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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 1998
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 1-14671
WORONOCO BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 04-3444269
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
31 Court Street, Westfield, Massachusetts 01085
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (413) 568-9141
-------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.01 per share The American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
YES |_| NO |X|
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 the 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. |X|
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of March 24, 1999 was $57,053,833.
As of March 24, 1999, there were 5,998,860 shares of the Registrant's
Common Stock outstanding.
INDEX
PART I
Page No.
--------
Item 1. Business............................................... 1
Item 2. Properties............................................. 33
Item 3. Legal Proceedings...................................... 34
Item 4. Submission of Matters to a Vote of Security Holders.... 34
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters........................ 34
Item 6. Selected Financial Data................................ 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 37
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk................................................... 48
Item 8. Financial Statements and Supplementary Data............ 53
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.................... 54
PART III
Item 10. Directors and Executive Officers of the Registrant..... 54
Item 11. Executive Compensation................................. 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 59
Item 13. Certain Relationships and Related Transactions......... 60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................... 61
SIGNATURES.............................................................. 63
PART I
Item 1. Business.
Woronoco Bancorp, Inc. (the "Company") was incorporated in October 1998
under Delaware law. On March 19, 1999, the Company acquired Woronoco Savings
Bank (the "Bank") as part of the Bank's conversion from a
Massachusetts-chartered mutual to stock savings bank (the "Conversion"). The
Company is currently a savings and loan holding company regulated by the Office
of Thrift Supervision ("OTS"). In connection with the Conversion, the Company
issued an aggregate of 5,998,860 shares of its common stock, par value $0.01 per
share ("Common Stock") at a purchase price of $10 per share, of which 5,554,500
shares were issued in a subscription offering and 444,360 shares were issued to
Woronoco Savings Charitable Foundation, a charitable foundation established by
the Bank.
The Bank is a community-oriented Massachusetts savings bank which was
organized in 1871. The Bank's principal business consists of the acceptance of
retail deposits from the general public in the areas surrounding its 12 banking
offices and the investment of those deposits, together with funds generated from
operations and borrowings, primarily in mortgage loans secured by real property
which contain one to four residences ("one- to four-family residences") and
consumer loans, primarily home equity loans and lines of credit. The Bank, to a
lesser extent, also invests those funds in multi-family and commercial real
estate loans, construction and development loans, commercial business loans and
other types of consumer loans, primarily automobile and personal loans. The Bank
originates loans primarily for investment. However, the Bank will sell some
loans in the secondary market, while generally retaining the servicing rights.
The Bank also invests in mortgage-backed securities, equity securities and other
permissible investments. The Bank's revenues are derived principally from the
generation of interest and fees on loans originated and, to a lesser extent,
interest and dividends on investment securities. The Bank's primary sources of
funds are deposits, principal and interest payments on loans and investment
securities and advances from the Federal Home Loan Bank (the "FHLB").
Market Area
The Bank is headquartered in Westfield, Massachusetts. The Bank's primary
deposit gathering area is concentrated in the communities surrounding its main
office located in Westfield and its eleven other banking offices located in the
communities of Southwick, Feeding Hills, South Hadley, Springfield, Westfield,
West Springfield and Amherst, Massachusetts. The Bank's primary lending area is
significantly broader than its deposit gathering area and includes all of
Hampden and Hampshire Counties in western Massachusetts and parts of northern
Connecticut.
The city of Westfield is largely suburban and is located in the Pioneer
Valley near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike)
and 91. Interstate 90 is the major east-west highway that transverses
Massachusetts. Interstate 91 is the major north-south highway that runs directly
through the heart of New England. Westfield is located approximately 90 miles
west of Boston, Massachusetts, 70 miles southeast of Albany, New York and 30
miles north of Hartford, Connecticut. Westfield's estimated 1996 population was
approximately 38,194 and the estimated 1996 population for Hampden and Hampshire
Counties was 441,280 and 150,373, respectively. The economy in the Bank's
primary market area has benefitted from the presence of large employers such as
the University of Massachusetts, Baystate Medical Center, MassMutual Life
Insurance Company, Big Y Foods, Inc., Friendly Ice Cream Corporation, Old Colony
Envelope, Hamilton Standard, Pratt and Whitney and Strathmore Paper Company.
Other employment and economic activity is provided by financial institutions,
eight other colleges and universities, seven other hospitals and a variety of
wholesale and retail trade businesses.
Competition
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a local, state-wide or regional presence and, in some
cases, a national presence. Many of these financial institutions are
significantly larger and have greater financial resources than the Bank. The
Bank's competition for loans comes principally from commercial banks, other
savings banks, co-operative banks, mortgage brokers,
1
mortgage banking companies and insurance companies. Its most direct competition
for deposits has historically come from savings, co-operative and commercial
banks. In addition, the Bank faces significant competition for deposits from
non-bank institutions such as brokerage firms and insurance companies in such
instruments as short-term money market funds, corporate and government
securities funds, mutual funds and annuities. Competition may also increase as a
result of the lifting of restrictions on the interstate operations of financial
institutions. The Bank has also experienced significant competition from credit
unions which have a competitive advantage as they do not pay state or federal
income taxes. Such competitive advantage has placed increased pressure on the
Bank with respect to its loan and deposit pricing.
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may originate
are limited by federal and state laws and regulations. Interest rates charged by
the Bank on loans are affected principally by the Bank's current asset/liability
strategy, the demand for such loans, the supply of money available for lending
purposes and the rates offered by its competitors. These factors are, in turn,
affected by general and economic conditions, monetary policies of the federal
government, including the Federal Reserve Board ("FRB"), legislative tax
policies and governmental budgetary matters.
At December, 31, 1998, the Bank's total loan portfolio was $287.0 million,
of which $157.7 million were one- to four-family residential mortgage loans, or
55.0% of total loans. At such date, the remainder of the loan portfolio
consisted of $23.0 million of multi-family loans, or 8.0% of total loans; $20.6
million of commercial real estate loans, or 7.2% of total loans; $3.5 million of
construction and development loans, or 1.2% of total loans; $77.6 million of
consumer loans, or 27.0% of total loans consisting primarily of $64.7 million of
home equity loans and lines of credit, or 83.4% of consumer loans; and $4.6
million of commercial loans, or 1.6% of total loans. Primarily all loans in the
Bank's portfolio, with the exception of home equity loans and lines of credit,
are located in the Bank's primary market area.
2
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the respective portfolio at
the dates indicated.
At December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Real estate loans:
One- to four-family............ $157,698 54.95% $139,811 52.84% $138,289 58.39% $127,811 62.73% $140,614 74.11%
Multi-family................... 22,962 8.00 19,047 7.20 17,826 7.53 11,843 5.81 8,823 4.65
Commercial..................... 20,595 7.18 21,757 8.22 19,697 8.32 3,032 1.49 16,500 8.70
Construction and development... 3,464 1.21 2,868 1.08 1,124 0.47 18,580 9.12 1,037 0.55
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans...... 204,719 71.34 183,483 69.34 176,936 74.71 161,266 79.15 166,974 88.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity loans and lines of
credit....................... 64,705 22.55 62,227 23.52 43,662 18.43 29,305 14.39 13,404 7.06
Automobile..................... 9,460 3.30 10,287 3.89 7,969 3.36 5,507 2.70 2,701 1.42
Other.......................... 3,454 1.20 4,291 1.62 4,397 1.86 4,286 2.10 3,868 2.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans.......... 77,619 27.05 76,805 29.03 56,028 23.65 39,098 19.19 19,973 10.52
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans................. 4,613 1.61 4,319 1.63 3,879 1.64 3,382 1.66 2,795 1.47
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans................... 286,951 100.00% 264,607 100.00% 236,843 100.00% 203,746 100.00% 189,742 100.00%
====== ====== ====== ====== ======== ======
Less:
Unadvanced loan funds(1)....... (1,453) (1,866) (1,395) (2,089) (1,212)
Net deferred loan origination
costs (fees)................. 711 934 598 370 (92)
Allowance for loan losses...... (2,166) (1,952) (1,911) (1,838) (1,657)
-------- -------- -------- --------
Loans, net................... $284,043 $261,723 $234,135 $200,189 $186,781
======== ======== ======== ======== ========
- ----------
(1) Includes committed but unadvanced loan amounts.
3
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
activities are conducted primarily by its salaried loan representatives
operating at its eleven full service banking offices. All loans originated by
the Bank are underwritten by the Bank under the Bank's policies and procedures.
The Bank originates both adjustable-rate and fixed-rate mortgage loans. The
Bank's ability to originate fixed- or adjustable-rate loans is dependent upon
the relative customer demand for such loans, which is affected by the current
and expected future level of interest rates. Consistent with its current
business strategy, the Bank plans to hire at least two commissioned loan
officers in the future with the primary responsibility of originating one- to
four-family mortgage loans for the Bank.
The Bank is primarily a portfolio lender, originating substantially all of
its loans for investment. Recently, however, the Bank completed the
securitization of $19.1 million of 30-year fixed-rate one- to four-family
mortgage loans with Fannie Mae. Such loans are serviced as mortgage-backed
securities for Fannie Mae. The Bank may continue to securitize a portion of its
loans, mostly 30-year fixed-rate one- to four-family mortgage loans, in the
future. Any loans originated for sale by the Bank conform to the underwriting
standards specified by Fannie Mae and Freddie Mac. The Bank generally retains
the servicing rights on any mortgage loans which it sells or securitizes.
At December 31, 1998, the Bank was servicing $41.4 million of loans for
others, consisting of conforming fixed-rate mortgage loans sold by the Bank.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, contacting delinquent mortgagors, supervising
foreclosures and property dispositions when there are unremedied defaults,
making insurance and tax payments on behalf of the borrowers and generally
administering the loans. Substantially all of the loans currently being serviced
for others are loans which have been sold or securitized by the Bank. The gross
servicing fee income from loans sold is generally 25 basis points of the total
balance of the loan being serviced.
During the years ended December 31, 1998, December 31, 1997 and December
31, 1996, the Bank originated $53.3 million, $9.9 million and $15.6 million of
fixed-rate one- to four-family loans, respectively, of which $45.9 million, $5.1
million and $9.8 million, respectively, were retained by the Bank. During these
same periods, the Bank also originated $5.6 million, $8.6 million and $12.4
million of adjustable-rate one- to four-family loans, respectively, all of which
were retained by the Bank. The Bank recognizes, at the time of sale, the cash
gain or loss on the sale of loans based on the difference between the net cash
proceeds received and the carrying value of the loans sold. The Bank has, from
time-to-time, participated in loans, primarily multi-family and commercial real
estate loans and commercial business loans and, at December 31, 1998, had $3.8
million in loan participation interests.
4
The following table sets forth the Bank's loan originations, sales and
principal repayments for the periods indicated.
For the Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Loans, net, beginning of period .................. $ 261,723 $ 234,135 $ 200,189
--------- --------- ---------
Loans originated:
Real estate .................................. 67,216 25,233 39,467
Consumer:
Home equity loans and lines of credit ...... 23,286 40,976 35,352
Automobile ................................. 4,774 6,829 5,651
Other ...................................... 3,196 2,980 3,325
--------- --------- ---------
Total consumer ........................... 31,256 50,785 44,328
--------- --------- ---------
Commercial ................................... 4,717 3,131 3,853
--------- --------- ---------
Total loans originated ................... 103,189 79,149 87,648
--------- --------- ---------
Principal repayments, unadvanced funds and
other, net ................................... (61,681) (51,141) (52,256)
Sale/securitization of mortgage loans,
principal balance ............................ (19,068) -- (815)
Net loan charge-offs ........................... (26) (139) (107)
Transfers to REO ............................... (94) (281) (524)
--------- --------- ---------
Total deductions ........................... (80,869) (51,561) (53,702)
--------- --------- ---------
Net loan activity ................................ 22,320 27,588 33,946
--------- --------- ---------
Loans, net, end of period .................. $ 284,043 $ 261,723 $ 234,135
========= ========= =========
5
Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loan portfolio at December 31, 1998. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on loans totalled $83.0 million, $52.7 million
and $51.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998
---------------------------------------------------------------------------------------------------------
One- to Construction Home Equity Total
Four- Multi- Commercial and Loans and Other Loans
Family Family Real Estate Development Lines of Credit Automobile Consumer Commercial Receivable
------- ------ ----------- ----------- --------------- ---------- -------- ---------- ----------
(In thousands)
Amounts due:
One year or less ....... $ 607 $ -- $ 804 $1,279 $ -- $ 337 $ 476 $ 399 $ 3,902
After one year:
More than one year to
three years ........ 841 -- 1,104 660 31 5,083 1,982 1,886 11,587
More than three years
to five years....... 2,198 -- 378 1,525 3,631 4,040 108 856 12,736
More than five years
to 10 years ........ 31,068 3,736 1,686 -- 5,178 -- 107 1,142 42,917
More than 10 years to
15 years ........... 41,198 3,769 6,353 -- 2,653 -- 52 44 54,069
More than 15 years ... 81,786 15,457 10,270 -- 53,212 -- 729 286 161,740
-------- ------- ------- ------ ------- ------ ------ ------ --------
Total amount due ... $157,698 $22,962 $20,595 $3,464 $64,705 $9,460 $3,454 $4,613 286,951
======== ======= ======= ====== ======= ====== ====== ======
Less:
Unadvanced loan funds ................................................................................................ (1,453)
Net deferred loan
origination costs .................................................................................................. (2,166)
Allowance for loan
losses ............................................................................................................. 711
--------
Loans, net ............................................................................................................. $284,043
========
6
The following table sets forth at December 31, 1998, the dollar amount of
gross loans receivable contractually due after December 31, 1999, and whether
such loans have fixed interest rates or adjustable interest rates.
Due After December 31, 1999
----------------------------
Fixed Adjustable Total
-------- ---------- --------
(In thousands)
Real estate loans:
One- to four-family ............................ $103,114 $ 53,977 $157,091
Multi-family and commercial real estate ........ 2,594 40,159 42,753
Construction and development ................... -- 2,185 2,185
-------- -------- --------
Total real estate loans ..................... 105,708 96,321 202,029
-------- -------- --------
Consumer loans:
Home equity loans and lines of credit .......... 55,487 9,218 64,705
Automobile loans ............................... 9,123 -- 9,123
Other .......................................... 2,870 108 2,978
Commercial loans ................................. 1,807 2,407 4,214
-------- -------- --------
Total loans ................................. $174,995 $108,054 $283,049
======== ======== ========
One- to Four-Family Lending. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years secured
by one- to four-family residences substantially all of which are located in the
Bank's primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives from existing
or past customers, through advertising, and through referrals from local
builders, real estate brokers and attorneys. At December 31, 1998, the Bank's
one- to four-family mortgage loans totalled $157.7 million, or 55.0% of total
loans. Of the one- to four-family mortgage loans outstanding at that date, 65.4%
were fixed-rate mortgage loans and 34.6% were ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms of up to 30
years. The Bank also currently offers a number of ARM loans with terms of up to
30 years and interest rates which adjust every one or three years from the
outset of the loan or which adjust annually after a five year initial fixed
period. The interest rates for the Bank's ARM loans are indexed to either the
one, three or five year Constant Maturity Treasury ("CMT") Index. The Bank
originates ARM loans with initially discounted rates. The Bank's ARM loans
generally provide for periodic (not more than 2%) and overall (not more than 6%)
caps on the increase or decrease in the interest rate at any adjustment date and
over the life of the loan. The Bank retains for its portfolio substantially all
loans originated, selling or securitizing, from time to time, 30-year fixed-rate
mortgage loans. Loans that are sold are generally sold to Freddie Mac and Fannie
Mae. The Bank generally retains the servicing on all loans sold.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower also rise, thereby
increasing the potential for default. The Bank attempts to minimize such risk by
assuming a 200 basis point increase in the loan's interest rate when evaluating
a borrower's creditworthiness based on the assumed higher payment. Periodic and
lifetime caps on interest rate increases also help to reduce the risks
associated with adjustable-rate loans but also limit the interest rate
sensitivity of such loans.
All one- to four-family mortgage loans are underwritten according to the
Bank's policies and secondary market underwriting guidelines. Generally, the
Bank originates one- to four-family residential mortgage loans in amounts up to
80% of the lower of the appraised value or the selling price of the property
securing the loan and up to 95% of the lesser of the appraised value or selling
price if private mortgage insurance ("PMI") is obtained. Mortgage loans
originated by the Bank generally include due-on-sale clauses which provide the
Bank with the contractual right to
7
redeem the loan immediately due and payable if a borrower transfers ownership of
the property without the Bank's consent. Due-on-sale clauses are an important
means of adjusting the yields on the Bank's fixed-rate mortgage loan portfolio
and the Bank has generally exercised its rights under these clauses. The Bank
requires fire, casualty, title and flood insurance, if applicable, on all
properties securing real estate loans made by the Bank.
In an effort to provide financing for first-time home buyers, the Bank
offers its own first-time home buyer loan program. This program offers one-and
two-family residential mortgage loans to qualified low-to-moderate income
individuals. These loans are offered with initial five year fixed-rates of
interest which adjust annually thereafter with terms of up to 30 years. The
program includes initially discounted rates and periodic (not more than 1%) and
overall (not more than 4%) caps on the increase or decrease in the interest rate
at any adjustment date and over the life of the loan. With this program,
borrowers receive reduced loan origination fees and closing costs. Such loans
must be secured by an owner-occupied residence. These loans are originated using
similar underwriting guidelines as are the Bank's other one- to four-family
mortgage loans. Such loans are originated in amounts of up to 95% of the lower
of the property's appraised value or the sale price. Private mortgage insurance
is required for loans with loan-to-value ("LTV") ratios of over 80%.
Home Equity Loans and Lines of Credit. The Bank offers home equity
revolving lines of credit, substantially all of which are secured by second
mortgages on owner-occupied one- to four-family residences located in the Bank's
primary market area and, to a lesser extent, by properties in northern
Connecticut and in Franklin County, Massachusetts. The lines of credit
maintained outside of the Bank's primary market were generated through the
services of a third party telemarketing firm and later approved by the Bank.
Such third party currently does very little solicitation on behalf of the Bank.
At December 31, 1998, home equity loans and lines of credit totalled $64.7
million, or 22.6% of the Bank's total loans and 83.4% of consumer loans. Home
equity lines of credit have adjustable-rates of interest which adjust on a
monthly basis. The adjustable-rate of interest charged on such loans is indexed
to the prime rate as reported in The Wall Street Journal. Home equity lines of
credit generally have an 18% lifetime limit on interest rates. Generally, the
maximum LTV ratio on home equity lines of credit is 75% of the assessed value of
the property less the outstanding balance of the first mortgage up to a maximum
of $100,000. The underwriting standards employed by the Bank for home equity
lines of credit include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment and, additionally, from any
verifiable secondary income.
The home equity line of credit may be drawn down by the borrower for a
period of ten years from the date of the loan agreement (the "draw period").
During the draw period, the borrower has the option of paying, on a monthly
basis, either principal and interest or only the interest. Following the draw
period, the borrower has fifteen years in which to pay back the line of credit
(the "repayment period"). A borrower is precluded from accessing the home equity
line of credit during the repayment period unless terms are renegotiated with
the Bank. At any time during the draw period, all, or a portion of the
outstanding balance of a home equity line of credit, may be converted into a
fixed-rate, home equity loan with terms of five, ten or 15 years.
Multi-Family and Commercial Real Estate Lending. The Bank originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings, industrial facilities or retail facilities primarily
located in the Bank's primary market area. The Bank's multi-family and
commercial real estate underwriting policies provide that such real estate loans
may be made in amounts of up to 80% of the appraised value of the property, 75%
if the property is being refinanced, provided such loan complies with the Bank's
current loans-to-one-borrower limit, which at December 31, 1998 was $4.0
million. The Bank's multi-family and commercial real estate loans may be made
with terms of up to 25 years and are offered with interest rates that adjust
periodically and are generally indexed to the prime rate as reported in The Wall
Street Journal. In reaching its decision on whether to make a multi-family or
commercial real estate loan, the Bank considers the net operating income of the
property, the borrower's expertise, credit history and profitability and the
value of the underlying property. In addition, with respect to commercial real
estate rental properties, the Bank will also consider the term of the lease and
the quality of the tenants. The Bank has generally required that the properties
securing these
8
real estate loans have debt service coverage ratios (the ratio of earnings
before debt service to debt service) of at least 1.15x. Environmental impact
surveys are generally required for commercial real estate loans. Generally, all
multi-family and commercial real estate loans made to corporations, partnerships
and other business entities require personal guarantees by the principals. The
Bank's multi-family real estate loan portfolio at December 31, 1998 was $23.0
million, or 8.0% of total loans, and the Bank's commercial real estate loan
portfolio at such date was $20.6 million, or 7.2% of total loans. The largest
multi-family or commercial real estate loan in the Bank's portfolio at December
31, 1998 was a $3.1 million multi-family real estate loan secured by a 126-unit
apartment building located in West Springfield, Massachusetts.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be affected by adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks through its underwriting
standards.
Construction and Development Lending. The Bank originates construction and
development loans primarily to finance the construction of one- to four-family,
owner-occupied residential real estate and commercial real estate properties
located in the Bank's primary market area. Commercial real estate construction
loans typically convert into permanent financing. Construction and development
loans are generally offered to customers and experienced builders with whom the
Bank has an established relationship. Construction and development loans are
typically offered with terms of up to 12 months; however, terms may be extended
up to four years under certain circumstances. The maximum loan-to-value limit
applicable to such loans is 80% for contract sales and 75% for speculative
properties. Construction loan proceeds are disbursed periodically in increments
as construction progresses and as inspections by the Bank's lending officers or,
on larger projects, independent architects or engineering firms, warrant. At
December 31, 1998, the Bank's largest construction and development loan was a
performing revolving line of credit for $1.4 million secured by a condominium
development project in Easthampton, Massachusetts. At December 31, 1998,
construction and development loans totalled $3.5 million, or 1.2%, of the Bank's
total loans.
The Bank originates land loans to local contractors and developers for the
purpose of making improvements thereon, or for the purpose of holding or
developing the land for sale. Such loans are secured by a lien on the property,
are limited to 60% of the lower of the acquisition price or the appraised value
of the land and have a term of up to three years with a floating interest rate
based on the prime rate as reported in The Wall Street Journal. The Bank's land
loans are generally secured by property in its primary market area. The Bank
requires title insurance and, if applicable, a hazardous waste survey reporting
that the land is free of hazardous or toxic waste.
Construction and development financing is generally considered to involve
a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction compared to the estimated cost (including interest)
of construction and other assumptions, including the estimated time to sell
residential properties. If the estimate of value proves to be inaccurate, the
Bank may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.
Automobile and Other Consumer Lending. The Bank offers automobile loans
with term of up to 60 months and loan-to-value ratios of 80% for new cars. For
used cars, the maximum loan-to-value ratio is 75% of the lesser of the retail
value shown in the NADA Used Car Guide or the purchase price, and the terms for
used automobile loans range between 48 months (for automobiles up to four years
old) to 36 months (for older vehicles). The interest rates offered are the same
for new and used automobile loans. At December 31, 1998, automobile loans
totalled $9.5 million, or 3.3% of the Bank's total loans and 12.2% of consumer
loans. Other consumer loans at December 31, 1998 amounted to $3.5 million, or
1.2% of the Bank's total loans and 4.4% of consumer loans. These loans include
education, second mortgages, collateral, motorcycle, boat, mobile home and
unsecured personal loans. Motorcycle, boat and mobile home loans are generally
made in amounts of up to 80% of the fair market value of the property securing
the loan. Collateral
9
loans are generally secured by a passbook account, a certificate of deposit,
securities or life insurance. Unsecured personal loans generally have a maximum
borrowing limitation of $5,000 and a maximum term of three years.
Loans secured by rapidly depreciable assets such as automobiles,
motorcycles and boats or that are unsecured entail greater risks than one- to
four-family mortgage loans. In such cases, repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance, since there is a greater likelihood of damage, loss or
depreciation of the underlying collateral. Further, collections on these loans
are dependent on the borrower's continuing financial stability and, therefore,
are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Finally, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans if a borrower defaults.
Commercial Lending. At December 31, 1998, the Bank had $4.6 million in
commercial loans which amounted to 1.6% of total loans. In addition, at such
date, the Bank had $1.2 million of unadvanced commercial lines of credit. The
Bank makes commercial business loans primarily in its market area to a variety
of professionals, sole proprietorships and small businesses. The Bank offers a
variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. The maximum amount of a commercial
business loan is limited by the Bank's loans-to-one-borrower limit which at
December 31, 1998, was $4.0 million. Term loans are generally offered with
initial fixed rates of interest for the first five years and with terms of up to
7 years. Business lines of credit have adjustable rates of interest and are
payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a monthly basis and are indexed to the
prime rate as published in The Wall Street Journal.
In making commercial business loans, the Bank considers the financial
statements of the borrower, the Bank's lending history with the borrower, the
debt service capabilities of the borrower, the projected cash flows of the
business and the value of the collateral. Commercial business loans are
generally secured by a variety of collateral, primarily equipment, assets and
accounts receivable, and are supported by personal guarantees. Depending on the
collateral used to secure the loans, commercial loans are made in amounts of up
to 80% of the adjusted value of the collateral securing the loan. The Bank
generally does not make unsecured commercial loans. In addition, the Bank
participates in loans, often community-based, with area lenders with whom the
Bank has a relationship. When determining whether to participate in such loans,
the Bank will underwrite its participation interest according to its own
underwriting standards. At December 31, 1998, $148,000, or 3.2% of the
commercial loan portfolio, were participation loans of this nature. In an effort
to increase its emphasis on commercial loans, the Bank intends to hire an
experienced commercial loan officer with the primary responsibility of
increasing commercial business and real estate loan volume.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans are of higher risk and typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial loans may be substantially dependent on the success of the business
itself. Further, any collateral securing such loans may depreciate over time,
may be difficult to appraise and may fluctuate in value. At December 31, 1998,
the Bank's largest commercial loan was a $200,000 revolving line of credit to a
retail business located in South Hadley, Massachusetts.
Loan Approval Procedures and Authority. The lending policies and loan
approval limits of the Bank are established by the Board of Investment and
ratified by the Board of Trustees. In connection with one- to four-family
mortgage loans, the Board of Investment has authorized the following persons to
approve the loans up to the amounts indicated: one assistant vice president and
the vice president of commercial lending may approve loans up to $150,000; the
other assistant vice president and all loan origination and underwriting
officers may approve loans up to $227,150; and the Chief Executive Officer and
the Senior Vice President, Lending may approve loans up to $250,000.
10
With respect to consumer loans, the Board of Investment has authorized the
following persons to approve loans up to the amounts indicated: assistant branch
managers and all but one branch supervisor may approve secured and unsecured
loans of up to $15,000 and $5,000, respectively; the remaining branch
supervisor, branch managers, loan originators and underwriting officers and the
vice president, operations may approve secured and unsecured loans of up to
$25,000 and $10,000, respectively; and the Chief Executive Officer and the
Senior Vice President, Lending may approve loans up to $75,000 and $50,000,
respectively.
The Board of Investment has authorized the following individuals to
approve home equity loans and lines of credit up to the amounts indicated: one
loan origination officer may approve such loans up to $25,000; lending vice
presidents, assistant vice presidents and loan origination and underwriting
officers may approve loans up to $100,000; and the Chief Executive Officer and
the Senior Vice President, Lending may approve loans up to $125,000.
All loans in excess of these amounts must be approved by either the Senior
Vice President, Lending, the Officers' Loan Committee and/or the Board of
Investment. The Officers' Loan Committee, which currently consists of three
lending officers, is selected by the Board of Investment and ratified by the
Board of Trustees. Specifically, all loans, commitments or other extensions of
credit, which either alone or in the aggregate total up to $350,000 may be
approved by the Senior Vice President, Lending. Those loan commitments or other
extensions of credit, either alone or in the aggregate, which are greater than
$350,000 but are less than $750,000 must be approved by the Officers' Loan
Committee and those loans commitments or other extensions of credit, either
alone or in the aggregate, which exceed $750,000 must be approved by the Board
of Investment. Additionally, those loans less than $750,000 must be ratified by
the Board of Investment. All loans, commitments and other extensions of credit
which increase the total aggregate unsecured liability of a borrower to $75,000
or more must be approved by the Officers' Loan Committee.
With respect to commercial loans, the Board of Investment has authorized
the following persons to approve loans up to the amounts indicated: the
Assistant Vice President, Loan Servicing and Collection may approve commercial
real estate loans, commercial secured and unsecured loans in amounts of up to
$125,000, $50,000 and $10,000, respectively; the vice president/commercial
lending officer may approve commercial real estate loans, commercial secured and
unsecured loans in amounts of up to $250,000, $200,000 and $100,000,
respectively; and the Chief Executive Officer and the Senior Vice President,
Lending may approve commercial real estate loans, commercial secured and
unsecured loans in amounts of up to $350,000, $250,000 and $125,000,
respectively.
All loans in excess of these amounts must be approved by either the
Officer's Loan Committee and/or the Board of Investment. The Officers' Loan
Committee, which currently consists of three lending officers, is selected by
the Board of Investment and ratified by the Board of Trustees. Specifically, all
loans, commitments or other extensions of credit, either alone or in the
aggregate which exceed $350,000 or $750,000 must be approved by the Officers'
Loan Committee and the Board of Investment, respectively. Additionally, all
loans, commitments and other extensions of credit which increase the total
aggregate unsecured liability of a borrower to $125,000 or more must be approved
by the Officers' Loan Committee.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquent Loans. Reports listing all delinquent accounts are generated
and reviewed by management and the Board of Investment on a monthly basis and
the Board of Trustees performs a bi-monthly review of all loans or lending
relationships delinquent 90 days or more. The procedures taken by the Bank with
respect to delinquencies vary depending on the nature of the loan, period and
cause of delinquency and whether the borrower is habitually delinquent. When a
borrower fails to make a required payment on a loan, the Bank takes a number of
steps to have the borrower cure the delinquency and restore the loan to current
status. The Bank generally sends the borrower a written notice of non-payment
after the loan is 15 days past due. The Bank's guidelines provide that telephone
and written correspondence will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time before foreclosure, the Bank will offer to work out a
repayment schedule with the borrower to avoid foreclosure. If payment is not
then received or the loan not otherwise satisfied, additional letters and
telephone calls generally are made. If the loan is still not brought current or
satisfied and it becomes
11
necessary for the Bank to take legal action, which typically occurs after a loan
is 90 days or more delinquent, the Bank will demand the loan and then commence
foreclosure proceedings against any real property that secured the loan or
accept a deed in lieu of foreclosure. If a foreclosure action is instituted and
the loan is not brought current, paid in full, or refinanced before the
foreclosure sale, the property securing the loan generally is sold at
foreclosure and, if purchased by the Bank, becomes real estate owned.
Classified Assets. Federal regulations and the Bank's internal policies
require that the Bank utilize an internal asset classification system as a means
of reporting problem and potential problem assets. The Bank currently classifies
problem and potential problem assets as "Substandard," "Doubtful" or "Loss"
assets. An asset is considered Substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not
corrected. Assets classified as Doubtful have all of the weaknesses inherent in
those classified Substandard with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and improbable.
Assets classified as Loss are those considered uncollectible and of such little
value that their continuance as assets, without the establishment of a specific
loss reserve, is not warranted. Assets which do not currently expose the Bank to
a sufficient degree of risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
"Special Mention."
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for possible
loan losses in an amount deemed prudent by management unless the loss of
principal appears to be remote. When the Bank classifies one or more assets, or
portions thereof, as Loss, it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified or
to charge off the loan in full.
The Bank determines the classification of its assets and the amount of its
valuation allowances. These determinations can be reviewed by the Federal
Deposit Insurance Corporation ("FDIC") and the Commissioner of Banks for the
Commonwealth of Massachusetts (the "Commissioner"), which can order the
establishment of additional general or specific loss allowances. The FDIC, in
conjunction with the other federal banking agencies, recently adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Bank believes that it has established an adequate allowance for
possible loan losses, there can be no assurance that regulators, in reviewing
the Bank's loan portfolio, will not request the Bank to materially increase at
that time its allowance for possible loan losses, thereby negatively affecting
the Bank's financial condition and earnings at that time. Although management
believes that adequate specific and general loan loss allowances have been
established, future provisions are dependent upon future events such as loan
growth and portfolio diversification and, as such, further additions to the
level of specific and general loan loss allowances may become necessary.
Management of the Bank and the Board of Investment review and classify the
assets of the Bank on a monthly basis and the Board of Trustees reviews the
results of the reports on a bi-monthly basis. The Bank classifies its assets in
accordance with the management guidelines described above. At December 31, 1998,
the Bank had $3.2 million, or 0.8%, of assets designated as Substandard,
consisting of 23 one- to four-family loans, three commercial real estate loans,
seven multi-family loans, three home equity lines of credit , eight consumer
loans and two commercial business loans. At such date, the Bank had no loans
classified as Doubtful or Loss. Also, at December 31, 1998, the Bank had
$864,000, or 0.2% of assets designated as Special Mention, consisting of seven
one- to four-family loans, three commercial real estate loans, two home equity
lines of credit and four commercial business loans. At December 31, 1998, all of
these classified assets represented 1.4% of total loans.
12
At December 31, 1998, the Bank had two loans, each with balances of
$500,000 or more, which had been adversely classified or identified as a problem
credit. The first, which is classified as substandard, was restructured in 1994
and is secured by a blanket first mortgage on ten multi-family properties
located in Westfield, Massachusetts. Currently, the borrower provides the Bank
with monthly financial statements and the Bank actively monitors the properties'
vacancy rates. The borrower is current with respect to payments. The second
loan, which was originally restructured in 1992 and, more recently in December
1997, is classified as impaired. This loan is secured by an office/retail
building located in Wilbraham, Massachusetts. The borrower is current with
respect to payments. As of December 31, 1998, the aggregate outstanding carrying
balance of these loans was $1.4 million.
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
At December 31, 1998 At December 31, 1997
------------------------------------ ------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------- ----------------- ----------------- -----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in thousands)
One- to four-family..................... 1 $74 2 $167 2 $ 80 1 $ 95
Commercial real estate.................. -- -- 2 109 2 192 1 790
Home equity loans and lines of credit... 1 6 1 30 1 30 -- --
Other consumer.......................... 3 5 -- -- 6 38 -- --
---- ---- --- ---- ---- ---- ---- ----
Total loans............................. 5 $85 5 $306 11 $340 2 $885
==== ==== === ==== ==== ==== ==== ====
Delinquent loans to total loans(1)...... 0.03% 0.11% 0.13% 0.34%
==== ==== ==== ====
At December 31, 1996 At December 31, 1995
------------------------------------ ------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------- ----------------- ----------------- -----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in thousands)
One- to four-family..................... 2 $51 1 $ 71 6 $340 4 $384
Commercial real estate.................. 1 43 2 124 1 43 1 61
Home equity loans
and lines of credit................... -- -- 1 30 2 39 -- --
Other consumer.......................... 1 4 4 27 4 22 1 93
---- ---- ---- ---- ---- ---- ---- ----
Commercial.............................. -- -- -- -- -- -- 1 28
---- ---- ---- ---- ---- ---- ---- ----
Total loans............................. 4 $98 8 $252 13 $444 7 $566
==== ==== ==== ==== ==== ==== ==== ====
Delinquent loans to total loans(1)...... 0.04% 0.11% 0.22% 0.28%
==== ==== ==== ====
- ----------
(1) Total loans includes loans, less unadvanced loan funds, plus deferred loan
costs (fees), net.
Nonperforming Assets and Impaired Loans. The following table sets forth
information regarding nonaccrual loans and real estate owned ("REO"). At
December 31, 1998, nonaccrual loans totalled $306,000, consisting of five loans.
It is the general policy of the Bank to cease accruing interest on loans 90 days
or more past due and to fully reserve for all previously accrued interest. If
interest payments on all nonaccrual loans for the years ended December 31, 1998,
1997 and 1996 had been made in accordance with original loan agreements,
interest income of $11,000, $48,000 and $13,000, respectively, would have been
recognized. On January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118. At December 31, 1998, the Bank had a $1.2 million
recorded investment in impaired loans which had specific allowances of $283,000.
At December 31, 1997, there were $1.2 million of impaired loans with specific
loan loss allowances of $200,000. At December 31, 1998, REO totalled $241,000,
consisting of three residential building lots, a 25 lot residential subdivision
and a mobile home. When the Bank acquires property through foreclosure or deed
in lieu of foreclosure, it is initially recorded at the lower of the recorded
investment in the corresponding loan
13
or the fair value of the related assets at the date of foreclosure, less costs
to sell. Thereafter, if there is a further deterioration in value, the Bank
provides for a specific allowance and charges operations for the diminution in
value.
At December 31,
-----------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual loans:
Real estate:
One- to four-family ............. $ 167 $ 95 $ 71 $ 412 $ 404
Multi-family .................... -- -- -- -- 180
Commercial ...................... 109 790 124 61 880
Home equity loans and lines of
credit .......................... 30 -- 30 93 113
Other consumer .................... -- -- 27 -- 5
------ ------ ---- ------ ------
Total ........................... 306 885 252 566 1,582
Real estate owned (REO), net(1) ..... 241 189 348 534 955
Real estate in possession ........... -- 192 75 107 --
------ ------ ---- ------ ------
Total nonperforming assets ........ 547 1,266 675 1,207 2,537
Troubled debt restructurings ........ 773 274 -- 1,947 939
------ ------ ---- ------ ------
Troubled debt restructurings and
total nonperforming assets ........ $1,320 $1,540 $675 $3,154 $3,476
====== ====== ==== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans(2)(3) ... 0.38% 0.44% 0.11% 1.24% 1.34%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets(3) ..... 0.31% 0.45% 0.21% 1.15% 1.31%
- ----------
(1) Real estate owned balances are shown net of related loss allowances.
(2) Total loans includes loans, less unadvanced loan funds, plus deferred loan
costs (fees), net.
(3) Nonperforming assets consist of nonperforming loans and REO. Nonperforming
loans consist of nonaccruing loans and all loans 90 days or more past due
and other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or principal.
Allowance for Loan Losses
The allowance for loan losses is maintained through provisions for loan
losses based on management's on-going evaluation of the risks inherent in its
loan portfolio in consideration of the trends in its loan portfolio, the
national and regional economies and the real estate market in the Bank's primary
lending area. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses in its loan portfolio
which are deemed probable and estimable based on information currently known to
management. The Bank's loan loss allowance determinations also incorporate
factors and analyses which consider the potential principal loss associated with
the loan, costs of acquiring the property securing the loan through foreclosure
or deed in lieu thereof, the periods of time involved with the acquisition and
sale of such property, and costs and expenses associated with maintaining and
holding the property until sale.
Management calculates a loan loss allowance sufficiency analysis on a
bi-monthly basis based upon the loan portfolio composition, asset
classifications, loan-to-value ratios, potential impairments in the loan
portfolio and other factors. The analysis is compared to actual losses, peer
group comparisons and economic conditions. As of December 31, 1998, the Bank's
allowance for loan losses was $2.2 million or 0.76% of total loans, and 201% of
nonperforming loans and troubled debt restructurings as compared to $2.0 million
or 0.74% of total loans, and 168% of nonperforming loans and troubled debt
restructurings as of December 31, 1997. The Bank had total nonperforming loans
and troubled debt restructurings of $1.1 and $1.2 million at December 31, 1998
and 1997, respectively, and
14
nonperforming loans and troubled debt restructurings to total loans of 0.38% and
0.44%, respectively. Management believes that, based on information available at
December 31, 1998, the Bank's allowance for loan losses was sufficient to cover
losses inherent in its loan portfolio at that time. Based upon the Bank's plan
to increase its emphasis on non-one- to four-family mortgage lending, the Bank
may further increase its allowance for loan losses over future periods as
conditions dictate. However, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Bank or that further future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. In addition, the
FDIC and the Commissioner, as an integral part of their examination processes,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for estimated loan losses based
upon judgments different from those of management.
The following table sets forth activity in the Bank's allowance for
loan losses for the periods set forth in the table.
At or For the Year Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Allowance for loan losses, beginning of period $1,952 $1,911 $1,838 $1,657 $1,667
Charged-off loans:
Real estate ................................ -- 52 34 30 271
Consumer ................................... 100 109 72 45 73
Commercial ................................. -- 10 30 -- --
------ ------ ------ ------ ------
Total charged-off loans .................. 100 171 136 75 344
------ ------ ------ ------ ------
Recoveries on loans previously charged-off:-
Real estate ................................ 37 11 10 24 11
Consumer ................................... 37 21 19 22 23
Commercial ................................. -- -- -- -- --
------ ------ ------ ------ ------
Total recoveries ......................... 74 32 29 46 34
------ ------ ------ ------ ------
Net loans charged-off ........................ 26 139 107 29 310
Provision for loan losses .................... 240 180 180 210 300
------ ------ ------ ------ ------
Allowance for loan losses, end of period ..... $2,166 $1,952 $1,911 $1,838 $1,657
====== ====== ====== ====== ======
Net loans charged-off to average
interest-earning loans ..................... 0.01% 0.06% 0.05% 0.01% 0.17%
Allowance for loan losses to total loans(1) .. 0.76% 0.74% 0.81% 0.91% 0.88%
Allowance for loan losses to nonperforming
loans and troubled debt restructuring(2) ... 200.74% 168.42% 758.33% 73.14% 65.73%
Net loans charged-off to allowance for loan
losses ..................................... 1.20% 7.12% 5.60% 1.58% 18.71%
Recoveries to charge-offs .................... 74.00% 18.71% 21.32% 61.33% 9.88%
- ----------
(1) Total loans includes loans, less unadvanced loan funds, plus deferred loan
costs (fees), net.
(2) Nonperforming loans and troubled debt restructuring consist of all loans
90 days or more past due and other loans which have been identified by the
Bank as presenting uncertainty with respect to the collectibility of
interest or principal.
15
The following table sets forth the Bank's percent of allowance for loan
losses to total allowances and the percent of loans to total loans in each of
the categories listed at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. These
allocations are not necessarily indicative of future losses and do not restrict
the use of the allowance to absorb losses in any other loan category.
At December 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------ ------------------------------
% of % of % of
Allowance Percent of Allowance Percent of Allowance Percent of
in each Loans in in each Loans in in each Loans in
Category Each Category Each Category Each
to Total Category to to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
Real estate loans................... $1,543 71.24% 71.34% $1,506 77.15% 69.34% $1,547 80.95% 74.71%
Consumer loans...................... 525 24.24 27.05 348 17.83 29.03 256 13.40 23.65
Commercial loans.................... 98 4.52 1.61 98 5.02 1.63 108 5.65 1.64
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses................... $2,166 100.00% 100.00% $1,952 100.00% 100.00% $1,911 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
At December 31,
---------------------------------------------------------------
1995 1994
------------------------------- ------------------------------
% of % of
Allowance Percent of Allowance Percent of
in each Loans in in each Loans in
Category Each Category Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
Real estate loans........................... $1,555 84.60% 79.15% $1,441 86.96% 88.01%
Consumer loans.............................. 145 7.89 19.19 78 4.71 10.52
Commercial loans............................ 138 7.51 1.66 138 8.33 1.47
------ ------ ------ ------ ------ ------
Total allowance for loan losses.......... $1,838 100.00% 100.00% $1,657 100.00% 100.00%
====== ====== ====== ====== ====== ======
16
Investment Activities
The Board of Trustees establishes the investment policy and procedures of
the Bank and has delegated investment authority and responsibility to the Bank's
Board of Investment. It is the general policy of the Bank that all investment
transactions be conducted in a safe and sound manner. The Bank's investment
policy further provides that investment decisions be based upon a thorough
analysis of each proposed investment to determine its quality, inherent risks,
fit within the Bank's overall asset/liability management objectives, the effect
on the Bank's risk-based capital and prospects for yield and/or appreciation.
While general investment strategies are developed and authorized by the Board of
Investment, the execution of specific investment actions and the day-to-day
oversight of the Bank's investment portfolio rests with the President and Senior
Vice President/Treasurer. These officers are authorized to execute investment
transactions of up to $5 million per transaction without the prior approval of
the Board of Investment if such transactions are within the scope of the Bank's
established investment policy. On a monthly basis, the Board of Investment
reviews and evaluates all investment activities for safety and soundness,
adherence to the Bank's investment policy and assurance that authority levels
are maintained.
As required by SFAS No. 115, the Bank has established an investment
portfolio of securities that are categorized as held-to-maturity,
available-for-sale or held-for-trading. The Bank generally invests in securities
as a method of utilizing funds not utilized for loan origination activity and as
a method of maintaining liquidity at levels deemed appropriate by management.
The Bank does not currently maintain a portfolio of securities categorized as
held-for-trading or held-to-maturity. At December 31, 1998, the Bank's
securities portfolio totalled $111.4 million, or 26.1% of assets, all of which
was categorized as available-for-sale.
Mortgage-Backed Securities. In the past, the Bank has purchased
mortgage-backed securities to (1) achieve positive interest rate spreads with
minimal administrative expense and (2) lower its credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and Ginnie Mae. The Bank
purchases mortgage-backed securities insured or guaranteed by Fannie Mae,
Freddie Mac and Ginnie Mae. More recently, the Bank completed the securitization
of $19.1 million of fixed-rate one- to four-family mortgage loans with Fannie
Mae. The loans are serviced as mortgage-backed securities for Fannie Mae. In
addition to resulting in a decrease in loans receivable and a related increase
in mortgage-backed securities, the securitization provides several benefits to
the Bank, including (1) improvement in the credit risk profile of the Bank's
balance sheet by converting whole loans into mortgage-backed securities
guaranteed by Fannie Mae, (2) reduction of the required level of risk-based
capital, and (3) addition of high quality collateral designated as
"available-for-sale" which can be pledged for borrowings or sold in the
secondary market to fund future loan growth. Additionally, in the fourth quarter
of 1998, the Bank borrowed funds to purchase $40.0 million of mortgage-backed
securities insured or guaranteed by Ginnie Mae in anticipation of receiving
proceeds from the Bank's conversion.
Mortgage-backed securities are created by the pooling of mortgages and
issuance of a security with an interest rate which is less than the interest
rate on the underlying mortgage. Mortgage-backed securities typically represent
a participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage-backed securities backed
by one- to four-family mortgages. The issuers of such securities (generally U.S.
government agencies and government sponsored enterprises, including Fannie Mae,
Freddie Mac and Ginnie Mae) pool and resell the participation interests in the
form of securities to investors such as the Bank and guarantee the payment of
principal and interest to investors. Mortgage-backed securities generally yield
less than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. However, mortgage-backed securities are
usually more liquid than individual mortgage loans and may be used to
collateralize specific liabilities and obligations of the Bank.
Although the Bank no longer invests in Real Estate Mortgage Investment
Conduits ("REMICs"), the Bank did maintain $8.1 million of such investments in
its securities portfolio at December 31, 1998. Generally, REMICs hold commercial
and/or residential real estate mortgages in trust and issue securities
representing an undivided interest in such mortgages. A REMIC, which can be a
corporation, trust, association or partnership, assembles mortgages
17
into pools and issues pass-through certificates, multiclass bonds (similar to a
collateralized mortgage obligation) or other securities to investors in the
secondary mortgage market.
At December 31, 1998, mortgage-backed securities totalled $88.8 million,
or 20.8%, of assets and 22.0% of interest earning assets, all of which were
classified as available-for-sale. At December 31, 1998, 9.1% of the
mortgage-backed securities were backed by adjustable-rate loans and 90.9% were
backed by fixed-rate loans. The mortgage-backed securities portfolio had a
stated rate of 6.7% at December 31, 1998. The estimated fair value of the Bank's
mortgage-backed securities at December 31, 1998, was $88.8 million, which is
$791,000 more than the amortized cost of $88.0 million. Investments in
mortgage-backed securities involve a risk that actual prepayments may differ
from estimate prepayments over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments thereby changing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities or if such securities are redeemed by the issuer. In addition, the
market value of such securities may be adversely affected by changes in interest
rates.
Equity Securities. The Bank currently maintains a diversified equity
security portfolio. At December 31, 1998, the Bank's equity securities portfolio
totalled $22.6 million, or 5.3% of assets, all of which were classified as
available-for-sale. Such portfolio consisted of $15.4 million of diversified
common stock and $3.8 million of preferred stock issued by corporate issuers and
$1.5 million of mutual funds at cost. The Bank's current policies generally
provide that the maximum equity investment in any one corporation shall not
exceed $300,000 and the maximum aggregate investment in equity securities shall
not exceed 10% of the Bank's total assets.
Investments in equity securities involve risk as they are not insured or
guaranteed investments and are affected by stock market fluctuations. Such
investments are carried at their market value and can directly affect the net
surplus of the Bank. The Bank also utilizes, from time to time, "covered" call
options with respect to common stocks as a means to further supplement its
revenues associated with equity investments. Such investment activity is
specifically authorized by both federal and Massachusetts law.
18
The following table sets forth at the dates indicated information
regarding the amortized cost and market values of the Bank's investment
securities.
At December 31,
-----------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- ------- --------- ------- -------- --------
(Dollars in thousands)
Debt Securities:
U.S. Government and federal
agency obligations ...... $ -- $ -- $ -- $ -- $ -- $ --
Other debt securities ..... -- -- -- -- 250 250
-------- -------- ------- ------- ------- -------
Total debt securities ... -- -- -- -- 250 250
-------- -------- ------- ------- ------- -------
Equity securities available-
for-sale:
Preferred stock ........... 3,754 3,815 3,177 3,345 4,527 4,723
Common stock .............. 15,438 17,436 9,425 12,382 7,576 9,122
Mutual funds .............. 1,524 1,394 -- -- -- --
-------- -------- ------- ------- ------- -------
Total equity securities . 20,716 22,645 12,602 15,727 12,103 13,845
-------- -------- ------- ------- ------- -------
Mortgage-backed securities
available-for sale:
Freddie Mac ............... 5,459 5,546 7,923 8,059 11,218 11,268
Fannie Mae ................ 31,955 32,435 18,353 18,476 22,275 22,116
Ginnie Mae ................ 42,726 42,670 2,814 2,941 2,937 2,999
REMICs .................... 7,833 8,113 10,169 10,437 10,874 11,148
-------- -------- ------- ------- ------- -------
Total mortgage-backed
securities ............ 87,973 88,764 39,259 39,913 47,304 47,531
-------- -------- ------- ------- ------- -------
Total securities(1) ..... $108,689 $111,409 $51,861 $55,640 $59,657 $61,626
======== ======== ======= ======= ======= =======
- ----------
(1) Does not include $5.6 million, $2.4 million and $2.1 million of
FHLB-Boston stock held by the Bank in 1998, 1997 and 1996 respectively.
19
The following table sets forth the Bank's securities activities for the
periods indicated. This table does not include FHLB stock held by the Bank.
For the Year Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
Mortgage-backed securities (available-for-sale):
Mortgage-backed securities, beginning of period ....... $ 39,913 $ 47,531 $ 35,561
-------- -------- --------
Purchases and securitization .......................... 59,637 -- 18,039
Calls: mortgage-backed securities ..................... -- (496) (120)
Repayments and prepayments ............................ (10,937) (7,561) (6,017)
Net accretion ......................................... 15 12 13
Increase in unrealized gain ........................... 136 427 55
-------- -------- --------
Net increase (decrease) in mortgage-backed securities 48,851 (7,618) 11,970
-------- -------- --------
Mortgage-backed securities, end of period ............. $ 88,764 $ 39,913 $ 47,531
======== ======== ========
Debt and equity securities:
Debt and equity securities, beginning of period ....... $ 15,727 $ 14,095 $ 18,476
-------- -------- --------
Purchases: equity securities (available-for-sale) .... 16,376 10,285 8,569
Sales: equity securities (available-for-sale) ......... (7,588) (7,521) (10,727)
Calls:
Debt securities (held-to-maturity) .................. -- -- --
Debt securities (available-for-sale) ................ -- -- (241)
Equity securities (available-for-sale) .............. (642) (1,716) --
Principal payments: Corporate bonds ................... -- -- (166)
Transfer to Charitable Foundation: equity securities .. (33) (549) --
(available-for-sale)
Maturities:
Debt securities (held-to-maturity) .................. -- -- --
Debt securities (available-for-sale) ................ -- (250) (2,386)
Net amortization ...................................... -- -- (28)
Increase (decrease) in unrealized gain ................ (1,195) 1,383 598
-------- -------- --------
Net increase (decrease) in debt and equity securities 6,918 1,632 (4,381)
-------- -------- --------
Debt and equity securities, end of period ............. $ 22,645 $ 15,727 $ 14,095
======== ======== ========
20
The table below sets forth information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's securities
portfolio as of December 31, 1998. There were no securities with contractual
maturities of one year or less.
At December 31, 1998
------------------------------------------------------------------------------
More than One More than Five
Year to Five Years to Ten More than Ten
Years Years Years Total
------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Available-for-sale securities:
Mortgage-backed securities:
Freddie Mac.................... $10 10.00% $ 3 7.75% $ 5,533 6.44% $ 5,546 6.44%
Fannie Mae..................... 32 7.00 13,428 6.31 18,975 7.42 32,435 7.43
Ginnie Mae..................... -- -- -- -- 42,670 6.95 42,670 6.69
REMICs......................... -- -- -- -- 8,113 6.55 8,113 6.55
--- ------- ------- --------
Total mortgage-backed
securities.................. 42 7.73% 13,431 6.31% 75,291 6.71% 88,764 6.65%
Equity securities................ -- -- -- -- -- -- 22,645
--- ------- ------- --------
Total securities(1).......... $42 $13,431 $75,291 $111,409
=== ======= ======= ========
- ----------
(1) Does not include $5.6 million of FHLB stock held by the Bank.
Sources of Funds
General. Deposits, repayments and prepayments of loans, cash flows
generated from operations and FHLB advances are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of consumer and commercial deposit
accounts with a range of interest rates and terms. The Bank's deposit accounts
consist of savings, retail checking/NOW accounts, commercial checking accounts,
money market accounts, club accounts and certificate of deposit accounts. The
Bank offers certificate of deposit accounts with balances in excess of $100,000
at preferential rates (jumbo certificates) and also offers Individual Retirement
Accounts ("IRAs") and other qualified plan accounts.
At December 31, 1998, the Bank's deposits totalled $275.0 million, or
70.3%, of total liabilities. For the year ended December 31, 1998, the average
balance of core deposits (savings, NOW, money market and demand accounts)
totalled $129.6 million, or 48.0% of total average deposits. At December 31,
1998, the Bank had a total of $138.4 million in certificates of deposit, of
which $106.4 million had maturities of less than one year. For the year ended
December 31, 1997, the average balance of core deposits represented
approximately 45.6% of total deposits and certificate accounts represented
54.4%, as compared to core deposits representing 46.8% of total deposits and
certificate accounts representing 53.2% of deposits for the year ended December
31, 1996. Although the Bank has a significant portion of its deposits in core
deposits, management monitors activity on the Bank's core deposits and, based on
historical experience and the Bank's current pricing strategy, believes it will
continue to retain a large portion of such accounts. The Bank is not limited
with respect to the rates it may offer on deposit products.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its banking offices are located. The Bank relies primarily on customer
service, advertising and long-standing relationships with customers to attract
and retain these deposits; however, market interest rates and rates offered by
competing financial institutions affect the Bank's ability to attract and retain
deposits. The Bank uses traditional means of advertising its deposit products,
including radio and print media and generally does not actively solicit
deposits from outside
21
its market area. While certificate accounts in excess of $100,000 are accepted
by the Bank, and may receive preferential rates, the Bank does not actively
solicit such deposits as such deposits are more difficult to retain than core
deposits. Although the Bank's policies allow for the use of brokered deposits,
the Bank does not currently solicit brokered deposits. All Massachusetts savings
banks are required to be members of the Mutual Savings Central Fund and as such,
must pay its assessments. The Mutual Savings Central Fund maintains the DIF, a
private deposit insurer, which insures all deposits in member banks in excess of
FDIC deposit insurance limits.
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Increase before interest credited .......... $ 1,977 $ 3,512 $ 7,848
Interest credited(1) ....................... 10,385 10,185 9,445
------- ------- -------
Net increase ............................... $12,362 $13,697 $17,293
======= ======= =======
- ----------
(1) Does not include escrow interest credited of $8,000, $7,000 and $7,000 for
the periods ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Bank had $23.2 million in certificate accounts
in amounts of $100,000 or more, maturing as follows:
Weighted
Average
Maturity Period Amount Rate
------ --------
(Dollars in thousands)
Three months or less ............................. $ 6,999 5.02%
Over three through six months .................... 3,473 5.11
Over six through 12 months ....................... 7,468 5.72
Over 12 months ................................... 5,277 6.45
-------
Total ............................................ $23,217 5.58
=======
22
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize average daily balances.
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
------------------------------ -------------------------------
Percent Weighted Percent Weighted
Average of Total Average Average of Total Average
Balance Deposits Rate Balance Deposits Rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Demand deposits........................ $ 10,184 3.77% --% $ 7,939 3.11% --%
Savings accounts(1).................... 66,805 24.75 2.39 64,285 25.16 2.74
Money Market accounts.................. 24,465 9.06 2.89 19,238 7.53 2.12
NOW accounts........................... 28,116 10.42 1.04 24,941 9.76 1.01
Total certificates of deposit.......... 140,371 52.00 5.56 139,119 54.44 5.56
-------- ------ -------- ------
Total average deposits............. $269,941 100.00% 3.85% $255,522 100.00% 3.97%
======== ====== ======== ======
For the Year Ended December 31,
---------------------------------
1996
---------------------------------
Percent Weighted
Average of Total Average
Balance Deposits Rate
------- -------- --------
(Dollars in thousands)
Demand deposits .......................... $ 6,933 2.90% --%
Savings accounts(1) ...................... 65,042 27.25 2.59
Money Market accounts .................... 16,825 7.05 2.62
NOW accounts ............................. 22,831 9.57 1.06
Total certificates of deposit ............ 127,068 53.23 5.54
-------- ------
Total average deposits ............... $238,699 100.00% 3.94%
======== ======
- ----------
(1) Savings accounts include mortgagors' escrow deposits.
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1998.
Period to Maturity from
December 31, 1998
------------------------------------
Less One Two
than to to Over Total At December 31,
One Two Three Three December 31, -------------------
Year Years Years Years 1998 1997 1996
-------- ------- ------ ----- ------------ -------- --------
(Dollars in thousands)
Certificate accounts:
0 to 4.00%............ $ 34 $ 11 $ 32 $ 2 $ 79 $ 75 $ 132
4.01% to 5.00%........ 43,667 4,569 1,954 -- 50,190 3,744 29,506
5.01% to 6.00%........ 52,795 11,604 3,660 -- 68,059 107,995 85,788
6.01% to 7.00%........ 3,253 5 -- -- 3,258 15,306 7,282
7.01% to 8.00%........ 6,681 10,137 -- -- 16,818 16,129 15,689
-------- ------- ------ --- -------- -------- ---------
Total............. $106,430 $26,326 $5,646 $ 2 $138,404 $143,249 $138,397
======== ======= ====== === ======== ======== ========
23
Borrowed Funds. As part of its operating strategy, the Bank utilizes
advances from the FHLB as an alternative to retail deposits to fund its
operations. By utilizing FHLB advances, which possess varying stated maturities,
the Bank can meet its liquidity needs without otherwise being dependent upon
retail deposits, which have no stated maturities (except for certificates of
deposit), which are interest rate sensitive and which may be withdrawn from the
Bank at any time. These FHLB advances are collateralized primarily by the Bank's
mortgage loans and mortgage-backed securities and secondarily by the Bank's
investment in capital stock of the FHLB. FHLB advances are made under several
different credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time-to-time in accordance
with the policies of the FHLB. At December 31, 1998, the Bank had $111.2 million
in outstanding advances from the FHLB compared to $41.7 million at December 31,
1997.
The following table sets forth information regarding the Bank's borrowed
funds at or for the periods ended on the dates indicated:
At or For the Year Ended
December 31,
-------------------------------
1998 1997 1996
--------- ------- -------
(Dollars in thousands)
FHLB advances:
Average balance outstanding ............... $ 55,588 $40,099 $26,941
========= ======= =======
Maximum amount outstanding at any
month-end during the period ............. $ 111,163 $44,878 $38,145
========= ======= =======
Balance outstanding at end of period ...... $ 111,163 $41,726 $35,441
========= ======= =======
Weighted average interest rate during
the period .............................. 5.54% 5.84% 5.97%
==== ==== ====
Weighted average interest rate at end
of period ............................... 5.15% 5.94% 5.66%
==== ==== ====
Trust Services
In 1994, the Bank established the Woronoco Savings Bank Trust & Investment
Management Department (the "trust department"). The trust department provides
trust and investment services to individuals, partnerships, corporations and
institutions and acts as a fiduciary of estates and conservatorships and as a
trustee under various wills, trusts and other plans. The Bank believes that the
trust department is an important element of its operating strategy to attract
and retain customers. The Bank has implemented several policies governing the
practices and procedures of the trust department, including policies relating to
maintaining confidentiality of trust records, drafting trust documents and
instruments, investment of trust property, handling conflicts of interest, and
maintaining impartiality. Such policies are aimed at maintaining the highest
standards of fiduciary conduct. At December 31, 1998, the trust department was
managing 200 accounts for others with assets of $17.8 million, in the aggregate.
Subsidiary Activities
Walshingham Enterprises, Inc. was established in July 1983 for the purpose
of acquiring, holding and selling residential and commercial real estate.
However, the subsidiary no longer holds any real property and currently is
inactive. Woronoco Security Corp. was established in November 1996, for the
purpose of acquiring and holding investment securities of a type that are
permissible for banks to hold under applicable law. Woronoco Security Corp. was
established to qualify as a "securities corporation" for Massachusetts tax
purposes. The results of operations of all of the Bank's subsidiaries will be
consolidated in the results and operations of the Company.
24
The Woronoco Foundation, Inc.
In 1996, the Bank established a private charitable foundation, The
Woronoco Foundation, Inc. (the "foundation"). The foundation, which is not a
subsidiary of the Bank, was established for the purpose of providing grants to
charitable organizations in the communities in which the Bank operates. The
foundation was funded in 1997 by a donation from the Bank of marketable equity
securities with a cost basis and fair value of approximately $235,000 and
$549,000, respectively, at the date of donation and transfer. The foundation's
current nine member Board of Directors consists of three of each of the Bank's
current Trustees, officers and corporators. The Bank will continue to maintain
the foundation after conversion but may, in the future, wind down its operations
and affairs. It is not expected that the existence of the Bank's current
foundation will impact the business and affairs of the Woronoco Savings
Charitable Foundation which is being established in connection with the Bank's
Conversion.
REGULATION AND SUPERVISION
General
As a savings bank chartered by the Commonwealth of Massachusetts, the Bank
is extensively regulated under state law with respect to many aspects of its
banking activities; this state regulation is administered by the Commissioner.
In addition, as a bank whose deposits are insured by the FDIC under the Bank
Insurance Fund ("BIF"), the Bank must pay deposit insurance assessments and is
examined and supervised by the FDIC. These laws and regulations have been
established primarily for the protection of depositors, customers and borrowers
of the Bank, not bank stockholders.
The Holding Company is also required to file reports with, and otherwise
comply with the rules and regulations, of the OTS, the Commissioner and of the
Securities and Exchange Commission ("SEC") under the federal securities laws.
The following discussion of the laws and regulations material to the operations
of the Company and the Bank is a summary and is qualified in its entirety by
reference to such laws and regulations.
Massachusetts Banking Laws and Supervision
Massachusetts savings banks are regulated and supervised by the
Commissioner. The Commissioner is required to regularly examine each
state-chartered bank. The approval of the Commissioner is required to establish
or close branches, to merge with another bank, to form a holding company, to
issue stock or to undertake many other activities. Any Massachusetts bank that
does not operate in accordance with the regulations, policies and directives of
the Commissioner may be sanctioned. The Commissioner may suspend or remove
trustees or officers of a bank who have violated the law, conducted a bank's
business in a manner which is unsafe, unsound or contrary to the depositors'
interests, or been negligent in the performance of their duties.
All Massachusetts-chartered savings banks are required to be members of
the Mutual Savings Central Fund and as such must pay its assessments. The Mutual
Savings Central Fund maintains the Deposit Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of FDIC deposit
insurance limits. In addition, the Mutual Savings Central Fund acts as a source
of liquidity to its members in supplying them with low-cost funds, and
purchasing qualifying obligations from them.
Payment of Dividends. A savings bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
account. No dividends may be paid to stockholders of a bank if such dividends
would reduce stockholders' equity of the bank below the amount of the
liquidation account required by Massachusetts conversion regulations.
25
Assessments. Savings banks are required to pay assessments to the
Commissioner to fund operations. Assessments paid by the Bank for the fiscal
year ended December 31, 1998 totalled $32,000.
Federal Regulations
Capital Requirements. Under FDIC regulations, federally insured
state-chartered banks that are not members of the Federal Reserve System ("state
non-member banks"), such as the Bank, are required to comply with minimum
leverage capital requirements. For an institution determined by the FDIC to not
be anticipating or experiencing significant growth and to be in general a strong
banking organization, receiving the highest examination rating, the minimum
capital leverage requirement is a ratio of Tier 1 capital to total assets of 3%.
For all other institutions, the minimum leverage capital ratio is 3% plus an
additional "cushion" amount of at least 100 to 200 basis points. Tier 1 capital
is the sum of common stockholders' equity, noncumulative perpetual preferred
stock (including any related surplus) and minority investments in certain
subsidiaries, less intangible assets (except for certain servicing rights and
credit card relationships).
The FDIC has also adopted risk-based capital guidelines to which the Bank
is subject. The FDIC guidelines require state non-member banks to maintain
certain levels of regulatory capital in relation to regulatory risk-weighted
assets. Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
State non-member banks must maintain a minimum ratio of qualifying capital
to risk-weighted assets of at least 8%, of which at least one-half be Tier 1
capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or
supplementary capital items, which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, and
other capital instruments. The includable amount of Tier 2 capital cannot exceed
the amount of the institution's Tier 1 capital.
The following is a summary of the Bank's regulatory capital at December
31, 1998:
GAAP Capital to Total Assets........................ 8.38%
Total Capital to Risk-Weighted Assets............... 13.87%
Tier I Leverage Ratio............................... 9.35%
Tier I to Risk-Weighted Assets...................... 13.04%
Standards for Safety and Soundness. The federal banking agencies have
adopted final regulations and Interagency Guidelines Establishing Standards for
Safety and Soundness (the "Guidelines") to implement safety and soundness
standards. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard.
Investment Activities
Under federal law, all state-chartered FDIC insured banks, including
savings banks, have generally been limited to activities as principal and equity
investments of the type and in the amount authorized for national banks,
notwithstanding state law. There are certain exceptions to these limitations.
For example, state chartered banks, such as the Bank, may, with FDIC approval,
continue to exercise state authority to invest in common or preferred stocks
listed on a national securities exchange or the Nasdaq National Market and in
the shares of an investment company registered under federal law. In addition,
the FDIC is authorized to permit such institutions to engage in state authorized
activities or investments that do not meet this standard (other than
non-subsidiary equity investments) for institutions that meet all applicable
capital requirements if it is determined that such activities or investments do
not
26
pose a significant risk to the BIF. The Bank received grandfathering authority
from the FDIC in February 1993 to invest in listed stocks and/or registered
shares. The maximum permissible investment was 100% of Tier 1 capital, as
specified by the FDIC's regulations, or the maximum amount permitted by
Massachusetts Banking Law, whichever is less. Such grandfathering authority may
be terminated upon the FDIC's determination that such investments pose a safety
and soundness risk to the Bank or if the Bank converts its charter, other than a
mutual to stock conversion, or undergoes a change in control. As of December 31,
1998, the Bank had $22.6 million of securities which were under such
grandfathering authority.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. An institution is "undercapitalized" if it
has a total risk-based capital ratio of less than 8%, a Tier I risk-based
capital ratio of less than 4%, or generally a leverage ratio of less than 4%. An
institution is deemed to be "significantly undercapitalized" if it has a total
risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of
less than 3%, or a leverage ratio of less than 3%. An institution is considered
to be "critically undercapitalized" if it has a ratio of tangible equity (as
defined in the regulations) to total assets that is equal to or less than 2%. As
of December 31, 1998, the Bank was a "well capitalized" institution and
immediately upon completion of the Conversion expects to be a "well capitalized"
institution.
"Undercapitalized" banks must adhere to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution in an
amount equal to the lesser of 5% of the bank's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks must comply with one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks or dismiss
directors or officers, and restrictions on interest rates paid on deposits,
compensation of executive officers and capital distributions by the parent
holding company. "Critically undercapitalized" institutions must comply with
additional sanctions including, under to a narrow exception, the appointment of
a receiver or conservator within 270 days after it obtains such status. No
savings bank may pay a dividend that would cause it to be "undercapitalized."
Transactions with Affiliates
Transactions between depository institutions and their affiliates are
governed by federal law. In a holding company context, at a minimum, the parent
holding company of a savings institution and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, the extent to which a savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate is limited to 10% of such savings
bank's capital stock and surplus. Federal law contains an aggregate limit on all
such transactions with all affiliates to 20% of capital stock and surplus. The
term "covered transaction" includes, among other things, the making of loans or
other extensions of credit to an affiliate and the purchase of assets from an
affiliate. There are also specific collateral requirements for loans or
extensions of credit to, or guarantees, acceptances on letters of credit issued
on behalf of an affiliate. Federal law also requires that covered transactions
and a broad list of other specified transactions be on terms substantially the
same, or no less favorable, to the savings institution or its subsidiary as
similar transactions with nonaffiliates.
Further, federal law restricts an institution with respect to loans to
directors, executive officers, and principal stockholders ("insiders"). Loans to
insiders and their related interests may not exceed, together with all other
outstanding loans to such persons and affiliated entities, the institution's
total capital and surplus. Loans to insiders above specified amounts must
receive the prior approval of the board of directors. Further, loans to
directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable
27
transactions to other persons, except that such insiders may receive
preferential loans made under a benefit or compensation program that is widely
available to the Bank's employees and does not give preference to the insider
over the employees. Federal law places additional limitations on loans to
executive officers.
Enforcement
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist orders and to
remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations and unsafe or
unsound practices. The FDIC also has authority under Federal law to appoint a
conservator or receiver for an insured bank under certain circumstances.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and other information which the FDIC
determines to be relevant. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. BIF-insured
institutions are also required to make payments on certain bonds issued by the
Financing Corporation in the late 1980's. The Bank's insurance assessments
totalled $32,000 during fiscal 1998. The FDIC is authorized to raise the
assessment rates. If such action is taken by the FDIC, it could have an adverse
effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $46.5 million or less (which may be adjusted by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $46.5
million, the reserve requirement is $1.4 million plus 10% (which may be adjusted
by the Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (which may be adjusted by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at December 31, 1998 of $5.6
million. At December 31, 1998, the Bank had $111.2 million in FHLB advances.
28
Holding Company Regulation
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL"), discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
federal law. Such election results in its holding company being regulated as a
savings and loan holding company by the OTS rather than as a bank holding
company by the Federal Reserve Board. The Bank has made such election and is a
non-diversified unitary savings and loan holding company within the meaning of
federal law. As such, the Company is registered with the OTS and has adhered to
the OTS' regulations and reporting requirements. In addition, the OTS may
examine and supervise the Company and the OTS has enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. Additionally, the
Bank is required to notify the OTS at least 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company is generally
not restricted under existing laws as to the types of business activities in
which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would have extensive limitations
on the types of business activities in which it could engage. Federal law limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act,
provided the prior approval of the OTS is obtained, and to other activities
authorized by OTS regulation. Multiple savings and loan holding companies are
generally prohibited from acquiring or retaining more than 5% of a
non-subsidiary company engaged in activities other than those permitted.
The HOLA prohibits a savings and loan holding company from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
association or savings and loan holding company or from acquiring such an
institution or company by merger, consolidation or purchase of its assets,
without prior written approval of the OTS. In evaluating applications by holding
companies to acquire savings associations, the OTS considers the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, except: (1) interstate supervisory acquisitions by savings
and loan holding companies; and (2) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions.
To be regulated as a savings and loan holding company by the OTS (rather
than as a bank holding company by the Federal Reserve Board), the Bank must
qualify as a QTL. To qualify as a QTL, the Bank must maintain compliance with
the test for a "domestic building and loan association," as defined in the Code,
or with a Qualified Thrift Lender Test ("QTL Test"). Under the QTL Test, a
savings institution is required to maintain at least 65% of its "portfolio
assets" (total assets less: (1) specified liquid assets up to 20% of total
assets; (2) intangibles, including goodwill; and (3) the value of property used
to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
and related securities) in at least 9 months out of each 12 month period. As of
December 31, 1998, the Bank maintained in excess of 65% of its portfolio assets
in qualified thrift investments. The Bank also met the QTL test in each of the
prior 12 months and, therefore, met the QTL test.
Massachusetts Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing business
in Massachusetts must comply with Massachusetts law. The term "bank holding
company," for the purposes of Massachusetts law, is defined generally to include
any company which, directly or indirectly, owns, controls or holds with power to
vote more than 25% of the voting stock of each of two or more banking
institutions, including commercial banks and state co-operative banks, savings
banks and savings and loan associations and national banks, federal savings
banks and federal savings and loan associations. In general, a holding
29
company controlling, directly or indirectly, only one banking institution is not
deemed to be a bank holding company for the purposes of Massachusetts law. Under
Massachusetts law, the prior approval of the Board of Bank Incorporation is
required before: any company may become a bank holding company; any bank holding
company acquires direct or indirect ownership or control of more than 5% of the
voting stock of, or all or substantially all of the assets of, a banking
institution; or any bank holding company merges with another bank holding
company.
Thrift Rechartering
The Bank and the Company, as a savings and loan holding company, are
extensively regulated and supervised. Such regulation, which affects the Bank on
a daily basis, may be changed at any time, and the interpretation of the
relevant law and regulations may also change because of new interpretations by
the applicable authorities. Any change in the regulatory structure or the
applicable statutes or regulations, whether by the Commissioner, the
Commonwealth of Massachusetts, the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Bank and their operations.
Legislation enacted several years ago provides that the BIF and the
Savings Association Insurance Fund ("SAIF") would merge on January 1, 1999 if
there were no more savings associations as of that date. Several bills were
introduced in the last Congress that would have eliminated the federal thrift
charter and the OTS. A bill that was passed by the House of Representatives in
1998 would have subjected unitary savings and loan holding companies to the
activities restrictions generally applicable to multiple savings and loan
holding companies. A grandfathering provision would have allowed existing
unitary savings and loan holding companies to continue to engage in activities
permitted a unitary savings and loan holding company under existing law and that
grandfather could be transferred to acquirers. Unless the grandfather date in
that bill were changed, the Company would not have qualified for the
grandfather. The Bank is unable to predict whether such legislation will be
enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also unable to
predict whether the SAIF and BIF will eventually be merged.
Federal Securities Laws
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the common stock to be issued in the
Conversion. Upon completion of the Conversion, the Company's common stock will
be registered with the SEC under the Exchange Act. The Company will then have to
observe the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the common stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the common stock purchased by persons who are not affiliates of the Company may
be resold without registration. The resale restrictions of Rule 144 under the
Securities Act govern shares purchased by an affiliate of the Company. If the
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of other persons) would be able to sell in the public
market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (1) 1% of the outstanding shares of the
Company or (2) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under specific circumstances.
30
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank will report their income on a
consolidated basis, using a calendar year and the accrual method of accounting
and must comply with federal income taxation laws and regulations in the same
manner as other corporations with some exceptions, including particularly the
Bank's treatment of its reserve for bad debts discussed below. The following
discussion of tax matters material to the operations of the Company and Bank is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Company. The Bank has
not been audited by the Internal Revenue Service (the "IRS") or the
Massachusetts Department of Revenue ("Massachusetts DOR") in the past five
years.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
relating to a savings institution's use of bad debt reserves for federal income
tax purposes and requires such institutions to recapture (i.e., take into
income) portions of their accumulated bad debt reserves. The effect of the 1996
Act on the Bank is discussed below. Before the enactment of the 1996 Act, the
Bank was permitted to establish tax reserves for bad debts and to make annual
additions thereto, which additions, within specified formula limits, were
deducted in arriving at the Bank's taxable income. Before the 1996 Tax Act, the
Bank's deduction with respect to "qualifying loans," which are generally loans
secured by certain interests in real property, could be computed using an amount
based on a six-year moving average of the Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8% of the Bank's taxable income
(the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve. The Bank's deduction with respect to non-qualifying
loans was required to be computed under the Experience Method.
The 1996 Act. Under the 1996 Act, for its current and future taxable
years, as a "Small Bank" (as defined in the 1996 Act, a "small bank" is
generally defined as one with assets under $500 million), the Bank is permitted
to make additions to its tax bad debt reserves under the Experience Method based
on total loans. The Federal income tax reserve for loan losses for the Bank's
base year amounted to approximately $1.6 million. If any portion of the reserve
is used for purposes other than to absorb the losses for which it was
established, approximately 150% of the amount actually used (limited to the
amount of the reserve) would be taxed in the fiscal year in which used. Since
the Bank intends to use the reserve only to absorb loan losses, a deferred
income tax liability of approximately $831,000 has not been provided.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. The term "non-dividend
distributions" is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not cause this pre-1988 reserve to be included in the Bank's
income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but not in
excess of the amount of such reserves) would be includable in income for federal
income tax purposes, assuming a 35% federal corporate income tax rate. The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its tax bad debt reserves.
31
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
excluded.
State Taxation
Massachusetts Taxation. Before July, 1995, the Bank had to pay an annual
Massachusetts excise (income) tax equal to 12.54% of its pre-tax income. In
1995, legislation was enacted to reduce the Massachusetts bank excise (income)
tax rate and to allow Massachusetts-based financial institutions to apportion
income earned in other states. Further, this legislation expands the
applicability of the tax to non-bank entities and out-of-state financial
institutions. The Massachusetts excise tax rate for savings banks is currently
10.91% of federal taxable income, adjusted for certain items. This rate will be
reduced over the next year so that the Bank's tax rate will become 10.5% by
December 31, 1999. Taxable income includes gross income as defined under the
Code, plus interest from bonds, notes and evidences of indebtedness of any
state, including Massachusetts, less deductions, but not the credits, allowable
under the provisions of the Code. No deductions, however, are allowed for
dividends received until July 1, 1999. In addition, carryforwards and carrybacks
of net operating losses are not allowed.
A financial institution or business corporation is generally entitled to
special tax treatment as a "security corporation," provided that: (a) its
activities are limited to buying, selling, dealing in or holding securities on
its own behalf and not as a broker; and (b) it has applied for, and received,
classification as a "security corporation" by the Commissioner of the
Massachusetts DOR. A security corporation that is also a bank holding company
under the Code must pay a tax equal to 0.33% of its gross income. A security
corporation that is not a bank holding company under the Code must pay a tax
equal to 1.32% of its gross income.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
32
Item 2. Properties.
The Bank currently conducts its business through its main office located
in Westfield, Massachusetts and eleven other banking offices and one stand-alone
ATM. The Company believes that the Bank's facilities are adequate to meet the
present and immediately foreseeable needs of the Bank and the Company.
Net Book Value
of Property
or Leasehold
Leased, Original Year Date of Lease/ Improvements
Licensed or Leased License at December 31,
Location Owned or Acquired Expiration 1998
- ------------------------------------------ ----------- ------------- -------------- ---------------
Main/Executive Office: (In thousands)
31 Court Street
Westfield, Massachusetts 01085........... Owned 1951 -- $ 976
Banking Offices:
44 Little River Road
Westfield, Massachusetts 01085............ Owned 1971 -- 142
185 College Highway
Southwick, Massachusetts 01077............ Owned 1988 -- 625
74 Lamb Street
South Hadley, Massachusetts 01075......... Owned 1995 -- 473
119 Winsor Street
Ludlow, Massachusetts 01056............... Owned 1997 -- 541
608 College Highway
Southwick, Massachusetts 01077............ Leased 1977 2002 54
1359 Springfield Street
Feeding Hills, Massachusetts 01013........ Leased 1994 1999(1) 55
800 Boston Road
Springfield, Massachusetts 01119.......... Licensed 1994 1999(1)(2) 124
503 Memorial Avenue
West Springfield, Massachusetts 01089..... Licensed 1994 1999(1)(2) 125
44 Willimansett Street
South Hadley, Massachusetts 01075......... Licensed 1997 2002(1)(2) 82
175 University Drive
Amherst, MA 01002........................ Licensed 1998 2003(1)(2)(3) --
Other Office and Properties:
177 Montgomery Road
Westfield, Massachusetts 10185............ (4) -- -- --
2-16 Central Street
Westfield, Massachusetts 01085............ Owned(5) 1990 -- (6)
127 North Elm Street
Westfield, Massachusetts 01085............ Leased(7) 1998 2003 21
------
Total............................... $3,218
======
- ----------
(1) The Bank has an option to renew this lease/license for three additional
five-year periods.
(2) This banking office is located inside a supermarket/grocery store operated
by the regionally based Big Y Foods, Inc. The Bank maintains a sublicense
or, in the case of the South Hadley and Amherst offices, a license to
possess the property. Generally, the holder of a license or sublicense has
less property rights than the possessor of a leasehold interest.
(3) The Amherst branch opened January 25, 1999.
(4) This office is located in a local high school and is operated by students,
under the supervision of a Bank employee, for the benefit of teachers and
students of the school. This office offers only retail deposit products
and does not provide any other banking services. The Bank does not pay
rent but does pay for its portion of the utilities. The Bank has been
operating at this location since 1990.
(5) The property consists of commercial retail space which the Bank leases to
a local glass and mirror company. The property also consists of vacant
office space which the Bank currently utilizes as a storage facility.
(6) Net book value of the property is included in net book value for the
Bank's main office.
(7) Consists of a stand-alone ATM located at a Dunkin' Donuts
establishment. The ATM became operational in September 1998.
33
Item 3. Legal Proceedings.
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the financial condition and results of operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
The Company's common stock is listed on the American Stock Exchange (the
"AMEX") under the symbol "WRO." The stock began trading on March 19, 1999.
Therefore, no information was available with respect to the high and low sales
price for the equity for the quarter ended December 31, 1998. As of March 19,
1999, the Company has approximately 2,688 holders of record.
Use of Proceeds
The following information is provided in connection with the Company's
sale of its common stock as part of the Bank's conversion:
a. The effective date of the Registration Statement on Form S-1 (File
No. 333-67255) was January 13, 1999.
b. The offering was consummated on March 19, 1999 with the sale of all
securities registered pursuant to the Registration Statement.
Sandler O'Neill & Partners, L.P. acted as marketing agent for the
offering.
c. The class of securities registered was common stock, par value $.01
per share. The aggregate amount of such securities registered was
5,998,860 shares which represented an aggregate amount of
$59,988,600. That amount included 5,554,500 shares (or $55,545,000)
sold in the offering and 444,360 shares (or $4,443,600) issued to
Woronoco Savings Charitable Foundation.
d. A reasonable estimate of the expenses incurred in connection with
the conversion and offering was $2,000,000, including expenses paid
to or for underwriters of $734,000, attorney and accounting fees of
$849,000 and other expenses of $417,000. The net proceeds resulting
from the offering after deducting expenses was $53,545,000.
e. The net proceeds are temporarily invested in short- to
intermediate-term mortgage-backed securities.
34
Item 6. Selected Financial Data.
We have derived the following selected consolidated financial and other
data of Woronoco Savings in part from our consolidated financial statements and
notes appearing elsewhere in this Form 10-K.
At December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
Selected Financial Data:
Total assets ......................... $426,826 $341,909 $316,708 $275,405 $266,325
Cash and cash equivalents ............ 11,978 11,686 10,469 12,320 9,627
Loans, net ........................... 284,043 261,723 234,135 200,189 186,781
Debt securities:
Available-for-sale ................. -- -- 250 6,205 --
Held-to-maturity/ held-for-
investment ....................... -- -- -- -- 7,461
Mortgage-backed securities, net:
Available-for-sale ................. 88,764 39,913 47,531 35,561 --
Held-to-maturity/held-for-investment -- -- -- -- 42,756
Equity securities:
Available-for-sale ................. 22,645 15,727 13,845 12,271 11,425
Held-for-investment ................ -- -- -- -- --
Deposits ............................. 275,041 262,679 248,982 231,689 218,856
FHLB advances ........................ 111,163 41,726 35,441 14,472 22,000
Total surplus ........................ 35,773 33,332 29,074 26,221 22,261
Other real estate owned, net ......... 241 381 423 641 955
Nonperforming assets and
troubled debt restructurings ....... 1,320 1,540 675 3,154 3,476
For the Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
Selected Operating Data:
Total interest and dividend income ... $ 25,265 $ 23,658 $ 21,734 $ 19,869 $ 16,980
Interest expense ..................... 13,477 12,500 11,022 9,823 7,035
-------- -------- -------- -------- --------
Net interest income ................ 11,788 11,158 10,712 10,046 9,945
Provision for loan losses ............ 240 180 180 210 300
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses .................. 11,548 10,978 10,532 9,836 9,645
Noninterest income ................... 3,342 3,324 1,896 1,592 949
Noninterest expense .................. 10,087 9,743 8,372 7,693 7,139
-------- -------- -------- -------- --------
Income before income taxes ........... 4,803 4,559 4,056 3,735 3,455
Income taxes ......................... 1,693 1,541 1,582 1,400 1,263
-------- -------- -------- -------- --------
Net income ......................... $ 3,110 $ 3,018 $ 2,474 $ 2,335 $ 2,192
======== ======== ======== ======== ========
35
For the Year Ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Selected Operating Ratios and Other Data:
Performance Ratios:
Average yield on interest-earning assets......... 7.41% 7.62% 7.80% 7.75% 7.11%
Average rate paid on interest-
bearing liabilities............................ 4.27 4.35 4.26 4.11 3.16
Average interest rate spread..................... 3.14 3.27 3.54 3.64 3.95
Net interest margin.............................. 3.46 3.59 3.84 3.92 4.16
Ratio of interest-earning assets to
interest-bearing liabilities................... 108.18 107.96 107.70 107.35 107.37
Net interest income after provision for loan
losses to noninterest expense.................. 114.48 112.67 125.80 127.87 135.10
Noninterest expense as a percent of
average assets................................. 2.79 2.96 2.84 2.85 2.85
Return on average assets......................... 0.86 0.92 0.84 0.86 0.87
Return on average surplus........................ 8.89 9.67 9.10 9.58 10.05
Ratio of average surplus to average assets....... 9.66 9.50 9.23 9.01 8.70
Efficiency ratio(1).............................. 73.57% 73.04% 70.61% 69.56% 65.69%
For the Year Ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Regulatory Capital Ratios:
Leverage capital................................. 9.35% 9.08% 8.94% 9.28% 8.53%
Total risk-based capital......................... 13.87 15.14 15.67 15.95 15.90
Asset Quality Ratios:
Nonperforming loans and troubled debt
restructurings as a percent of total loans..... 0.38 0.44 0.11 1.24 1.34
Nonperforming assets and troubled debt
restructurings as a percent of total assets.... 0.31 0.45 0.21 1.15 1.31
Allowance for loan losses as a percent
of total loans................................. 0.76 0.74 0.81 0.91 0.88
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings................................. 200.74 168.42 758.33 73.14 65.73
Net loans charged-off to average interest-
earning loans.................................. 0.01% 0.06% 0.05% 0.01% 0.17%
Banking offices at end of period................... 11 10 9 9 8
- ----------
(1) The efficiency ratio represents the ratio of noninterest expense divided by
the sum of the net interest income and noninterest income. This ratio does
not include realized gains on investment securities. If this ratio included
realized gains on investment securities, then the efficiency ratio would be
66.67%, 63.49%, 66.40%, 66.10% and 65.53% for the years ended December 31,
1998, 1997, 1996, 1995 and 1994, respectively.
36
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the "Selected
Consolidated Financial and Other Data of the Bank" and the Bank's Consolidated
Financial Statements and notes thereto, each appearing elsewhere in this 10-K.
General
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
the Bank's interest-earning assets, such as loans and investments, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Bank also generates non-interest income such as gains (losses)
on securities and loan sales and service charges and other fees. The Bank's
noninterest expenses primarily consist of employee compensation and benefits,
occupancy and equipment expense, marketing expenses, data processing,
professional services and other general and administrative expenses. The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory agencies. The Bank exceeded all of
its regulatory capital requirements at December 31, 1998.
Forward-Looking Statements
This Form 10-K contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of the
Company. These forward-looking statements are generally identified by use of the
words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of the Company and the
subsidiaries include, but are not limited to, changes in interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area and accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. The Company does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Management Strategy
The Bank operates as a community-oriented savings bank, offering
traditional deposit and loan products to its customers. In recent years, the
Bank's strategy has been to maintain profitability while managing its capital
position and limiting its credit and interest rate risk exposure. To accomplish
these objectives, the Bank has sought to:
o Emphasize providing superior service and competitive rates to
increase deposits, including commercial accounts
o Control credit risk by emphasizing the origination of single-family,
owner-occupied residential mortgage loans and consumer loans,
consisting primarily of home equity loans and lines of credit
o Invest funds in excess of loan demand primarily in mortgage-backed
and investment grade equity securities
o Control interest rate risk by selectively utilizing off-balance
sheet hedging transactions such as interest rate swaps, caps and
floors
37
o Originate high quality, multi-family and commercial real estate and
commercial business loans which increase the yields earned on its
overall loan portfolio, without incurring unnecessary risk
o Expand its lending and deposit base through the establishment of
full-service banking offices located inside supermarket/grocery
stores
Beginning in 1994, the Bank began opening full-service banking offices in
supermarket/grocery stores operated by the regionally based Big Y Foods, Inc.
Since 1994, the Bank has established three such banking offices and on January
25, 1999 opened a fourth banking office at a Big Y supermarket located in
Amherst, Massachusetts. The Bank will continue to seek attractive opportunities
to expand its branching activities through supermarket facilities as such
opportunities arise.
The Bank intends to continue its current operating strategy in an effort
to enhance its long-term profitability while maintaining a reasonable level of
interest rate risk. The Bank also intends to enhance its current operating
strategy by expanding the products and services that it offers, as necessary, to
improve its market share in its primary market area. In this regard, the Bank
has begun to offer new consumer and commercial deposit products and various
other customer improvement services and intends to expand its trust services and
invest in technological enhancements, such as PC banking, to better serve its
customers in the future. In addition, and consistent with its plan to increase
its loan portfolio, the Bank intends to hire additional loan originators, a
commercial loan officer and an additional credit analyst to assist the loan
department.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends on the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
38
Average Balance Sheet. The following table sets forth information
relating to the Bank for the years ended December 31, 1998, 1997 and 1996. The
average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown and reflect annualized yields and costs.
Average balances are derived from average daily balances. The yields and costs
include fees which are considered adjustments to yields. Loan interest and yield
data does not include any accrued interest from nonaccruing loans.
For the Year Ended December 31,
----------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- -------- ------- -------- --------
(Dollars in thousands)
Assets:
Interest-earning assets(1):
Investments:
Debt securities................ $ -- $ -- --% $ -- $ -- --%
Mortgage-backed securities..... 43,762 2,887 6.60 44,094 2,894 6.56
Equity securities.............. 19,405 885 4.56 13,707 785 5.73
FHLB stock..................... 2,978 177 5.94 2,308 144 6.24
Loans, net(2).................... 271,193 21,103 7.78 247,911 19,682 7.94
Other............................ 3,818 213 5.58 2,568 153 5.96
-------- ------- -------- -------
Total interest-earning assets.. 341,156 25,265 7.41 310,588 23,658 7.62
Noninterest-earning assets.......... 20,843 18,050
-------- --------
Total assets................... $361,999 $328,638
======== ========
Liabilities and surplus:
Interest-bearing liabilities:
Deposits:
Money market accounts.......... $ 24,465 $ 707 2.89% $ 19,238 $ 407 2.12%
Savings accounts(3)............. 66,805 1,598 2.39 64,285 1,759 2.74
NOW accounts................... 28,116 292 1.04 24,941 253 1.01
Certificates of deposit........ 140,371 7,800 5.56 139,119 7,740 5.56
-------- ------- -------- -------
Total interest-bearing
deposits................... 259,757 10,397 4.00 247,583 10,159 4.10
Borrowings....................... 55,617 3,080 5.54 40,099 2,341 5.84
-------- ------- -------- -------
Total interest-bearing
liabilities................. 315,374 13,477 4.27% 287,682 12,500 4.35
------- ------ ------- ------
Demand deposits.................. 10,184 7,939
Other noninterest-bearing
liabilities.................... 1,463 1,799
-------- --------
Total liabilities............ 327,021 297,420
Surplus.......................... 34,978 31,218
-------- --------
Total liabilities and surplus $361,999 $328,638
======== ========
Net interest-earning assets...... $ 25,782 $ 22,906
======== ========
Net interest income/interest
rate spread(4)................. $11,788 3.14% $11,158 3.27%
======= ======= ======= ======
Net interest margin as a percentage
of interest-earning assets(5).. 3.46% 3.59%
====== ======
Ratio of interest-earning assets
to interest-bearing liabilities 108.18% 107.96%
====== ======
For the Year Ended December 31,
---------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets(1):
Investments:
Debt securities................ $ 2,373 $ 140 5.90% $ 6,622 $ 398 6.01%
Mortgage-backed securities..... 43,123 2,743 6.36 39,322 2,428 6.17
Equity securities.............. 12,392 801 6.46 12,146 735 6.05
FHLB stock..................... 2,009 127 6.32 1,568 127 8.10
Loans, net(2).................... 215,613 17,732 8.22 191,903 15,856 8.26
Other............................ 3,111 191 6.19 4,757 325 6.83
-------- ------- -------- -------
Total interest-earning assets.. 278,621 21,734 7.80 256,318 19,869 7.75
Noninterest-earning assets.......... 15,938 14,028
-------- --------
Total assets................... $294,559 $270,346
======== ========
Liabilities and surplus:
Interest-bearing liabilities:
Deposits:
Money market accounts.......... $ 16,825 $ 441 2.62% $ 17,754 $ 499 2.81%
Savings accounts(3)............. 65,042 1,684 2.59 67,221 1,707 2.54
NOW accounts................... 22,831 243 1.06 20,920 272 1.30
Certificates of deposit........ 127,068 7,045 5.54 115,933 6,223 5.37
-------- ------- -------- -------
Total interest-bearing
deposits................... 231,766 9,413 4.06 221,828 8,701 3.92
Borrowings....................... 26,941 1,609 5.97 16,948 1,122 6.62
-------- ------- -------- -------
Total interest-bearing
liabilities................. 258,707 11,022 4.26 238,776 9,823 4.11
------- ------ ------- ------
Demand deposits.................. 6,933 5,703
Other noninterest-bearing
liabilities.................... 1,744 1,501
-------- --------
Total liabilities............ 267,384 245,980
Surplus.......................... 27,175 24,366
-------- --------
Total liabilities and surplus $294,559 $270,346
======== ========
Net interest-earning assets...... $ 19,914 $ 17,542
======== ========
Net interest income/interest
rate spread(4)................. $10,712 3.54% $10,046 3.64%
======= ====== ======= ======
Net interest margin as a percentage
of interest-earning assets(5).. 3.84% 3.92%
====== ======
Ratio of interest-earning assets
to interest-bearing liabilities 107.70% 107.35%
====== ======
- ----------
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan origination fees, unadvanced loan funds,
allowance for loan losses and includes nonaccruing loans. The Bank records
interest income on nonaccruing loans on a cash basis.
(3) Savings accounts include mortgagors' escrow deposits.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
39
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
Compared to Compared to Compared to
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------- -------------------------- -------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Due to Due to
---------------- --------------- ----------------
Volume Rate Net Volume Rate Net Volume Rate Net
------- ----- ------- ------- ------ ------- ------- ------ -------
(In thousands)
Interest-earning assets:
Debt securities ............... $ -- $ -- $ -- $ (70) $ (70) $ (140) $ (251) $ (7) $ (258)
Mortgage-backed securities .... (22) 15 (7) 63 88 151 240 75 315
Equity securities ............. 196 (96) 100 227 (243) (16) 15 51 66
FHLB stock .................... 40 (7) 33 19 (2) 17 -- -- --
Loans, net .................... 1,802 (381) 1,421 2,537 (587) 1,950 1,950 (74) 1,876
Other ......................... 69 (9) 60 (32) (6) (38) (104) (30) (134)
------- ----- ------- ------- ----- ------- ------- ----- -------
Total interest-earning assets 2,085 (478) 1,607 2,744 (820) 1,924 1,850 15 1,865
------- ----- ------- ------- ----- ------- ------- ----- -------
Interest-bearing liabilities:
Deposits:
Money market accounts ....... 128 172 300 97 (131) (34) (25) (33) (58)
Savings accounts(1) ......... 73 (234) (161) (19) 94 75 (58) 35 (23)
NOW accounts ................ 33 6 39 20 (10) 10 29 (58) (29)
Certificates of deposit ..... 70 (10) 60 670 25 695 612 210 822
------- ----- ------- ------- ----- ------- ------- ----- -------
Total deposits ............ 304 (66) 238 768 (22) 746 558 154 712
Borrowings .................... 852 (113) 739 767 (35) 732 584 (97) 487
------- ----- ------- ------- ----- ------- ------- ----- -------
Total interest-bearing
liabilities ............. 1,156 (179) 977 1,535 (57) 1,478 1,142 57 1,199
------- ----- ------- ------- ----- ------- ------- ----- -------
Increase (decrease) in net
interest income ............. $ 929 $(299) $ 630 $ 1,209 $(763) $ 446 $ 708 $ (42) $ 666
======= ===== ======= ======= ===== ======= ======= ===== =======
- ----------
(1) Includes interest on mortgagors' escrow deposits.
40
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Total assets increased by $84.9 million, or 24.8%, to $426.8 million at
December 31, 1998, from $341.9 million at December 31, 1997. The growth in
assets was primary attributable to a $48.9 million increase in mortgage-backed
securities available-for-sale, a $6.9 million increase in equity securities
available-for-sale, a $22.3 million increase in net loans and a $2.4 million
increase in banking premises and equipment. Mortgage-backed securities increased
by $48.9 million, or 122%, to $88.8 million at December 31, 1998 from $39.9
million at December 31, 1997. The net increase in mortgage-backed securities was
primarily due to the purchase of $40.5 million of mortgage-backed securities.
Such securities were purchased in the fourth quarter of 1998 as management used
borrowed funds in anticipation of receiving conversion proceeds to purchase
them. The securitization of $19.1 million of fixed rate one- to four-family
mortgage loans also contributed to this increase. Equity securities at December
31, 1998 totaled $22.6 million, an increase of $6.9 million, or 44.0%, compared
to $15.7 million at December 31, 1997 attributable to net purchases of $8.1
million and a decrease in the unrealized gain of $1.2 million. Net loans
increased by $22.3 million, or 8.5%, to $284.0 million at December 31, 1998,
from $261.7 million at December 31, 1997, primarily due to increased
originations of one- to four-family mortgage loans and home equity loans and
lines of credit. The relatively low interest rate environment during 1998
increased one- to four-family refinance activity, primarily 15- and 30-year
fixed-rate mortgage products. These originations were partially offset by the
$19.1 million in fixed rate one- to four-family loans that were securitized and
are now classified as mortgage-backed securities. Premises and equipment
increased by $2.4 million, or 40.1%, due to the construction of an addition to
the Bank's main office, which will provide additional office space for the
Bank's administrative operations, and the renovation of a branch office. The
construction on the main office is due to be completed during the second quarter
of 1999.
Asset growth was funded primarily through FHLB borrowings and deposit
inflows. Borrowed funds increased $69.5 million, or 166%, to $111.2 million at
December 31, 1998 from $41.7 million at December 31, 1997. Total deposits at
December 31, 1998 were $275.0 million, an increase of $12.3 million, or 4.7%,
compared to $262.7 million at December 31, 1997. The increase was primarily due
to an increase of $17.2 million, or 14.4%, in core deposit accounts, to $136.6
million at December 31, 1998 from $119.4 million at December 31, 1997. This
increase in deposits consisted of $2.1 million in demand, $6.5 million in NOW,
$4.9 million in money market, and $3.7 million in savings accounts and was due
in part to an active promotion to gain new checking account customers and the
opening of a new banking office in 1998 which had $3.6 million of deposits at
December 31, 1998. Certificates of deposit decreased $4.9 million, or 3.4%, to
$138.4 million at December 31,1998 from $143.3 million at December 31, 1997. The
decrease in certificates of deposit was primarily attributable to the maturing
of previously offered certificate "specials" that the Bank did not actively seek
to retain. To some extent, the increase in core deposits and decrease in
certificate accounts is reflective of depositors' general unwillingness to
commit funds to longer time periods given the current low interest rate
environment.
Total surplus increased $2.5 million, or 7.3%, to $35.8 million at
December 31, 1998, from $33.3 million at December 31, 1997, primarily the result
of net income of $3.1 million for the year ended December 31, 1998 which was
offset by a $669,000 decrease in the after-tax net unrealized gain on
available-for-sale securities during the same period. The $669,000 decrease in
the after-tax net unrealized gain on available-for-sale securities, along with
the increase in assets, caused a decrease in the Bank's ratio of equity capital
to total assets to 8.38% at December 31, 1998 from 9.75 % at December 31, 1997.
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997
General. Net income increased $92,000, or 3.0%, to $3.1 million for the
year ended December 31, 1998 from $3.0 million for the year ended December 31,
1997. This increase was due to the increase in net interest income which,
despite a decrease in the average interest rate spread to 3.14% from 3.27%,
increased by $630,000 due to an increase in the average balance of net
interest-earning assets. This increase was partially offset by a $344,000
increase in non-interest expense, and a $152,000 increase in income taxes.
41
Interest Income. Interest income amounted to $25.3 million for the year
ended December 31, 1998, representing an increase of $1.6 million, or 6.8%, from
1997. The increase was the result of a $30.6 million increase in average
interest-earning assets offset by a 21 basis point decrease in the yield on
interest-earning assets. Interest income on loans increased by $1.4 million to
$21.1 million for the year ended December 31, 1998 from $19.7 million for the
same period in 1997, due to a $23.3 million increase in the average balance in
loans offset by a 16 basis point decrease in the average yield to 7.78%. The
decrease in the average interest rate on interest-earning assets was primarily
due to the lower interest rate environment during 1998 which resulted in lower
yields on all new loans originated or refinanced. Interest and dividend income
on the securities portfolio increased $93,000 to $3.8 million for the year ended
December 31, 1998.
Interest Expense. Total interest expense for the year ended December 31,
1998 was $13.5 million, compared to $12.5 million for the year ended December
31, 1997, an increase of $977,000, or 7.8%. This increase reflects a $27.7
million increase in the average balance of interest-bearing liabilities in 1998
compared to 1997, offset by an 8 basis point decrease in the average rate paid
on such liabilities over the same period due to a lower interest rate
environment. Average interest-bearing deposits increased $12.2 million primarily
attributable to an increase in the average balance of core deposit accounts to
$119.4 million for the year ended December 31, 1998 from $108.5 million for the
year ended December 31, 1997. To some extent, the increase in core deposits can
be attributed to the maturing of previously offered certificate "specials" and
the depositors' general unwillingness to commit funds to longer time periods
given the current low interest rate environment. Interest expense on borrowed
funds increased $739,000, or 31.6%, in the year ended December 31, 1998 to $3.1
million from $2.3 million for the same period in 1997 due to a $15.5 million
increase in the average balance of such funds to $55.6 million, which was
partially offset by a 30 basis point reduction in the average rate paid on
borrowed funds to 5.54% for the year ended December 31, 1998. The increase in
borrowed funds in 1998 reflects management's decision to increase its
utilization of borrowings to fund asset growth when such borrowings are a cost
effective source of funds.
Provision for Loan Losses. The Bank's provision for loan losses increased
by $60,000, or 33.3%, to $240,000 for the year ended December 31, 1998 from
$180,000 for the year ended December 31, 1997. The increase in the provision was
due primarily to the growth of the Bank's loan portfolio. The increased
provision also reflects management's strategy to continue to emphasize the
origination of commercial real estate and commercial business loans. Such loans
generally bear a greater degree of risk compared to one- to four-family mortgage
loans. At December 31, 1998, the Bank's allowance for loan losses as a
percentage of total non-performing loans and troubled debt restructurings was
201%, compared to 168% at December 31, 1997, due to the increase in the
provision and a decrease in non-accruing loans to $306,000 at December 31, 1998
from $885,000 at December 31, 1997. At December 31, 1998, the Bank's allowance
for loan losses as a percentage of total loans, net, was 0.76% compared to 0.74%
at December 31, 1997.
Management of the Bank assesses the adequacy of the allowance for loan
losses based on known and inherent risks in the loan portfolio and upon
management's continuing analysis of the factors underlying the quality of the
loan portfolio. While management believes that, based on information currently
available, the Bank's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Bank or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. Management may in
the future increase its level of allowance for loan losses as a percentage of
total loans and non-performing loans in the event it increases the level of
commercial real estate, multi-family, commercial, construction and development
or consumer lending as a percentage of its total loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to provide additions to the allowance based upon judgments
different from management.
Non-interest Income. Total non-interest income was $3.3 million for both
1998 and 1997. Service charges and fees increased $220,000, or 15.6%, to $1.6
million for 1998 compared to $1.4 million for 1997. Net gains on sales of loans
for 1998 totalled $290,000 compared to no net gains on sales of
42
loans for 1997. This gain was the result of the securitization of 30 year
fixed-rate mortgage loans during 1998. These increases were partially offset by
a decrease in net gains on sales of securities of $475,000 to $1.4 million in
1998 from $1.9 million in 1997.
Non-interest Expense. Total noninterest expense increased by $344,000, or
3.5%, to $10.1 million for 1998 from $9.7 million for 1997. Compensation and
employee benefit expense increased $269,000 to $5.0 million for 1998 from $4.7
million for 1997 primarily due to staffing costs associated with the opening of
a full-service banking office during 1998. Occupancy and equipment expenses
increased $163,000, or 12.5%, primarily due to the opening of new, full-service
banking offices in 1997 and 1998. Other noninterest expenses decreased $88,000,
primarily due to the $549,000 contribution to the charitable foundation in 1997,
offset by higher professional services expense, computer processing charges and
expenses associated with growth in the Bank's core deposits. During 1997, the
Bank established a private charitable foundation to provide grants to charitable
organizations. The foundation was funded by a donation from the Bank of equity
securities with a fair value of $549,000 at the date of transfer, the total
amount of which is included in other noninterest expenses. The Bank expects that
compensation and benefits expense may increase after the Conversion. In this
regard, the proposed ESOP, which purchased 8% of the Common Stock issued in
connection with the Offering, including shares issued to the Foundation, and the
Stock Programs which, if implemented, would purchase an amount of Common Stock
equal to 14% of the Common Stock issued in connection with the Offering,
including shares issued to the Foundation, may result in increased compensation
and benefits expense as the amortization of the ESOP loan and amortization of
the Stock Program awards will be reflected as compensation expense. In addition,
the Bank expects non interest expenses to increase in future periods as a result
of its renovation of its headquarters and its main banking office and the
opening of a new banking office in January of 1999.
Income Taxes. Total income tax expense was $1.7 million for the year ended
December 31, 1998, compared to $1.5 million in 1997, an increase of $152,000, or
9.9%. The effective tax rates were 35.2% and 33.8% for the respective periods.
The transfer of $549,000 of equity securities to a charitable foundation in 1997
reduced the effective tax rate for that year. In addition, a securities
corporation was formed in May 1997 to hold its remaining equity securities.
Because this subsidiary's income is taxed at a lower rate than the Bank at the
state level, both 1997 and 1998 state income taxes were reduced.
Comparison of Operating Results for the Years Ended December 31, 1997 and
December 31, 1996
General. Net income increased $544,000, or 22.0%, to $3.0 million for the
year ended December 31, 1997 from $2.5 million for the year ended December 31,
1996. This increase was due to the increase in net interest income, which
increased by $446,000, or 4.2%, an increase in noninterest income of $1.4
million, or 75.3%, which primarily resulted from gains on the sale of securities
and a decrease in income tax expense of $41,000. Despite a decreasing interest
rate spread for the Bank during 1997, net interest income increased due to a
higher average balance of net interest-earning assets. An increase in
noninterest expense of $1.4 million partially offset the above positive changes.
Interest Income. Interest income increased $2.0 million to $23.7 million
for the year ended December 31, 1997 compared to $21.7 million for the year
ended December 31, 1996. This increase reflects a $32.0 million increase in
total average interest-earning assets in 1997 compared to 1996 partially offset
by an 18 basis point decrease in the average yield on such assets over the same
period. Interest income on loans increased by $2.0 million to $19.7 million for
the year ended December 31, 1997 from $17.7 million for the same period in 1996,
due to a $32.3 million increase in the average balance of loans offset by a 28
basis point decrease in the average yield to 7.94%. The increase in the average
balance of loans was primarily due to an increase in the Bank's one- to
four-family mortgage loan and home equity loans and lines of credit portfolios.
The decrease in the average yield on interest-earning assets was due primarily
to a decrease in market interest rates and an increase in non-accruing loans and
troubled debt restructurings, to $1.2 million from $252,000, at December 31,
1997 and 1996, respectively. Interest and dividend income on the securities
portfolio decreased $5,000, or 0.1%, to $3.7 million for the year ended December
31, 1997.
43
Interest Expense. Total interest expense for the year ended December 31,
1997 was $12.5 million, compared to $11.0 million for the year ended December
31, 1996, an increase of $1.5 million, or 13.4%. The increase in interest
expense was due to an increase in the average costs of deposits and borrowings
to 4.35% for 1997, from 4.26% for 1996. Interest on deposits increased by
$746,000, or 7.9%, to $10.2 million for 1997 compared to $9.4 million for 1996.
This increase reflects a $15.8 million increase in the average balance of
interest-bearing deposits in 1997 compared to 1996 primarily due to an increase
in the average balance of higher yielding certificates of deposit, which
increased to $139.1 million for the year ended December 31, 1997 from $127.1
million for 1996. The increase in the average balance of certificates of deposit
was primarily due to certificates of deposit promotions at the Bank's three
banking offices at supermarkets and the opening of a new branch. These two
increases resulted in the interest expense on certificates of deposit accounts
increasing by $695,000, or 9.9%, to $7.7 million for the year ended December 31,
1997. These increases were partially offset by a decrease in the average rate
paid on all other core deposits to 2.23% for 1997 from 2.26% for 1996.
The Bank incurred interest expense on borrowed funds for 1997 of $2.3
million as compared to $1.6 million for 1996 reflecting management's decision to
utilize borrowings to fund a portion of its asset growth. The average balance in
borrowed funds increased $13.2 million to $40.1 million at December 31, 1997
compared to $26.9 million at December 31, 1996. The increase in the average
balance in borrowed funds was partially offset by a decrease in the average rate
paid on such borrowings to 5.84% for 1997 compared to 5.97% for 1996.
Provision for Loan Losses. For 1997, the Bank's provision for loan losses
was $180,000, the same amount as was provided in 1996. Management determined
that an increase in the provision was unnecessary in light of its review of the
adequacy of the balance in the allowance for loan losses, the quality of the
loan portfolio, and the national and regional economies. At December 31, 1997,
the allowance for loan losses totalled 168% of total nonperforming loans and
troubled debt restructurings, a decrease from 758% at December 31, 1996. Net
charge-offs for the year ended December 31, 1997 were $139,000 compared to
$107,000 from the year ended December 31, 1996.
Noninterest Income. Total noninterest income increased $1.4 million, or
75.3%, to $3.3 million for 1997, from $1.9 million for 1996. Net gains on sales
of securities increased $1.1 million, or 152%, to $1.9 million for 1997 compared
to $751,000 for 1996. Service charges and fees increased $283,000, of which
$191,000 was due to an increase in certain NOW accounts which were introduced in
the latter part of 1996 and aggressively promoted during 1997. Additionally,
insufficient funds charges increased $146,000 due to the larger number of
checking accounts serviced by the Bank.
Noninterest Expense. Total noninterest expense increased by $1.4 million,
or 16.4%, to $9.7 million for 1997 from $8.4 million for 1996. Compensation and
employee benefits expense increased $421,000 to $4.7 million for 1997 from $4.3
million for 1996, primarily due to the added personnel costs associated with the
opening of a new banking office and the addition of several new positions.
Occupancy and equipment expense increased $172,000 primarily due to an increase
in depreciation, an increase in rent expense due to the new banking office and
an increase in real estate taxes due to the purchase of property adjacent to the
main office building which property was purchased in anticipation of future
growth and the need for greater storage capacity. Other noninterest expense
increased $744,000 to $2.0 million for 1997 from $1.3 million for 1996,
primarily due to the transfer of stock with a market value of $549,000 to fund
the charitable foundation, and an increase in expenses associated with checking
accounts of $152,000 due to increased volume.
Income Taxes. Tax expense totalled $1.5 million for the year ended
December 31, 1997 compared to $1.6 million in 1996. The decrease was
attributable to the transfer of equity securities to establish the charitable
foundation which decreased taxes by $126,000 in 1997 and the formation of a
securities corporation in 1997 to hold equity securities, reducing the amount of
state tax paid on the equity income.
44
Liquidity and Capital Resources
Liquidity and funding strategies are the responsibility of the ALCO. The
ALCO is responsible for establishing liquidity targets and implementing
strategies to meet desired goals. Liquidity is measured by the Bank's ability to
raise cash within 30 days at a reasonable cost and with a minimum of loss. The
Bank's primary sources of funds are deposits, principal and interest payments on
loans and investment securities and borrowings from the FHLB-Boston. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of
residential one-to four-family mortgage loans and consumer loans, primarily home
equity loans and lines of credit, and, to a lesser extent, multi-family and
commercial real estate loans, construction and development loans, commercial
business loans, other types of consumer loans and the investment in
mortgage-backed and equity securities. These activities are funded primarily by
principal and interest payments on loans and investment securities, deposit
growth and the utilization of FHLB advances. During the years ended December 31,
1998, 1997 and 1996, the Bank's loan originations totalled $103.2 million, $79.1
million and $87.6 million, respectively. For the years ended December 31, 1998,
1997 and 1996, the Bank's investments in mortgage-backed and equity securities
totalled $111.4 million, $55.6 million and $61.6 million, respectively. The Bank
experienced a net increase in total deposits of $12.4 million, $13.7 million and
$17.3 million for the years ended December 31, 1998. 1997 and 1996,
respectively. Deposit flows are affected by the overall level of interest rates,
the interest rates and products offered by the Bank and its local competitors
and other factors. The Bank closely monitors its liquidity position on a daily
basis. If the Bank requires funds beyond its ability to generate them
internally, additional sources of funds are available through FHLB advances. At
December 31, 1998, the Bank had $111.2 million of outstanding FHLB borrowings.
Although the Bank's policies allow for the use of brokered deposits, the Bank
does not currently solicit brokered deposits.
More recently, the Bank completed the securitization (converting whole
loans into mortgage-backed securities) of $19.1 million of 30 year fixed-rate
one- to four-family mortgage loans with Fannie Mae. The loans are serviced as
mortgage-backed securities for Fannie Mae. In addition to resulting in a
decrease in loans receivable and a related increase in mortgage-backed
securities, the securitization provides a liquidity related benefit to the Bank
in that it adds high quality collateral to the Bank's balance sheet which can be
pledged for borrowings in the secondary market and designates such loans as
"available-for-sale" so that the Bank could sell or collateralize such
securities.
Outstanding commitments for all loans totalled $10.0 million at December
31, 1998. Management of the Bank anticipates that it will have sufficient funds
available to meet its current loan commitments. Certificates of deposit which
are scheduled to mature in one year or less from December 31, 1998 totalled
$106.4 million. The Bank relies primarily on competitive rates, customer
service, and long-standing relationships with customers to retain deposits. From
time to time, the Bank will also offer competitive special products to its
customers to increase retention and to attract new deposits. Based upon the
Bank's experience with deposit retention and current retention strategies,
management believes that, although it is not possible to predict future terms
and conditions upon renewal, a significant portion of such deposits will remain
with the Bank.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $34.1 million, or 9.35% of
adjusted assets, which is above the required level of $14.6 million, or 4.00%,
and risk-based capital of $36.2 million, or 13.87% of adjusted assets, which is
above the required level of $20.9 million, or 8.00%.
Year 2000 Compliance
As the year 2000 approaches, an important business issue has emerged
regarding how existing computer application software programs and operating
systems can accommodate this date value. Many existing application software
products are designed to accommodate only two digits. If not corrected, many
computer applications and
45
systems could fail or create erroneous results by or at the Year 2000. While the
Bank maintains an internal computer system for approximately 20% of its
operating functions, the substantial majority of the Bank's data processing is
out-sourced to a third party vendor. The Bank's Year 2000 Project Planning
Committee has identified potential problems associated with the Year 2000 issue
and has implemented a Year 2000 Action Plan (the "Y2K Plan") designated to
ensure that all software and hardware used in connection with the Bank's
business will manage and manipulate data involved in the transition from 1999 to
2000 without functional or data abnormality and without inaccurate results
related to such data. Currently, 93% of the Bank's internal software and 97% of
its hardware are Year 2000 compliant, with full compliance expected by June 30,
1999. The Bank has prepared a critical issues schedule which identifies
timelines and responsibilities for completion of the remainder. Specifically,
the remaining items consist of the Bank's file server, E-mail, safe deposit
billing, voice mail and credit reporting systems. While most of the above items
are expected to be completed by March 31, 1999, the voice mail and e-mail
systems are now scheduled for completion in the second quarter. Our objective is
to have all hardware and software fully year 2000 compliant by June 30, 1999.
The Bank recognizes that its ability to be Year 2000 compliant is
dependent upon the cooperation of its vendors and, in particular, the outside
third party data processor. The Bank is requiring its computer systems and
software vendors to represent that the products provided are or will be Year
2000 compliant and has planned a program of testing for compliance. The Bank
utilizes these representations from its computer system and software vendors for
the purpose of determining the vendors' Year 2000 readiness. Upon receiving such
representations, the Bank then determines the need for replacement of or
remediations to each particular vendor's system. The Bank recognizes that its
ability to pursue vendors for possible misrepresentations is limited in
comparison to the disruption that may occur in the Bank's business and
operations if a particular vendor is not Year 2000 compliant. Accordingly,
rather than solely relying on representations from its vendors, the Bank also
independently tests all critical vendor applications. The Bank has completed
testing of its critical vendors' computer applications and all Year 2000 issues
have been corrected. The Bank has received representations from its primary
third party data processing vendor confirming completion of over 97% of that
vendor's internally developed programs. Of the data center's internal programs,
its critical banking related programs are now fully compliant. Remaining
internal and external programs are presently being converted to be Year 2000
compliant. The Bank began testing the data center's completed programs in April
of 1998 and is currently engaged in additional testing of remaining programs.
The Bank anticipates that all of its vendors also will have resolved any Year
2000 problems in their software by March 31, 1999. All Year 2000 issues for the
Bank, including testing, are expected to be addressed and any problems remedied
by June 30, 1999.
The Bank has also identified and contacted commercial borrowers that may
be vulnerable to the Year 2000 date change and has also provided brochures to
its customers to make them aware of the Year 2000 issue. The Bank has determined
that Year 2000 readiness issues have little or no impact on the Bank's one- to
four-family lending relationships. However, the Bank views Year 2000 compliance
as an integral part of the commercial loan credit analysis and underwriting
process. Therefore, and as warranted by the type and nature of a particular loan
request, the Bank reviews and assesses the impact of Year 2000 on an applicant's
business and any factors that may limit the applicant's ability to repay the
debt. Additionally, an assessment is made on the potential effect that vendors,
suppliers and customers, who fail to remediate Year 2000 risks, might have on
the applicant's business. Based upon the results of the review and analysis, a
determination is then made as to whether or not it is necessary to require the
applicant to develop a formal program to address Year 2000 issues and to report
the progress of such a program to the Bank. In situations that warrant formal
programs and monitoring, this requirement becomes a condition of the terms for
granting the loan. Additionally, the Bank has completed its efforts to contact
and survey all of its existing commercial borrowers with lending relationships
having aggregate exposure exceeding $500,000. The majority of credits
represented by these relationships are comprised of multi-family and commercial
real estate loans. All 32 borrowers in this category responded to a
comprehensive questionnaire either in writing or via telephone. Based upon the
responses and analysis of the type of business operations that each borrower
conducts, the Bank concluded that the effect of Year 2000 issues on these
credits does not pose a material risk to the Bank.
46
The Bank's operations may also be affected by the Year 2000 compliance of
its significant suppliers and other vendors, including those vendors that
provide non-information and technology systems. The Bank has completed the
process of requesting information related to the Year 2000 compliance of its
significant suppliers and other vendors. Over 80% of those critical suppliers
and vendors contacted are Year 2000 compliant or sufficiently progressing
towards that goal. If any critical supplier or vendor is not Year 2000
compliant, the Bank will replace that supplier. In addition, the Bank is
requiring a contingency plan for all critical and practical applications as part
of the Year 2000 section of its Business Resumption Policy. Various department
managers are assigned the responsibility for writing contingency plans for
business resumption if there was a Year 2000 related failure. This project is
part of a general upgrade to the Bank's existing Business Resumption Policy,
which is scheduled for implementation during the second quarter of 1999. Such
upgrade is scheduled for completion during the first quarter of 1999. A test
plan to validate the Bank's Business Resumption Policy and related Year 2000
contingency plans is also scheduled to take place in the second quarter of 1999.
With respect to significant other vendors, information has been gathered from
such vendors to assess their individual Year 2000 compliance. Those vendors that
are not Year 2000 compliant and who are unlikely to achieve Year 2000 compliance
are being replaced. If any of the Bank's significant suppliers or other vendors
do not achieve Year 2000 compliance in a timely manner, the Bank's business or
operations could be adversely affected. The Bank's most likely worst case
scenario relates to a possible excess amount of withdrawal requests created by
depositor concerns over possible Year 2000 failures. Accordingly, the Bank has
implemented a customer awareness program that informs depositors of the Bank's
efforts towards Year 2000 compliance and maintaining the safety of their
deposits. Additionally, as part of its Year 2000 contingency planning efforts,
the Bank has developed cash and liquidity contingency plans that identifies
methods for obtaining additional funds in case its cash reserves are
significantly reduced.
The Bank has budgeted approximately $235,000 from its 1998 and 1999
operating budgets in connection with achieving Year 2000 compliance and, as of
December 31, 1998, had expended approximately $46,000. Approximately 16% of the
$235,000 Year 2000 budget is being used for remediation. To ensure the
reliability of the Bank's Year 2000 risk and cost estimates, the Bank follows
the work program guidelines as provided by the Federal Financial Institutions
Examination Council. These are the same guidelines used by federal examiners to
determine the effectiveness of the Year 2000 efforts by the banks they examine.
The Bank's Compliance Officer regularly monitors the Bank's Year 2000 progress
and the Bank's internal auditor has performed regular audits of the Y2K Plan.
These audits are designed to be specific to the current regulatory guidelines.
In addition, the FDIC conducts regular Y2K examinations on the Bank. Material
costs, if any, that may arise from the failure to achieve Year 2000 compliance
by either the Bank's third party data processing vendor or its significant
suppliers and other vendors is not currently determinable. To the extent that
the Bank's systems are not fully Year 2000 compliant, there can be no assurance
that potential systems interruptions or the cost necessary to update software
would not have a materially adverse effect on the Bank's business, financial
condition, results of operations, cash flows or business prospects. If the
Bank's progress towards becoming Year 2000 compliant is deemed inadequate,
regulatory action may be undertaken.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which generally require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Impact of New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). This Statement establishes standards for
reporting and displaying comprehensive income and its components within
47
the financial statements. Comprehensive income is defined in FASB Concepts
Statement 6 as the "change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." The Statement is effective
for fiscal years beginning after December 15, 1997 and was adopted on January 1,
1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements. This Statement requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This Statement supersedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This Statement
is effective for financial statements for periods beginning after December 15,
1997 and was adopted on January 1, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"), which
standardizes the disclosure requirements for pensions and other postretirement
benefits. This Statement supersedes FASB Statements No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions." This Statement is effective for fiscal years beginning after December
15, 1997 and was adopted on January 1, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal years beginning
after June 15, 1999. This Statement standardizes the accounting for derivative
instruments, including derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities in the
balance sheet and measure them at fair value. In specific circumstances, an
entity may elect to designate a derivative as follows: a hedge of the exposure
to changes in the fair market value of a recognized asset or liability, or of an
unrecognized firm commitment that are attributable to a particular risk. A hedge
of the exposure to variability in the cash flows of a recognized asset or
liability, or of a forecasted transaction, that are attributable to a particular
risk. Or, a hedge of the foreign currency exposure of an unrecognized firm
commitment, an available-for-sale security, a forecasted transaction, or a net
investment in a foreign operation. This Statement generally provides for
matching the timing of a gain or loss recognition on the hedging instrument with
the recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or the earnings effect of the
hedged forecasted transaction. The Company will adopt the requirements of this
statement during the year ended December 31, 2000, and it is not expected to
have a material impact on the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Management of Interest Rate Risk and Market Risk Analysis
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with approved guidelines. Through
such management, the Bank seeks to reduce the vulnerability of its operations to
changes in interest rates. The Bank monitors its interest rate risk as such risk
relates to its operating strategies. The Bank maintains an Asset/Liability
Management Committee (the "ALCO"), responsible for reviewing its asset/liability
policies and interest rate risk position, which meets on a quarterly basis and
reports trends and interest rate risk position to the Board of Trustees on a
quarterly basis.
48
The extent of the movement of interest rates is an uncertainty that could
have a negative impact on the earnings of the Bank. Besides the risk that rising
interest rates could cause the cost of liabilities to rise faster than the yield
on assets, the Bank's interest rate spread and margin could also be negatively
affected in a declining interest rate environment if prepayments were to
increase and the Bank were to reinvest such proceeds at a lower rate. The Bank's
spread and margin would also be negatively impacted if deposit interest rates
did not decline commensurate with asset yields in such a declining interest rate
environment. Similarly, spreads and margins would contract in a so-called flat-
or inverse-yield curve environment, in which traditional spreads between short-
and long-term interest rates were to be compressed or become negative.
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination of shorter-term
adjustable-rate loans, such as home equity loans and lines of credit as well as
emphasizing the origination of multi-family and commercial real estate loans;
(2) emphasizing the origination of retail checking accounts and offering deposit
products with a variety of interest rates; (3) preparing and monitoring static
gap and asset/liability funding matrix reports; and (4) selectively utilizing
off-balance sheet hedging transactions, such as interest rate swaps, caps and
floors.
The Bank periodically is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include interest rate swap, cap and floor
agreements. Interest rate swap agreements generally involve the exchange of
fixed and floating-rate interest payment obligations without the exchange of the
underlying principal, or notional, amounts. These transactions are accounted for
using the accrual method. Net interest income resulting from the differential
between exchanging floating and fixed-rate payments is recorded on a current
basis. Interest rate cap and floor agreements generally involve the payment of a
premium in return for cash receipts if interest rates rise above or fall below a
specified interest rate level. Payments are based on a notional principal
amount. Swaps are generally negotiated for periods of one to five years. Caps
and floors generally are not readily available for time periods longer than five
years. The Bank's stated objective regarding the utilization of interest rate
swaps, caps and floors is to reduce risk associated with adverse rate volatility
while enabling the Bank to benefit from favorable interest rate movements. The
Bank's policies provide that a rate swap is in essence a "cross hedge" and may
only be undertaken if the potential correlation of the swap is reasonable. The
Bank's policies also provide that the costs of caps and floors must be analyzed
as they pertain to the spread, asset yield or liability cost being protected.
Such costs must be viewed in light of the Bank's overall profitability. The
Bank's policies further provide that swap arrangements and the purchase of caps
and floors shall only be negotiated with firms which meet the Bank's investment
criteria. All counter-parties to swap, cap and floor arrangements must be
pre-approved by the Bank's Board of Directors. At December 31, 1998, the
notional principal amounts of the Bank's outstanding interest rate cap and floor
agreements were $10 million each. Under the terms of the cap agreements, the
Bank paid premiums totalling $80,000 which is included in other assets and being
amortized over three years which are the terms of the agreements. Amortization
for the year ended December 31, 1998 totalled $16,000 and is recorded as an
interest expense on advances. The agreements provide that, if the London
Interbank Offered Rate ("LIBOR") increases above 6%, the Bank receives cash
payments on a quarterly basis. There were no cash payments received at December
31, 1998. Under the terms of the floor agreement, the Bank paid a premium of
$134,000 during 1996 which is included in other assets and is being amortized
over five years which is the term of the agreement. Amortization for the year
ended December 31, 1998 totalled $27,000 and is recorded as an interest expense
on advances. The agreement provides that if LIBOR falls below 5.75%, the Bank
receives cash payments on a quarterly basis. Cash payments received during the
year ended December 31, 1998 totalled $7,000 and was recorded as a credit to
interest on advances. At December 31, 1998, the Bank was not a party to any swap
arrangements.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At December 31, 1998, the Bank's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or
49
repricing within one year, was negative 18.67%. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a negative gap position would be in a worse position to invest
in higher yielding assets which, consequently, may result in the cost of its
interest-bearing liabilities increasing at a rate faster than its yield on
interest-earning assets than if it had a positive gap. Conversely, during a
period of falling interest rates, an institution with a negative gap would tend
to have its interest-bearing liabilities repricing downward at a faster rate
than its interest-earning assets as compared to an institution with a positive
gap which, consequently, may tend to positively affect the growth of its net
interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "Gap Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
December 31, 1998, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a one-year period and
subsequent selected time intervals. For loans on residential properties,
adjustable-rate loans, and fixed-rate loans, actual repricing and maturity dates
were used. Mortgage-backed securities were assumed to prepay at rates between
13.47% and 23.20% annually. The stratification of savings deposits (including
NOW, savings and money market accounts) is based on management's philosophy of
repricing core deposits in response to changes in the general interest rate
environment. Prepayment rates can have a significant impact on the Bank's
estimated gap. While the Bank believes such assumptions to be reasonable, there
can be no assurance that assumed prepayment rates will approximate actual future
loan prepayment activity.
50
At December 31, 1998
--------------------------------------------------------------------------
More than More than More than
1 Year 1 Year to 2 Years to 3 Years to
or Less 2 Years 3 Years 4 Years
------------------ ------------------ ------------------ -----------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
-------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Interest-earning assets(1):
Mortgage-backed securities....... $ 20,285 6.59% $ 10,680 6.65% $ 9,360 6.66% $ 7,915 6.66%
Equity securities................ 5,023 1.57 -- -- -- -- -- --
FHLB stock....................... 5,648 6.40 -- -- -- -- -- --
Loans, net....................... 140,565 7.74 46,305 7.22 24,507 7.57 24,669 7.70
Other............................ 1,607 3.50 -- -- -- -- -- --
-------- -------- -------- -------
Total interest-earning assets.... $173,128 $ 56,985 $ 33,867 $32,584
======== ======== ======== =======
Interest-bearing liabilities:
Savings accounts................. $ 6,164 1.97% $ -- --% $ -- --% $ -- --%
Money market accounts............ 27,176 3.08 -- -- -- -- -- --
NOW accounts..................... -- -- -- -- -- -- -- --
Certificates of deposit.......... 109,577 5.17 24,191 6.10 4,636 5.22 -- --
Borrowings ...................... 109,895 4.23 -- -- -- -- -- --
-------- -------- -------- -------
Total interest-bearing
liabilities................ $252,812 $ 24,191 $ 4,636 $ --
======== ======== ======== =======
Interest sensitivity gap(2)...... $(79,684) $ 32,794 $ 29,231 $32,584
======== ======== ======== =======
Cumulative interest
sensitivity gap................ $(79,684) $(46,890) $(17,659) $14,925
======== ======== ======== =======
Cumulative interest
sensitivity gap as a
percentage of
total assets................... (18.67)% (10.99)% (4.14)% 3.50%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets........ (19.92)% (11.72)% (4.41)% 3.73%
Cumulative net interest
earning assets as a
percentage of
cumulative interest-
bearing liabilities............ 68.48% 83.07% 93.73% 105.30%
At December 31, 1998
-------------------------------------------------------
More than
4 Years to More than Total Fair
5 Years 5 Years Amount Value(3)
----------------- ----------------- -------- --------
Average Average
Balance Rate Balance Rate
------- ------- ------- -------
(Dollars in thousands)
Interest-earning assets(1):
Mortgage-backed securities....... $ 6,686 6.66% $ 33,047 6.66% $ 87,973 $ 88,764
Equity securities................ -- -- 15,693 1.59 20,716 22,645
FHLB stock....................... -- -- -- -- 5,648 5,648
Loans, net....................... 18,320 7.68 29,677 7.11 284,043 283,031
Other............................ -- -- -- -- 1,607 1,607
------- -------- -------- --------
Total interest-earning assets.... $25,006 $ 78,417 $399,987 $403,728
======= ======== ======== ========
Interest-bearing liabilities:
Savings accounts................. $ -- --% $ 60,610 1.98% $ 66,774 $ 66,774
Money market accounts............ -- -- -- -- 27,176 27,176
NOW accounts..................... -- -- 32,305 1.00 32,305 32,305
Certificates of deposit.......... -- -- -- -- 138,404 139,709
Borrowings....................... -- -- 1,368 8.51 111,263 111,261
------- -------- -------- --------
Total interest-bearing
liabilities................ $ -- $ 94,283 $375,922 $377,225
======= ======== ======== ========
Interest sensitivity gap(2)...... $25,006 $(15,866) $ 24,065
Cumulative interest ======= ======== ========
sensitivity gap................ $39,931 $ 24,065
======= ========
Cumulative interest
sensitivity gap as a
percentage of
total assets................... 9.36% 5.64%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets........ 9.98% 6.02%
Cumulative net interest
earning assets as a
percentage of
cumulative interest-
bearing liabilities............ 114.18% 106.40%
- ----------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments and contractual maturities.
(2) Interest sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
(3) Fair value of securities, including mortgage-backed securities, is based
on quoted market prices, where available. If quoted market prices are not
available, fair value is based on quoted market prices of comparable
instruments. Fair value of loans is, depending on the type of loan, based
on carrying values or estimates based on discounted cash flow analyses.
Fair value of deposit liabilities are either based on carrying amounts or
estimates based on a discounted cash flow calculation. Fair values for
FHLB advances are estimated using a discounted cash flow analysis that
applies interest rates concurrently being offered on advances of
aggregated expected monthly maturities on FHLB advances.
51
Shortcomings are inherent in the method of analysis presented in the Gap
Table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, some assets, such as adjustable-rate loans, have features
which restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, if interest rates changed, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, it would become more difficult for borrowers to
repay their adjustable-rate loans if interest rates increased.
52
Item 8. Financial Statements and Supplementary Data.
53
TABLE OF CONTENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31,
1998 and 1997 F-3
Consolidated Statements of Income for the Years
Ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Surplus for
the Years Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 F-6,-F-7
Notes to Consolidated Financial Statements F-8,-F-35
INDEPENDENT AUDITORS' REPORT
The Audit Committee
Woronoco Savings Bank
Westfield, Massachusetts
We have audited the consolidated balance sheets of Woronoco Savings Bank and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in surplus and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Bank'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 Woronoco Savings
Bank and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ WOLF & COMPANY, P.C.
Boston, Massachusetts
March 26, 1999
F-2
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
December 31,
--------------------------------
1998 1997
-------------- --------------
Cash and due from banks $ 10,371 $ 9,246
Interest-bearing balances 1,607 2,440
-------------- --------------
Total cash and cash equivalents 11,978 11,686
Securities available for sale 111,409 55,640
Federal Home Loan Bank stock, at cost 5,648 2,433
Loans, net 284,043 261,723
Other real estate owned, net 241 381
Banking premises and equipment, net 8,290 5,919
Accrued interest receivable 1,748 1,479
Net deferred tax asset 55 -
Cash surrender value of life insurance 1,917 1,716
Other assets 1,497 932
-------------- --------------
$426,826 $341,909
============== ==============
LIABILITIES AND SURPLUS
Deposits $275,041 $262,679
Federal Home Loan Bank advances 111,163 41,726
Repurchase agreements 100 -
Mortgagors' escrow accounts 645 647
Net deferred tax liability - 452
Accrued expenses and other liabilities 4,104 3,073
-------------- --------------
Total liabilities 391,053 308,577
-------------- --------------
Commitments and contingencies
Surplus:
Surplus 34,060 30,950
Accumulated other comprehensive income 1,713 2,382
-------------- --------------
Total surplus 35,773 33,332
-------------- --------------
$426,826 $341,909
============== ==============
See accompanying notes to consolidated financial statements.
F-3
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
Years Ended December 31,
----------------------------------------------
1998 1997 1996
------------- ------------- ------------
Interest and dividend income:
Interest and fees on loans $ 21,103 $ 19,682 $ 17,732
Interest and dividends on investment securities:
Interest 2,887 2,894 2,883
Dividends 1,061 929 928
Interest on federal funds sold 63 36 115
Other interest income 151 117 76
------------- ------------- ------------
Total interest and dividend income 25,265 23,658 21,734
------------- ------------- ------------
Interest expense:
Interest on deposits 10,397 10,159 9,413
Interest on advances 3,080 2,341 1,609
------------- ------------- ------------
Total interest expense 13,477 12,500 11,022
------------- ------------- ------------
Net interest income 11,788 11,158 10,712
Provision for loan losses 240 180 180
------------- ------------- ------------
Net interest income, after provision for loan losses 11,548 10,978 10,532
------------- ------------- ------------
Other income:
Customer service fees 1,632 1,412 1,129
Gain on sales and disposition of securities,
net 1,420 1,895 751
Gain on sales of property - 17 -
Gain on sales of loans, net 290 - 16
------------- ------------- ------------
Total other income 3,342 3,324 1,896
------------- ------------- ------------
Other expenses:
Salaries and employee benefits 4,993 4,724 4,303
Occupancy and equipment 1,465 1,302 1,130
Other real estate owned 96 110 211
Marketing 625 610 540
Professional services 494 360 395
Data processing 658 595 524
Deposit insurance 32 31 2
Contributions 116 613 81
Other general and administrative 1,608 1,398 1,186
------------- ------------- ------------
Total other expenses 10,087 9,743 8,372
------------- ------------- ------------
Income before income taxes 4,803 4,559 4,056
Provision for income taxes 1,693 1,541 1,582
------------- ------------- ------------
Net income $ 3,110 $ 3,018 $ 2,474
============= ============= ============
See accompanying notes to consolidated financial statements.
F-4
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
Accumulated
Other
Comprehensive Total
Surplus Income Surplus
---------------- --------------- ---------------
Balance at December 31, 1995 $ 25,458 $ 763 $ 26,221
---------------
Comprehensive income:
Net income 2,474 - 2,474
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects - 379 379
---------------
Total comprehensive income 2,853
---------------- --------------- ---------------
Balance at December 31, 1996 27,932 1,142 29,074
---------------
Comprehensive income:
Net income 3,018 - 3,018
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects - 1,240 1,240
---------------
Total comprehensive income 4,258
---------------- --------------- ---------------
Balance at December 31, 1997 30,950 2,382 33,332
---------------
Comprehensive income:
Net income 3,110 - 3,110
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects - (669) (669)
---------------
Total comprehensive income 2,441
---------------- --------------- ---------------
Balance at December 31, 1998 $ 34,060 $ 1,713 $ 35,773
================ =============== ===============
See accompanying notes to consolidated financial statements.
F-5
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 3,110 $ 3,018 $ 2,474
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 240 180 180
Provision for losses on other real estate owned 31 21 52
Charitable contribution in the form of equity
securities 102 549 -
Net (accretion) amortization of investments (15) (12) 15
Amortization of net deferred loan fees 231 152 109
Depreciation and amortization 651 550 487
Deferred tax provision (benefit) (117) (209) 222
Gain on sales and disposition of securities, net (1,420) (1,895) (751)
Gain on sales of loans, net (290) - (16)
Gain on sales of property - (17) -
Loss (gain) on sales of other real estate owned 25 7 (16)
Changes in operating assets and liabilities:
Accrued interest receivable (269) (52) (61)
Accrued expenses and other liabilities 1,031 468 350
Other, net (766) 53 (562)
------------- ------------ -------------
Net cash provided by operating activities 2,544 2,813 2,483
------------- ------------ -------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 8,889 9,416 11,478
Purchase of securities available for sale (56,945) (10,285) (26,608)
Proceeds from maturities of securities available for sale 692 2,461 2,747
Principal payments on mortgage-backed investments 10,937 7,561 6,183
Purchase of Federal Home Loan Bank stock (3,215) (332) (202)
Loans originated, net of loan payments received (41,663) (28,201) (35,574)
Proceeds from the sale of loans - - 830
Purchases of banking premises and equipment (3,022) (2,751) (541)
Proceeds from sales of property - 126 -
Proceeds from sales of foreclosed real estate 178 295 665
Purchase of life insurance - - (1,500)
------------- ------------ -------------
Net cash used by investing
activities (84,149) (21,710) (42,522)
------------- ------------ -------------
(continued)
See accompanying notes to consolidated financial statements.
F-6
WORONOCO SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(IN THOUSANDS)
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Cash flows from financing activities:
Net increase in deposits 12,362 13,697 17,293
Net increase (decrease) in mortgagors' escrow accounts (2) 132 (74)
Net increase (decrease) in Federal Home Loan Bank
advances with maturities of three months or less 23,475 6,320 16,000
Proceeds from Federal Home Loan Bank advances with
maturities in excess of three months 81,000 22,000 19,000
Repayment of Federal Home Loan Bank advances
with maturities in excess of three months (35,038) (22,035) (14,031)
Net change in repurchase agreements 100 - -
------------ ------------- ------------
Net cash provided by financing activities 81,897 20,114 38,188
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 292 1,217 (1,851)
Cash and cash equivalents at beginning of year 11,686 10,469 12,320
------------ ------------- ------------
Cash and cash equivalents at end of year $ 11,978 $ 11,686 $ 10,469
============ ============= ============
Supplemental cash flow information:
Interest paid on deposits $ 10,385 $ 10,192 $ 9,450
Interest paid on advances 3,268 2,346 1,535
Income taxes paid, net 1,687 1,701 1,855
Transfers from loans to other real estate owned 94 281 524
Transfers from other real estate owned to banking
premises and equipment - - 41
Securitization of loans to mortgage-backed securities 19,068 - -
See accompanying notes to consolidated financial statements.
F-7
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Woronoco
Savings Bank (the "Bank") and its wholly-owned subsidiaries Walshingham
Enterprises, Inc., which previously held certain real estate and Woronoco
Security Corporation which engages exclusively in securities transactions.
All significant intercompany balances and transactions have been eliminated
in consolidation.
BUSINESS
The Bank provides a variety of financial services, including trust and
financial management services, mutual funds and various deposit and lending
products to individuals and small businesses through its eleven offices in
western Massachusetts. Its primary deposit products are checking, savings
and term certificate accounts and its primary lending products are
residential, commercial mortgage, consumer and home equity loans. While the
Bank's chief decision makers monitor the revenue streams of the various
products and services, operations are managed and financial performance is
evaluated on a Bank-wide basis. Accordingly, all of the Bank's operations
are considered by management to be aggregated in one reportable operating
segment.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Bank, (2)
the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Bank does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
F-8
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SERVICING
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing
rights are reported in other assets and are amortized into other income in
proportion to, and over the period of, the estimated future net servicing
income of the underlying financial assets. Servicing assets are evaluated
for impairment based upon the fair value of the rights as compared to
amortized cost. Impairment is determined by stratifying rights by
predominant characteristics, such as interest rates and terms. Fair value
is determined using prices for similar assets with similar characteristics,
when available, or based upon discounted cash flows using market-based
assumptions. Impairment is recognized through a valuation allowance for an
individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities
as of the date of the consolidated balance sheet and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. A material estimate that is particularly
susceptible to significant change in the near term relates to the
determination of the allowance for loan losses.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks and interest-bearing
balances with maturities of ninety days or less.
INVESTMENT SECURITIES
Investments are classified as "available for sale" and reflected on the
consolidated balance sheet at fair value, with unrealized gains and losses
excluded from earnings and reported as other comprehensive income, net of
tax effects. Available for sale securities are presented net of the fair
value of covered call options written.
Purchase premiums and discounts are amortized to earnings by the interest
method over the terms of the investments. Declines in the value of
investments that are deemed to be other than temporary are reflected in
earnings when identified. Gains and losses on disposition of investments
are recorded on the trade date and determined using the specific
identification method.
F-9
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans, as reported, have been adjusted by unadvanced loan funds, net
deferred loan costs, and the allowance for loan losses.
Interest on loans is recognized on a simple interest basis and is generally
not accrued on loans which are identified as impaired or loans which are
ninety days or more past due. Interest income previously accrued on such
loans is reversed against current period interest income. Interest income
on all nonaccrual loans is recognized only to the extent of interest
payments received.
Net deferred loan costs are amortized to interest income over the
contractual lives of the related loans on the interest method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to earnings and is maintained at a level considered adequate
by management.
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the
nature and volume of the loan portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant change. Ultimately losses may vary from current estimates and
future additions to the allowance may be necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if
any, are credited to the allowance.
F-10
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
Loans are considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. Substantially all of the Bank's loans which
have been identified as impaired have been measured by the fair value of
existing collateral.
Large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment, and loans that are measured at fair value fall
outside the scope of evaluation for impairment.
OTHER REAL ESTATE OWNED
Other real estate owned includes both formally foreclosed properties and
repossessed properties, whereby the Bank has taken physical possession of
the property without formal foreclosure proceedings.
Foreclosed real estate is initially recorded at the lower of cost or fair
value at the date of acquisition. Costs relating to the development and
improvement of property are capitalized, whereas costs relating to holding
property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established through a charge to earnings if the carrying value of
a property exceeds its fair value less estimated costs to sell.
F-11
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and improvements and equipment are
stated at cost, less accumulated depreciation and amortization, computed on
the straight-line method over the estimated useful lives of the assets or
the terms of the leases, if shorter.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for betterments are capitalized
and depreciated.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
accordingly through the provision for income taxes. The Bank's base amount
of its federal income tax reserve for loan losses is a permanent difference
for which there is no recognition of a deferred tax liability. However, the
loan loss allowance maintained for financial reporting purposes is a
temporary difference with allowable recognition of a related deferred tax
asset, if it is deemed realizable.
PENSION PLAN
The compensation cost of an employee's pension benefit is recognized on the
net periodic pension cost method over the employee's approximate service
period. The aggregate cost method is utilized for funding purposes.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," effective for fiscal
years beginning after December 15, 1997. The Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does
not change the measurement or recognition of those plans. The Statement
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practical, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that were previously required by generally accepted accounting
principles. The Bank has adopted these disclosure requirements for all
periods presented herein.
F-12
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REPURCHASE AGREEMENTS
The Bank enters into repurchase agreements with commercial demand deposit
account customers. The funds are invested in an overnight sweep account and
deposited back in customer accounts on a daily basis.
Collateral securing repurchase agreements is required by Bank policy to be
in the Form of U.S. Government mortgage-backed securities and must have a
market value equal to or exceeding 125% of the value of all outstanding
repurchase agreements secured by such collateral.
ADVERTISING COSTS
Advertising costs are charged to earnings when incurred.
TRUST ASSETS
Trust assets held in a fiduciary or agency capacity for others are not
included in these consolidated financial statements because they are not
assets of the Bank. Trust assets totaled $17,762 and $15,496 at December
31, 1998 and 1997, respectively.
COMPREHENSIVE INCOME
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate
component of the surplus section of the consolidated balance sheet, such
items, along with net income, are components of comprehensive income. The
adoption of SFAS No. 130 had no effect on the Bank's net income or surplus.
F-13
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
COMPREHENSIVE INCOME (CONCLUDED)
The components of and changes in accumulated other comprehensive income and
related tax effects are as follows:
Years Ended December 31,
----------------------------------
1998 1997 1996
------- ------- -------
Unrealized holding gains on available for
sale securities $ 361 $ 3,705 $ 1,405
Less: Reclassification adjustment for gains
realized in income (1,420) (1,895) (751)
------- ------- -------
Change in unrealized gains (1,059) 1,810 654
Tax effect 390 (570) (275)
------- ------- -------
$ (669) $ 1,240 $ 379
======= ======= =======
RECENT ACCOUNTING PRONOUNCEMENT
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This Statement standardizes the accounting
for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those
items as assets or liabilities in the balance sheet and measure them at
fair value. If certain conditions are met, an entity may elect to designate
a derivative as follows: (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability, or of an unrecognized firm
commitment that are attributable to a particular risk; (2) a hedge of the
exposure to variability in the cash flows of a recognized asset or
liability, or of a forecasted transaction, that is attributable to a
particular risk; or, (3) a hedge of the foreign currency exposure of an
unrecognized firm commitment, an available-for-sale security, a forecasted
transaction, or a net investment in a foreign operation. The Bank will
adopt the requirements of this Statement during the year ended December 31,
2000. Management does not anticipate that the adoption of SFAS No. 133 will
have a material impact on the consolidated financial statements.
F-14
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for
sale, with gross unrealized gains and losses, follows:
December 31, 1998
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- ------------ -------------
Marketable equity
securities $ 20,716 $ 3,705 $ (1,776) $ 22,645
Mortgage-backed:
FHLMC 10,310 390 (16) 10,684
FNMA 34,937 545 (72) 35,410
GNMA 42,726 124 (180) 42,670
-------------- ------------- ------------ -------------
$108,689 $ 4,764 $ (2,044) $111,409
============== ============= ============ =============
December 31, 1997
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- ------------ --------------
Marketable equity
securities $ 12,602 $ 3,399 $ (274) $ 15,727
Mortgage-backed:
FHLMC 13,765 435 (22) 14,178
FNMA 22,680 234 (119) 22,795
GNMA 2,814 126 - 2,940
-------------- ------------- ------------ --------------
$ 51,861 $ 4,194 $ (415) $ 55,640
============== ============= ============ ==============
At December 31, 1998 and 1997, the Bank has pledged securities available
for sale with an amortized cost of $1,660 and $997, and a fair value of
$1,690 and $990, respectively, as collateral against its treasury, tax and
loan account and sweep account.
Proceeds from sales of securities available for sale during the years ended
December 31, 1998, 1997 and 1996 amounted to $8,889, $9,416 and $11,478,
respectively. Gross realized gains of $1,629, $1,601 and $758, and gross
realized losses of $278, $20 and $7, were realized during the years ended
December 31, 1998, 1997 and 1996, respectively.
F-15
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE (CONCLUDED)
During 1997, the Bank established a private charitable foundation (the
"Foundation") to provide grants to charitable organizations in the
Westfield area. The Foundation, which is not a subsidiary of the Bank, was
funded by a donation from the Bank of marketable equity securities with a
cost basis and fair value of $235 and $549, respectively, at the date of
transfer. Such securities had been classified as available for sale and,
accordingly, the transfer resulted in the Bank recognizing the unrealized
appreciation of the securities of $314 in the consolidated statement of
income.
During the year ended December 31, 1998, additional marketable equity
securities with a cost basis and fair value of $33 and $102 , respectively,
were transferred from the Bank, resulting in the Bank recognizing the
unrealized appreciation of $69 in the consolidated statement of income.
3. LOANS
A summary of the balances of loans follows:
December 31,
---------------------------
1998 1997
--------- ---------
Residential mortgage $ 180,660 $ 158,858
Home equity 64,705 62,227
Commercial real estate 20,595 21,757
Construction 3,464 2,868
Consumer 12,914 14,578
Commercial 4,613 4,319
--------- ---------
Total loans 286,951 264,607
Net deferred loan costs 711 934
Unadvanced loan funds (1,453) (1,866)
Allowance for loan losses (2,166) (1,952)
--------- ---------
Loans, net $ 284,043 $ 261,723
========= =========
F-16
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
LOANS (CONTINUED)
An analysis of the allowance for loan losses follows:
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ------------ ------------
Balance at beginning of period $1,952 $1,911 $1,838
Provision for loan losses 240 180 180
Recoveries 74 32 29
Loans charged-off (100) (171) (136)
----------- ------------ ------------
Balance at end of period $2,166 $1,952 $1,911
=========== ============ ============
The following is a summary of the impaired and non-accrual loans:
December 31,
-----------------------------
1998 1997
------------- ------------
Impaired loans without a valuation allowance $ 159 $ 164
Impaired loans with a valuation allowance 1,057 989
------------- ------------
Total impaired loans $ 1,216 $ 1,153
============= ============
Valuation allowance related to impaired loans $ 283 $ 200
============= ============
Non-accrual loans $ 1,079 $ 1,159
============= ============
No additional funds are committed to be advanced in connection with impaired
loans.
Years Ended December 31,
--------------------------------------
1998 1997 1996
----------- ---------- ----------
Average recorded investment in
impaired loans $1,276 $ 953 $ 753
=========== ========== ==========
Interest income recognized on
a cash basis on impaired loans $ 70 $ 57 $ 38
=========== ========== ==========
F-17
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
LOANS (CONCLUDED)
The Bank has sold mortgage loans in the secondary mortgage market and has
retained the servicing responsibility and receives fees for the services
provided. Loans sold and serviced for others amounted to $41,367 and
$29,868 at December 31, 1998 and 1997, respectively. Included in the
$41,367 of loans serviced for others is $18,106 of loans that were
securitized by the Bank and are included in investments. All loans serviced
for others were sold without recourse provisions and are not included in
the accompanying consolidated balance sheets.
The balance of capitalized servicing rights included in other assets at
December 31, 1998, was $164. The fair values of these rights approximates
carrying amounts.
4. OTHER REAL ESTATE OWNED
Other real estate owned consists of the following:
December 31,
--------------------
1998 1997
----- -----
Real estate acquired in settlement of loans $ 810 $ 727
Real estate in possession - 192
----- -----
810 919
Less allowance for losses (569) (538)
----- -----
$ 241 $ 381
===== =====
An analysis of the following for losses on other real estate owned is as
follows:
Years Ended December 31,
------------------------
1998 1997 1996
------ ----- ------
Balance at beginning of period $ 538 $ 517 $ 613
Provision for losses 31 21 52
Charge-offs - - (148)
------ ----- ------
Balance at end of period $ 569 $ 538 $ 517
====== ===== ======
F-18
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
OTHER REAL ESTATE OWNED (CONCLUDED)
Expenses applicable to other real estate owned consist of the following:
Years Ended December 31,
-------------------------
1998 1997 1996
----- ----- -----
Net loss (gain) on sales of other
real estate owned $ 25 $ 7 $ (16)
Provision for losses 31 21 52
Operating expenses, net of rental income 40 82 175
----- ----- -----
$ 96 $ 110 $ 211
===== ===== =====
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows:
December 31, Estimated
-------------------------
1998 1997 Useful Lives
----------- ---------- ---------------
Banking premises:
Land $ 560 $ 589
Buildings and improvements 3,845 3,893 5 - 40 years
Equipment 3,640 2,838 3 - 10 years
Construction in progress 3,556 1,289
----------- ----------
11,601 8,609
Less accumulated depreciation
and amortization (3,311) (2,690)
----------- ----------
$ 8,290 $ 5,919
=========== ==========
The balance of construction in progress represents costs incurred to date in
connection with expansion of the Bank's main office. The expansion work is
expected to cost approximately $4,000.
Depreciation and amortization expense for the years ended December 31, 1998,
1997 and 1996 amounted to $651, $550 and $487, respectively.
F-19
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. DEPOSITS
A summary of deposit balances, by type, is as follows:
December 31,
------------------------
1998 1997
---------- ----------
Demand $ 10,382 $ 8,264
NOW 32,305 25,862
Money market deposit 27,176 22,234
Regular 66,774 63,070
---------- ----------
Total non-certificate accounts 136,637 119,430
---------- ----------
Certificate accounts with less than $100,000 115,187 117,855
Certificate accounts with $100,000 or more 23,217 25,394
---------- ----------
Total certificate accounts 138,404 143,249
---------- ----------
$ 275,041 $ 262,679
========== ==========
A summary of certificate accounts, by maturity, is as follows:
December 31, 1998 December 31, 1997
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- --------- --------- --------
Within 1 year $ 106,430 5.19% $ 106,334 5.42%
Over 1 year to 3 years 31,972 5.84 36,895 6.26
Over 3 years to 5 years 2 2.50 20 2.50
--------- ---------
$ 138,404 5.34% $ 143,249 5.63%
========= =========
F-20
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DEPOSITS (CONCLUDED)
Interest on deposits, classified by type, is as follows:
Years Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- ---------
NOW $ 292 $ 253 $ 243
Money market deposits 707 407 441
Regular 1,598 1,759 1,684
Certificate accounts 7,800 7,740 7,045
-------- -------- ---------
$ 10,397 $ 10,159 $ 9,413
======== ======== =========
7. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank of Boston ("FHLB") advances consist of the
following:
Interest December 31,
----------------------
Maturity Date Rate 1998 1997
----------------- ---------- --------- --------
January 6, 1999 5.56% $ 10,000 $ -
February 8, 1999 4.99 10,000 -
February 24, 1999 4.89 10,000 -
March 17, 1999 5.12 40,000 -
March 25, 1999 5.13 6,000 -
April 7, 1999 5.02 4,000 -
April 15, 1999 4.99 5,000 -
April 16, 1999 5.09 5,000 -
April 23, 1999 5.09 9,000 -
June 16, 1999 4.95 8,000 -
January 7, 1998 5.62 10,000
February 27, 1998 5.73 3,000
March 9, 1998 5.77 4,000
March 19, 1998 5.78 4,000
March 24, 1998 5.77 10,000
April 15, 1998 5.64 5,000
December 30, 2004 8.51 1,368 1,406
--------- --------
108,368 37,406
Line of Credit 2,795 4,320
--------- --------
$ 111,163 $ 41,726
========= ========
F-21
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
FEDERAL HOME LOAN BANK ADVANCES (concluded)
Years Ended December 31,
-----------------------------
1998 1997
--------- ---------
Average amount outstanding during the year $ 55,588 $ 40,099
Maximum outstanding at any month 111,163 44,878
Highest interest rate paid during the year 5.77% 5.88%
Interest expense4 3,079 2,341
The advance due on December 30, 2004 requires monthly principal and
interest payments.
The interest rate on the line of credit adjusts daily. Borrowings under the
line are limited to 2% of the Bank's total assets. All borrowings from the
FHLB are secured by a blanket lien on qualified collateral, defined
principally as 75% of the carrying value of first mortgage loans on owner-
occupied residential property and 90% of the market value of U.S.
government and federal agency securities.
Additionally, as a member of the FHLB, the Bank is eligible to borrow
amounts up to the level of qualified collateral maintained.
8. REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase are summarized as follows:
Year Ended
December 31,
1998
------------
Balance at year end $ 100
Average amount outstanding during year 51
Interest expense incurred during year 1
Maximum amount outstanding at any month-end 100
Weighted average interest rate during the year 1.97%
Weighted average interest rate on year-end balances 1.77%
Mortgage-backed securities available for sale, with a market value of
$1,690 and an amortized cost of $1,660 are pledged to secure the repurchase
agreements at December 31, 1998. The securities pledged to secure the
repurchase agreements are under the Bank's control.
F-22
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
Years Ended December 31,
--------------------------------
1998 1997 1996
------- ------- -------
Current tax provision:
Federal $ 1,460 $ 1,385 $ 927
State 350 365 433
------- ------- -------
1,810 1,750 1,360
------- ------- -------
Deferred tax provision (benefit):
Federal (80) (165) 165
State (37) (44) 57
------- ------- -------
(117) (209) 222
------- ------- -------
$ 1,693 $ 1,541 $ 1,582
======= ======= =======
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates are summarized as follows:
Years Ended December 31,
-------------------------------
1998 1997 1996
------ ------ ------
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 4.3 4.6 8.0
Dividends received deduction (3.3) (2.6) (3.8)
Non-taxable appreciation of securities donated (0.4) (2.3) -
Other, net 0.6 0.1 0.8
------ ------ ------
Effective tax rates 35.2% 33.8% 39.0%
====== ====== ======
F-23
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES (CONTINUED)
The components of the net deferred tax asset (liability) are as follows:
December 31,
-----------------------------
1998 1997
--------- ---------
Deferred tax asset:
Federal $ 1,030 $ 952
State 352 316
--------- ---------
1,382 1,268
--------- ---------
Deferred tax liability:
Federal (1,134) (1,521)
State (193) (199)
--------- ---------
(1,327) (1,720)
--------- ---------
Net deferred tax asset (liability) $ 55 $ (452)
========= =========
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
December 31,
-----------------------------
1998 1997
--------- ---------
Net unrealized gain on securities
available for sale $ (1,007) $ (1,397)
Depreciation (53) (63)
Deferred income (247) (221)
Allowance for loan losses 881 792
Employee benefit plans 471 412
Other 10 27
--------- ---------
Net deferred tax asset (liability) $ 55 $ (452)
========= =========
F-24
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES (CONCLUDED)
A summary of the change in the net deferred tax asset (liability) is as
follows:
Years Ended December 31,
------------------------------
1998 1997 1996
------ ------- ------
Balance at beginning of period $ (452) $ (91) $ 406
Deferred tax (provision) benefit 117 209 (222)
Deferred tax effects on net unrealized gain
on securities available for sale 390 (570) (275)
------ ------- ------
Balance at end of period $ 55 $ (452) $ (91)
====== ======= ======
There was no valuation allowance for deferred tax assets as of December 31,
1998, 1997 and 1996.
The federal income tax reserve for loan losses at the Bank's base year is
$1,551. If any portion of the reserve is used for purposes other than to
absorb loan losses, approximately 150% of the amount actually used, limited
to the amount of the reserve, would be subject to taxation in the fiscal
year in which used. As the Bank intends to use the reserve to absorb only
loan losses, a deferred tax liability of approximately $636 has not been
provided.
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial
statements.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters
of credit, interest rate swap agreements, interest rate cap agreements and
interest rate floor agreements. These 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 the Bank's involvement
in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
these commitments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
F-25
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
For interest rate swap, cap, and floor agreements, the notional amounts do
not represent exposure to credit loss. Rather, the credit loss exposure
relates to the net fair value to be received if such contracts were to be
offset in the marketplace. The Bank controls the credit risk of such
contracts through credit approvals, limits, and monitoring procedures.
LOAN COMMITMENTS
A summary of outstanding loan commitments whose contract amounts represent
credit risk is as follows:
December 31,
-------------------------
1998 1997
---------- ----------
Commitments to grant loans:
Fixed $ 8,087 $ 4,539
Variable 1,943 1,261
Unadvanced funds on lines of credit 49,530 48,324
Standby letters of credit 87 87
Commitments to extend credit are agreements to lend to a customer as long
as 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. The commitments for lines of
credit may expire without being drawn upon, therefore, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. These
financial instruments are generally collateralized by real estate or other
business assets.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These letters of
credit are primarily issued to support borrowing arrangements and are
generally written for one year terms. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending
loan facilities to customers. Standby letters of credit are collateralized
by real estate and deposit accounts.
INTEREST RATE SWAP AGREEMENTS
The Bank periodically enters into interest rate swap agreements with the
FHLB to moderate its exposure to interest rate changes and offset deposit
costs. Interest rate swap agreements generally involve the exchange of
fixed and floating-rate interest payment obligations without the exchange
of the underlying principal, or notional, amounts. These transactions are
accounted for using the accrual method. Net interest income resulting from
the differential between exchanging floating and fixed-rate payments is
recorded on a current basis.
F-26
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
INTEREST RATE SWAP AGREEMENTS (CONCLUDED)
The notional principal amount of the Bank's outstanding interest rate swaps
was $5,000 at December 31, 1996. Under the terms of the swap agreement, the
FHLB agreed to pay semi-annual fixed rate payments of 6.635% while the Bank
must pay quarterly floating rate payments. The agreement matured on June
29, 1997 and the original term was three years. Net interest income
resulting from the differential between the floating and fixed-rate
interest payments amounted to $0, $20 and $53 for the years ended December
31, 1998, 1997 and 1996, respectively, and is recorded against interest
expense on deposits.
INTEREST RATE CAP AND FLOOR AGREEMENTS
The Bank periodically enters into interest rate cap and floor agreements to
moderate its exposure to interest rate changes and offset borrowing costs.
Interest rate cap and floor agreements generally involve the payment of a
premium in return for cash receipts if interest rates rise above or fall
below a specified interest rate level. Payments are based on a notional
principal amount.
During the year ended December 31, 1998, the Bank entered into two interest
rate cap agreements. The notional principal amount of the cap agreements
amounted to $10,000. Under the terms of the cap agreements, the Bank paid
premiums of $80 in exchange for future cash payments if LIBOR increases
above 6%. Amortization for the year ended December 31, 1998 amounted to
$16. The agreements have a term of three years and mature in May and June
2001.
The notional principal amount of the Bank's outstanding interest rate floor
agreement was $10,000 at December 31, 1998, 1997 and 1996. Under the terms
of the floor agreement, the Bank paid a premium of $134 during 1996 which
is included in other assets and is being amortized over five years which is
the term of the agreement. Amortization for the years ended December 31,
1998, 1997 and 1996 totaled $27, $27 and $16, respectively, and is recorded
as interest expense on advances. If LIBOR falls below 5.75%, the Bank
receives cash payments on a quarterly basis. Cash payments received during
the years ended December 31, 1998, 1997 and 1996 totaled $7, $12 and $4,
respectively, and are recorded as a credit to interest on advances.
F-27
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONCLUDED)
LEASE COMMITMENTS
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1998 and 1997, future minimum rent commitments pertaining to
banking premises are as follows:
Years Ending December 31,
--------------------
December 31, 1998 1997
------------ -------- -------
1999 $ 196 $ 129
2000 196 53
2001 196 53
2002 193 50
2003 185 45
Thereafter 858 780
-------- -------
$ 1,824 $ 1,110
======== =======
Annual real estate taxes assessed to the leased premises will be added to
the basic rental scheduled above. The leases contain options to extend for
periods from five to twenty-five years. The cost of such rentals is not
included above.
Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted
to $156, $119 and $96, respectively.
CONTINGENCIES
Various legal claims arise from time to time in the ordinary course of
business. In the opinion of management, these claims will have no material
effect on the Bank's consolidated financial position.
F-28
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the 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 Bank's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined) to risk weighted
assets (as defined) and to average assets (as defined). Management
believes, as of December 31, 1998 and 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, the most recent notification from the
Federal Deposit Insurance Corporation 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 1 risk-based and Tier 1 leverage ratios as set forth in
the following table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
F-29
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONCLUDED)
The Bank's actual capital amounts and ratios as of December 31, 1998 and 1997
are also presented in the table.
Minimum
to be Well
Capitalized Under
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ---------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- ---------- ---------- ------------ -------------
As of December 31, 1998:
- ------------------------
Total Capital to Risk
Weight Assets $36,226 13.9% $20,898 8.0% $26,122 10.0%
Tier 1 Capital to Risk
Weighted Assets 34,060 13.0 10,449 4.0 15,673 6.0
Tier 1 Capital to Average
Assets 34,060 9.3 10,929 - 3.0- 18,215 5.0
18,215 5.0
As of December 31, 1997:
- ------------------------
Total Capital to Risk
Weighted Assets $32,902 15.1% $17,389 8.0% $21,736 10.0%
Tier 1 Capital to Risk
Weighted Assets 30,950 14.2 8,694 4.0 13,042 6.0
Tier 1 Capital to Average
Assets 30,950 9.2 10,225 3.0- 17,043 5.0
17,043 5.0
F-30
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. PENSION PLANS
DEFINED BENEFIT PLAN
The Bank provides basic and supplemental pension benefits for eligible employees
through the Savings Banks Employees Retirement Association ("SBERA") Pension
Plan. Each employee reaching the age of 21 and having completed at least 1,000
hours of service in one twelve-month period, beginning with such employee's date
of employment, automatically becomes a participant in the retirement plan.
All participants are fully vested after three years of such service.
Plan Years Ended October, 31
---------------------------------------
1998 1997 1996
-------- --------- ---------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 3,400 $ 3,071 $ 2,497
Actual return on plan assets 278 517 439
Employer contribution 187 260 242
Benefits paid (121) (448) (107)
-------- -------- --------
3,744 3,400 3,071
-------- -------- --------
Change in benefit obligation:
Benefit obligation at
beginning of year 3,891 3,460 3,492
Service cost 343 282 270
Interest cost 282 259 244
Actuarial loss (gain) (131) 338 (439)
Benefits paid (121) (448) (107)
-------- --------- ---------
4,264 3,891 3,460
-------- --------- ---------
Funded status (520) (491) (389)
Deferred gain (673) (562) (657)
Unrecognized prior service cost 41 46 50
-------- --------- ---------
Accrued pension cost $(1,152) $(1,007) $(996)
======== ========= =========
F-31
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
PENSION PLANS (CONTINUED)
DEFINED BENEFIT PLAN (CONCLUDED)
The components of net periodic pension cost are as follows:
Plan Years Ended October 31,
--------------------------------------
1998 1997 1996
------- -------- ---------
Service cost $ 343 $ 282 $ 270
Interest cost 282 259 244
Expected return on plan assets (272) (246) (200)
Amortization of prior service cost 4 4 4
Recognized net actuarial (gain) loss (25) (28) 1
------- -------- ---------
$ 332 $ 271 $ 391
======= ======== =========
Actuarial assumptions used in
accounting were:
1998 1997 1996
------- -------- ---------
Discount rates on benefit obligations 7.50% 7.25% 7.50%
Rates of increase in compensation levels 6.00 6.00 6.00
Expected long-term rates of
return on plan assets 8.00 8.00 8.00
Total pension expense for the years ended December 31, 1998, 1997 and 1996
amounted to $439, $336 and $386, respectively.
DEFINED CONTRIBUTION PLAN
In addition to the defined benefit plan, the Bank has a 401(k) plan. Each
employee reaching the age of 21 and having completed at least 1,000 hours of
service in one twelve month period, beginning with such employee's date of hire,
automatically becomes a participant in the plan. The plan provides for voluntary
contributions by participating employees up to 15% of their compensation,
subject to certain limits based on federal tax laws. Presently, the Bank does
not make matching contributions.
TRUSTEES' RETIREMENT PLAN
During 1996, the Board of Trustees voted to adopt a Trustee's Indexed Fee
Continuation Program effective as of January 1, 1997. Under the terms of the
plan, Trustees are eligible to participate in the plan upon election to the
Board of Trustees and the retirement benefits vest over a 10 year period.
During, 1996 the Bank purchased life insurance contracts for $1,500. The
retirement benefit for any plan year is determined by the performance of the
insurance contracts, as defined in the plan. Plan expenses for the years ended
December 31, 1998 and 1997 were $20 and $50, respectively.
F-32
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
PENSION PLANS (CONCLUDED)
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Bank has entered into a Split Dollar Life Insurance Arrangement with its
President and Chief Executive Officer intended to provide supplemental
retirement benefits. The Bank pays the annual premiums and records its share of
the cash surrender value in other assets.
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to officers,
trustees and their affiliates amounting to approximately $1,473 and $1,579 at
December 31, 1998 and 1997, respectively.
An analysis of the activity of these loans is as follows:
Years Ended
December 31,
-----------------
1998 1997
------- -------
Balance at beginning of period $1,579 $1,448
Additions 441 416
Repayments (547) (285)
------- -------
Balance at end of period $1,473 $1,579
======= =======
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of estimated fair values of all financial instruments where it is
practicable to estimate such values. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
F-33
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used by the Bank in estimating fair
value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
-------------------------
instruments approximate fair values.
Securities available for sale: Fair values for securities available for
-----------------------------
sale are based on quoted market prices.
Federal Home Loan Bank stock: The carrying value of Federal Home Loan Bank
----------------------------
stock approximates fair value based on the redemption provisions of the
Federal Home Loan Bank of Boston.
Loans receivable: Fair values for performing loans are estimated using
----------------
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. Fair
values for non-performing loans are estimated using underlying collateral
values, where applicable.
Deposit liabilities: The fair values of non-certificate accounts are, by
-------------------
definition, equal to the amount payable on demand at the reporting date
which is their carrying amounts. Fair values for certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances: The fair values of the Bank's borrowings
-------------------------------
are estimated using discounted cash flow analyses based on the Bank's
current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest: The carrying amounts of accrued interest approximate
----------------
fair value.
Loan commitments: Fair values for loan commitments are based on fees
----------------
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing,
and are not significant since fees charged are not material.
Interest rate swap, cap, and floor agreements: The fair value of interest
---------------------------------------------
rate swap, cap, and floor agreements are obtained from dealer quotes. These
values represent the estimated amount the Bank would receive or pay to
terminate agreements taking into consideration current interest rates.
F-34
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)
The carrying or notional amounts and estimated fair values of the Bank's
financial instruments are as follows:
December 31,
---------------------------------------
1998 1997
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- --------- -------
Financial assets:
Cash and cash equivalents $ 11,978 $ 11,978 $ 11,686 $ 11,686
Securities available for sale 111,409 111,409 55,640 55,640
Federal Home Loan Bank
stock 5,648 5,648 2,433 2,433
Loans, net 248,043 283,031 261,723 263,564
Accrued interest receivable 1,748 1,748 1,479 1,479
Financial liabilities:
Deposits 275,041 276,182 262,679 263,383
Borrowings 111,263 111,361 41,726 41,835
Other:
Interest rate floor
agreement - 204 - 102
Interest rate cap
agreements - 33 - -
15. PLAN OF CONVERSION
On August 26, 1998, the Board of Trustees of the Bank approved a Plan of
Conversion, as amended, for Woronoco Savings Bank ("Plan"). The Plan provides
for the conversion of the Bank from a state-chartered mutual savings bank to a
state-chartered stock savings bank. It is currently intended that all of the
stock of the Bank will be held by a holding company, Woronoco Bancorp, Inc. (the
"Company"), a Delaware corporation. The Plan was approved by the Bank's
Corporators on January 20, 1999 and various regulatory agencies.
F-35
WORONOCO SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(DOLLARS IN THOUSANDS)
PLAN OF CONVERSION (CONCLUDED)
As part of the Conversion, the Bank will establish a liquidation account for the
benefit of eligible and supplemental eligible account holders. The liquidation
account will be reduced annually to the extent that such account holders have
reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an account holder's interest in the liquidation
account. In the event of a complete liquidation, each eligible and supplemental
eligible account holder will be entitled to receive balances for accounts then
held.
The conversion was completed on March 19, 1999, 5,554,500 shares of common stock
were sold for gross proceeds of $55,545. The Company contributed 444,360
shares of common stock to the Woronoco Savings Charitable Foundation at a cost
to the Company of approximately $4,400. The Bank's employee stock ownership plan
purchased 479,908 shares of common stock. Costs associated with the stock
conversion and offering are expected to be approximately $2,000. The Company and
Bank each intend to enter into employment agreements, change in control
agreements and severance agreements with certain officers.
Subsequent to the Conversion, the Company and the Bank may not declare or pay
dividends on and the Company may not repurchase any of its shares of common
stock if the effect thereof would cause stockholders' equity to be reduced below
applicable regulatory capital maintenance requirements or if such declaration,
payment or repurchase would otherwise violate regulatory requirements.
F-36
Item 9. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
PART II
Item 10. Directors and Executive Officers of the Registrant.
The Directors of the Company are also Directors of the Bank. The following
table sets forth information regarding the Board of Directors.
Director Term
Name Age(1) Position(s) Held(2) Since(3) Expires(4)
- ---- ------ ------------------- -------- ----------
James A. Adams ............... 75 Director 1962 2000
William G. Aiken ............. 58 Director 1983 2001
Paul S. Allen ................ 78 Director 1974 1999
Francis J. Ehrhardt .......... 71 Director 1979 2000
Joseph M. Houser, Jr. ........ 59 Director 1983 1999
Joseph P. Keenan ............. 50 Director 1991 2001
Cornelius D. Mahoney ......... 53 Chairman of the 1985 2000
Board, President
and Chief Executive
Officer(5)
Richard L. Pomeroy ........... 71 Director 1986 2001
Ann V. Schultz ............... 64 Director 1991 2001
Norman H. Storey ............. 52 Director 1987 1999
D. Jeffrey Templeton ......... 57 Director 1988 2000
Paul Tsatsos ................. 51 Director 1995 2001
- ----------
(1) As of December 31, 1998.
(2) Positions listed are for the Company and the Bank unless otherwise noted.
(3) Lists date individual became trustee of the Bank. All Directors of the
Company were appointed in 1998, the year of the Company's incorporation.
(4) Expiration date is the same for the Company and the Bank.
(5) Mr. Mahoney became Chairman of the Board of Directors of the Bank on
February 10, 1999 succeeding Asher Nesin who passed away on January 25,
1999. Mr. Mahoney was already serving as Chairman of the Board of the
Company. Until the time of his death, Mr. Nesin served as a Director of
the Company and Vice President and Chairman of the Board of the Bank.
Executive Officers Who Are Not Directors
The following table sets forth information regarding the executive
officers of the Company and Bank who are not also Directors.
Name Age (1) Position(s) Held
- ---- ------- ----------------
Agostino J. Calheno ........... 48 Senior Vice President - Lending of the
Bank and Senior Vice President of the
Company
Debra L. Murphy ............... 42 Senior Vice President and Treasurer of
the Bank and Senior Vice President and
Chief Financial Officer of the Company
- ----------
(1) As of December 31, 1998.
54
Biographical Information
Directors
James A. Adams is president and funeral director of Adams Funeral Service,
Inc., located in Westfield, Massachusetts.
William G. Aiken has been a pharmacy manager with Foodmart Pharmacy since
October, 1997. From 1990 to September, 1997, Mr. Aiken was the pharmacy manager
of Brooks Drug.
Paul S. Allen is a certified public accountant. He has maintained a
practice with Paul S. Allen, sole proprietorship, for over fifty years.
Francis J. Ehrhardt is a manager of commercial real estate and a general
contractor.
Joseph M. Houser, Jr. has been a self-employed certified public accountant
for the past twenty-seven years and a consultant with Data Results, Inc. for the
past seven years.
Joseph P. Keenan is a self-employed physician.
Cornelius D. Mahoney joined Woronoco Savings Bank in 1975 after five years
at First Hawaiian Bank, Honolulu, Hawaii. He became President and Chief
Executive Officer of the Bank in 1986. He is the immediate Past Chairman of
America's Community Bankers, Past Chairman of the Massachusetts Bankers
Association and a former Director of the Federal Home Loan Bank of Boston. Mr.
Mahoney holds an MBA from Western New England College.
Richard L. Pomeroy was, until his retirement in 1987, the owner of and an
insurance agent with Pomeroy Insurance, Inc.
Ann V. Schultz served as a vice president of the Bank from 1987 to 1990.
Norman H. Storey has been a real estate broker with Storey Real Estate for
the past 30 years. In addition, Mr. Storey has been a reserve police officer for
the past 30 years and Justice of the Peace for the past eight years with the
Town of Southwick, Massachusetts.
D. Jeffrey Templeton is the owner and President of The Mosher Company,
Inc. of Chicopee, Massachusetts, a manufacturer of buffing and polishing
compounds, abrasive slurries and distributor of related grinding, polishing and
lapping machinery.
Paul Tsatsos is a self-employed certified public accountant.
Executive Officers Who Are Not Directors
Agostino J. Calheno joined the Bank in 1992 as Senior Vice President of
Lending. He operates as the chief lending officer of the Bank, overseeing all
lending operations. Mr. Calheno has over twenty-four years of bank lending
experience in the local area. He is a member of the Mortgage Markets and Lending
Technology Committee of America's Community Bankers and serves on numerous
boards of local charitable organizations. Mr. Calheno received a B.B.A. from the
University of Massachusetts and is a graduate of the National School of Finance
& Management and Executive Development Program at Fairfield University.
55
Debra L. Murphy, CPA joined the Bank in 1988 as Senior Vice President and
Treasurer. She operates as the chief financial officer of the Bank and is
responsible for all regulatory financial reporting and management of the
investment portfolio, in addition to overseeing the human resource and training
areas of the Bank. She has ten years previous experience with KPMG Peat Marwick
LLP as senior audit manager specializing in the audits of financial
institutions. Ms. Murphy received a B.B.A. from the University of Massachusetts
and is a graduate of the National School of Finance & Management and the
Executive Development Program at Fairfield University. She also serves on
several boards of charitable organization within the local community.
Honorary Directors
The Bank also maintains three Honorary Directors. Under the Bank's Bylaws,
persons who have served as a Director at the Bank for at least ten years may be
elected for an indefinite term. Honorary Directors are not officers nor members
of the Board of Directors and therefore are not included in determining whether
a quorum is present. Such persons receive no compensation nor are they entitled
to vote.
Item 11. Executive Compensation.
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Bank as well as other compensation paid or accrued for
services rendered in all capacities during the year ended December 31, 1998 to
the Chief Executive Officer and to other officers of the Bank who received
salary and bonus in excess of $100,000 ("Named Executive Officers").
Long-Term Compensation(3)
-------------------------------
Annual Compensation (1) Awards Payouts
------------------------------ ---------------------- -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Fiscal Salary Bonus Compensation Awards Option/SARs Payouts Compensation
Executive Year(2) ($) ($) ($)(3) ($)(4) (#)(5) ($)(6) ($)(7)
- --------- ------- -------- ------- ------------ ---------- ----------- ------- ------------
Cornelius D. Mahoney ....... 1998 $189,950 $32,300 -- -- -- -- $121,000
President and Chief 1997 171,572 32,200 -- -- -- -- 121,000
Executive Officer
Agostino J. Calheno ........ 1998 $99,400 $18,012 -- -- -- -- $1,621
Senior Vice 1997 94,800 17,940 -- -- -- -- --
President-Lending
Debra L. Murphy ............ 1998 $99,400 $18,012 -- -- -- -- 1,599
Senior Vice President 1997 94,800 17,800 -- -- -- -- --
and Treasurer
James E. Gardner ........... 1998 $99,000 $16,048 -- -- -- -- 1,555
Vice President 1997 94,400 9,060 -- -- -- -- --
- ----------
(1) Under Annual Compensation, the column titled "Salary" includes amounts
deferred by the Named Executive Officers under the Bank's 401(k) Plan.
"Bonus" consists of Board approved discretionary bonus.
(2) Neither the Company nor its predecessor, the Bank, was a reporting company
with respect to the 1996 fiscal year.
(3) For 1998 and 1997, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans before settlement or maturation; (d) tax payment reimbursements; or
(e) preferential discounts on stock. For 1998, the Bank had no restricted
stock or stock related plans in existence.
(4) No stock awards were granted or earned in 1998 or 1997.
(5) No stock options or SARs were earned or granted in 1998 or 1997.
(6) For 1998 and 1997, there were no payouts or awards under any long-term
incentive plan.
(7) Other compensation includes insurance premiums paid by the Bank under a
split-dollar life insurance arrangement for Mr. Mahoney and the Bank's
matching contributions under the Bank's 401(k) Plan to Messrs. Calheno and
Gardner and Ms. Murphy.
56
Employment Agreements
The Bank and the Company each intend to enter into employment agreements
with Messrs. Mahoney and Calheno and Ms. Murphy (individually, the "Executive")
(collectively, the "Employment Agreements"). The Employment Agreements are
intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base after the Conversion. The continued success
of the Bank and the Company depends to a significant degree on the skills and
competence of the above referenced officers.
The Employment Agreements will provide for a three-year term. The term of
the Company Employment Agreements shall be extended on a daily basis unless
written notice of non-renewal is given by the Board of Directors and the term of
the Bank Employment Agreements shall be renewable on an annual basis. The
Employment Agreements provide that the Executive's base salary will be reviewed
annually. The base salaries effective for such Employment Agreements for Messrs.
Mahoney and Calheno and Ms. Murphy are $215,000, $115,000 and $115,000,
respectively. In addition to the base salary, the Employment Agreements provide
for, among other things, participation in stock benefits plans and other fringe
benefits applicable to executive personnel. The Employment Agreements provide
for termination by the Bank or the Company for cause, as defined in the
Employment Agreements, at any time. If the Bank or the Company chooses to
terminate the Executive's employment for reasons other than for cause, or if the
Executive resigns from the Bank and the Company after a: (1) failure to re-elect
the Executive to his/her current offices; (2) material change in the Executive's
functions, duties or responsibilities; (3) relocation of the Executive's
principal place of employment by more than 25 miles; (4) reduction in the
benefits and perquisites being provided to the Executive in the Employment
Agreement; (5) liquidation or dissolution of the Bank or the Company; or (6)
breach of the Employment Agreement by the Bank or the Company, the Executive or,
if the Executive dies, his/her beneficiary, would be entitled to receive an
amount equal to the remaining base salary payments due to the Executive for the
remaining term of the Employment Agreement and the contributions that would have
been made on the Executive's behalf to any employee benefit plans of the Bank
and the Company during the remaining term of the Employment Agreement. The Bank
and the Company would also continue and/or pay for the Executive's life, health,
dental and disability coverage for the remaining term of the Employment
Agreement. Upon any termination of the Executive, the Executive must adhere to a
one year non-competition agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, the Executive or, if the
Executive dies, his/her beneficiary, would be entitled to a severance payment
equal to the greater of: (1) the payments due for the remaining terms of the
agreement; or (2) three times the average of the five preceding taxable years'
annual compensation. The Bank and the Company would also continue the
Executive's life, health, and disability coverage for thirty-six months. Even
though both the Bank and Company Employment Agreements provide for a severance
payment if a change in control occurs, the Executive would only be entitled to
receive a severance payment under one agreement.
Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company if payments or benefits are not paid by the Bank.
Payment under the Company's Employment Agreement would be made by the Company.
All reasonable costs and legal fees paid or incurred by the Executive under any
dispute or question of interpretation relating to the Employment Agreements
shall be paid by the Bank or Company, respectively, if the Executive is
successful on the merits in a legal judgment, arbitration or settlement. The
Employment Agreements also provide that the Bank and Company shall indemnify the
Executive to the fullest extent legally allowable. If a change in control of the
Bank or the Company occurred, the total amount of payments due under the
Agreements, based solely on the base salaries of the officers who will receive
Employment Agreements excluding any benefits under any employee benefit plan
which may be payable, would equal approximately $1.4 million.
Change in Control Agreements
The Bank intends to enter into three-year Change in Control Agreements
with six officers, all of whom are not covered by an employment agreement. The
Change in Control Agreement shall be renewable on an annual basis. The Change in
Control Agreements will provide that if voluntary or involuntary termination
follows a change in control of
57
the Company or the Bank, the officers would be entitled to receive a severance
payment equal to three times their average annual compensation for the five most
recent taxable years. The Bank would also continue and pay for the officers'
life, health and disability coverage for thirty-six months following
termination. If a change in control of the Company or the Bank occurred, the
total payments that would be due under the Change in Control Agreements, based
solely on the current annual compensation paid to the officers covered by the
Change in Control Agreements and excluding any benefits under any employee
benefit plan which may be payable, would equal approximately $1.3 million.
Supplemental Executive Retirement Plan. The Code limits the amount of
compensation the Bank may consider in providing benefits under its tax-qualified
retirement plans, such as the 401(k) Plan, the Pension Plan and the ESOP. The
Code further limits the amount of benefit accruals and annual contributions
under such plans on behalf of any employee. The Bank intends to implement a
non-qualified deferred compensation arrangement known as a Supplemental
Executive Retirement Plan (the "SERP"). The SERP will generally provide benefits
to eligible individuals (designated by the Board of Directors of the Bank or its
affiliates) that cannot be provided under the ESOP as a result of the
limitations imposed by the Code, but that would have been provided under the
ESOP but for such limitations. In addition to providing for benefits lost under
the ESOP as a result of limitations imposed by the Code, the SERP will also make
up lost ESOP benefits to designated individuals who retire, who terminate
employment in connection with a change in control, or whose participation in the
ESOP ends due to termination of the ESOP in connection with a change in control
before the complete scheduled repayment of the ESOP loan. Generally, upon the
retirement of an eligible individual or upon a change in control of the Bank or
the Company before complete repayment of the ESOP Loan, the SERP provides the
individual with a benefit equal to what the individual would have received under
the ESOP had he remained employed throughout the term of the ESOP or had the
ESOP not been terminated before the scheduled repayment of the ESOP loan less
the benefits actually provided under the ESOP on behalf of such individual. An
individual's benefits under the SERP will generally become payable upon the
participant's retirement (in accordance with the standard retirement policies of
the Bank), upon the change in control of the Bank or the Company, or as
determined under the ESOP.
The Bank may establish a grantor trust in connection with the SERP to
satisfy the obligations of the Bank with respect to the SERP. Until paid to plan
participants, creditors may make claims against the trust's assets if the Bank
becomes insolvent.
Split Dollar Life Insurance Arrangement. In 1995, the Bank established a
split-dollar life insurance arrangement for Mr. Mahoney primarily to restore
retirement benefits lost under the Pension Plan due to limitations imposed by
the Code. Under the terms of the arrangement, the Bank pays the premiums on the
life insurance policy, which is owned by Mr. Mahoney. Upon Mr. Mahoney's death,
or upon liquidation of the policy's cash surrender value, the Bank will recover
all of the payments it made with respect to the policy. In connection with the
split-dollar arrangement, the Bank also agreed to reimburse Mr. Mahoney each
year for the tax obligations arising from any federal or state taxable income he
recognizes as a result of the reportable economic benefit of the arrangement and
as a result of the Bank's reimbursement for such tax liabilities.
Director Compensation
The Bank provides all non-employee Directors of the Bank with an annual
retainer of $3,600 and a fee of $500 for all regular monthly and special
meetings attended. All members of the Board committees receive a fee of $300 for
each meeting attended, except that no committee member receives committee fees
which aggregate more than $1,200. There are no annual retainers for committee
members or chairpersons and no fees associated with serving as a clerk or
secretary of the Board of Directors or of any committee.
The Bank currently sponsors the Trustee Indexed Fee Continuation Plan (the
"Trustee Plan") for members of its Board of Directors. The Trustee Plan provides
an annual retirement benefit to each Director upon the Director's retirement
from the Board. To qualify for benefits under the Trustee Plan, a director must
be 65 years old and have completed ten years of continuous service with the
Board at the time of his or her retirement. If the director has
58
completed at least five but less than ten continuous years of service with the
Board at the time of retirement, his or her benefits will be reduced. The
retirement benefit provided to each director is based on an indexed formula,
which is tied to the earnings on a specific life insurance policy. The Bank has
funded the Trustee Plan through the purchase of split-dollar life insurance on
the lives of the directors. The life insurance is designed to offset annual
expenses associated with the Trustee Plan. The Bank generally expects to offset
all of the expenses of the Trustee Plan during the life of each director, and
recover all of the plan's costs at the director's death. However, the Bank does
not anticipate recovering all of the plan's expenses in the case of the two
eldest directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
The following table sets forth information as to those persons believed by
management to be beneficial owners of more than 5% of the Company's outstanding
shares of Common Stock or as disclosed in certain reports received to date
regarding such ownership filed by such persons with the Company and with the
SEC, in accordance with Sections 13(d) and 13(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Other than those persons listed below,
the Company is not aware of any person, as such term is defined in the Exchange
Act, who owns more than 5% of the Company's Common Stock as of the Record Date.
Name and Address of Number
Title of Class Beneficial Owner of Shares Percent of Class
- -------------- ------------------------------ ---------- ----------------
Common Stock Woronoco Savings Bank 479,908(1) 8.0%
Employee Stock Ownership Plan
and Trust
31 Court Street
Westfield, Massachusetts 01085
Common Stock Woronoco Savings Charitable 444,360(2) 7.4%
Foundation (the "Foundation")
31 Court Street
Westfield, Massachusetts 01085
- ----------
(1) Shares of Common Stock were acquired by the ESOP in the Bank's Conversion.
The ESOP Committee administers the ESOP. Eastern Bank and Trust Company
has been appointed as the corporate trustee for the ESOP ("ESOP Trustee").
The ESOP Trustee, subject to its fiduciary duty, must vote all allocated
shares held in the ESOP in accordance with the instructions of the
participants. As of December 31, 1998, no shares had been allocated under
the ESOP. Under the ESOP, unallocated shares and allocated shares as to
which voting instructions are not given by participants are to be voted by
the ESOP Trustee in a manner calculated to most accurately reflect the
instructions received from participants regarding the allocated stock so
long as such vote is in accordance with the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
(2) The Foundation was established and funded by the Company in connection
with the Bank's Conversion with an amount of the Company's Common Stock
equal to 7.4% of the total amount of Common Stock issued in the
Conversion. The Foundation is a Delaware non-stock corporation and is
dedicated to the promotion of charitable purposes within the communities
in which the Bank maintains a banking office. The Foundation is governed
by a board of directors with seven members, all of whom are directors or
officers of the Company and the Bank. Pursuant to the terms of the
contribution of Common Stock, as mandated by the Federal Deposit Insurance
Corporation, all shares of Common Stock held by the Foundation must be
voted in the same ratio as all other shares of the Company's Common Stock
on all proposals considered by shareholders of the Company.
59
Security Ownership of Management
The following table sets forth as of March 19, 1999, the number of shares
of Common Stock that the directors and Named Executive Officers own and that all
directors and executive officers own as a group.
Number of Percent
Name Title of Class Shares(1) of Class
- ---- -------------- --------- --------
James A. Adams .......................... Common Stock 4,000 *
William G. Aiken ........................ Common Stock 1,500 *
Paul S. Allen ........................... Common Stock 5,000 *
Francis J. Ehrhardt ..................... Common Stock 2,000 *
Joseph M. Houser, Jr. ................... Common Stock 1,000 *
Joseph P. Keenan ........................ Common Stock 20,000 *
Cornelius D. Mahoney .................... Common Stock 10,052 *
Richard L. Pomeroy ...................... Common Stock 1,000 *
Ann V. Schultz .......................... Common Stock 2,100 *
Norman H. Storey ........................ Common Stock 5,000 *
D. Jeffrey Templeton .................... Common Stock 5,000 *
Paul Tsatsos ............................ Common Stock 4,000 *
Agostino J. Calheno ..................... Common Stock 1,408 *
Debra L. Murphy ......................... Common Stock 4,012 *
James G. Gardner ........................ Common Stock 5,117 *
------
All Directors and Executive Officers
as a Group (15 persons) ............... Common Stock 71,189 1.19%
====== ======
- ----------
*Does not exceed 1.0% of the Company's voting securities.
(1) Each person effectively exercises sole (or shares with spouse or other
immediate family members) voting or dispositive powers as to shares
reported.
Item 13. Certain Relationships and Related Transactions.
Federal regulations require that all loans or extensions of credit to executive
officers and Directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition,
Massachusetts law regulates the granting of loans to officers and Directors of
the Bank. Loans made to a Director or executive officer in excess of the greater
of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors.
The Bank currently makes loans to its executive officers and directors on
the same terms and conditions offered to the general public. The Bank's policy
provides that all loans made by the Bank to its executive officers and directors
be made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. As of December 31, 1998,
11 of the Bank's executive officers or directors had loans with outstanding
balances totaling $723,000 in the aggregate. All such loans were made by the
Bank in the ordinary course of business, with no favorable terms and such loans
do not involve more than the normal risk of collectibility or present
unfavorable features.
60
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of the Bank and its
subsidiaries are filed as part of this document under Item 8:
- Consolidated Balance Sheets at December 31, 1998 and 1997
- Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
- Consolidated Statements of Changes in Surplus for the Years Ended
December 31, 1998, 1997 and 1996
- Consolidated Statements of Cash Flows for each of the Years Ended
December 31, 1998, 1997 and 1996
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
(a) 2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1998
None
61
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
2.1 Amended Plan of Conversion of Woronoco Savings Bank (1)
3.1 Certificate of Incorporation of Woronoco Bancorp, Inc. (1)
3.2 Bylaws of Woronoco Bancorp, Inc. (1)
4.0 Draft Stock Certificate of Woronoco Bancorp, Inc. (1)
10.1 Form of Employment Agreement between Woronoco Savings Bank and
certain executive officers (1)
10.2 Form of Employment Agreement between Woronoco Bancorp, Inc. and
certain executive officers (1)
10.3 Form of Change in Control Agreement between Woronoco Savings Bank
and certain executive officers (1)
10.4 Form of Change in Control Agreement between Woronoco Bancorp, Inc.
and certain executive officers (1)
10.5 Form of Woronoco Savings Bank Employee Severance Compensation Plan
(1)
10.6 Form of Woronoco Savings Bank Supplemental Executive Retirement Plan
(1)
11.0 Statement Re: Computation of Per Share Earnings(2)
21.0 Subsidiaries Information Incorporated Herein By Reference to Part
1 - Subsidiaries
27.0 Financial Data Schedule
- ----------
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, and any amendments thereto,
Registration No. 333-67255.
(2) Not applicable as the Company did not have earnings in 1998.
62
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Woronoco Bancorp, Inc.
By: /s/ Cornelius D. Mahoney March 29, 1999
---------------------------
Cornelius D. Mahoney
Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/Cornelius D. Mahoney Chairman of the Board, President March 29, 1999
- ----------------------- and Chief Executive Officer
Cornelius D. Mahoney (principal executive officer)
/s/Debra L. Murphy Senior Vice President and Chief March 29, 1999
- ----------------------- Financial Officer
Debra L. Murphy (principal accounting and
financial officer)
/s/James A. Adams Director March 29, 1999
- -----------------------
James A. Adams
/s/William G. Aiken Director March 29, 1999
- -----------------------
William G. Aiken
/s/Paul S. Allen Director March 29, 1999
- -----------------------
Paul S. Allen
/s/Francis J. Ehrhardt Director March 29, 1999
- -----------------------
Francis J. Ehrhardt
/s/Joseph M. Houser, Jr. Director March 29, 1999
- -----------------------
Joseph M. Houser, Jr.
/s/Joseph P. Keenan Director March 29, 1999
- -----------------------
Joseph P. Keenan
/s/Richard L. Pomeroy Director March 29, 1999
- -----------------------
Richard L. Pomeroy
/s/Norman H. Storey Director March 29, 1999
- -----------------------
Norman H. Storey
/s/Ann V. Schultz Director March 29, 1999
- -----------------------
Ann V. Schultz
/s/D. Jeffrey Templeton Director March 29, 1999
- -----------------------
D. Jeffrey Templeton
/s/Paul Tsatos Director March 29, 1999
- -----------------------
Paul Tsatsos