section 4999 Tax payable by Putney (not including the Section 4999 Tax imposed on such additional amount) and the Section 4999 Tax which would be payable by Putney if his Base Amount (as defined under Section 280G of the Internal Revenue Code or any successor section and regulations thereunder) were equal to one hundred eighty two thousand dollars ($182,000.00). b. Once Putney's Base Amount exceeds $182,000.00, if any Parachute Payments are payable hereunder, then such payments shall be reduced if necessary to insure that the total amount of payments remaining for Putney after subtracting (I) the ordinary federal and state income taxes and employment taxes payable by Putney, (ii) the Section 4999 Tax payable by Putney, and (iii) the amount reimburseable by Putney, if any, pursuant to paragraph (c) below, is maximized. To the extent that payments exceeding the amount determined by the foregoing sentence have been paid, such excess payments shall be considered as a loan to Putney from the Bank, and shall be repaid by Putney with interest thereon, if necessary, calculated at the Applicable Federal Rate determined under Section 1274(d) of the Internal Revenue Code, compounded annually, or at any other rate as may be required, in order that no such payments shall exceed the amount determined by the foregoing sentence. All calculations relating to this paragraph shall be made by the Bank's independent public accountant immediately prior to the change of control and shall be subject to the approval of Putney. c. Once Putney's Base Amount exceeds $182,000, if any Parachute Payments are paid hereunder, Putney shall reimburse the Bank for the amount of additional federal tax the Bank or the Company incurs as a result of the loss of a federal tax deduction for such payment of Parachute Payments under Section 280G, or any successor section, and the Bank may, in its discretion, withhold from any such Parachute Payments made hereunder an amount necessary to effect such reimbursement. 6 7 15. Non-Competition. The provisions of this paragraph 15 shall apply only if Putney resigns from his position and terminates this Agreement in accordance wit paragraph 11 hereof. The provisions of this paragraph 15 shall not if Putney resigns pursuant to paragraph 10 or if the Bank fails to renew this Agreement or terminates this Agreement pursuant to paragraph 9. If this paragraph applies, Putney agrees that he will not, for a period of one (1) year following his termination of employment, directly or indirectly, solicit any customer of the Bank on behalf of any business entity engaged in the banking or mortgage lending business or encourage any customer of the Bank to terminate or otherwise modify adversely its business relationship with the Bank. In the event that Putney breaches, or proposes to breach, any of the provisions of this paragraph 15, the Bank shall be entitled to an injunction or other appropriate equitable relief to restrain any such breach. 16. Successors. This Agreement shall inure to the benefit of and be binding upon the parties and their respective heirs, executors, successors and assigns. 17. Notices. All notices required under this Agreement shall be sufficient if made by certified or registered mail, return receipt requested, delivered to the then residence of Putney and to the Bank in care of the Chairman at his then residence. 18. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect its other provisions, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions had been omitted. 19. Applicable Law. This Agreement shall be construed under the laws of the Commonwealth of Massachusetts. 20. Arbitration. Any dispute or controversy arising under, out of, in connection with or in relation to this Agreement shall be determined and settled by arbitration in Boston, Massachusetts, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association. Any award rendered therein shall be final and binding on all parties hereto and judgment may be entered thereon in any court of appropriate jurisdiction. Each party shall bear its own costs and expenses in connection with any such arbitration. Notwithstanding the foregoing, this provision shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporary restraining order or a preliminary injunction in circumstances in which such relief is appropriate. 21. Waiver. No waiver by any party of any right on any occasion shall be construed as a bar to or waiver of any right or remedy on any future occasion. 22. Rights Under Employee Benefit Plans. Nothing in this Agreement shall be construed to affect the Putney's rights as a former employee or the rights of his heirs or his beneficiaries under any employee benefit plan of the Bank or the Company. 7 8 IN WITNESS WHEREOF, the parties hereto have hereunto affixed their hands and seals as to the date first set forth above. WARREN FIVE CENTS SAVINGS BANK By: ____________________________ __________________________________ Stephen G. Kasnet John R. Putney 8 9 SCHEDULE A BENEFITS 1. Bank Vehicle. Putney shall have the use of a Bank-leased vehicles. the Bank shall pay all lease and maintenance costs for such vehicle; provided, however, that any monthly lease payment in excess of six hundred dollars ($600) shall be paid by Putney. [List specific benefits] X. Other Benefits. Putney shall be entitled to any and all other standard employee benefits not listed in this Schedule A as are in accordance with the then practice and policy of the Bank with respect to its senior executives. 9 10 SCHEDULE A (CONTINUED) X. Other Benefits. 1. Medical Insurance 2. Group Life Insurance 3. Long Term Disability Insurance 4. Business Travel Insurance 10 EX-10.18 5 CONSULTING AGREEMENT 1 Exhibit 10.18 November 26, 1997 Mr. George W. Philips 101 Chestnut Street Boston, MA 02108 Dear George: This letter sets forth the agreement between you and Warren Bancorp, Inc. ("Company") regarding your responsibilities as a Director and a consultant to the Company and its subsidiaries for the period from January 1, 1998 through May 31, 2000, unless earlier terminated as provided herein. A. Services In addition to serving as a Director for the Company, you have agreed to: 1. Strategic Planning Function Establish and chair the Strategic Planning Committee of the Board of Directors, which shall conduct such reviews and initiate such studies as agreed to by you and the Board of Directors from time to time. 2. Performance Review Function Prepare and present quarterly to the Board of Directors analyses of the Company's financial performance, including relevant comparative data; and 3. Special Projects Assist the Board and management regarding special projects relating to various areas of the Company's business from time to time. 2 B. Compensation, Reimbursement and Support Services You have agreed to waive director fees and other benefits. In lieu of such fees and benefits, for the services described above you will receive a fee of $12,500 per quarter. payable February 15, May 15, August 15 and November 15 of each year. You will also be reimbursed for all of your out of pocket expenses, including any commuting expenses incurred in connection with rendering the services hereunder. The Company will provide you with office space, telephone, fax and secretarial support at Peabody Square. Ms. Ouellette will provide secretarial support. C. Additional Services It is expressly understood that the foregoing compensation arrangements apply only to the services described herein. Any additional assistance including advice and consultation in connection with any merger, acquisition or similar transaction, would be subject to separate arrangements to be agreed upon when and if such assistance is requested. D. Termination This agreement may be terminated for any reason by either the Company or by you on 60 days prior notice. If the foregoing accurately states the arrangement between you and the Company, please indicate your agreement by signing as indicated below. Sincerely, Stephen G. Kasnet Chairman of the Board Agreed: _______________________________ George W. Phillips _______________________________ Date EX-21.1 6 LIST SUBSIDIARIES 1 Exhibit 21.1 SUBSIDIARIES WARREN FIVE CENTS SAVINGS BANK DECEMBER 31, 1997 ------------------- WARREN BANCORP, INC. ------------------- | | ------------------------------ WARREN FIVE CENTS SAVINGS BANK ------------------------------ | | ============================================================================== | | | | | - ------------------------------------------------------------------------------ NORTHBANK NORTHBANK HANNAH WARREN PEABODY FINANCIAL REALTY, BROKERAGE SECURITIES COMMUNITY CORPORATION INC. SERVICE, INC. CORPORATION II DEVELOPMENT (inactive CORP. 7/22/94) - ------------------------------------------------------------------------------ Warren Bancorp, Inc. owns 100% of Warren Five Cents Savings Bank Warren Five Cents Savings Bank owns 100% of all subsidiaries EX-23.1 7 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Warren Bancorp, Inc. We consent to the incorporation by reference in the Registration Statements (Nos. 33-27899, 33-47899, 33-94104 and 33-71240) on Form S-8 of Warren Bancorp, Inc. or our report dated January 23, 1997, relating to the consolidated balance sheets of Warren Bancorp, Inc. and subsidiaries as of December 31, 1996 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the two year period ended December 31, 1996, which report appears in the December 31, 1997 annual report on Form 10-K of Warren Bancorp, Inc. KPMG Peat Marwick LLP Boston Massachusetts March 26, 1998 EX-23.2 8 CONSENT OF ARTHUR ANDERSON LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into the Corporation's previously filed registration statements on Form S-8, File Nos. 33-27899, 33-71240, 33-47899, and 33-94104. Arthur Andersen LLP Boston, Massachusetts March 26, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) DEC.31,1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 7,191 6,288 0 0 101,698 6,294 6,534 241,794 4,066 370,933 325,293 2,255 2,746 671 390 0 0 39,638 370,993 21,248 7,291 0 28,539 11,258 11,404 17,135 (316) 140 9,857 10,933 10,933 0 0 7,285 1.92 1.83 5.03 $347,000 0 $720,000 0 4,533 608 457 4,066 4,066 0 0
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