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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-14671
WORONOCO BANCORP, INC.
----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3444269
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31 Court Street, Westfield, Massachusetts 01085
- -------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant'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 of
1934 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 X NO
------ --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ________
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of February 29, 2000 was $51,705,250.
As of February 29, 2000, there were 5,698,860 shares of the Registrant's
Common Stock outstanding.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
INDEX
PART I Page No.
--------
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 29
Item 3. Legal Proceedings................................................. 30
Item 4. Submission of Matters to a Vote of Security Holders............... 30
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.................................. 31
Item 6. Selected Financial Data........................................... 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 34
Item 7a. Quantitative and Qualitative Disclosures About Market Risk........ 44
Item 8. Financial Statements and Supplementary Data....................... 48
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.............................. 49
PART III
Item 10. Directors and Executive Officers of the Registrant................ 49
Item 11. Executive Compensation............................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 50
Item 13. Certain Relationships and Related Transactions.................... 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 50
SIGNATURES....................................................................... 52
PART I
Item 1. Business.
- ----------------
Woronoco Bancorp, Inc. (the "Corporation") was incorporated in October 1998
under Delaware law. On March 19, 1999, the Corporation acquired Woronoco
Savings Bank (the "Bank") as part of the Bank's conversion from a Massachusetts-
chartered mutual savings bank to a Massachusetts-chartered stock savings bank
(the "Conversion"). The Corporation acquired the Bank for 50% of the net
proceeds from the Conversion. The Corporation is currently a savings and loan
holding company regulated by the Office of Thrift Supervision ("OTS"). In
connection with the Conversion, the Corporation issued an aggregate of 5,998,860
shares of its common stock, par value $0.01 per share, of which 5,554,500 shares
were sold at a purchase price of $10 per share in a subscription offering and
444,360 shares were issued to Woronoco Savings Charitable Foundation, a
charitable foundation established by the Bank. The net proceeds resulting from
the offering totaled $53.5 million.
Woronoco Bancorp, Inc. and its subsidiaries (the "Company") does not
transact any material business other than through 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 11 banking offices and the
investment of those deposits, together with funds generated from operations and
borrowings, primarily in one-to four-family residential loans and consumer
loans, mainly 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 may 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 Company is headquartered in Westfield, Massachusetts. The Company's
primary lending and deposit market areas include 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 crosses 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 Company'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 Company faces significant competition both in generating loans and in
attracting deposits. The Company's primary market area is highly competitive
and the Company 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 Company. The
Company's competition for loans comes principally from commercial banks, other
savings banks, co-operative banks, mortgage brokers, 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 Company 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.
1
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. The Company has also
experienced significant competition from credit unions which have a competitive
advantage as they are not required to pay state or federal income taxes. Such
competitive advantage has placed increased pressure on the Company with respect
to its loan and deposit pricing.
Lending Activities
Loan Portfolio Composition. Federal and state laws and regulations limit
the types of loans that the Company may originate. Interest rates charged by
the Company on loans are affected principally by the Company'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, 1999, the Company's total loan portfolio was $311.5
million, of which $170.8 million were one- to four-family residential mortgage
loans, or 54.8% of total loans. At such date, the remainder of the loan
portfolio consisted of $26.1 million of multi-family loans, or 8.4% of total
loans; $23.8 million of commercial real estate loans, or 7.6% of total loans;
$2.9 million of construction and development loans, or 0.9% of total loans;
$83.0 million of consumer loans, or 26.7% of total loans consisting primarily of
$69.8 million of home equity loans, or 84.1% of consumer loans; and $4.9 million
of commercial loans, or 1.6% of total loans. Primarily all loans in the
Company's portfolio, with the exception of home equity loans and lines of
credit, are located in the Company's primary market area.
2
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the respective portfolio at
the dates indicated.
At December 31,
----------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------- ----------- ------------- ----------- ------------- -----------
(Dollars In Thousands)
Real estate loans
One- to four-family $170,808 54.83% $157,698 54.95% $139,811 52.84%
Multi-family 26,104 8.38% 22,962 8.00% 19,047 7.20%
Commercial 23,796 7.64% 20,595 7.18% 21,757 8.22%
Construction and development 2,873 0.92% 3,464 1.21% 2,868 1.08%
------------- ----------- ------------- ----------- ------------- -----------
Total real estate loans 223,581 71.77% 204,719 71.34% 183,483 69.34%
------------- ----------- ------------- ----------- ------------- -----------
Consumer loans
Home equity loans 69,821 22.41% 64,705 22.55% 62,227 23.52%
Automobile 9,653 3.10% 9,460 3.30% 10,287 3.89%
Other 3,551 1.14% 3,454 1.20% 4,291 1.62%
------------- ----------- ------------- ----------- ------------- -----------
Total consumer loans 83,025 26.65% 77,619 27.05% 76,805 29.03%
------------- ----------- ------------- ----------- ------------- -----------
Commercial loans 4,907 1.58% 4,613 1.61% 4,319 1.63%
------------- ----------- ------------- ----------- ------------- -----------
Total loans 311,513 100.00% 286,951 100.00% 264,607 100.00%
=========== =========== ===========
Less:
Unadvanced loan funds (1) (2,350) (1,453) (1,866)
Net deferred loan origination costs 553 711 934
Allowance for loan losses (2,309) (2,166) (1,952)
------------- ------------- -------------
Loans, net $307,407 $284,043 $261,723
============= ============= =============
At December 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
Percent Percent
Amount of Total Amount of Total
------------- ----------- -------------- -----------
(Dollars In Thousands)
Real estate loans
One- to four-family $138,289 58.39% $127,811 62.73%
Multi-family 17,826 7.53% 11,843 5.81%
Commercial 19,697 8.32% 3,032 1.49%
Construction and development 1,124 0.47% 18,580 9.12%
------------- ----------- -------------- -----------
Total real estate loans 176,936 74.71% 161,266 79.15%
------------- ----------- -------------- -----------
Consumer loans
Home equity loans 43,662 18.43% 29,305 14.39%
Automobile 7,969 3.36% 5,507 2.70%
Other 4,397 1.86% 4,286 2.10%
------------- ----------- -------------- -----------
Total consumer loans 56,028 23.65% 39,098 19.19%
------------- ----------- -------------- -----------
Commercial loans 3,879 1.64% 3,382 1.66%
------------- ----------- -------------- -----------
Total loans 236,843 100.00% 203,746 100.00%
=========== ===========
Less:
Unadvanced loan funds (1) (1,395) (2,089)
Net deferred loan origination costs 598 370
Allowance for loan losses (1,911) (1,838)
------------- --------------
Loans, net $234,135 $200,189
============= ==============
(1) Includes committed but unadvanced loan amounts.
Origination, Sale and Servicing of Loans. The Company'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 Company are underwritten by the Company under the Company's policies and
procedures. The Company originates both adjustable-rate and fixed-rate mortgage
loans. The Company'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. The Company hired two
commissioned loan officers in 1999 with the primary responsibility of
originating one- to four-family mortgage loans for the Company. The Company may
hire additional loan officers in the future consistent with its business plan.
The Company is primarily a portfolio lender, originating substantially all
of its loans for investment. In August 1998, however, the Company 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 Company 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 Company conform to the
underwriting standards specified by Fannie Mae and Freddie Mac. The Company
generally retains the servicing rights on any mortgage loans which it sells or
securitizes.
At December 31, 1999, the Company was servicing $35.1 million of loans for
others, consisting of conforming fixed-rate mortgage loans sold or securitized
by the Company. 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. 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, 1999, December 31, 1998 and December
31, 1997, the Company originated $26.5 million, $53.3 million and $9.9 million
of fixed-rate one- to four-family loans, respectively, of which
3
$26.5 million, $45.9 million and $5.1 million, respectively, were retained by
the Company. During these same periods, the Company also originated $8.6
million, $5.6 million and $8.6 million of adjustable-rate one- to four-family
loans, respectively, all of which were retained by the Company. The Company
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 Company has, from time-to-time, participated in
loans, primarily multi-family and commercial real estate loans and commercial
business loans and, at December 31, 1999, had $3.9 million in loan participation
interests.
The following table sets forth the Company's loan originations and
purchases, sales and principal repayments for the periods indicated.
For the Years Ended December 31,
-----------------------------------------------
1999 1998 1997
-------------- --------------- --------------
(In Thousands)
Loans, net, beginning of period $ 284,043 $ 261,723 $ 234,135
-------------- --------------- --------------
Loans originated and purchased:
Real estate 49,648 67,216 25,233
Consumer:
Home equity 23,808 23,286 40,976
Automobile 5,842 4,774 6,829
Other 3,245 3,196 2,980
-------------- --------------- --------------
Total consumer 32,895 31,256 50,785
Commercial 4,688 4,717 3,131
-------------- --------------- --------------
Total loans originated and purchased 87,231 103,189 79,149
-------------- --------------- --------------
Principal repayments, unadvanced
funds and other, net (62,985) (61,681) (51,141)
Sale/securitization of mortgage loans, principal balance - (19,068) -
Loan charge-offs, net (37) (26) (139)
Transfers to REO (845) (94) (281)
-------------- --------------- --------------
Total deductions (63,867) (80,869) (51,561)
-------------- --------------- --------------
Net loan activity 23,364 22,320 27,588
-------------- --------------- --------------
Loans, net, end of period $ 307,407 $ 284,043 $ 261,723
============== =============== ==============
4
Loan Maturity. The following table shows the remaining contractual maturity of
the Company's loan portfolio at December 31, 1999. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on loans totaled $82.2 million, $83.0 million and $52.7
million for the years ended December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999
------------------------------------------------------------------------------------
One- to Construction
Four- Multi- Commercial and Home Equity
Family Family Real estate Development Loans Automobile
------------- ------------ ----------- ------------- ------------ -----------
(In Thousands)
Amounts due:
One year or less $ 62 $ - $ 35 $ 1,252 $ - $ 494
After one year:
More than one year to three years 1,185 12 246 1,045 196 4,616
More than three years to five years 1,881 - 236 96 4,500 4,543
More than five years to 10 years 30,934 2,844 2,939 480 6,602 -
More than ten years to 15 years 47,093 7,020 6,488 - 5,465 -
More than 15 years 89,653 16,228 13,852 - 53,058 -
------------- ------------ ----------- ----------- ----------- -----------
Total amount due $ 170,808 $ 26,104 $ 23,796 $ 2,873 $ 69,821 $ 9,653
============= ============ =========== =========== =========== ===========
Less:
Unadvanced loan funds
Net deferred loan origination costs
Allowance for loan losses
Loans, net
At December 31, 1999
--------------------------------------------
Total
Other Loans
Consumer Commercial Receivable
------------ -------------- -------------
(In Thousands)
Amounts due:
One year or less $ 670 $ 137 $ 2,650
After one year:
More than one year to three years 1,792 1,033 10,125
More than three years to five years 177 1,709 13,142
More than five years to 10 years 48 590 44,437
More than ten years to 15 years 79 - 66,145
More than 15 years 785 1,438 175,014
------------ ----------- --------------
Total amount due $ 3,551 $ 4,907 311,513
============ ===========
Less:
Unadvanced loan funds (2,350)
Net deferred loan origination costs 553
Allowance for loan losses (2,309)
--------------
Loans, net $307,407
==============
The following table sets forth at December 31, 1999, the dollar amount of
gross loans receivable contractually due after December 31, 2000, and whether
such loans have fixed interest rates or adjustable interest rates.
Due After December 31, 2000
------------------------------------------------
Fixed Adjustable Total
-------------- -------------- --------------
(In Thousands)
Real estate loans:
One- to four-family $ 117,497 $ 53,249 $ 170,746
Multi-family and commercial real estate 1,925 47,940 49,865
Construction and development - 1,621 1,621
-------------- -------------- --------------
Total real estate loans 119,422 102,810 222,232
-------------- -------------- --------------
Consumer loans:
Home equity 15,111 54,710 69,821
Automobile 9,159 - 9,159
Other 2,611 270 2,881
Commercial loans 2,699 2,071 4,770
-------------- -------------- --------------
Total loans $ 149,002 $ 159,861 $ 308,863
============== ============== ==============
5
One- to Four-Family Loans. The Company currently offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans which are secured by one- to four-
family residences located mainly in the Company's primary market area. One- to
four-family mortgage loan originations are generally obtained from the Company's
in-house and commissioned offsite loan representatives, from existing or past
customers, through advertising, and through referrals from local builders, real
estate brokers and attorneys. The Company also purchases from time to time ARM
loans from various financial institutions. At December 31, 1999, the Company's
one- to four-family mortgage loans totaled $170.8 million, or 54.8% of total
loans. Of the one- to four-family mortgage loans outstanding at that date,
68.8% were fixed-rate mortgage loans and 31.2% were ARM loans.
The Company currently offers a variety of fixed-rate and variable-rate
mortgage loan products to meet the needs of our customers, which includes
flexible lending terms suited for variable interest rate conditions. For
example, during periods of rising longer-term rates, customers typically choose
variable rate products to finance the purchase of a home. Conversely, as rates
decline, customers are more likely to use a fixed rate mortgage to finance a
purchase or to refinance an existing fixed-rate or variable-rate mortgage. The
Company currently offers fixed-rate mortgage loans with terms of up to 30 years.
The Company 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 or seven year initial
fixed period. The interest rates for the Company's ARM loans are indexed to
either the one, three or five year Constant Maturity Treasury ("CMT") Index.
The Company originates ARM loans with initially discounted rates. The Company'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 Company retains for its
portfolio substantially all loans originated, while, from time to time, it sells
or securitizes, 30-year fixed-rate mortgage loans. Loans are generally sold to
Freddie Mac and Fannie Mae. The Company generally retains the servicing on all
loans sold. The Company's purchased ARM loans generally have terms of up to 30
years and interest rates which adjust annually after three and five years and
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 origination or purchase of adjustable-rate residential mortgage loans,
as opposed to fixed-rate residential mortgage loans, helps reduce the Company'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 Company attempts to minimize
such risk, particularly on one-year adjustable-rate mortgages, by assuming a 200
basis point increase in the loan's interest rate when evaluating a borrower's
creditworthiness. 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
Company's policies and secondary market underwriting guidelines. Generally, the
Company 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 Company generally include due-on-sale clauses which provide
the Company with the contractual right to deem the loan immediately due and
payable if a borrower transfers ownership of the property without the Company's
consent. Due-on-sale clauses are an important means of adjusting the yields on
the Company's fixed-rate mortgage loan portfolio and the Company has generally
exercised its rights under these clauses. The Company requires fire, casualty,
title and flood insurance, if applicable, on all properties securing real estate
loans made by the Company.
In an effort to provide financing for first-time home buyers, the Company
offers its own first-time home buyer loan program. This program offers one- and
two-family owner-occupied 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, 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 and reduced
loan origination fees and closing costs. These loans are originated using more
liberal underwriting guidelines than the Company'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%.
6
Home Equity Loans and Lines of Credit. The Company 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
Company'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 Company's primary market were generated through the
services of a third party telemarketing firm and later approved by the Company.
Such third party completed limited solicitation on behalf of the Company in
1999. At December 31, 1999, home equity loans and lines of credit totaled $69.8
million, or 22.4% of the Company's total loans and 84.1% 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 80% 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 Company for home equity
lines of credit include a determination of the applicant's credit history, 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 Company. 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 Company 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 Company's primary market area. The Company'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
Company's current loans-to-one-borrower limit, which at December 31, 1999 was
$5.0 million. The Company'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 Company 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 Company will also
consider the term of the lease and the quality of the tenants. The Company has
generally required that the properties securing these 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 Company's multi-family real
estate loan portfolio at December 31, 1999 was $26.1 million, or 8.4% of total
loans, and the Company's commercial real estate loan portfolio at such date was
$23.8 million, or 7.6% of total loans. The largest multi-family or commercial
real estate loan in the Company's portfolio at December 31, 1999 was a $2.9
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 Company seeks to minimize these risks through its underwriting
standards.
Construction and Development Lending. The Company 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 Company's primary market area. Commercial real estate
construction loans typically
7
convert into permanent financing. Construction and development loans are
generally offered to customers and experienced builders with whom the Company
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 Company's lending officers
or, on larger projects, independent architects or engineering firms, warrant. At
December 31, 1999, the Company'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, 1999,
construction and development loans totaled $2.9 million, or 0.9%, of the
Company's total loans.
The Company 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 generally 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 Company's land loans are generally secured by property in its primary market
area. The Company 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
Company may be confronted with a project, when completed, having a value which
is insufficient to assure full repayment.
Automobile and Other Consumer Lending. The Company offers automobile loans
with term of up to 60 months and loan-to-value ratios of 90% for new cars. For
used cars, the maximum loan-to-value ratio is 90% 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 36 months (for older vehicles) to 60 months
(for automobiles up to four years old). The interest rates offered are the same
for new and used automobile loans. At December 31, 1999, automobile loans
totaled $9.7 million, or 3.1% of the Company's total loans and 11.6% of consumer
loans. Other consumer loans at December 31, 1999 amounted to $3.6 million, or
1.1% of the Company's total loans and 4.3% 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 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, 1999, the Company had $4.9 million in
commercial loans which amounted to 1.6% of total loans. In addition, at such
date, the Company had $1.8 million of unadvanced commercial lines of credit.
The Company makes commercial business loans primarily in its market area to a
variety of professionals, sole proprietorships and small businesses. The
Company 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 Company's loans-to-one-borrower
limit which at December 31, 1999, was $5.0 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
8
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 Company considers the financial
statements of the borrower, the Company'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 Company
generally does not make unsecured commercial loans. In addition, the Company
participates in loans, often community-based, with area lenders with whom the
Company has a relationship. When determining whether to participate in such
loans, the Company will underwrite its participation interest according to its
own underwriting standards. At December 31, 1999, $695,000, or 12.0% of the
commercial loan portfolio, were participation loans of this nature. In an effort
to increase its emphasis on commercial loans, in December 1999, the Company
hired 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, 1999, the Company's largest commercial loan was a $500,000 revolving line of
credit to a consortium of physicians located in Westfield, Massachusetts.
Loan Approval Procedures and Authority. The lending policies and loan
approval limits of the Company are established by the Executive Committee and
ratified by the Board of Directors. In connection with one- to four-family
mortgage loans, the Executive Committee has authorized the following persons to
approve the loans up to the amounts indicated: one assistant vice president and
each vice president of commercial lending may approve loans up to $150,000 and
$200,000, respectively; the vice president of residential lending and all loan
origination and underwriting officers may approve loans up to $240,000; and the
Chief Executive Officer and the Senior Vice President, Lending may approve loans
up to $400,000.
With respect to consumer loans, the Executive Committee has authorized the
following persons to approve loans up to the amounts indicated: one assistant
branch manager and all branch supervisors may approve secured and unsecured
loans of up to $15,000 and $5,000, respectively; branch managers, loan
originators and underwriting officers and the vice president of 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 Executive Committee has authorized the following individuals to approve
home equity loans and lines of credit up to the amounts indicated: 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 $200,000.
All loans in excess of these amounts must be approved by either the Senior
Vice President, Lending, the Officers' Loan Committee and/or the Executive
Committee. The Officers' Loan Committee, which currently consists of three
lending officers, is selected by the Executive Committee and ratified by the
Board of Directors. Specifically, all loans, commitments or other extensions of
credit, which either alone or in the aggregate total up to $400,000 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
$400,000 but are less than $1,000,000 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 $1,000,000 must be approved by the
Executive Committee. Additionally, those loans less than $1,000,000 must be
ratified by the Executive Committee. All loans, commitments and other
extensions of credit which increase the total aggregate unsecured liability of a
borrower to $150,000 or more must be approved by the Officers' Loan Committee.
9
With respect to commercial loans, the Executive Committee 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
$150,000, $100,000 and $20,000, respectively; the vice president/commercial
lending officer may approve commercial real estate loans, commercial secured and
unsecured loans in amounts of up to $300,000, $250,000 and $125,000,
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 $400,000, $300,000 and $150,000,
respectively.
All loans in excess of these amounts must be approved by either the
Officers' Loan Committee and/or the Executive Committee. Specifically, all
loans, commitments or other extensions of credit, either alone or in the
aggregate which exceed $400,000 or $1,000,000 must be approved by the Officers'
Loan Committee and the Executive Committee, respectively. Additionally, all
loans, commitments and other extensions of credit which increase the total
aggregate unsecured liability of a borrower to $150,000 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 Executive Committee on a monthly basis and
the Board of Directors performs a monthly review of all loans or lending
relationships delinquent 90 days or more. The procedures taken by the Company
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 Company
generally sends the borrower a written notice of non-payment after the loan is
15 days past due. The Company'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 Company 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
necessary for the Company to take legal action, which typically occurs after a
loan is 90 days or more delinquent, the Company 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 Company, becomes real estate owned.
Classified Assets. Federal regulations and the Company's internal policies
require that the Company utilize an internal asset classification system as a
means of reporting problem and potential problem assets. The Company 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 Company 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 Company 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 Company classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for loan
losses in an amount deemed prudent by management unless the loss of principal
appears to be remote. When the Company 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 Company 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
10
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 Company believes that it has established an adequate allowance for
loan losses, there can be no assurance that regulators, in reviewing the
Company's loan portfolio, will not request the Company to materially increase at
that time its allowance for loan losses, thereby negatively affecting the
Company's financial condition and earnings. 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 Company and the Executive Committee review and classify
the assets of the Company on a monthly basis and the Board of Directors reviews
the results of the reports on a monthly basis. The Company classifies its
assets in accordance with the management guidelines described above. At
December 31, 1999, the Company had $2.3 million, or 0.5%, of assets designated
as Substandard, consisting of ten one- to four-family loans, three commercial
real estate loans, four multi-family loans, ten home equity lines of credit,
nine consumer loans and one commercial business loan. At such date, the Company
had no loans classified as Doubtful or Loss. Also, at December 31, 1999, the
Company had $934,000, or 0.2% of assets, designated as Special Mention,
consisting of seven one- to four-family loans, two commercial real estate loans,
three multi-family real estate loans and three commercial business loans. At
December 31, 1999, all of these classified assets represented 1.0% of total
loans.
At December 31, 1999, the Company had one loan, classified as Substandard,
with a balance of $689,000. The loan is secured by a blanket first mortgage on
ten multi-family properties located in Westfield, Massachusetts. Currently, the
borrower provides the Company with monthly financial statements and the Company
actively monitors the properties' vacancy rates. The borrower is current with
respect to payments.
11
The following table sets forth the delinquencies in the Company's loan
portfolio as of the dates indicated.
December 31, 1999 December 31, 1998
----------------------------------------------------- ----------------------------------------------------
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 of Balance of of Balance of of Balance of
Loans Loans Loans Loans Loans Loans Loans Loans
------------ ----------- ----------- ------------ ----------- ----------- ------------ -----------
(Dollars in Thousands)
One- to four- family 1 $77 1 $49 1 $74 2 $167
Commercial real estate - - 1 12 - - 2 109
Home equity 1 24 2 114 1 6 1 30
Other consumer 3 6 - - 3 5 - -
------------ ----------- ----------- ------------ ----------- ----------- ------------ -----------
Total loans 5 $107 4 $175 5 $85 5 $306
============ =========== =========== ============ =========== =========== ============ ===========
Delinquent loans to
total loans (1) 0.03% 0.06% 0.03% 0.11%
December 31, 1997 December 31, 1996
----------------------------------------------------- ----------------------------------------------------
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 of Balance of of Balance of of Balance of
Loans Loans Loans Loans Loans Loans Loans Loans
------------ ----------- ----------- ------------ ----------- ----------- ------------ -----------
(Dollars in Thousands)
One- to four- family 2 $80 1 $95 2 $51 1 $71
Commercial real estate 2 192 1 790 1 43 2 124
Home equity 1 30 - - - - 1 30
Other consumer 6 38 - - 1 4 4 27
------------ ----------- ----------- ------------ ----------- ----------- ------------ -----------
Total loans 11 $340 2 $885 4 $98 8 $252
============ =========== =========== ============ =========== =========== ============ ===========
Delinquent loans to
total loans (1) 0.13% 0.34% 0.04% 0.11%
December 31, 1995
-----------------------------------------------------
60-89 Days 90 Days or More
------------------------- -------------------------
Number Principal Number Principal
of Balance of of Balance of
Loans Loans Loans Loans
------------ ----------- ----------- ------------
(Dollars in Thousands)
One- to four- family 6 $340 4 $384
Commercial real estate 1 43 1 61
Home equity 2 39 - -
Other consumer 4 22 1 93
Commercial - - 1 28
------------ ----------- ----------- ------------
Total loans 13 $444 7 $566
============ =========== =========== ============
Delinquent loans to
total loans (1) 0.22% 0.28%
(1) Total loans includes gross loans, less unadvanced loan funds, plus net
deferred loan costs
12
Nonperforming Assets and Impaired Loans. The following table sets forth
information regarding nonaccrual loans and real estate owned ("REO"). At
December 31, 1999, nonaccrual loans totaled $175,000, consisting of four loans.
It is the general policy of the Company 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,
1999, 1998 and 1997 had been made in accordance with original loan agreements,
interest income of $9,000, $11,000 and $48,000, respectively, would have been
recognized. On January 1, 1995, the Company 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, 1999, the Company had a $126,000
recorded investment in impaired loans which had specific allowances of $81,000.
At December 31, 1998, there were $1.2 million of impaired loans with specific
loan loss allowances of $283,000. At December 31, 1999, REO totaled $879,000,
consisting of an office/retail building, two residential building lots, a 25 lot
residential subdivision and a single-family residence. The Company sold the
office/retail building, which had a book value of $738,000, for $736,000 in
January, 2000. When the Company 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 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 Company provides for a specific allowance and
charges operations for the diminution in value.
At December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- ---------------
(Dollars in Thousands)
Non-accrual loans:
Real estate:
One- to four- family $49 $167 $95 $71 $412
Commercial 12 109 790 124 61
Home equity 114 30 - 30 93
Other consumer - - - 27 -
-------------- -------------- -------------- -------------- ---------------
Total 175 306 885 252 566
Real estate owned, net (1) 879 241 189 348 534
Other repossessed assets 4 - 192 75 107
-------------- -------------- -------------- -------------- ---------------
Total nonperforming assets 1,058 547 1,266 675 1,207
Troubled debt restructurings - 773 274 - 1,947
Troubled debt restructurings and
-------------- -------------- -------------- -------------- ---------------
total nonperforming assets $1,058 $1,320 $1,540 $675 $3,154
============== ============== ============== ============== ===============
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans (2) (3) 0.06% 0.38% 0.44% 0.11% 1.24%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets (3) 0.21% 0.31% 0.45% 0.21% 1.15%
(1) REO balances are shown net of related loss allowances.
(2) Total loans includes loans, less unadvanced loan funds, plus net deferred
loan costs.
(3) Nonperforming assets consist of nonperforming loans, REO and other
repossessed assets. Nonperforming loans consist of nonaccruing loans and all
loans 90 days or more past due and other loans which have been identified by
the Company as presenting uncertainty with respect to the collectibility of
interest or principal.
13
Allowance for Loan Losses
Management completes a loan loss allowance sufficiency analysis on a
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 data and
economic conditions. 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, consideration of the trends in the
Company's loan portfolio, the national and regional economies and the real
estate market in the Company'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 Company'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.
At December 31, 1999, the Company's allowance for loan losses was $2.3
million, or 0.75% of total loans, and 1319% of nonperforming loans and troubled
debt restructurings as compared to $2.2 million, or 0.76% of total loans, and
201% of nonperforming loans and troubled debt restructurings as of December 31,
1998. Management believes that, based on information available at December 31,
1999, the Company's allowance for loan losses was sufficient to cover losses
inherent in its loan portfolio at that time. Based upon the Company's plan to
increase its emphasis on non-one- to four-family mortgage lending, the Company
may further increase its allowance for loan losses over future periods as
conditions dictate. However, no assurances can be given that the Company's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Company 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 Company's allowance for loan losses. Such
agencies may require the Company to make additional provisions for estimated
loan losses based upon judgments different from those of management.
14
The following table sets forth activity in the Company's allowance for loan
losses for the periods set forth in the table.
At or for the Year Ended December 31,
------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
(Dollars in Thousands)
Allowance for loan losses, beginning of period $2,166 $1,952 $1,911
Charged-off loans:
Real estate 8 - 52
Consumer 78 100 10
Commercial - - 109
---------------- ---------------- ----------------
Total charged-off loans 86 100 171
---------------- ---------------- ----------------
Recoveries on loans previously charged-off:
Real estate 12 37 11
Consumer 37 37 -
Commercial - - 21
---------------- ---------------- ----------------
Total recoveries 49 74 32
---------------- ---------------- ----------------
Net loans charged-off 37 26 139
Provision for loan losses 180 240 180
---------------- ---------------- ----------------
Allowance for loan losses, end of period $2,309 $2,166 $1,952
================ ================ ================
Net loans charged-off to average loans, net 0.01% 0.01% 0.06%
Allowance for loan losses to total loans (1) 0.75% 0.76% 0.74%
Allowance for loan losses to nonperforming
loans and troubled debt restructuring (2) 1,319.43% 200.74% 168.42%
Net loans charged-off to allowance for loan losses 1.60% 1.20% 7.12%
Recoveries to charge-offs 56.98% 74.00% 18.71%
At or for the Year Ended December 31,
-------------------------------------
1996 1995
---------------- ----------------
(Dollars in Thousands)
Allowance for loan losses, beginning of period $1,838 $1,657
Charged-off loans:
Real estate 34 30
Consumer 30 -
Commercial 72 45
---------------- ----------------
Total charged-off loans 136 75
---------------- ----------------
Recoveries on loans previously charged-off:
Real estate 10 24
Consumer - -
Commercial 19 22
---------------- ----------------
Total recoveries 29 46
---------------- ----------------
Net loans charged-off 107 29
Provision for loan losses 180 210
---------------- ----------------
Allowance for loan losses, end of period $1,911 $1,838
================ ================
Net loans charged-off to average loans, net 0.05% 0.01%
Allowance for loan losses to total loans (1) 0.81% 0.91%
Allowance for loan losses to nonperforming
loans and troubled debt restructuring (2) 758.33% 73.14%
Net loans charged-off to allowance for loan losses 5.60% 1.58%
Recoveries to charge-offs 21.32% 61.33%
(1) Total loans includes loans, less unadvanced loan funds, plus net deferred
loan costs.
(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
Company as presenting uncertainty with respect to the collectibility of
interest or principal.
15
The following table sets forth the Company'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.
1999 1998
-------------------------------------------- ---------------------------------------------
% of Percent % of Percent
Allowance of Loans Allowance of Loans
in each in each in each in each
Category Category Category Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------------- ------------- ------------ ------------- ------------- -------------
(Dollars in Thousands)
Real estate loans $1,547 67.00% 71.77% $1,543 71.24% 71.34%
Consumer loans 664 28.76% 26.65% 525 24.24% 27.05%
Commercial loans 98 4.24% 1.58% 98 4.52% 1.61%
------------- ------------- ------------ ------------- ------------- -------------
Total allowance
for loan losses $2,309 100.00% 100.00% $2,166 100.00% 100.00%
============= ============= ============ ============= ============= =============
1997 1996
--------------------------------------------- --------------------------------------------
% of Percent % of Percent
Allowance of Loans Allowance of Loans
in each in each in each in each
Category Category Category Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------------- ------------- ------------- ------------- ------------- ------------
Real estate loans $1,506 77.15% 69.34% $1,547 80.95% 74.71%
Consumer loans 348 17.83% 29.03% 256 13.40% 23.65%
Commercial loans 98 5.02% 1.63% 108 5.65% 1.64%
------------- ------------- ------------- ------------- ------------- ------------
Total allowance
for loan losses $1,952 100.00% 100.00% $1,911 100.00% 100.00%
============= ============= ============= ============= ============= ============
1995
---------------------------------------------
% of Percent
Allowance of Loans
in each in each
Category Category
to Total to Total
Amount Allowance Loans
------------- ------------- -------------
(Dollars in Thousands)
Real estate loans $1,555 84.60% 79.15%
Consumer loans 145 7.89% 19.19%
Commercial loans 138 7.51% 1.66%
------------- ------------- -------------
Total allowance
for loan losses $1,838 100.00% 100.00%
============= ============= =============
16
Investment Activities
The Board of Directors establishes the investment policy and procedures of
the Company. It is the general policy of the Company that all investment
transactions be conducted in a safe and sound manner. The Company'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 Company's overall asset/liability management objectives, the
effect on the Company's risk-based capital and prospects for yield and/or
appreciation. While general investment strategies are developed and authorized
by the Board of Directors, the execution of specific investment actions and the
day-to-day oversight of the Company's investment portfolio rests with the Chief
Executive Officer and Senior Vice President/Chief Financial Officer. These
officers are authorized to execute investment transactions of up to $5 million
without the prior approval of the Executive Committee if such transactions are
within the scope of the Company's established investment policy. On a monthly
basis, the Board of Directors reviews and evaluates all investment activities
for safety and soundness, adherence to the Company's investment policy and
assurance that authority levels are maintained.
As required by SFAS No. 115, the Company has established an investment
portfolio of securities that are categorized as held-to-maturity, available-for-
sale or held-for-trading. The Company 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. At
December 31, 1999, the Company's securities portfolio totaled $150.0 million, or
29.9% of assets, all of which was categorized as available-for-sale.
Mortgage-Backed Securities. The Company purchases 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. 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
Company focuses its investments on mortgage-backed securities backed by one- to
four-family mortgages. The issuers of such securities pool and resell the
participation interests in the form of securities to investors such as the
Company 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 Company.
At December 31, 1999, mortgage-backed securities totaled $120.0 million, or
24.0% of assets and 25.7% of interest earning assets, all of which were
classified as available-for-sale. At December 31, 1999, 6.0% of the mortgage-
backed securities were backed by adjustable-rate loans and 94.0% were backed by
fixed-rate loans. The mortgage-backed securities portfolio had a stated rate of
6.7% at December 31, 1999. Investments in mortgage-backed securities involve a
risk that actual prepayments may differ from estimated 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.
Although the Company no longer invests in Real Estate Mortgage Investment
Conduits ("REMICs"), the Company did maintain $7.0 million of such investments
in its securities portfolio at December 31, 1999. 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
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.
Equity Securities. The Company currently maintains a diversified equity
security portfolio, which includes common, preferred and trust preferred stock.
Trust preferred securities are corporate debt securities issued by bank and
savings and loan holding companies. The Company's current policies generally
provide that the maximum investment in the common stock or preferred stock of
any one corporation shall not exceed $500,000 and the maximum investment
17
in the trust preferred stock of any one corporation shall not exceed $2,000,000.
The maximum aggregate investment in equity securities shall not exceed 10% of
the Company'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 Company. The Company 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.
The following table sets forth at the dates indicated information regarding
the amortized cost and market values of the Company's investment securities.
At December 31,
--------------------------------------------------------------------------------------
1999 1998 1997
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------- ------------ ------------ ------------- ------------- ------------
(In Thousands)
Equity securities available-
for-sale:
Preferred stock $4,358 $3,924 $3,754 $3,815 $3,177 $3,345
Common stock 14,270 13,683 15,438 17,436 9,425 12,382
Trust preferred stock 13,353 12,345 - - - -
Mutual funds - - 1,524 1,394 - -
------------- ------------ ------------ ------------- ------------- ------------
Total equity securities 31,981 29,952 20,716 22,645 12,602 15,727
------------- ------------ ------------ ------------- ------------- ------------
Mortgage-backed securities
available-for-sale:
Freddie Mac 23,502 23,081 5,459 5,546 7,923 8,059
Fannie Mae 54,001 52,916 31,955 32,435 18,353 18,476
Ginnie Mae 39,912 37,049 42,726 42,670 2,814 2,941
REMICS 6,712 6,959 7,833 8,113 10,169 10,437
------------- ------------ ------------ ------------- ------------- ------------
Total mortgage-backed
securities 124,127 120,005 87,973 88,764 39,259 39,913
------------- ------------ ------------ ------------- ------------- ------------
Total securities (1) $156,108 $149,957 $108,689 $111,409 $51,861 $55,640
============= ============ ============ ============= ============= ============
(1) Does not include $7.5 million, $5.6 million and $2.4 million of FHLB-Boston
stock held by the Company in 1999, 1998 and 1997, respectively.
18
The following table sets forth the Company's securities activities for the
periods indicated. This table does not include FHLB stock held by the Company.
For the Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(In Thousands)
Mortgage-backed securities (available-for-sale):
Mortgage-backed securities, beginning of period $88,764 $39,913 $47,531
----------- ----------- -----------
Purchases and securitization 49,732 59,637 -
Calls: Mortgage-backed securities - - (496)
Repayments and prepayments (13,532) (10,937) (7,561)
Net (amortization) accretion (46) 15 12
(Decrease) increase in unrealized gain (loss) (4,913) 136 427
----------- ----------- -----------
Net increase (decrease) in mortgage-backed securities 31,241 48,851 (7,618)
----------- ----------- -----------
Mortgage-backed securities, end of period $120,005 $88,764 $39,913
=========== =========== ===========
Debt and equity securities:
Debt and equity securities, beginning of period $22,645 $15,727 $14,095
----------- ----------- -----------
Purchases: equity securities (available-for-sale) 26,506 16,376 10,285
Sales: equity securities (available-for-sale) (14,794) (7,588) (7,521)
Calls:
Equity securities (available-for-sale) (449) (642) (1,716)
Transfer to Charitable Foundation: equity securities
(available-for-sale) - (33) (549)
Maturities:
Debt securities (available-for-sale) - - (250)
Net accretion 2 - -
(Decrease) increase in unrealized gain (loss) (3,958) (1,195) 1,383
----------- ----------- -----------
Net increase in debt and equity securities 7,307 6,918 1,632
----------- ----------- -----------
Debt and equity securities, end of period $29,952 $22,645 $15,727
=========== =========== ===========
19
The table below sets forth information regarding the carrying value,
weighted average yields and contractual maturities of the Company's securities
portfolio as of December 31, 1999. There were no securities with contractual
maturities of one year or less.
More than One Year More than Five Years
to Five Years to Ten Years
----------------------- ---------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------- ----------- ----------- ------------
(Dollars in Thousands)
Available-for-sale securities:
Mortgage-backed securities:
Freddie Mac $ 3 10.00% $3,387 7.50%
Fannie Mae 7,011 6.11% 2,350 7.00%
Ginnie Mae - - - -
REMICS - - - -
---------- -----------
Total mortgage-backed securities 7,014 6.11% 5,737 7.30%
Equity securities:
Trust preferreds - - - -
Common stocks - - - -
Preferred stocks - - - -
---------- -----------
Total equity securities - - - -
---------- -----------
Total securities (1) $ 7,014 $5,737
========== ===========
More than Ten
Years Total
--------------------------- -------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
------------ ------------ ------------- ----------
(Dollars in Thousands)
Available-for-sale securities:
Mortgage-backed securities:
Freddie Mac $ 19,691 7.00% $ 23,081 7.07%
Fannie Mae 43,555 6.75% 52,916 6.68%
Ginnie Mae 37,049 6.54% 37,049 6.54%
REMICS 6,959 7.21% 6,959 7.21%
------------ -------------
Total mortgage-backed securities 107,254 6.75% 120,005 6.74%
Equity securities:
Trust preferreds 12,345 7.97% 12,345 7.97%
Common stocks - - 13,683 -
Preferred stocks - - 3,924 -
------------ -------------
Total equity securities 12,345 7.97% 29,952 -
------------ -------------
Total securities (1) $ 119,599 $ 149,957
============ =============
(1) Does not include $7.5 million of FHLB stock held by the Company.
Sources of Funds
General. Deposits, repayments and prepayments of loans, cash flows
generated from operations and FHLB advances are the primary sources of the
Company's funds for use in lending, investing and for other general purposes.
Deposits. The Company offers a variety of consumer and commercial deposit
accounts with a range of interest rates and terms. The Company's deposit
accounts consist of savings, retail checking/NOW accounts, commercial checking
accounts, money market accounts, club accounts and certificate of deposit
accounts. The Company from time to time offers certificate of deposit accounts
with balances in excess of $100,000 (jumbo certificates) preferential rates and
also offers Individual Retirement Accounts ("IRAs") and other qualified plan
accounts.
At December 31, 1999, the Company's deposits totaled $263.2 million, or
62.7% of total liabilities. The Company had a total of $118.7 in certificates
of deposit at December 31, 1999, of which $102.7 million had maturities of less
than one year. Core deposits, consisting of savings, NOW, money market and
demand accounts, represented approximately 54.9% of total deposits and
certificate accounts represented 45.1% at December 31, 1999, as compared to core
deposits representing 49.7% of total deposits and certificate accounts
representing 50.3% of deposits as of December 31, 1998. Although a significant
portion of the Company's deposits are in core deposits, management monitors
activity in this category and, based on historical experience and the Company's
current pricing strategy, believes it will continue to retain a large portion of
such accounts. The Company 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 Company's deposits are obtained predominantly from the areas
in which its banking offices are located. The Company 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 Company's ability to
attract and retain deposits. The Company uses traditional means of advertising
its deposit products, including television, radio and print media. The Company
also uses its website to attract deposits. While certificate accounts in excess
of $100,000 are accepted by the Company, and may receive preferential rates, the
Company does not actively solicit jumbo certificates as these accounts are more
difficult
20
to retain than core deposits. Although the Company's policies allow for the use
of brokered deposits, the Company did not solicit brokered deposits in 1999. All
Massachusetts savings banks are required to be members of the Mutual Savings
Central Fund and as such, must pay 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 Company for the
periods indicated.
For the Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997
------------------ ------------------- ------------------
(In Thousands)
(Decrease) increase before interest credited ($20,883) $1,977 $3,512
Interest credited (1) 9,038 10,385 10,185
------------------ ------------------- ------------------
Net (decrease) increase ($11,845) $12,362 $13,697
================== =================== ==================
(1) Does not include escrow interest credited of $9,000, $8,000 and $7,000
for the periods ended December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999, the Company had $18.6 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 $6,432 5.66%
Over three through six months 3,996 4.86%
Over six through 12 months 6,314 5.10%
Over 12 months 1,849 5.07%
----------------
Total $18,591 5.24%
================
21
The following table sets forth the distribution of the Company's deposit
accounts for the periods indicated.
December 31,
-------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Total of Total of Total
Balance Deposits Balance Deposits Balance Deposits
------------ ------------- ------------ ------------- ------------ -------------
(Dollars in Thousands)
Demand $11,975 4.55% $10,382 3.77% $8,264 3.15%
Savings 67,169 25.52% 66,774 24.28% 63,070 24.01%
Money market 30,321 11.52% 27,176 9.88% 22,234 8.46%
NOW 35,076 13.33% 32,305 11.75% 25,862 9.85%
Certificates of deposit 118,655 45.08% 138,404 50.32% 143,249 54.53%
------------ ------------- ------------ ------------- ------------ -------------
Total deposits $263,196 100.00% $275,041 100.00% $262,679 100.00%
============ ============= ============ ============= ============ =============
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, 1999.
Period to Maturity from December 31, 1999
--------------------------------------------------------
Less One Two At December 31,
than to to Over Total at ---------------------------
One Two Three Three December 31,
Year Years Years Years 1999 1998 1997
------------- ------------ ------------- ------------- ------------- ------------ -------------
(Dollars in Thousands)
Certificate accounts:
0 to 4.00% $3,128 $30 $2 $1 $3,161 $79 $75
4.01% to 5.00% 61,015 4,715 2,264 - 67,994 50,190 3,744
5.01% to 6.00% 28,772 7,156 1,784 30 37,742 68,059 107,995
6.01% to 7.00% 6 - - - 6 3,258 15,306
7.01% to 8.00% 9,752 - - - 9,752 16,818 16,129
------------- ------------ ------------- ------------- ------------- ------------ -------------
Total $102,673 $11,901 $4,050 $31 $118,655 $138,404 $143,249
============= ============ ============= ============= ============= ============ =============
Borrowed Funds. As part of its operating strategy, the Company 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 Company 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 Company at any time. These FHLB advances are collateralized
primarily by the Company's mortgage loans and mortgage-backed securities and
secondarily by the Company'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 Company, fluctuates from
time-to-time in accordance with the policies of the FHLB. At December 31, 1999,
the Company had $152.1 million in outstanding advances from the FHLB compared to
$111.2 million at December 31, 1998.
22
The following table sets forth information regarding the Company's borrowed
funds at or for the periods ended on the dates indicated:
At or For the Year Ended
December 31,
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(Dollars in Thousands)
FHLB advances and other borrowings:
Average balance outstanding $102,504 $55,588 $40,099
============== ============== ==============
Maximum amount outstanding at any month-end during the period $152,147 $111,163 $44,878
============== ============== ==============
Balance outstanding at end of period $152,147 $111,163 $41,726
============== ============== ==============
Weighted average interest rate during the period 5.33% 5.54% 5.84%
============== ============== ==============
Weighted average interest rate at end of period 5.75% 5.15% 5.94%
============== ============== ==============
Trust Services
In 1994, the Company 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 Company believes that the trust department is an important element of its
operating strategy to attract and retain customers. The Company 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, 1999,
the trust department was managing 292 accounts with assets of $22.3 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.
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. Court Street Security Corporation and Little
River Security Corporation were established in 1999 for the same purpose.
Woronoco Security Corporation, Court Street Corporation and Little River
Corporation qualify as "securities corporations" for Massachusetts tax purposes.
Income earned by a qualifying securities corporation is generally entitled to
special tax treatment from Massachusetts income tax. The results of operations
of all of the Bank's subsidiaries are consolidated in the results and operations
of the Company.
REGULATION AND SUPERVISION
General
As a savings bank chartered by the Commonwealth of Massachusetts, the
Company 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 Company must pay deposit insurance
assessments and is examined and supervised by the FDIC. These laws and
23
regulations have been established primarily for the protection of depositors,
customers and borrowers of the Company, not Company 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
directors 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.
Assessments. Savings banks are required to pay assessments to the
Commissioner to fund operations. Assessments paid by the Company for the fiscal
year ended December 31, 1999 totaled $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 4%. 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 must 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.
24
The following is a summary of the Bank's regulatory capital at December 31,
1999:
GAAP Capital to Total Assets 10.78%
Total Capital to Risk-Weighted Assets 18.58%
Tier I Leverage Ratio 11.38%
Tier I to Risk-Weighted Assets 17.85%
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 Company, 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 pose a significant risk to the BIF. The Company 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 Company or if the Company converts its charter,
other than a mutual to stock conversion, or undergoes a change in control.
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, 1999, the Company was 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."
25
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 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 Company'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 Company. 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 Company's insurance assessments
totaled $33,000 during fiscal 1999. 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 Company.
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 Company 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 $44.3 million or less (which may be adjusted by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $44.3
million, the reserve requirement is $1.329
26
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 $44.3
million. The first $5.0 million of otherwise reservable balances (which may be
adjusted by the Federal Reserve Board) are exempted from the reserve
requirements. The Company is in compliance with the foregoing requirements.
Federal Home Loan Bank System
The Company 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 Company, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount equal to at least 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 Company was in compliance
with this requirement with an investment in FHLB stock at December 31, 1999 of
$7.5 million. At December 31, 1999, the Company had $152.1 million in FHLB
advances.
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 Company has made such election and
the Company 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 Company 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 Company must
qualify as a QTL. To qualify as a QTL, the Company 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
27
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, 1999, the Company
maintained in excess of 65% of its portfolio assets in qualified thrift
investments. The Company 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 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.
Recent Legislation
The Company, as a savings and loan holding company, is extensively
regulated and supervised. Such regulation, which affects the Company 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
and its operations. The Company 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 Gramm-Leach-Bliley Act of 1999 expands the authority of bank holding
companies to affiliate with other financial services companies such as insurance
companies and investment banking companies. The Gramm-Leach-Bliley Act,
however, provided that savings and loan holding companies may only engage in
activities permitted to financial holding companies under that Act and those
authorized for multiple savings and loan holding companies. Unitary savings and
loan holding companies existing prior to May 4, 1999, such as the Company, were
grandfathered as to the unrestricted activities. Under the Act, however, even
grandfathered savings and loan holding companies may not be acquired by
companies engaged in commercial activities. The Company is a grandfathered
unitary savings and loan holding company.
Federal Securities Laws
The Company's common stock is registered with the SEC under the Exchange
Act. The Company is required 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
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.
28
Item 2. Properties.
- -------------------
The Company currently conducts its business through its main office located
in Westfield, Massachusetts and ten 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
Original or Leasehold
Leased, Year Date of Lease/ Improvements
Licensed or Leased License at December 31,
Location Owned or Acquired Expiration 1999
- ----------------------------------------------- ------------- -------------- --------------- -----------------
Main/Executive Office: (In thousands)
31 Court Street
Westfield, Massachusetts 01085................ Owned 1951 -- $4,772
Banking Offices:
44 Little River Road
Westfield, Massachusetts 01085................. Owned 1971 -- 135
185 College Highway
Southwick, Massachusetts 01077................. Owned 1988 -- 606
74 Lamb Street
South Hadley, Massachusetts 01075.............. Owned 1995 -- 466
119 Winsor Street
Ludlow, Massachusetts 01056.................... Owned 1997 -- 530
608 College Highway
Southwick, Massachusetts 01077................. Leased 1977 2002 50
1359 Springfield Street
Feeding Hills, Massachusetts 01013............. Leased 1994 2005 (1) 43
800 Boston Road
Springfield, Massachusetts 01119............... Licensed 1994 2005 (1)(2) 113
503 Memorial Avenue
West Springfield, Massachusetts 01089.......... Licensed 1994 2005 (1)(2) 113
44 Willimansett Street
South Hadley, Massachusetts 01075.............. Licensed 1977 2002 (2)(3) 75
175 University Drive
Amherst, MA 01002.............................. Licensed 1998 2003 (2)(3) 123
Other Office and Property:
2-16 Central Street
Westfield, Massachusetts 01085................. Owned (4) 1990 -- (5)
127 North Elm Street
Westfield, Massachusetts 01085................. Leased (6) 1998 2003 17
------
Total........................... $7,043
======
(1) The Company has an option to renew this lease/license for two 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 Company 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 Company has an option to renew this lease/license for three additional
five-year periods.
(4) The property consists of vacant office space which the Company currently
utilizes as a storage facility.
(5) Net book value of the property is included in net book value for the Bank's
main office.
(6) Consists of a stand-alone ATM located at a Dunkin' Donuts establishment.
The ATM became operational in September 1998.
29
Item 3. Legal Proceedings.
- --------------------------
The Company 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 Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
a. An annual meeting of shareholders of the Company was held on
October 6, 1999 ("Annual Meeting").
b. Not applicable.
c. There were 5,998,860 shares of Common Stock of the Company eligible
to be voted at the Annual Meeting and 5,475,804 shares were
represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual Meeting
and the vote for each proposal were as follows:
1. Election of directors for a three-year term
Director Nominees Elected
For Three Year Term: For Withheld
------------------------- ----------- ------------
Paul S. Allen 5,267,611 208,193
Joseph M. Houser, Jr. 5,257,206 218,598
Norman H. Storey 5,247,366 228,438
William G. Aiken 5,247,882 227,922
2. The approval of the Woronoco Bancorp, Inc. 1999 Stock-Based
Incentive Plan
Broker
For Against Abstain Non-Vote
---------- ------------- ------------- ------------
3,437,463 576,009 35,954 1,426,378
3. The ratification of the appointment of Wolf & Company, P.C.
as independent auditors of Woronoco Bancorp, Inc.
for the year ending December 31, 1999.
For Against Abstain
----------- ------------ -----------
5,262,232 102,342 111,230
30
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------------------
(a) The Company's common stock is listed on the American Stock
Exchange (the "AMEX") under the symbol "WRO." The following table
sets forth the high and low last sales prices of the common stock
for the past year, as reported by AMEX. The stock began trading on
March 19, 1999. For information relating to restrictions on the
Company's declaration of dividends, see "Item I. Business -
Regulation and Supervision".
Dividend High Low
----------- ------------ ------------
First Quarter NA $9.81 $9.31
Second Quarter NA $10.06 $8.50
Third Quarter NA $10.88 $9.94
Fourth Quarter $0.0425 $10.25 $9.50
(b) As of February 29, 2000, the most recent practicable date, the
closing sale price of the Company's common stock, as reported by
AMEX, was $9.63 per share and the Company had 1,938 holders of
record of the Company's common stock.
31
Item 6. Selected Financial Data.
- --------------------------------
We have derived the following selected consolidated financial and other
data of the Company in part from our consolidated financial statements and notes
appearing elsewhere in this Form 10-K.
At December 31,
1999 1998 1997 1996 1995
-------------- -------------- --------------- -------------- --------------
(In Thousands)
Selected Financial Data:
Total assets $500,948 $426,826 $341,909 $316,708 $275,405
Cash & cash equivalents 16,185 12,011 11,686 10,469 12,320
Loans, net 307,407 284,043 261,723 234,135 200,189
Debt securities available-for-sale - - - 250 6,205
Mortgage-backed securities available-for-sale 120,005 88,764 39,913 47,531 35,561
Equity securities available-for-sale 29,952 22,645 15,727 13,845 12,271
Deposits 263,196 275,041 262,679 248,982 231,689
FHLB Advances 152,147 111,163 41,726 35,441 14,472
Total stockholders' equity 80,895 35,773 33,332 29,074 26,221
Other real estate owned, net 883 241 381 423 641
Nonperforming assets and
troubled debt restructurings 1,058 1,320 1,540 675 3,154
For the Year Ended December 31,
1999 1998 1997 1996 1995
-------------- -------------- --------------- -------------- --------------
(In Thousands)
Selected Operating Data:
Total interest and dividend income $30,548 $25,054 $23,517 $21,734 $19,869
Interest expense 14,625 13,477 12,500 11,022 9,823
-------------- -------------- --------------- -------------- --------------
Net interest income 15,923 11,577 11,017 10,712 10,046
Provision for loan losses 180 240 180 180 210
-------------- -------------- --------------- -------------- --------------
Net interest income after provision
for loan losses 15,743 11,337 10,837 10,532 9,836
Other income 3,851 3,553 3,465 1,896 1,592
Other expenses 17,367 10,087 9,743 8,372 7,693
-------------- -------------- --------------- -------------- --------------
Income before income taxes 2,227 4,803 4,559 4,056 3,735
Income taxes 822 1,693 1,541 1,582 1,400
-------------- -------------- --------------- -------------- --------------
Net income $1,405 $3,110 $3,018 $2,474 $2,335
============== ============== =============== ============== ==============
32
For the Year Ended December 31,
1999 1998 1997 1996 1995
-------------- -------------- ------------- -------------- --------------
Selected Operating Ratios and Other Data:
Performance Ratios:
Average yield on interest-earning assets 7.03% 7.34% 7.57% 7.80% 7.75%
Average rate paid on interest-bearing liabilities 3.91% 4.27% 4.35% 4.26% 4.11%
Average interest rate spread 3.12% 3.07% 3.22% 3.54% 3.64%
Net interest margin 3.66% 3.39% 3.55% 3.84% 3.92%
Ratio of interest-earning assets to
interest-bearing liabilities 116.33% 108.18% 107.96% 107.70% 107.35%
Net interest income after provision for loan
losses to other expenses 90.65% (2) 112.39% 111.23% 125.80% 127.87%
Other expenses as a percent of
average assets 3.71% (2) 2.79% 2.96% 2.84% 2.85%
Return on average assets 0.30% (2) 0.86% 0.92% 0.84% 0.86%
Return on average equity 1.85% (2) 8.89% 9.67% 9.10% 9.58%
Ratio of average equity to average assets 16.22% 9.66% 9.50% 9.23% 9.01%
Efficiency ratio (1) 96.29% (2) 75.16% 77.51% 70.61% 69.56%
(1) The efficiency ratio represents the ratio of other expenses divided by the
sum of the net interest income and other income. This ratio excludes
realized gains on sales of investment securities, property and loans, net.
If this ratio included these realized gains, then the efficiency ratio
would be 87.83%, 66.67%, 67.28%, 66.40% and 66.10% for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
(2) Excluding the effect of the $4.4 million contribution to Woronoco Savings
Charitable Foundation, and the related tax effect of $1.5 million, where
applicable, the following ratios for 1999 would be: net interest income
after provision for loan losses to other expenses 121.82%, other expenses
as a percent of average assets 2.76%, return on average assets 0.93%,
return on average equity 5.72% and efficiency ratio 71.65%.
For the Year Ended December 31,
1999 1998 1997 1996 1995
-------------- -------------- --------------- -------------- --------------
Regulatory Capital Ratios:
Leverage capital 16.77% 9.35% 9.08% 8.94% 9.28%
Total risk-based capital 26.97% 13.87% 15.14% 15.67% 15.95%
Asset Quality Ratios:
Nonperforming loans and troubled debt
restructurings as a percent of total loans 0.06% 0.38% 0.44% 0.11% 1.24%
Nonperforming assets and troubled debt
restructurings as a percent of total assets 0.21% 0.31% 0.45% 0.21% 1.15%
Allowance for loan losses as a percent
of total loans 0.75% 0.76% 0.74% 0.81% 0.91%
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings 1,319.43% 200.74% 168.42% 758.33% 73.14%
Net loans charged-off to average interest-
earning loans 0.01% 0.01% 0.06% 0.05% 0.01%
Banking offices at end of period 11 11 10 9 9
33
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 Company" and the Company's
Consolidated Financial Statements and notes thereto, each appearing elsewhere in
this 10-K.
General
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on the
Company's interest-earning assets, such as loans and investments, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Company also generates non-interest income such as gains
(losses) on securities and loan sales and service charges and other fees. The
Company'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
Company'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 Company
exceeded all of its regulatory capital requirements at December 31, 1999.
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 Company operates as a community-oriented savings bank, offering a wide
variety of financial products and services. In recent years, the Company'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 Company has sought to:
. Provide superior service and competitive rates to increase deposits,
including commercial accounts
. 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
. Invest funds in excess of loan demand primarily in mortgage-backed
and investment grade equity securities
. Control interest rate risk by selectively utilizing off-balance sheet
hedging transactions such as interest rate swaps, caps and floors
. 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
34
. Expand its lending and deposit base through the establishment of
full-service banking offices located inside supermarkets
. Explore opportunities through use of the internet
Beginning in 1994, the Company began opening full-service banking offices
in supermarkets operated by the regionally based Big Y Foods, Inc. Since 1994,
the Company has established four such banking offices. The Company will continue
to seek attractive opportunities to expand its branching activities through
supermarket facilities as such opportunities arise.
The Company continued to follow its current operating strategy in 1999.
The Company also enhanced its strategic plan in an effort to improve its long-
term profitability, while maintaining a reasonable level of interest rate and
credit risk. The Company's primary goal is to increase its loan and deposit
market share, which we believe will improve our long-term profitability and
maximize shareholder value. In 1999, in an effort to increase market share, the
Company expanded its products and services, opened a new full service banking
office in Amherst, Massachusetts, hired two outside residential loan
originators, a commercial loan officer and a credit analyst, improved customer
service and invested in technology.
The Company's most significant new product, Woronoco Online Link, was
launched in January of 1999. Woronoco Online Link is a PC and Internet based
banking product, which allows consumers to transfer funds, complete balance and
transaction history inquiries and pay bills. Demand for the new product has
exceeded our expectations. At December 31, 1999, 6% of our checking account
customers were using Online Link. We will continue to focus on ways to utilize
electronic banking technology to reduce the cost of transactions and remain
competitive in the market.
The Company will continue to develop financial products, services and
delivery systems while expanding fee-based businesses such as trust and
investment management services. While emphasizing internal growth, the Company
will also evaluate opportunities to grow through acquisition. Our first
acquisition, the January 2000 purchase of Agan Insurance Agency, Inc., located
in Westfield, Massachusetts, will move the Company closer to its goal of
providing a full range of life cycle products and services to its customers.
With the purchase of Agan, the Company plans to offer property and casualty
insurance products to its existing customers and banking products to Agan's
customers. In an effort to further benefit shareholder value, the Company also
implemented a capital management strategy which includes a share repurchase
program and a dividend plan. In February 2000, the Company completed its 5%
buyback and announced a plan to repurchase up to 10% of its outstanding stock.
The Company increased its dividend to $.05 per share, payable in February 2000.
The Company will continue to seek opportunities to enhance long-term
profitability and to maximize shareholder value.
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.
Average Balance Sheet. The following table sets forth information relating
to the Company for the years ended December 31, 1999, 1998 and 1997. 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.
35
For the Year Ended December 31,
-------------------------------------------
1999
-------------------------------------------
Average
Average Yield/
Balance Interest Rate
--------------- ------------ ------------
(Dollars in Thousands)
Interest-earning assets: (1)
Investments:
Mortgage-backed securities $ 97,270 $ 6,511 6.69%
Equity securities 28,921 1,367 4.73%
FHLB stock 6,041 342 5.66%
Loans: (2)
Residential real estate loans 186,791 13,559 7.26%
Commercial real estate loans 23,331 2,112 9.05%
Consumer loans 77,186 5,767 7.47%
Commercial loans 6,333 474 7.48%
--------------- ------------
Loans, net 293,641 21,912 7.46%
Other 8,820 416 4.72%
--------------- ------------
Total interest-earning assets 434,693 30,548 7.03%
------------
Noninterest-earning assets 32,951
---------------
Total assets $ 467,644
===============
Interest-bearing liabilities:
Deposits:
Money market accounts $ 29,429 $ 912 3.10%
Savings accounts (3) 77,119 1,356 1.76%
NOW accounts 33,358 276 0.83%
Certificates of deposit 131,163 6,615 5.04%
--------------- ------------
Total interest-bearing deposits 271,069 9,159 3.38%
Borrowings 102,609 5,466 5.33%
--------------- ------------
Total interest-bearing liabilities 373,678 14,625 3.91%
------------ ------------
Demand deposits 15,389
Other noninterest-bearing liabilities 2,748
---------------
Total liabilities 391,815
Total stockholders' equity 75,829
---------------
Total liabilities and stockholders' equity $ 467,644
===============
Net interest-earning assets $ 61,015
===============
Net interest income/interest
rate spread (4) $ 15,923 3.12%
============ ============
Net interest margin as a percentage
of interest-earning assets (5) 3.66%
============
Ratio of interest-earning assets
to interest-bearing liabilities 116.33%
============
For the Year Ended December 31,
-------------------------------------------------------------------------
1998 1997
---------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- --------- ----------- ----------- ---------- -----------
(Dollars in thousands)
Interest-earning assets: (1)
Investments:
Mortgage-backed securities $ 43,762 $ 2,887 6.60% $ 44,094 $ 2,894 6.56%
Equity securities 19,405 721 3.72% 13,707 644 4.70%
FHLB stock 2,978 177 5.94% 2,308 144 6.24%
Loans: (2)
Residential real estate loans 166,037 12,820 7.72% 156,979 12,617 8.04%
Commercial real estate loans 21,201 1,984 9.36% 18,141 1,795 9.90%
Consumer loans 78,040 5,847 7.49% 69,420 4,972 7.16%
Commercial loans 5,915 452 7.64% 3,371 298 8.84%
---------- --------- ----------- ----------
Loans, net 271,193 21,103 7.78% 247,911 19,682 7.94%
Other 3,818 166 4.35% 2,568 153 5.96%
---------- --------- ----------- ----------
Total interest-earning assets 341,156 25,054 7.34% 310,588 23,517 7.57%
--------- ----------
Noninterest-earning assets 20,843 18,050
---------- -----------
Total assets $ 361,999 $ 328,638
========== ===========
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
Total stockholders' equity 34,978 31,218
---------- -----------
Total liabilities and stockholders' equity $ 361,999 $ 328,638
========== ===========
Net interest-earning assets $ 25,782 $ 22,906
========== ===========
Net interest income/interest
rate spread (4) $ 11,577 3.07% $ 11,017 3.22%
========= ========= ========== ===========
Net interest margin as a percentage
of interest-earning assets (5) 3.39% 3.55%
========= ===========
Ratio of interest-earning assets
to interest-bearing liabilities 108.18% 107.96%
========= ===========
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan origination costs, unadvanced loan funds,
allowance for loan losses and includes nonaccrual loans. The Company
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 average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
36
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 Company'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
December 31, 1999
Compared to
December 31, 1998
-----------------------------------------
Increase (Decrease)
Due to
-----------------------------------------
Volume Rate Net
------------ ------------- ------------
Interest-earning assets:
Mortgage-backed securities $3,581 $ 43 $3,624
Equity securities 416 230 646
FHLB stock 173 (8) 165
Loans:
Residential real estate loans 1,419 (680) 739
Commercial real estate loans 190 (62) 128
Consumer loans (64) (16) (80)
Commercial loans 31 (9) 22
------------ ------------- ------------
Total loans 1,576 (767) 809
Other 235 15 250
------------ ------------- ------------
Total interest-earning assets $5,981 $ (487) $5,494
------------ ------------- ------------
Interest-bearing liabilities:
Deposits:
Money market accounts 151 54 205
Savings accounts (1) 340 (582) (242)
NOW accounts 173 (189) (16)
Certificates of deposit (492) (693) (1,185)
------------ ------------- ------------
Total interest-bearing deposits 172 (1,410) (1,238)
Borrowings 2,498 (112) 2,386
------------ ------------- ------------
Total interest-bearing liabilities 2,670 (1,522) 1,148
------------ ------------- ------------
Increase (decrease) in net interest income $3,311 $1,035 $4,346
============ ============= ============
Year Ended
December 31, 1998
Compared to
December 31, 1997
-----------------------------------------
Increase (Decrease)
Due to
-----------------------------------------
Volume Rate Net
------------ ------------ ------------
Interest-earning assets:
Mortgage-backed securities $ (22) $ 15 $ (7)
Equity securities 155 (78) 77
FHLB stock 40 (7) 33
Loans:
Residential real estate loans 637 (434) 203
Commercial real estate loans 278 (89) 189
Consumer loans 638 237 875
Commercial loans 187 (33) 154
------------ ------------ ------------
Total loans 1,740 (319) 1,421
Other 29 (16) 13
------------ ------------ ------------
Total interest-earning assets $1,942 $ (405) $1,537
------------ ------------ ------------
Interest-bearing liabilities:
Deposits:
Money market accounts $ 128 $ 172 $ 300
Savings accounts (1) 73 (234) (161)
NOW accounts 33 6 39
Certificates of deposit 70 (10) 60
------------ ------------ ------------
Total interest-bearing deposits 304 (66) 238
Borrowings 852 (113) 739
------------ ------------ ------------
Total interest-bearing liabilities 1,156 (179) 977
------------ ------------ ------------
Increase (decrease) in net interest income $ 786 $ (226) $ 560
============ ============ ============
(1) Includes interest on mortgagors' escrow deposits.
37
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets increased by $74.1 million, or 17.4%, to $500.9 million at
December 31, 1999, from $426.8 million at December 31, 1998. The growth in
assets was primary attributable to increases in mortgage-backed securities
available-for-sale and net loans. Mortgage-backed securities increased by $31.2
million, or 35.2%, to $120.0 million at December 31, 1999 from $88.8 million at
December 31, 1998 primarily from the purchase of $49.7 million of mortgage-
backed securities, offset by repayments of existing mortgage-backed pools. Net
loans increased by $23.4 million, or 8.2%, to $307.4 million at December 31,
1999, from $284.0 million at December 31, 1998, primarily due to originations
and refinancings of one- to four-family mortgage loans, as well as originations
of multi-family and commercial mortgage loans and home equity loans and lines of
credit. The relatively low interest rate environment and strong housing market
during 1999 resulted in new originations of adjustable-rate and fixed-rate
mortgages as well as home equity loans and lines, and one- to four-family
refinance activity, primarily 15- and 30-year fixed-rate mortgage products.
These originations and refinancings were partially offset by principal payments.
Equity securities at December 31, 1999 totaled $30.0 million, an increase of
$7.3 million, or 32.3%, compared to $22.6 million at December 31, 1998 due to
the purchase of $12.3 million of trust preferred securities, offset by sales of
common stock and mutual funds. The deferred tax asset totaled $4.9 million at
December 31, 1999 compared to $55,000 at December 31, 1998 reflecting the $1.5
million tax effect related to the Company's $4.4 million contribution to
establish Woronoco Savings Charitable Foundation as well as the tax adjustment
associated with the change in unrealized gains (losses) on securities available
for sale.
Asset growth was funded primarily through FHLB borrowings and $53.5 million
of proceeds from the conversion. FHLB Advances increased $41.0 million, or
36.9%, to $152.2 million at December 31, 1999 from $111.2 million at December
31, 1998. Total deposits at December 31, 1999 were $263.2 million, a decrease
of $11.8 million, or 4.3%, compared to $275.0 million at December 31, 1998.
Certificates of deposit decreased $19.7 million, or 14.3%, to $118.7 million at
December 31, 1999 from $138.4 million at December 31, 1998. This decrease in
certificates of deposit was primarily attributable to the maturing of previously
offered premium rate certificate "specials" and other certificates of deposit
which the Company was unable to retain due to competitive pricing pressures.
This decrease in certificates of deposit was offset by an increase of $7.9
million, or 5.8%, in core deposit accounts, to $144.5 million at December 31,
1999 from $136.6 million at December 31, 1998. This increase in core deposits
consisted mainly of $1.6 million in demand, $2.8 million in NOW and $3.1 million
in money market, and was due in part to an active promotion of these products to
gain new customers and the opening of a new banking office in 1999. 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 interest rate environment.
Total stockholders' equity increased $45.1 million, or 126.1%, to $80.9
million at December 31, 1999, from $35.8 million at December 31, 1998, primarily
resulting from $53.5 million of net proceeds received from the Conversion,
partially offset by the purchase of $2.5 million of common stock in connection
with the Company's Stock Award Plan, the repurchase of $1.8 million of common
stock and a $5.6 million decrease in the after-tax net unrealized gain (loss) on
available-for-sale securities. As of result of these transactions and the
increase in total assets, the Company's ratio of equity capital to total assets
increased to 16.15% at December 31, 1999 from 8.38% at December 31, 1998.
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General. Net income decreased $1.7 million, or 54.8%, to $1.4 million for
the year ended December 31, 1999 from $3.1 million for the year ended December
31, 1998. Excluding the Company's $4.4 million contribution to establish the
Woronoco Savings Charitable Foundation and the related tax effect of $1.5
million, operating earnings for 1999 totaled $4.3 million, an increase of $1.2
million, or 39.5%, from 1998. This growth was primarily due to increases in net
interest income and other income. Net interest income increased $4.3 million
resulting from a $93.5 million increase in the average balance of net interest-
earning assets, expansion in the average interest rate spread to 3.12% from
3.07% and the net proceeds of $53.5 million realized from the Conversion. These
increases were partially offset by a $2.8 million increase in other expenses
(excluding the contribution of $4.4 million), and a $640,000 increase in income
taxes (excluding the $1.5 million tax effect of the charitable contribution).
Interest Income. Interest income amounted to $30.5 million for the year
ended December 31, 1999, representing an increase of $5.5 million, or 21.9%,
from 1998. The increase was the result of a $93.5 million increase
38
in average interest-earning assets offset by a 31 basis point decrease in the
yield on interest-earning assets. Interest and dividend income on the securities
portfolio increased $4.4 million to $8.2 million for the year ended December 31,
1999 reflecting increases of $53.5 million in average mortgage-backed securities
and $9.5 million in average equity securities. Interest income on loans
increased by $809,000 to $21.9 million for the year ended December 31, 1999 from
$21.1 million for the same period in 1998, due to a $22.4 million increase in
average loan balances, primarily in the residential real estate portfolio,
offset by a 32 basis point decrease in the average yield to 7.46%. The decrease
in the yield on average loans primarily reflects lower average interest rates
during 1999, which resulted in lower rates on all new loans originated or
refinanced.
Interest Expense. Total interest expense for the year ended December 31,
1999 was $14.6 million, compared to $13.5 million for the year ended December
31, 1998, an increase of $1.1 million, or 8.5%. This increase reflects growth
of $58.5 million in the average balance of interest-bearing liabilities, offset
by a 36 basis point decrease in the average rate paid on such liabilities. The
reduction in the average rate paid on interest-bearing liabilities primarily
reflects a lower interest rate environment and a shift in the composition of
deposits. Average interest-bearing deposits increased $11.3 million, primarily
attributable to growth in average core deposit balances to $139.9 million for
the year ended December 31, 1999 from $119.4 million for the year ended December
31, 1998. To some extent, the increase in core deposits can be attributed to the
shifting investment of maturing certificates into core deposits in part due to
depositors' general unwillingness to commit funds to longer time periods given
the current low interest rate environment. Interest expense on borrowed funds
increased $2.4 million, or 77.5%, in the year ended December 31, 1999 to $5.5
million from $3.1 million for the same period in 1998 due to a $47.0 million
increase in the average balance of such funds to $102.6 million, which was
partially offset by a 21 basis point reduction in the average rate paid on
borrowed funds to 5.33% for the year ended December 31, 1999. The increase in
borrowed funds in 1999 reflects management's decision to increase its
utilization of borrowings to fund asset growth.
Provision for Loan Losses. The Company's provision for loan losses
decreased by $60,000, or 25.0%, to $180,000 for the year ended December 31, 1999
from $240,000 for the year ended December 31, 1998. Management determined that
a decrease in the provision was warranted based upon an analysis of the adequacy
of the balance in the allowance for loan losses. At December 31, 1999, the
Company's allowance for loan losses as a percentage of total non-performing
loans and troubled debt restructurings was 1,319%, compared to 201% at December
31, 1998, primarily due to a decrease in troubled debt restructurings. At
December 31, 1999 the Company had no troubled debt restructurings compared to
$773,000 at December 31, 1998 mainly resulting from a foreclosure on an
office/retail building. At December 31, 1999, the Company's allowance for loan
losses as a percentage of total loans, net, was 0.75% compared to 0.76% at
December 31, 1998.
Management of the Company 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 Company'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
Company's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Company 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 Company's allowance for loan losses. Such agencies may
require the Company to provide additions to the allowance based upon judgments
different from management.
Other Income. Total non-interest income increased $298,000, or 8.4%, to
$3.9 million at December 31, 1999 compared to $3.6 million at December 31, 1998
resulting from growth in fee income and net gain on sales of securities, which
were partially offset by lower net gain on sales of loans. Fee income increased
$217,000, or 13.0%, to $1.9 million for 1999 compared to $1.7 million for 1998
due to growth in transaction accounts and higher servicing income resulting from
the securitization of $19.1 million of 30 year fixed-rate mortgage loans in
August, 1998. Net gain on sales of securities increased $317,000 to $1.7
million in 1999 from $1.4 million in 1998. The Company did not realize
39
gains on sales of loans in 1999 compared to gains on sales of loans for 1998
totaling $290,000. This gain was the result of the securitization of mortgage
loans during 1998.
Other Expenses. Total other expenses were $17.4 million in 1999 compared to
$10.1 million in 1998. Excluding the $4.4 million contribution to establish the
Woronoco Savings Charitable Foundation, total other expenses increased by $2.8
million, or 28.1%, to $12.9 million for 1999 from $10.1 million for 1998.
Compensation and employee benefit expense increased $1.5 million, or 29.7%,
primarily due to expenses of the Company's employee stock ownership plan and
stock-based incentive plan, additional staff required to support the Bank's
expanded branch network and the growth of the Bank, staffing costs associated
with the opening of full service banking offices in 1998 and 1999, standard wage
increases and increased benefits costs. Occupancy and equipment expenses
increased $301,000, or 20.5%, reflecting the opening of new, full-service
banking offices in 1998 and 1999 as well as the expansion and renovation of the
Company's headquarters in 1999. Marketing expenses increased $224,000, or
35.8%, resulting from increased promotional activities. Professional services
expense increased $296,000, or 59.9%, mainly due to higher legal and audit and
accounting expenses related to the additional requirements of being a public
company. Data processing expenses increased $114,000, or 17.3%, principally as a
result of an increase in transaction accounts. Contributions increased $4.3
million due to the Company's $4.4 million contribution to establish the Woronoco
Savings Charitable Foundation. Other general and administrative expenses
increased $489,000, or 30.4%, primarily resulting from expenses associated with
the additional requirements of being a public company, Delaware franchise taxes
and increased costs associated with the Company's larger deposit base.
Income Taxes. Total income tax expense was $822,000 for the year ended
December 31, 1999, compared to $1.7 million in 1998. Excluding the $1.5 million
tax effect related to the contribution to the foundation, income tax expense
would have totaled $2.3 million, representing an increase of $640,000, or 37.8%.
The effective tax rates were 36.9% and 35.2% for the respective periods.
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 primarily 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 122.4%, 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 Company's main office, which will provide additional office space for the
Company's administrative operations, and the renovation of a branch office.
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
40
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 Company 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
interest rate environment.
Total stockholders' equity 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 Company'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 3.07% from 3.22%,
increased by $560,000 due to an increase in the average balance of net interest-
earning assets. This increase was partially offset by a $344,000 increase in
other expenses, and a $152,000 increase in income taxes.
Interest Income. Interest income amounted to $25.1 million for the year
ended December 31, 1998, representing an increase of $1.5 million, or 6.5%, from
1997. The increase was the result of a $30.6 million increase in average
interest-earning assets offset by a 23 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 $103,000 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 $108.4
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.
Provision for Loan Losses. The Company'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 Company'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 Company'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 Company's
allowance for loan losses as a percentage of total loans, net, was 0.76%
compared to 0.74% at December 31, 1997.
41
Other Income. Total other income was $3.6 million for the year ended
December 31, 1998 compared to $3.5 million for the same period in 1997,
reflecting an increase of $88,000, or 2.5%. This increase was primarily due to
increases in fee income and gain on sales of loans, partially offset by lower
gain on sales of securities. Fee income increased $271,000, or 19.4%, to $1.7
million for 1998 compared to $1.4 million for 1997 reflecting growth in
transaction accounts. The $290,000 gain on sales of loans in 1998 was the result
of the securitization of 30 year fixed-rate mortgage loans during 1998.
Other Expenses. Total other expenses 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 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 Company's core deposits. During 1997, the Company
established a private charitable foundation to provide grants to charitable
organizations. The foundation was funded by a donation from the Company of
equity securities with a fair value of $549,000 at the date of transfer, the
total amount of which is included in other expenses.
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.
Liquidity and Capital Resources
Liquidity and funding strategies are the responsibility of the Company's
Asset Liability Management Committee ("ALCO"). The ALCO is responsible for
establishing liquidity targets and implementing strategies to meet desired
goals. Liquidity is measured by the Company's ability to raise cash within 30
days at a reasonable cost and with a minimum of loss. The Company'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 Company 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, 1999, 1998 and 1997, the Company's loan originations totaled $87.2 million,
$103.2 million and $79.1 million, respectively. For the years ended December
31, 1999, 1998 and 1997, the Company's investments in mortgage-backed and equity
securities totaled $150.0 million, $111.4 million and $55.6 million,
respectively. The Company experienced a net decrease in total deposits of $11.8
million for the year ended December 31, 1999 compared to increases in total
deposits of $12.4 million and $13.7 million for the years ended December 31,
1998 and 1997, respectively. Deposit flows are affected by the overall level of
interest rates, the interest rates and products offered by the Company and its
local competitors, as well as other factors. The Company closely monitors its
liquidity position on a daily basis. If the Company requires funds beyond its
ability to generate them internally, additional sources of funds are available
through FHLB advances. At December 31, 1999, the Company had $152.1 million of
outstanding FHLB borrowings. Although the Company's policies allow for the use
of brokered deposits, the Company currently has no brokered deposits.
In 1998, the Company 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
42
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
Company in that it adds high quality collateral to the Company's balance sheet
which can be pledged for borrowings in the secondary market and designates such
loans as "available-for-sale" so that the Company could sell or collateralize
such securities.
Outstanding commitments for all loans totaled $7.7 million at December 31,
1999. Management of the Company 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, 1999 totaled
$102.7 million. The Company relies primarily on competitive rates, customer
service, and long-standing relationships with customers to retain deposits.
From time to time, the Company will also offer competitive special products to
its customers to increase retention and to attract new deposits. Based upon the
Company'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 Company.
At December 31, 1999, the Company exceeded all of its regulatory capital
requirements with a leverage capital level of $83.7 million, or 16.77% of
adjusted assets, which is above the required level of $20.0 million, or 4.00%,
and risk-based capital of $86.0 million, or 26.97% of adjusted assets, which is
above the required level of $25.5 million, or 8.00%.
Year 2000 Compliance
The Company accomplished the objectives established in its Year 2000 Action
Plan. All internal software and hardware used in the Company's business made it
through the transition from 1999 to 2000 without any abnormalities or inaccurate
results. In addition, the Company's critical vendors and suppliers also made
the transition successfully. As evidenced by our quiet and uneventful transition
to the new millenium, the interests of our customers were well protected during
the entire project.
Other critical, future dates previously identified as being potentially
vulnerable to the Year 2000 problem were tested as part of the century rollover
testing. All critical applications thought to be impacted by future dates were
evaluated and further testing of various dates conducted as necessary. Any
potential problems identified during this testing have been corrected. Our
success with century rollover testing gives us confidence that testing of other
future critical dates is just as reliable. We therefore do not anticipate any
problems associated with these future dates.
As a side benefit of the Year 2000 project, the Company completed a
revision of its Business Resumption Plan. The new plan was successfully tested
and will continue to be updated and tested annually. The Company also
established a new Contingency Back-Up Site and plans to make further
improvements to the infrastructure of this site during 2000. Federal regulators
are continuing to monitor the status of the banking industry as it relates to
any future date implications.
Impact of Inflation and Changing Prices
The Consolidated 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 Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company are monetary in nature.
As a result, interest rates have a greater impact on the Company'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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which,
as amended by SFAS 137, is effective for fiscal years beginning after June 15,
2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity
43
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: (a) 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 is attributable to a particular risk, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge of
the foreign currency exposure of an unrecognized firm commitment, an available-
for-sale security, a foreign currency denominated forecasted transaction, or a
net investment in a foreign operation. The Statement generally provides for
matching the timing of the recognition of the gain or loss on derivatives
designated as hedging instruments with the recognition of the changes in the
fair value of the item being hedged. Depending on the type of hedge, such
recognition will be in either net income or other comprehensive income. For a
derivative not designated as a hedging instrument, changes in fair value will be
recognized in net income in the period of change. Management is currently
evaluating the impact of adopting this Statement on the consolidated financial
statements, but does not anticipate that it will have a material impact.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- --------------------------------------------------------------------
Management of Interest Rate Risk and Market Risk Analysis
The principal objective of the Company'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 Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with approved guidelines. Through
such management, the Company seeks to reduce the vulnerability of its operations
to changes in interest rates. The Company monitors its interest rate risk as
such risk relates to its operating strategies. The Company maintains an 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 Directors on a quarterly basis.
The extent of the movement of interest rates is an uncertainty that could
have a negative impact on the earnings of the Company. Besides the risk that
rising interest rates could cause the cost of liabilities to rise faster than
the yield on assets, the Company's interest rate spread and margin could also be
negatively affected in a declining interest rate environment if prepayments were
to increase and the Company were to reinvest such proceeds at a lower rate. The
Company'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 Company 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 Company 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 Company'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 Company to benefit from
favorable interest rate movements. The Company's policies provide that a rate
swap is in essence a "cross hedge" and may only
44
be undertaken if the potential correlation of the swap is reasonable. The
Company'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 Company's overall
profitability. The Company's policies further provide that swap arrangements and
the purchase of caps and floors shall only be negotiated with firms which meet
the Company's investment criteria. All counter-parties to swap, cap and floor
arrangements must be pre-approved by the Company's Board of Directors. At
December 31, 1999, the notional principal amounts of the Company's outstanding
interest rate cap and floor agreements were $10 million each. Under the terms of
the cap agreements, which were entered into during 1998, the Company paid
premiums totaling $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, 1999 totaled $27,000 and is recorded as an interest
expense on advances. The agreements provide that, if the London Interbank
Offered Rate ("LIBOR") increases above 6%, the Company receives cash payments on
a quarterly basis. There were no cash payments for the year ended December 31,
1999. Under the terms of the floor agreement, the Company 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, 1999 totaled $27,000 and is recorded as an interest expense
on advances. The agreement provides that if LIBOR falls below 5.75%, the Company
receives cash payments on a quarterly basis. Cash payments received during the
year ended December 31, 1999 totaled $53,000 and was recorded as a credit to
interest on advances. At December 31, 1999, the Company 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, 1999, the Company'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 repricing within
one year, was negative 30.12%. 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, 1999, which are
anticipated by the Company, 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, 1999, 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
5.28% and 27.89% 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 Company's
estimated gap. While the Company believes such assumptions to be reasonable,
there can be no assurance that assumed prepayment rates will approximate actual
future loan prepayment activity.
45
At December 31, 1999
-------------------------------------------------------------------------------------
More than More than
1 Year 1 Year to 2 Years to
or Less 2 Years 3 Years
-------------------------- --------------------------- --------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------------- --------- --------------- ---------- -------------- ---------
(Dollars in Thousands)
Interest-earning assets:(1)
Mortgage-backed securities $ 18,599 6.86% $ 11,404 6.76% $ 10,841 6.75%
Equity securities - - - - - -
FHLB stock 7,542 6.65% - - - -
Loans, net 114,799 7.93% 55,557 7.21% 24,873 7.44%
Other 2,616 4.25% - - - -
-------------- --------------- --------------
Total interest-earning assets $ 143,556 $ 66,961 $ 35,714
============== =============== ==============
Interest-bearing liabilities:
Savings accounts $ 6,000 1.98% $ - - $ - -
Money market accounts 30,321 3.30% - - - -
NOW accounts - - - - - -
Certificates of deposit 105,793 4.93% 9,879 4.97% 2,952 4.80%
Borrowings 152,317 5.65% - - - -
-------------- --------------- --------------
Total interest-bearing liabilities $ 294,431 $ 9,879 $ 2,952
============== =============== ==============
-------------- --------------- --------------
Interest-rate sensitivity gap (2) $(150,875) $ 57,082 $ 32,762
============== =============== ==============
Cumulative interest-rate
-------------- --------------- --------------
sensitivity gap $(150,875) $ (93,793) $ (61,031)
============== =============== ==============
Cumulative interest sensitivity gap
as a percentage of total assets (30.12%) (18.72%) (12.18%)
Cumulative interest sensitivity gap
as a percentage of total interest
earning assets (34.71%) (21.58%) (14.04%)
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities (95.15%) 117.31% 109.01%
At December 31, 1999
-------------------------------------------------------------------------------------
More than More than
3 Years to 4 Years to More than
4 Years 5 Years 5 Years
--------------------------- -------------------------- --------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------------- ---------- -------------- --------- -------------- ---------
(Dollars in Thousands)
Interest-earning assets:
Mortgage-backed securities $ 10,828 7.20% $ 7,013 6.11% $ 65,442 6.68%
Equity securities - - - - 31,981 4.18%
FHLB stock - - - - - -
Loans, net 28,339 7.75% 23,984 7.49% 59,855 8.53%
Other - - - - - -
-------------- -------------- --------------
Total interest-earning assets $ 39,167 $ 30,997 $ 157,278
============== ============== ==============
Interest-bearing liabilities:
Savings accounts $ - - $ - - $ 61,169 1.98%
Money market accounts - - - - - -
NOW accounts - - - - 35,076 0.50%
Certificates of deposit 31 5.60% - - - -
Borrowings - - - - - -
-------------- -------------- --------------
Total interest-bearing liabilities $ 31 $ - $ 96,245
============== ============== ==============
-------------- -------------- --------------
Interest-rate sensitivity gap (2) $ 39,136 $ 30,997 $ 61,033
============== ============== ==============
Cumulative interest-rate
-------------- -------------- --------------
sensitivity gap $ (21,895) $ 9,102 $ 70,135
============== ============== ==============
Cumulative interest sensitivity gap
as a percentage of total assets (4.37%) 1.82% 14.00%
Cumulative interest sensitivity gap
as a percentage of total interest
earning assets (5.04%) 2.09% 16.13%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities 100.08% 100.00% 257.69%
At December 31, 1999
------------------------------
Total Fair
Amount Value(3)
--------------- ---------------
(Dollars in Thousands)
Interest-earning assets:
Mortgage-backed securities $ 124,127 $ 120,005
Equity securities 31,981 29,952
FHLB stock 7,542 7,542
Loans, net 307,407 299,679
Other 2,616 2,617
--------------- ---------------
Total interest-earning assets $ 473,673 $ 459,795
=============== ===============
Interest-bearing liabilities:
Savings accounts $ 67,169 $ 67,169
Money market accounts 30,321 30,321
NOW accounts 35,076 35,076
Certificates of deposit 118,655 118,856
Borrowings 152,317 152,136
--------------- ---------------
Total interest-bearing liabilities $ 403,538 $ 403,558
=============== ===============
---------------
Interest-rate sensitivity gap (2) $ 70,135
===============
Cumulative interest-rate
sensitivity gap
Cumulative interest sensitivity gap
as a percentage of total assets
Cumulative interest sensitivity gap
as a percentage of total interest
earning assets
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities
(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.
46
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.
47
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
48
TABLE OF CONTENTS
Page
Independent Auditors' Report 1
Consolidated Balance Sheets as of December 31,
1999 and 1998 2
Consolidated Statements of Income for the Years
Ended December 31, 1999, 1998 and 1997 3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-44
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Woronoco Bancorp, Inc.
Westfield, Massachusetts
We have audited the consolidated balance sheets of Woronoco Bancorp, Inc. and
subsidiaries as of December 31, 1999 and 1998, 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, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Woronoco Bancorp,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
WOLF & COMPANY, P.C.
Boston, Massachusetts
January 20, 2000
1
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
December 31,
-------------------------------------------
Assets 1999 1998
-------------------- -------------------
Cash and due from banks $13,569 $10,371
Interest-bearing balances 2,616 1,640
-------------------- -------------------
Total cash and cash equivalents 16,185 12,011
Securities available for sale, at fair value 149,957 111,409
Federal Home Loan Bank stock, at cost 7,542 5,648
Loans, net of allowance for loan losses ($2,309 at
December 31, 1999 and $2,166 at December 31, 1998) 307,407 284,043
Other real estate owned, net 883 241
Banking premises and equipment, net 8,859 8,290
Accrued interest receivable 2,263 1,748
Net deferred tax asset 4,922 55
Cash surrender value of life insurance 2,075 1,917
Other assets 855 1,464
-------------------- -------------------
Total assets $500,948 $426,826
==================== ===================
Liabilities and Stockholders' Equity
Deposits $263,196 $275,041
Federal Home Loan Bank advances 152,147 111,163
Repurchase agreements 170 100
Mortgagors' escrow accounts 883 645
Accrued expenses and other liabilities 3,657 4,104
-------------------- -------------------
Total liabilities 420,053 391,053
-------------------- -------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock ($.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding) - -
Common stock ($.01 par value; 16,000,000 shares
authorized; shares issued: 5,998,860 at December 31, 1999;
shares outstanding: 5,822,360 at December 31, 1999) 60 -
Additional paid-in capital 57,874 -
Unearned compensation (6,604) -
Retained earnings 35,230 34,060
Accumulated other comprehensive (loss) income - net
unrealized (loss) gain on securities available for sale,
net of tax effects (3,875) 1,713
Treasury stock, at cost (176,500 shares) (1,790) -
-------------------- -------------------
Total stockholders' equity 80,895 35,773
-------------------- -------------------
Total liabilities and stockholders' equity $500,948 $426,826
==================== ===================
See accompanying notes to the consolidated financial statements
2
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
Interest and dividend income:
Interest and fees on loans $ 21,912 $ 21,103 $ 19,682
Interest and dividends on securities:
Interest 6,511 2,887 2,894
Dividends 1,709 898 788
Interest on federal funds sold 330 63 36
Other interest income 86 103 117
--------------- --------------- ----------------
Total interest and dividend income 30,548 25,054 23,517
--------------- --------------- ----------------
Interest expense:
Interest on deposits 9,159 10,397 10,159
Interest on borrowings 5,466 3,080 2,341
--------------- --------------- ----------------
Total interest expense 14,625 13,477 12,500
--------------- --------------- ----------------
Net interest and dividend income 15,923 11,577 11,017
Provision for loan losses 180 240 180
--------------- --------------- ----------------
Net interest income, after provision for loan losses 15,743 11,337 10,837
--------------- --------------- ----------------
Other income:
Fee income 1,886 1,669 1,398
Gain on sales and disposition of securities,
net 1,737 1,420 1,895
Gain on sales of property - - 17
Gain on sales of loans, net - 290 -
Other income 228 174 155
--------------- --------------- ----------------
Total other income 3,851 3,553 3,465
--------------- --------------- ----------------
Other expenses:
Salaries and employee benefits 6,478 4,993 4,724
Occupancy and equipment 1,766 1,465 1,302
Other real estate owned 123 96 110
Marketing 849 625 610
Professional services 790 494 360
Data processing 772 658 595
Deposit insurance 44 32 31
Contributions 4,448 116 613
Other general and administrative 2,097 1,608 1,398
--------------- --------------- ----------------
Total other expenses 17,367 10,087 9,743
--------------- --------------- ----------------
Income before income taxes 2,227 4,803 4,559
Provision for income taxes 822 1,693 1,541
--------------- --------------- ----------------
Net income $ 1,405 $ 3,110 $ 3,018
=============== =============== ================
See accompanying notes to consolidated financial statements.
3
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(In Thousands)
Additional
Common Paid-in Unearned Retained
Stock Capital Compensation Earnings
----------- ----------- ------------ -----------
Balance at December 31, 1996 $ -- $ -- $ -- $ 27,932
Comprehensive income:
Net income -- -- -- 3,018
Change in net unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effects -- -- -- --
Total comprehensive income
-------- -------- -------- --------
Balance at December 31, 1997 -- -- -- 30,950
Comprehensive income:
Net income -- -- -- 3,110
Change in net unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effects -- -- -- --
Total comprehensive income
-------- -------- -------- --------
Balance at December 31, 1998 -- -- -- 34,060
Comprehensive income (loss):
Net income -- -- -- 1,405
Change in net unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effects -- -- -- --
Total comprehensive loss
Issuance of common stock in connection with
Bank's conversion from mutual to stock-
owned savings bank 60 57,866 (4,609) --
Purchase of common stock in connection with
employee and non-employee directors benefit
programs -- -- (2,472) --
Decrease in unearned compensation -- 8 477 --
Cash dividends declared -- -- -- (235)
Treasury stock purchased -- -- --
-------- -------- -------- --------
Balance at December 31, 1999 $ 60 $ 57,874 $ (6,604) $ 35,230
======== ======== ======== ========
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
------------- ------------ -----------
Balance at December 31, 1996 $ 1,142 $ -- $ 29,074
--------
Comprehensive income:
Net income -- -- 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 2,382 -- 33,332
--------
Comprehensive income:
Net income -- -- 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 1,713 -- 35,773
--------
Comprehensive income (loss):
Net income -- -- 1,405
Change in net unrealized gain on securities
available for sale, net of reclassification
adjustment and tax effects (5,588) -- (5,588)
--------
Total comprehensive loss (4,183)
--------
Issuance of common stock in connection with
Bank's conversion from mutual to stock-
owned savings bank -- -- 53,317
Purchase of common stock in connection with
employee and non-employee directors benefit
programs -- -- (2,472)
Decrease in unearned compensation -- -- 485
Cash dividends declared -- -- (235)
Treasury stock purchased (1,790) (1,790)
-------- -------- --------
Balance at December 31, 1999 $ (3,875) $ (1,790) $ 80,895
======== ======== ========
See accompanying notes to consolidated financial statements
4
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31,
1999 1998 1997
-------------- -------------- --------------
Cash flows from operating activities:
Net income $1,405 $3,110 $3,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 180 240 180
Provision for losses on other real estate owned 65 31 21
Charitable contribution in the form of equity securities 4,444 102 549
Net amortization (accretion) of investments 44 (15) (12)
Depreciation and amortization 780 651 550
Employee stock ownership plan expense 403 - -
Management retention plan expense 82 - -
Deferred tax benefit (1,584) (117) (209)
Gain on sales and disposition of securities, net (1,737) (1,420) (1,895)
Gain on sales of loans, net - (290) -
Gain on sales of property - - (17)
(Gain) loss on sale of other real estate owned (11) 25 7
Changes in operating assets and liabilities:
Accrued interest receivable (515) (269) (52)
Accrued expenses and other liabilities (447) 1,031 468
Other, net 451 (733) 53
-------------- -------------- --------------
Net cash provided by operating activities 3,560 2,346 2,661
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 16,531 8,889 9,416
Purchases of securities available for sale (76,238) (56,945) (10,285)
Proceeds from maturities of securities available for sale 449 692 2,461
Principal payments on mortgage-backed investments 13,532 10,937 7,561
Purchases of Federal Home Loan Bank stock (1,894) (3,215) (332)
Loans originated, net of loan payments received (24,389) (41,432) (28,049)
Purchases of banking premises and equipment (1,349) (3,022) (2,751)
Proceeds from sales of property - - 126
Proceeds from sales of foreclosed real estate 149 178 295
Loan to fund employee stock ownership plan (4,609) - -
-------------- -------------- --------------
Net cash used in investing activities (77,818) (83,918) (21,558)
-------------- -------------- --------------
Cash flows from financing activities:
Net (decrease) increase in deposits (11,845) 12,362 13,697
Net increase in Federal Home Loan Bank Advances 40,984 69,437 6,285
Net increase in repurchase agreements 70 100 -
Net increase (decrease) in mortgagors' escrow accounts 238 (2) 132
Net proceeds from initial public offering 53,482 - -
Cash dividends paid (235) - -
Treasury stock purchased (1,790) - -
Purchase of common stock in connection with employee
and non-employee directors benefit programs (2,472) - -
-------------- -------------- --------------
Net cash provided by financing activities 78,432 81,897 20,114
-------------- -------------- --------------
Net increase in cash and cash equivalents 4,174 325 1,217
Cash and cash equivalents at beginning of period 12,011 11,686 10,469
-------------- -------------- --------------
Cash and cash equivalents at end of period $16,185 $12,011 $11,686
============== ============== ==============
Supplemental cash flow information:
Interest paid on deposits $9,038 $10,385 $10,192
Interest paid on borrowings 5,114 3,268 2,346
Income taxes paid 2,107 1,687 1,701
Transfers from loans to other real estate owned 845 94 281
Securitization of loans to mortgage-backed securities - 19,068 -
See accompanying notes to consolidated financial statements
5
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements of Woronoco Bancorp, Inc. and its
subsidiaries (the "Company") include the accounts of Woronoco Bancorp, Inc.
(the "Corporation") and its wholly-owned subsidiaries, Woronoco Savings Bank
(the "Bank") and WRO Funding Corporation. All significant intercompany
balances and transactions have been eliminated in consolidation.
Business
The Corporation was incorporated in October 1998 under Delaware law. On
March 19, 1999, the Corporation acquired the Bank as part of the Bank's
conversion from a Massachusetts-chartered mutual savings bank to a
Massachusetts-chartered stock savings bank (the "Conversion). The
Corporation is currently a savings and loan holding company regulated by the
Office of Thrift Supervision ("OTS"). In connection with the Conversion,
the Corporation issued an aggregate of 5,998,860 shares of its common stock
of which 5,554,500 shares were sold at a purchase price of $10 per share in
a subscription offering and 444,360 shares were issued to Woronoco Savings
Charitable Foundation, a charitable foundation established by the
Corporation. The net proceeds, after offering expenses of $2.1 million,
resulting from the offering totaled $53.5 million.
The Company provides a variety of financial services, including trust and
financial management services, 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, money
market and term certificate accounts and its primary lending products are
residential, commercial mortgage, consumer and home equity loans. While the
Company's chief decision makers monitor the revenue streams of the various
products and services, operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all of the Company's
operations are considered by management to be aggregated in one reportable
operating segment.
6
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Company,
(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 Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
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, and the deferred tax asset.
Cash and cash equivalents
Cash equivalents include amounts due from banks and interest-bearing
balances with maturities of ninety days or less.
7
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Securities
Securities 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.
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.
Loans
The Company grants mortgage, consumer and commercial loans to customers. A
substantial portion of the loan portfolio is comprised of mortgage loans in
the Company's primary market area. The ability of the Company's debtors to
honor their contracts is dependent upon the real estate and general economic
conditions in this area.
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.
8
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses (concluded)
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.
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 Company'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 Company has taken physical possession of
the property without formal foreclosure proceedings.
9
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other real estate owned (concluded)
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.
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.
Repurchase agreements
The Company 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 Company 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.
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 Company.
10
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Company'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.
Stock-based incentive plans
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the vesting
period. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," whereby compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the stock.
Stock options issued under the Company's stock option plan have no intrinsic
value at the grant date, and under Opinion No. 25 no compensation cost is
recognized for them. The Company has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, has provided pro forma
disclosure of net income and other disclosures, as if the fair value based
method of accounting had been applied. (See note 12).
11
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Employee stock ownership plan ("ESOP")
Compensation expense is recognized as ESOP shares are committed to be
released. Allocated and committed to be released ESOP shares are considered
outstanding for earnings per share calculations based on debt service
payments. Other ESOP shares are excluded from earnings per share
calculations. Dividends declared on allocated ESOP shares are charged to
retained earnings. Dividends declared on unallocated ESOP shares are used
to satisfy debt service. The value of unearned shares to be allocated to
ESOP participants for future services not yet performed is reflected as a
reduction of stockholders' equity.
Earnings per common share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by the Company
relate to outstanding stock options, and are determined using the treasury
stock method. Earnings per share data is not presented in these financial
statements for the years ended December 31, 1999, December 31, 1998 and
December 31, 1997 since shares of the Company's common stock were not issued
until March 19, 1999.
Comprehensive income
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.
12
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Comprehensive income
The components of and changes in accumulated other comprehensive income and
related tax effects are as follows:
Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
Unrealized holding gains (losses) on
available-for-sale securities $ (7,134) $ 361 $ 3,705
Less: Reclassification adjustment for gains
realized in income (1,737) (1,420) (1,895)
-------------- --------------- --------------
Change in net unrealized gains (losses) (8,871) (1,059) 1,810
Tax effect 3,283 390 (570)
-------------- --------------- --------------
$ (5,588) $ (669) $ 1,240
============== =============== ==============
Recent accounting pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which, as amended by SFAS 137, is effective for fiscal years beginning after
June 15, 2000. This Statement establishes accounting and reporting standards
for derivative instruments and hedging activities, including certain
derivative instruments embedded in other contracts, and requires 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: (a) 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 is attributable to a particular risk, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of an unrecognized firm
commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of
the gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged.
Depending on the type of hedge, such recognition will be in either net income
or other comprehensive income. For a derivative not designated as a hedging
instrument, changes in fair value will be recognized in net income in the
period of change. Management is currently evaluating the impact of adopting
this Statement on the consolidated financial statements, but does not
anticipate that it will have a material impact.
13
WORONOCO BANCORP, INC. 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, 1999
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ---------------- ---------------- -----------------
Marketable equity securities $ 31,981 $ 1,577 $ (3,606) $ 29,952
----------------- ---------------- ---------------- -----------------
Mortgage-backed:
FHLMC 23,502 - (421) 23,081
FNMA 60,713 306 (1,144) 59,875
GNMA 39,912 18 (2,881) 37,049
----------------- ---------------- ---------------- -----------------
124,127 324 (4,446) 120,005
----------------- ---------------- ---------------- -----------------
$ 156,108 $ 1,901 $ (8,052) $ 149,957
================= ================ ================ =================
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
----------------- ---------------- ---------------- -----------------
87,973 1,059 (268) 88,764
----------------- ---------------- ---------------- -----------------
$ 108,689 $ 4,764 $ (2,044) $ 111,409
================= ================ ================ =================
14
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
SECURITIES AVAILABLE FOR SALE (concluded)
At December 31, 1999 and 1998, the Company has pledged securities available
for sale with an amortized cost of $1,626 and $1,660, and a fair value of
$1,594 and $1,690, respectively, as collateral against its treasury, tax and
loan account and repurchase agreements.
Proceeds from sales of securities available for sale during the years ended
December 31, 1999, 1998 and 1997 amounted to $16,531, $8,889 and $9,416,
respectively. Gross realized gains of $2,657, $1,629 and $1,601, and gross
realized losses of $920, $278 and $20, were realized during the years ended
December 31, 1999, 1998 and 1997, respectively.
During 1997, the Company 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 Company, was funded
by a donation from the Company 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 Company 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 Company, resulting in the Company recognizing the
unrealized appreciation of $69 in the consolidated statement of income.
15
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
3. LOANS
A summary of the balances of loans follows:
December 31,
----------------------------------------
1999 1998
------------------ ------------------
Residential mortgage $196,912 $180,660
Home equity 69,821 64,705
Commercial real estate 23,796 20,595
Construction 2,873 3,464
Consumer 13,204 12,914
Commercial 4,907 4,613
------------------ ------------------
Total loans 311,513 286,951
Net deferred loan costs 553 711
Unadvanced loan funds (2,350) (1,453)
Allowance for loan losses (2,309) (2,166)
------------------ ------------------
Loans, net $307,407 $284,043
================== ==================
An analysis of the allowance for loan losses follows:
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Balance at beginning of period $ 2,166 $ 1,952 $ 1,911
Provision for loan losses 180 240 180
Recoveries 49 74 32
Loans charged-off (86) (100) (171)
------------- ------------- -------------
Balance at end of period $ 2,309 $ 2,166 $ 1,952
============= ============= =============
16
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
LOANS (continued)
The following is a summary of the impaired and non-accrual loans:
December 31,
-------------------------------------
1999 1998
---------------- -----------------
Impaired loans without a valuation allowance $ - $ 159
Impaired loans with a valuation allowance 126 1,057
---------------- -----------------
Total impaired loans $ 126 $ 1,216
================ =================
Valuation allowance related to impaired loans $ 81 $ 283
================ =================
Non-accrual loans $ 175 $ 306
================ =================
No additional funds are committed to be advanced in connection with impaired
loans.
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Average recorded investment in
impaired loans $ 1,072 $ 1,276 $ 953
============= ============= =============
Interest income recognized on
a cash basis on impaired loans $ 160 $ 70 $ 57
============= ============= =============
17
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
LOANS (concluded)
The Company 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 $35,126 and
$41,367 at December 31, 1999 and 1998, respectively. Included in the
$35,126 of loans serviced for others is $15,470 of loans that were
securitized by the Company 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, 1999 and 1998 was $121 and $164, respectively. The fair values
of these rights approximates carrying amounts. Amortization of mortgage
servicing rights totaled $43 and $3 for the years ended December 31, 1999
and 1998, respectively.
4. OTHER REAL ESTATE OWNED
Other real estate owned consists of the following:
December 31,
-------------------------------
1999 1998
------------- -------------
Real estate acquired in settlement of loans $ 1,510 $ 810
Real estate in possession 4 -
------------- -------------
1,514 810
Less allowance for losses (631) (569)
------------- -------------
$ 883 $ 241
============= =============
An analysis of the allowance for losses on other real estate owned is as
follows:
Years Ended December 31,
--------------------------------------------
1999 1998 1997
----------- ------------ -------------
Balance at beginning of period $569 $538 $ 517
Provision for losses 65 31 21
Charge-offs (3) - -
----------- ------------ -------------
Balance at end of period $631 $569 $ 538
=========== ============ =============
18
WORONOCO BANCORP, INC. 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,
-------------------------------------
1999 1998 1997
---------- ---------- ----------
Net (gain) loss on sales of other
real estate owned $(11) $ 25 $ 7
Provision for losses 65 31 21
Operating expenses, net of rental income 69 40 82
---------- ---------- ----------
$123 $ 96 $110
========== ========== ==========
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
1999 1998 Useful Lives
----------- ----------- -------------------
Banking premises:
Land $ 560 $ 560
Buildings and improvements 7,875 3,845 5 - 40 years
Equipment 4,510 3,640 3 - 10 years
Construction in progress - 3,556
----------- -----------
12,945 11,601
Less accumulated depreciation
and amortization (4,086) (3,311)
----------- -----------
$ 8,859 $ 8,290
=========== ===========
Depreciation and amortization expense for the years ended December 31, 1999,
1998 and 1997 amounted to $780, $651 and $550, respectively.
19
WORONOCO BANCORP, INC. 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,
--------------------------------
1999 1998
-------------- --------------
Non-interest-bearing demand $ 11,975 $ 10,382
NOW 35,076 32,305
Money market 30,321 27,176
Regular 67,169 66,774
-------------- --------------
Total non-certificate accounts 144,541 136,637
-------------- --------------
Certificate accounts with less than $100,000 100,064 115,187
Certificate accounts with $100,000 or more 18,591 23,217
-------------- --------------
Total certificate accounts 118,655 138,404
-------------- --------------
$ 263,196 $ 275,041
============== ==============
A summary of certificate accounts, by maturity, is as follows:
December 31, 1999 December 31, 1998
-------------------------------- --------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------------- -------------- -------------- --------------
Within 1 year $ 102,673 4.92% $ 106,430 5.19%
Over 1 year to 3 years 15,951 4.96% 31,972 5.84%
Over 3 years to 5 years 31 5.10% 2 2.50%
-------------- --------------
$ 118,655 4.92% $ 138,404 5.34%
============== ==============
20
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
7. BORROWINGS
Federal Home Loan Bank Advances
Federal Home Loan Bank of Boston ("FHLB") advances consist of the following:
December 31,
Interest --------------------------------
Maturity Date Rate 1999 1998
- --------------------------- --------- -------------- --------------
January 3, 2000 5.69% $ 10,000 $ -
February 9, 2000 5.98 10,000 -
February 28, 2000 5.78 17,000 -
March 8, 2000 5.73 8,000 -
March 29, 2000 4.99 10,000 -
March 29, 2000 5.73 20,000 -
April 17, 2000 5.09 5,000 -
April 26, 2000 5.77 23,000 -
May 3, 2000 5.80 8,000 -
November 22, 2000 5.98 35,000 -
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
December 30, 2004 8.51 - 1,368
-------------- --------------
146,000 108,368
Line of credit 6,147 2,795
-------------- --------------
$ 152,147 $ 111,163
============== ==============
21
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Federal Home Loan Bank Advances (concluded)
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.
Federal Reserve Bank of Boston Advances
Commercial loans with a principal balance of $53,290 were pledged to the
Federal Reserve Bank of Boston as security for a Y-2K liquidity line of
credit. No amounts were outstanding as of December 31, 1999 under this line
of credit.
Repurchase Agreements
Securities sold under agreements to repurchase are summarized as follows:
Years Ended December 31,
1999 1998
--------------- ---------------
Balance at year end $ 170 $ 100
Average amount outstanding during year 103 51
Interest expense incurred during year 4 1
Maximum amount outstanding at any month-end 175 100
Weighted average interest rate during the year 3.76% 1.97%
Weighted average interest rate on year-end balances 5.07% 1.77%
22
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
Repurchase Agreements (concluded)
Mortgage-backed securities available for sale, with a market value of $1,048
and $1,690 and an amortized cost of $1,063 and $1,660 are pledged to secure
the repurchase agreements at December 31, 1999 and 1998, respectively. The
securities pledged to secure the repurchase agreements are under the
Company's control.
8. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Current tax provision:
Federal $ 2,064 $ 1,460 $ 1,385
State 342 350 365
----------- ----------- -----------
2,406 1,810 1,750
----------- ----------- -----------
Deferred tax provision (benefit):
Federal (1,507) (80) (165)
State (77) (37) (44)
----------- ----------- -----------
(1,584) (117) (209)
----------- ----------- -----------
$ 822 $ 1,693 $ 1,541
=========== =========== ===========
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,
-------------------------------------
1999 1998 1997
---------- ---------- ----------
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 7.8 4.3 4.6
Dividends received deduction (6.6) (3.3) (2.6)
Non-taxable appreciation of securities donated - (0.4) (2.3)
Other, net 1.7 0.6 0.1
---------- ---------- ----------
Effective tax rates 36.9% 35.2% 33.8%
========== ========== ==========
23
WORONOCO BANCORP, INC. 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,
--------------------------
1999 1998
----------- -----------
Deferred tax asset:
Federal $ 4,738 $ 1,030
State 523 352
----------- -----------
5,261 1,382
----------- -----------
Deferred tax liability:
Federal (252) (1,134)
State (87) (193)
----------- -----------
(339) (1,327)
----------- -----------
Net deferred tax asset $ 4,922 $ 55
=========== ===========
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
December 31,
----------------------------
1999 1998
------------ ------------
Net unrealized loss (gain) on securities
available for sale $2,276 $(1,007)
Charitable contribution carryforward 1,292 -
Depreciation (40) (53)
Deferred income (287) (247)
Allowance for loan losses 966 881
Employee benefit plans 429 471
Other 286 10
------------ ------------
Net deferred tax asset $4,922 $ 55
============ ============
At December 31, 1999 the Company had a charitable contribution carryover for
tax return purposes of approximately $3.8 million, which will expire in
December 31, 2005 if not utilized.
24
WORONOCO BANCORP, INC. 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 is as follows:
Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- --------- -----------
Balance at beginning of period $ 55 $(452) $ (91)
Deferred tax benefit 1,584 117 209
Deferred tax effects on net unrealized loss (gain)
on securities available for sale 3,283 390 (570)
----------- --------- -----------
Balance at end of period $ 4,922 $ 55 $(452)
=========== ========= ===========
There was no valuation allowance for deferred tax assets as of December 31,
1999, 1998 and 1997.
The federal income tax reserve for loan losses at the Company'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 Company intends to use the reserve to absorb
only loan losses, a deferred tax liability of approximately $636 has not
been provided.
9. 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 Company 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 Company's
involvement in particular classes of financial instruments.
25
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
COMMITMENTS AND CONTINGENCIES (continued)
The Company'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 Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
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 Company 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,
-----------------------------
1999 1998
------------ -------------
Commitments to grant loans:
Fixed $ 2,496 $ 8,087
Variable 5,198 1,943
Unadvanced funds on lines of credit 58,111 49,530
Standby letters of credit 144 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 Company
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 Company
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.
26
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
COMMITMENTS AND CONTINGENCIES (continued)
Interest rate cap and floor agreements
The Company 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 Company 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
Company paid premiums of $80 in exchange for future cash payments if LIBOR
increases above 6%. Amortization for the year ended December 31, 1999 and
1998 amounted to $27 and $16, respectively. The agreements have a term of
three years and mature in May and June 2001.
The notional principal amount of the Company's outstanding interest rate
floor agreement was $10,000 at December 31, 1999, 1998 and 1997.
Amortization of premiums for the years ended December 31, 1999, 1998 and
1997 totaled $27, $27 and $27, respectively, and is recorded as interest
expense on advances. If LIBOR falls below 5.75%, the Company receives cash
payments on a quarterly basis. Cash payments received during the years
ended December 31, 1999, 1998 and 1997 totaled $53, $7 and $12,
respectively, and are recorded as a credit to interest on advances.
27
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
COMMITMENTS AND CONTINGENCIES (continued)
Lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1999 and 1998, future minimum rent commitments pertaining to
banking premises are as follows:
December 31,
Years Ending ---------------------------
December 31, 1999 1998
----------------- ----------- -----------
2000 $ 206 $ 196
2001 206 196
2002 202 196
2003 195 193
2004 132 185
Thereafter 735 858
----------- -----------
$ 1,676 $ 1,824
=========== ===========
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, 1999, 1998 and 1997 amounted
to $197, $156 and $119, respectively.
Employment and change in control agreements
The Company and the Bank have entered into three-year employment agreements
with its President and certain senior executives which generally provide for
a base salary and the continuation of certain benefits currently received.
The Company and Bank employment agreements renew on a daily and annual
basis, respectively. The employment agreements require payments for the
remaining base salary due to the employee for the remaining term of the
agreement and the contributions that would have been made on the employee's
behalf to any employee benefit plans of the Company and the Bank for certain
reasons other than cause, including a "change in control" as defined in the
agreement. However, such employment may be terminated for cause, as
defined, without incurring any continuing obligations.
28
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
COMMITMENTS AND CONTINGENCIES (concluded)
Employment and change in control agreements (concluded)
The Bank has also entered into three-year change in control agreements with
certain officers, all of whom are not covered by an employment agreement.
The change in control agreements are renewable on an annual basis and
generally provide a severance payment and the continuation of certain
benefits currently received following a "change in control" as defined in
the agreements.
Legal Claims
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 Company's consolidated financial position.
29
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
10. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are 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 Company's and the Bank's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the
Company's and the Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to savings and loan holding
companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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, 1999 and 1998, that the Company and the Bank
met all capital adequacy requirements to which they are subject.
As of December 31, 1999, 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.
30
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded)
The Company's and Bank's actual capital amounts and ratios as of December
31, 1999 and 1998 are also presented in the table. The Company's capital
amounts and ratios are not presented for December 31, 1998 since the
Conversion was not consummated until March 19, 1999.
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, 1999:
Total Capital to Risk Weighted Assets
Company $86,046 27.0% $25,520 8.0% N/A N/A
Bank $58,976 18.6% $25,399 8.0% $31,749 10.0%
Tier 1 Capital to Risk Weighted Assets
Company $83,737 26.2% $12,760 4.0% $19,140 6.0%
Bank $56,667 17.8% $12,700 4.0% $19,049 6.0%
Tier 1 Capital to Average Assets
Company $83,737 17.9% $18,728 4.0% $23,410 5.0%
Bank $56,667 12.1% $14,003 3.0% - $23,338 5.0%
$23,338 5.0%
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 Weighted Assets
Bank $36,226 13.9% $20,898 8.0% $26,122 10.0%
Tier 1 Capital to Risk Weigted Assets
Bank $34,060 13.0% $10,449 4.0% $15,673 6.0%
Tier 1 Capital to Average Assets
Bank $34,060 9.4% $10,913 - 3.0% - $18,188 5.0%
$18,188 5.0%
31
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
11. PENSION PLANS
Defined benefit plan
The Company 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,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year $3,744 $3,400 $3,071
Actual return on plan assets 784 278 517
Employer contribution 428 187 260
Benefits paid (101) (121) (448)
Other 20 - -
------------ ------------ ------------
Fair value of plan assets at end of year 4,875 3,744 3,400
------------ ------------ ------------
Change in benefit obligation:
Benefit obligation at beginning of year 4,264 3,891 3,460
Service cost 360 343 282
Interest cost 288 282 259
Actuarial loss (gain) (623) (131) 338
Benefits paid (101) (121) (448)
Other 20 - -
------------ ------------ ------------
Benefit obligation at end of year 4,208 4,264 3,891
------------ ------------ ------------
Funded status 667 (520) (491)
Deferred gain (1,752) (673) (562)
Unrecognized prior service cost 38 41 46
------------ ------------ ------------
Accrued pension cost $ (1,047) $ (1,152) $ (1,007)
============ ============ ============
32
WORONOCO BANCORP, INC. 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,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Service cost $360 $343 $282
Interest cost 288 282 259
Expected return on plan assets (299) (272) (246)
Amortization of prior service cost 4 4 4
Recognized net actuarial (gain) loss (29) (25) (28)
---------- ---------- ----------
$324 $332 $271
========== ========== ==========
Actuarial assumptions used in accounting were:
1999 1998 1997
---------- --------- ----------
Discount rates on benefit obligations 6.75% 7.50% 7.25%
Rates of increase in compensation levels 5.50 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, 1999, 1998 and 1997
amounted to $409, $383 and $336, respectively.
Defined contribution plan
In addition to the defined benefit plan, the Company 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.
The Company makes matching contributions up to 100% of the first 3% of
compensation. Total 401(k) plan expense for the years ended December 31,
1999 and 1998 amounted to $84 and $55, respectively. The Company did not
make matching contributions in 1997.
33
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
PENSION PLANS (concluded)
Directors' retirement plan
Under the terms of the plan, directors are eligible to participate in the
plan upon election to the Board of Directors and the retirement benefits
vest over a 10 year period. The retirement benefit for any plan year is
determined by the performance of related insurance contracts, as defined in
the plan. Plan expenses for the years ended December 31, 1999, 1998 and
1997 were $20, $20 and $50, respectively.
Supplemental Executive Retirement Plan
The Company has entered into a Split Dollar Life Insurance Arrangement with
its President and Chief Executive Officer intended to provide supplemental
retirement benefits. The Company pays the annual premiums and records its
share of the cash surrender value in other assets.
12. STOCK-BASED INCENTIVE PLANS AND EMPLOYEES' STOCK OWNERSHIP PLAN
Stock-Based Incentive Plans
Stock Options
Under the Company's Stock-Based Incentive Plan, the Company may grant
options to its directors, officers and employees for up to 599,886 shares of
common stock. Both incentive stock options and non-qualified stock options
may be granted under the plan. The exercise price of each option equals the
market price of the Company's stock on the date of grant and an option's
maximum term is ten years. Options vest at 20% per year commencing in
October 1999.
The Company applies APB Opinion 25 and related Interpretations in accounting
for stock options. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's stock options been determined based
upon the fair value at the grant dates for awards under the plan consistent
with the method prescribed by SFAS No. 123, the Company's net income for the
year ended December 31, 1999 would have been adjusted to $1,354 on a pro
forma basis.
34
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands Except Per Share Amounts)
STOCK-BASED INCENTIVE PLANS AND EMPLOYEES' STOCK OWNERSHIP PLAN (continued)
Stock Options (continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Year Ended
December 31,
1999
------------------
Dividend yield 0.54%
Expected life in years 10
Expected volatility 14.86%
Risk-free interest rate 6.45%
A summary of the status of the Company's stock option plan is presented
below:
1999
--------------------------------
Weighted
Average
Exercise
Shares Price
--------------------------------
Fixed Options:
Outstanding at beginning of year - $ -
Granted 577,408 9.69
Exercised - -
Forfeited - -
--------------
Outstanding at end of year 577,408 $ 9.69
==============
Options exercisable at year-end - $ -
Weighted-average fair value of
options granted during the year $ 4.20
35
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands Except Per Share Amounts)
STOCK-BASED INCENTIVE PLANS AND EMPLOYEES' STOCK OWNERSHIP PLAN (continued)
Stock Options (concluded)
Information pertaining to stock options outstanding at December 31, 1999 is
as follows:
Options Oustanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------- ---------------------------
$9.6875 577,408 9.8 years $9.69 - $ -
------------ -----------
Outstanding at end of year 577,408 9.8 years $9.69 - $ -
============ ===========
Stock Awards
Under the Company's Stock-Based Incentive Plan, the Company may grant stock
awards to its directors, officers and employees for up to 239,954 shares of
common stock. The Company applies APB Opinion 25 and related
Interpretations in accounting for stock awards. The stock awards vest at
20% per year, commencing in October 1999. The fair market value of the
stock allocations, based on the market price at date of grant, is recorded
as unearned compensation. Unearned compensation is amortized over the
periods to be benefited. The Company recorded compensation cost related to
the stock awards of $82 in 1999. No compensation expense was recorded in
1998 or 1997 as the plan was approved in 1999.
36
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands Except Per Share Amounts)
STOCK-BASED INCENTIVE PLANS AND EMPLOYEES' STOCK OWNERSHIP PLAN (continued)
Stock Awards (concluded)
A summary of the Company's stock award plan as of December 31, 1999 and
changes during the year ending on such date is presented below:
For the
Year Ended
December 31,
1999
------------------
Balance, beginning of year -
Granted 239,954
Canceled -
------------------
Balance, end of year 239,954
==================
Weighted-average fair value of stock awards
granted during the year $9.69
Employees' Stock Ownership Plan
The Company has established an Employees' Stock Ownership Plan (the "ESOP")
for the benefit of each employee that has reached the age of 21 and has
completed at least 1,000 hours of service in the previous twelve-month
period. As part of the Conversion, WRO Funding Corporation provided a loan
to the Woronoco Savings Bank Employee Stock Ownership Plan Trust which was
used to purchase 8%, or 479,908 shares, of the Corporation's outstanding
stock in the open market. The loan bears interest equal to 7.75% and
provides for quarterly payments of principal and interest.
37
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
STOCK-BASED INCENTIVE PLANS AND EMPLOYEES' STOCK OWNERSHIP PLAN (concluded)
Employees' Stock Ownership Plan (concluded)
At December 31, 1999, the remaining principal balance is payable as follows:
Years Ending
December 31,
-----------------
2000 $ 263
2001 284
2002 306
2003 331
2004 357
Thereafter 2,826
-----------
$ 4,367
===========
The Bank has committed to make contributions to the ESOP sufficient to
support the debt service of the loan. The loan is secured by the shares
purchased by Eastern Bank and Trust Company ("Trustee"), which are held in a
suspense account for allocation among the members as the loans are paid.
Total compensation expense applicable to the ESOP amounted to $403 for the
year ended December 31, 1999.
Shares held by the ESOP include the following:
December 31,
1999
-----------------
Allocated -
Committed to be released 39,992
Unallocated 439,916
-----------------
479,908
=================
The fair market value of unallocated shares at December 31, 1999 was $4,263.
38
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to
officers, directors and their affiliates amounting to approximately $1,603
and $1,473 at December 31, 1999 and 1998, respectively.
An analysis of the activity of these loans is as follows:
Years Ended
December 31,
--------------------------
1999 1998
----------- -----------
Balance at beginning of period $ 1,473 $ 1,579
Additions 529 441
Repayments (399) (547)
----------- -----------
Balance at end of period $ 1,603 $ 1,473
=========== ===========
14. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Corporation.
The total amount of dividends which may be paid at any date is generally
limited to the retained earnings of the Bank, and loans or advances are
limited to 10% of the Bank's capital stock and surplus on a secured basis.
At December 31, 1999, the Bank's retained earnings available for the payment
of dividends was $35,070. Funds available for loans or advances by the Bank
to the Corporation amounted to $5,383.
In addition, dividends paid by the Bank to the Corporation would be
prohibited if the effect thereof would cause the Bank's capital to be
reduced below applicable minimum capital requirements.
39
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
15. 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 Company.
The following methods and assumptions were used by the Company 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 Company's
-------------------------------
borrowings are estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
40
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
Repurchase agreements: The carrying amount of repurchase agreements,
---------------------
which are overnight borrowings, approximate their fair value.
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 Company would
receive or pay to terminate agreements taking into consideration
current interest rates.
The carrying or notional amounts and estimated fair values of the Company's
financial instruments are as follows:
December 31,
-----------------------------------------------------------------
1999 1998
------------------------------ -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
Financial assets:
Cash and cash equivalents $ 16,185 $ 16,185 $ 12,011 $ 12,011
Securities available for sale 149,957 149,957 111,409 111,409
Federal Home Loan Bank
stock 7,542 7,542 5,648 5,648
Loans, net 307,407 299,679 284,043 283,031
Accrued interest receivable 2,263 2,263 1,748 1,748
Financial liabilities:
Deposits 263,196 263,397 275,041 276,182
Federal Home Loan Bank Advances 152,147 151,966 111,163 111,261
Repurchase agreements 170 170 100 100
Other:
Interest rate floor
agreement 38 5 65 204
Interest rate cap
agreements 36 81 63 33
41
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands Except Per Share Amounts)
16. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Following is the quarterly financial information of the Company for 1999 and
1998:
First Quarter Second Quarter
----------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
Interest and dividend income $ 7,474 $ 6,127 $ 7,070 $ 6,224
Interest expense 3,733 3,257 3,182 3,318
------- ------- ------- -------
Net interest and dividend income 3,741 2,870 3,888 2,906
Provision for loan losses 60 60 60 60
Net gain on sale of loans -- -- -- --
Net gain on sale of securities 448 205 355 913
Fees and other income 471 397 544 460
Other expenses 7,284 (1) 2,518 3,110 2,489
Income tax (benefit) expense (1,036) 294 609 597
------- ------- ------- -------
Net income ($1,648) $ 600 $ 1,008 $ 1,133
======= ======= ======= =======
Earnings per share:
Basic N/A N/A $ 0.18 N/A
Diluted N/A N/A $ 0.18 N/A
Third Quarter Fourth Quarter
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
Interest and dividend income $ 7,657 $ 6,245 $ 8,347 $ 6,458
Interest expense 3,551 3,416 4,159 3,486
------- ------- ------- -------
Net interest and dividend income 4,106 2,829 4,188 2,972
Provision for loan losses 60 60 -- 60
Net gain on sale of loans -- 290 -- --
Net gain on sale of securities 384 64 550 238
Fees and other income 554 473 545 513
Other expenses 3,324 2,448 3,649 2,632
Income tax (benefit) expense 646 420 603 382
------- ------- ------- -------
Net income $ 1,014 $ 728 $ 1,031 $ 649
======= ======= ======= =======
Earnings per share:
Basic $ 0.18 N/A $ 0.19 N/A
Diluted $ 0.18 N/A $ 0.19 N/A
(1) The 1999 first quarter other expenses included a $4,444 contribution to
Woronoco Savings Charitable Foundation in conjunction with the
reorganization to stock-form of ownership.
17. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining to Woronoco Bancorp, Inc. is as follows:
December 31,
BALANCE SHEET 1999
----------------------
Assets
- ------
Cash and due from Woronoco Savings Bank $ 804
Short-term investments with Woronoco Savings Bank 19,573
----------------------
Total cash and cash equivalents 20,377
Investment in common stock of Woronoco Savings Bank 53,825
Investment in common stock of WRO Funding Corporation 4,767
Other assets 2,127
----------------------
Total assets $ 81,096
======================
Liabilities and Stockholders' Equity
- ------------------------------------
Accrued expenses $ 138
Other liabilities 63
----------------------
Total liabilities 201
Stockholders' equity 80,895
----------------------
Total liabilities and stockholders' equity $ 81,096
======================
42
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
(Dollars in Thousands)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued)
Year Ended
December 31,
STATEMENT OF INCOME 1999
- ------------------- ----------------------
Income:
Dividends from Woronoco Savings Bank $ 3,275
Interest on investments 201
Miscellaneous income 8
----------------------
Total income 3,484
Operating expenses:
Charitable contributions 4,444
Other 352
----------------------
Total operating expenses 4,796
Loss before income taxes and equity in
undistributed net income of subsidiaries (1,312)
Applicable income tax benefit (1,549)
----------------------
237
Equity in undistributed net income of Woronoco Savings Bank 1,010
Equity in undistributed net income of WRO Funding Corporation 158
----------------------
Net income $ 1,405
======================
43
WORONOCO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
Year Ended
December 31,
STATEMENT OF CASH FLOWS 1999
- ----------------------- ----------------------
Cash flows from operating activities:
Net income $ 1,405
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Woronoco Savings Bank (1,010)
Equity in undistributed earnings of WRO Funding Corporation (158)
Charitable contribution in the form of Woronoco
Bancorp, Inc. common stock 4,444
Deferred tax benefit (1,511)
Other, net (488)
----------------------
Net cash provided by operating activities 2,682
----------------------
Cash flows from investing activities:
Investment in Woronoco Savings Bank (26,754)
Investment in WRO Funding Corporation (4,609)
Other, net 73
----------------------
Net cash used in investing activities (31,290)
----------------------
Cash flows from financing activities
Proceeds from issuance of common stock 53,482
Payments to acquire common stock (1,790)
Payments to purchase common stock for Company's
stock award plan (2,472)
Dividends paid (235)
----------------------
Net cash provided by financing activities 48,985
----------------------
Net increase in cash and cash equivalents 20,377
Cash and cash equivalents at beginning of year -
----------------------
Cash and cash equivalents at end of year $ 20,377
======================
44
Item 9. Change in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------------------------------------------------------------
The information relating to Directors and Executive Officers of the Registrant
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 26, 2000 on pages 5 through
6. Information concerning Executive Officers who are not directors is contained
in Part I of this report.
Executive Officers of the Registrant
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 (2)
- ----------------------- ----------- --------------------------------------
Agostino J. Calheno 49 Senior Vice President - Lending of the
Bank and Senior Vice President of the
Company
Debra L. Murphy 43 Senior Vice President and Treasurer of
the Bank and Senior Vice President and
Chief Financial Officer of the Company
(1) As of December 31, 1999.
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.
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.
Item 11. Executive Compensation.
- --------------------------------
The response to this Item is contained in the discussion under the caption
"Executive Compensation" (excluding the Executive Compensation Committee Report
and Stock Performance Graph) contained on Pages 9 through 13 of the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 26,
2000, which is incorporated by reference herein.
49
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The response to this Item is contained in the discussion under the caption
"Stock Ownership" contained on Pages 3 through 4 of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 2000,
which is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The response to this Item is contained in the discussion under the caption
"Transactions With Management" contained on Page 17 of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 2000,
which is incorporated by reference herein.
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 Company and its
subsidiaries are filed as part of this document under Item 8:
- Consolidated Balance Sheets at December 31, 1999 and 1998
- Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
- Consolidated Statements of Cash Flows for each of the Years Ended
December 31, 1999, 1998 and 1997
- 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 1999
On November 5, 1999 the Company filed an 8-K relating to the press release
issued on November 5, 1999 announcing that the Company had received regulatory
clearance to repurchase up to 5% of its outstanding shares.
50
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
-------
3.1 Certificate of Incorporation of Woronoco Bancorp, Inc. (1)
3.2 Bylaws of Woronoco Bancorp, Inc. (1)
10.1 Woronoco Bancorp, Inc. 1999 Stock Based Incentive Plan (1)
10.2 Form of Employment Agreement between Woronoco Savings Bank and
certain executive officers (1)
10.3 Form of Employment Agreement between Woronoco Bancorp, Inc. and
certain executive officers (1)
11.0 Statement Re: Computation of Per Share Earnings (2)
21.0 Subsidiaries Information Incorporated Herein By Reference to
Part 1 - Subsidiaries
23.0 Consent of Wolf and Company, P.C. for S-8, on file
27.0 Financial Data Schedule
_____________________________
(1) Incorporated by reference to the Proxy Statement for the 1999 Special
Meeting of Shareholders filed on August 23, 1999.
(2) Not applicable as shares of the Company's common stock were not issued
until March 19, 1999.
51
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 20, 2000
---------------------------
Cornelius D. Mahoney
Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Cornelius D. Mahoney Chairman of the Board, President March 20, 2000
- ------------------------ and Chief Executive Officer
Cornelius D. Mahoney (principal executive officer)
/s/ Debra L. Murphy Senior Vice President and Chief March 20, 2000
- -------=---------------- Financial Officer
Debra L. Murphy (principal accounting and
financial officer)
/s/ James A. Adams Director March 20, 2000
- ------------------------
James A. Adams
/s/ William G. Aiken Director March 20, 2000
- ------------------------
William G. Aiken
/s/ Paul S. Allen Director March 20, 2000
- ------------------------
Paul S. Allen
/s/ Francis J. Ehrhardt Director March 20, 2000
- ------------------------
Francis J. Ehrhardt
/s/ Joseph M. Houser, Jr. Director March 20, 2000
- -------------------------
Joseph M. Houser, Jr.
/s/ Joseph P. Keenan Director March 20, 2000
- ------------------------
Joseph P. Keenan
52
/s/ Richard L. Pomeroy Director March 20, 2000
- ------------------------
Richard L. Pomeroy
/s/ Norman H. Storey Director March 20, 2000
- ------------------------
Norman H. Storey
/s/ Ann V. Schultz Director March 20, 2000
- ------------------------
Ann V. Schultz
/s/ D. Jeffrey Templeton Director March 20, 2000
- ------------------------
D. Jeffrey Templeton
/s/ Paul Tsatos Director March 20, 2000
- ------------------------
Paul Tsatsos
53