WORONOCO BANCORP INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to _________________

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 incorporation or organization)		(I.R.S. Employer Identification No.)

31 Court Street, Westfield, Massachusetts		01085

(Address of principal executive offices)		(Zip Code)

(413) 568-9141

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes

The issuer had 3,580,669 shares of common stock, par value $0.01 per share, outstanding as of November 5, 2002.

WORONOCO BANCORP, INC.
FORM 10-Q

INDEX

				Page

PART I.		FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets at September 30, 2002 and December 31, 2001.			1

	Consolidated Income Statements for the Three and Nine Months Ended September 30, 2002 and 2001			2

	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2002 and 2001			3

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001			4

	Notes to Unaudited Consolidated Financial Statements			5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			7

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			28

Item 4.	Controls and Procedures			28

PART II:			OTHER INFORMATION

Item 1.	Legal Proceedings			29
Item 2.	Changes in Securities and Use of Proceeds			29
Item 3.	Defaults Upon Senior Securities			29
Item 4.	Submission of Matters to a Vote of Security Holders			29
Item 5.	Other Information			29
Item 6.	Exhibits and Reports on Form 8-K			30

SIGNATURES				31

CERTIFICATIONS				32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)

			Unaudited September 30, 2002			December 31, 2001

Assets
Cash and due from banks			$	18,086		$	19,883
Interest-bearing balances				651			7,326
Federal funds sold				4,375			—

		Total cash and cash equivalents		23,112			27,209
Securities available for sale, at fair value				182,987			175,708
Federal Home Loan Bank stock, at cost				13,795			13,750
Loans held for sale				15,190			—
Loans, net of allowance for loan losses ($3,144 at September 30, 2002 and $2,701 at December 31, 2001)				457,877			427,409
Other real estate owned, net				—			—
Premises and equipment, net				10,578			11,172
Accrued interest receivable				3,836			3,036
Goodwill and other intangible assets, net				1,902			1,923
Net deferred tax asset				—			1,362
Cash surrender value of life insurance				2,556			2,412
Other assets				5,826			4,025

		Total assets	$	717,659		$	668,006

Liabilities and Stockholders’ Equity
Deposits			$	370,268		$	336,060
Short-term borrowings				42,000			44,041
Long-term debt				222,120			205,000
Mortgagors’ escrow accounts				1,245			1,130
Accrued expenses and other liabilities				8,870			11,926

		Total liabilities		644,503			598,157

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 September 30, 2002 and December 31,2001; shares outstanding: 3,592,285 at September 30, 2002 and 3,737,268 at December 31, 2001)			60			60
	Additional paid-in capital			58,624			58,292
	Unearned compensation			(4,167	)		(4,834	)
	Retained earnings			43,941			41,441
	Accumulated other comprehensive income			4,300			1,497
	Treasury stock, at cost (2,406,575 shares at September 30, 2002 and 2,261,592 shares at December 31, 2001)			(29,602	)		(26,607	)

		Total stockholders’ equity		73,156			69,849

		Total liabilities and stockholders’ equity	$	717,659		$	668,006

See accompanying notes to unaudited consolidated financial statements

WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(In Thousands Except Per Share Amounts)

				Unaudited Three Months Ended September 30,						Unaudited Nine Months Ended September 30,

				2002			2001			2002			2001

Interest and dividend income:
	Interest and fees on loans			$	7,700		$	7,474		$	22,450		$	22,287
	Interest and dividends on securities:
		Interest			2,033			2,101			6,435			6,746
		Dividends			801			799			2,309			2,444
	Interest on federal funds sold				19			12			92			200
	Other interest income				4			50			19			232

			Total interest and dividend income		10,557			10,436			31,305			31,909

Interest expense:
	Interest on deposits				2,004			2,734			6,256			8,513
	Interest on borrowings				3,204			2,970			9,431			9,535

			Total interest expense		5,208			5,704			15,687			18,048

Net interest income					5,349			4,732			15,618			13,861
Provision for loan losses					113			110			465			195

Net interest income, after provision for loan losses					5,236			4,622			15,153			13,666

Other income:
	Fee income				660			611			1,849			1,795
	Insurance commissions				223			114			516			358
	(Loss) gain on sales, disposition and impairment of securities, net				(191	)		162			(70	)		505
	Gain on sales of loans, net				206			—			206			70
	(Loss) gain on derivative instruments and hedging activities				(1	)		(14	)		1			(82	)
	Other income				13			14			43			111

			Total other income		910			887			2,545			2,757

Other expenses:
	Salaries and employee benefits				2,455			2,142			6,688			6,240
	Occupancy and equipment				561			504			1,674			1,597
	Marketing				234			143			534			516
	Professional services				320			239			751			745
	Data processing				240			233			706			678
	Other general and administrative				706			616			2,102			2,087

			Total other expenses		4,516			3,877			12,455			11,863

Income before income tax expense					1,630			1,632			5,243			4,560
Income tax expense					514			563			1,584			1,608

Net income before cumulative effect of change in accounting principle					1,116			1,069			3,659			2,952
Cumulative effect of change in accounting principle, net of tax benefit of $92					—			—			—			(161	)

			Net income	$	1,116		$	1,069		$	3,659		$	2,791

Earnings per share:
	Basic			$	0.34		$	0.30		$	1.09		$	0.78
	Diluted			$	0.31		$	0.29		$	1.01		$	0.74
Weighted average shares outstanding:
	Basic				3,327,935			3,515,910			3,354,910			3,581,826
	Diluted				3,587,761			3,720,572			3,612,359			3,762,123

See accompanying notes to unaudited consolidated financial statements

WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2002 and 2001
(In Thousands)
(Unaudited)

		Common Stock		Additional Paid-in Capital			Unearned Compensation			Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total

Balance at December 31, 2001		$	60	$	58,292		$	(4,834	)	$	41,441		$	1,497	$	(26,607	)	$	69,849

Comprehensive income:
Net income			—		—			—			3,659			—		—			3,659
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects			—		—			—			—			2,705		—			2,705
Net gain on derivative instruments			—		—			—			—			98		—			98

	Total comprehensive income																		6,462

Decrease in unearned compensation			—		299			667			—			—		—			966
Adjustment for tax benefit related to vesting of stock awards and stock option exercises			—		59			—			—			—		—			59
Treasury stock reissued in connection with Company’s stock-based incentive plan (19,017 shares)			—		(26	)		—			—			—		228			202
Cash dividends paid			—		—			—			(1,159	)		—		—			(1,159	)
Treasury stock purchased (164,000 shares)			—		—			—			—			—		(3,223	)		(3,223	)

Balance at September 30, 2002		$	60	$	58,624		$	(4,167	)	$	43,941		$	4,300	$	(29,602	)	$	73,156

Balance at December 31, 2000		$	60	$	57,954		$	(5,742	)	$	38,311		$	365	$	(20,189	)	$	70,759

Comprehensive income:
Net income			—		—			—			2,791			—		—			2,791
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects			—		—			—			—			2,933		—			2,933

	Total comprehensive income																		5,724


Decrease in unearned compensation			—		161			655			—			—		—			816
Treasury stock reissued in connection with Company’s stock-based incentive plan (500 shares)			—		—			—			—			—		6			6
Cash dividends paid			—		—			—			(782	)		—		—			(782	)
Treasury stock purchased (398,746 shares)			—		—			—			—			—		(6,056	)		(6,056	)

Balance at September 30, 2001		$	60	$	58,115		$	(5,087	)	$	40,320		$	3,298	$	(26,239	)	$	70,467

See accompanying notes to unaudited consolidated financial statements

WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

					Nine Months Ended September 30,

					2002			2001

					(In thousands)
Cash flows from operating activities:
	Net income				$	3,659		$	2,791
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses				465			195
		Net amortization (accretion) of investments				357			(15	)
		Depreciation and amortization				809			729
		Amortization of goodwill and other intangible assets				38			59
		Employee stock ownership plan expense				595			457
		Stock-based incentive plan expense				371			359
		Gain on sales, disposition and impairment of securities, net				70			(505	)
		Gain on sale of other real estate owned				—			(4	)
		Gain on sales of loans, net				(206	)		(70	)
		Proceeds from sale of loans				5,187			14,383
		Changes in operating assets and liabilities:
			Accrued interest receivable			(800	)		134
			Accrued expenses and other liabilities			(5,189	)		2,527
			Other, net			(1,796	)		247

				Net cash provided by operating activities		3,560			21,287

Cash flows from investing activities:
	Proceeds from sales of securities available for sale					7,543			3,347
	Purchases of securities available for sale					(31,597	)		(4,993	)
	Principal payments on mortgage-backed securities					22,596			21,575
	Purchases of Federal Home Loan Bank stock					(45	)		—
	Loans originations and principal collections, net					(51,164	)		(42,509	)
	Additions to premises and equipment					(215	)		(726	)
	Proceeds from sales of foreclosed real estate					3			65

				Net cash used in investing activities		(52,879	)		(23,241	)

Cash flows from financing activities:
	Net increase in deposits					34,208			27,444
	Net decrease in short-term borrowings					(2,041	)		(117,888	)
	Proceeds from issuance of long-term debt					17,120			100,000
	Net increase in mortgagors’ escrow accounts					115			827
	Cash dividends paid					(1,159	)		(782	)
	Treasury stock purchased					(3,223	)		(6,056	)
	Reissuance of treasury stock in connection with stock option exercises					202			6

				Net cash provided by financing activities		45,222			3,551

Net (decrease) increase in cash and cash equivalents						(4,097	)		1,597
Cash and cash equivalents at beginning of period						27,209			25,368

Cash and cash equivalents at end of period					$	23,112		$	26,965

Supplemental cash flow information:
	Interest paid on deposits				$	7,143		$	9,314
	Interest paid on borrowings					9,378			9,585
	Income taxes paid					1,725			1,244
	Transfer from loans to other real estate owned					3			225

See accompanying notes to unaudited consolidated financial statements

WORONOCO BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At and for the Nine Months Ended September 30, 2002

1. Unaudited Consolidated Financial Statements
The Unaudited Consolidated Financial Statements of Woronoco Bancorp, Inc. and its subsidiaries (the “Company”) included herein are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows, as of and for the periods covered herein, have been made. Certain information and note disclosures normally included in the Consolidated Financial Statements have been omitted as they are included in the most recent Securities and Exchange Commission Form 10-K and accompanying Notes to the Consolidated Financial Statements (the “Form 10-K”) filed by the Company for the year ended December 31, 2001. Management believes that the disclosures contained herein are adequate to make a fair presentation.

These unaudited consolidated financial statements should be read in conjunction with the Form 10-K.

The results for the three and nine month interim periods covered hereby are not necessarily indicative of the operating results for a full year.

2. New Accounting Pronouncements
The Company adopted the provisions of Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. As a result of the adoption of this statement, the Company no longer recognizes goodwill amortization of $6,458 each month. SFAS No. 142 also subjects goodwill to at least an annual assessment for impairment by applying a fair value based test. The Company completed a fair value assessment in June and determined that the remaining goodwill balance is not impaired. Additionally, under SFAS No. 142, acquired intangible assets should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the intent to do so. In connection with the acquisition of Keyes & Mattson Insurance Agency in November 2001, the Company recognized intangible assets totaling $150,000. These assets are being amortized over five years.

3. Earnings Per Share
Basic earnings per share represents net income 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 potential dilutive shares, such as stock options, had been issued. However, options will have a dilutive effect only when the average market price of the common stock exceeds the exercise price of the options.

The following table sets forth the calculation of basic and diluted earnings per share for the periods indicated (dollars in thousands except per share amounts).

				Unaudited Three Months Ended September 30,						Unaudited Nine Months Ended September 30,

				2002			2001			2002			2001

Net income				$	1,116		$	1,069		$	3,659		$	2,791

Weighted average shares outstanding:
	Weighted average shares outstanding				5,998,860			5,998,860			5,998,860			5,998,860
	Less: unearned ESOP shares				(335,710	)		(379,819	)		(345,889	)		(389,816	)
	Less: treasury shares				(2,335,215	)		(2,103,131	)		(2,298,061	)		(2,027,218	)

		Basic			3,327,935			3,515,910			3,354,910			3,581,826
			Effect of dilutive stock options		259,826			204,662			257,449			180,297

		Diluted			3,587,761			3,720,572			3,612,359			3,762,123

Net income per share:
	Basic			$	0.34		$	0.30		$	1.09		$	0.78
	Diluted			$	0.31		$	0.29		$	1.01		$	0.74

4. Dividends
On October 16, 2002, the Company declared a cash dividend of $0.125 per share payable on December 2, 2002 to shareholders of record as of the close of business on November 7, 2002.

5. Loan commitments
Outstanding loan commitments totaled $25.8 million at September 30, 2002 compared to $27.0 million at December 31, 2001. At September 30, 2002 and December 31, 2001, the Company had no commitments to purchase loans.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis discusses changes in the financial condition and results of operations of the Company at and for the three and nine months ended September 30, 2002 and 2001, and should be read in conjunction with the Company’s Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this document.

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, 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 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.

Except as required by applicable law and regulation, 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.

Comparison of Financial Condition at September 30, 2002 and December 31, 2001

The Company’s assets expanded $49.7 million, or 7.4%, to $717.7 million at September 30, 2002 as compared to $668.0 million at December 31, 2001 fueled by purchases of U.S. government agency securities totaling $20.7 million, an increase of $15.2 million in loans held for sale reflecting the transfer of residential mortgage loans from portfolio in the third quarter of 2002 and growth in net loans of $30.5 million, partially offset by mortgage-backed securities principal payments totaling $22.6 million. Total net loans rose 7.1% to $457.9 million at September 30, 2002 as compared to $427.4 million at December 31, 2001 reflecting strong loan origination and refinancing activity, partially offset by prepayments and payoffs of the existing portfolio, the transfer of $15.2 million of longer-term fixed rate residential mortgages to loans held for sale and the sale of $5.1 million of longer-term, fixed rate residential mortgages. Loan growth was strong in the one-to four-family and commercial real estate portfolios reflecting promotional and sales activities, the favorable interest rate environment, a solid housing market and a stable local economy. As a result of historically low interest rates, particularly for longer term fixed rate mortgages, the Company committed to sell an additional $21.0 million of loans, including the $15.2 million classified as held for sale and $5.8 million in the pipeline, to reduce interest rate risk and improve liquidity. The Company expects the sales to settle in the fourth quarter and to realize a net gain from the transactions.

The balance sheet expansion was funded primarily by growth in deposits and long term debt. Total deposits grew $34.2 million, or 10.2%, to $370.3 million at September 30, 2002 from $336.1 million at December 31, 2001 as a result of solid demand for the Company’s core deposit products as well as the net issuance of approximately $13.5 million of additional brokered deposits. Core deposits, excluding certificates of deposit and brokered deposits, rose $20.5 million, or 10.8%, to $209.8 million at September 30, 2002 from $189.3 million at December 31, 2001. Long-term debt increased $17.1 million, or 8.4%, to $222.1 million as the Company took advantage of low interest rates to support the growth in the balance sheet.

Total stockholders’ equity was $73.2 million at September 30, 2002, an increase of $3.3 million, or 4.7%, compared to $69.8 million at December 31, 2001, primarily due to net income of $3.7 million, an increase of $2.7 million in the net unrealized gain on available for sale securities and a reduction of $966,000 in unearned compensation, partially offset by cash dividends of $1.2 million and the repurchase of 164,000 shares of stock at a cost of $3.2 million.

Investments
At September 30, 2002, the Company’s securities portfolio totaled $183.0 million, or 25.5% of assets, all of which was categorized as available-for-sale. The following table sets forth information regarding the amortized cost and market values of the Company’s investment securities.

					September 30, 2002				December 31, 2001

					Amortized Cost		Fair Value		Amortized Cost		Fair Value

					(In Thousands)
Available-for-sale securities:
	Equity securities:
		Preferred stocks			$	4,899	$	4,702	$	4,116	$	4,147
		Common stocks				13,637		10,921		12,490		12,289
		Trust preferred stocks				20,013		22,486		19,600		19,586

			Total equity securities			38,549		38,109		36,206		36,022

	Debt securities:
		Mortgage-backed:
			Freddie Mac			14,091		14,866		19,689		20,323
			Fannie Mae			47,951		51,471		58,771		61,299
			Ginnie Mae			21,102		21,787		27,015		26,868
			REMICS			5,147		5,327		5,438		5,405

				Total mortgage-backed securities		88,291		93,451		110,913		113,895

		Other:
			U.S. agency			28,328		29,191		7,944		8,393
			Municipal bonds			21,457		22,236		18,340		17,398

				Total other debt securities		49,785		51,427		26,284		25,791

				Total debt securities		138,076		144,878		137,197		139,686

				Total available-for-sale securities	$	176,625	$	182,987	$	173,403	$	175,708

Securities available for sale balances increased $7.3 million, or 4.1%, primarily due to purchases of agency and municipal securities totaling $20.7 million and $3.1 million, respectively, and a $4.1 million increase in the unrealized gain on available for sale securities, partially offset by mortgage-backed security principal payments of $22.6 million. The Company purchased government agency securities with original maturities of two to three years in anticipation of accelerated cash flows from the mortgage-backed securities portfolio. Management believes these securities will enhance net interest income as a result of positive interest rate spreads, position the balance sheet for expected future rate increases and improve liquidity. These securities can also be used as collateral for certain borrowings. The Company also invested in additional municipal bonds to capitalize on the favorable income tax treatment, attractive yields and spreads, call protection for six to ten years, significant insurance coverage and excellent credit ratings. The increase in the unrealized gain on available for sale securities mainly reflects lower market interest rates.

Lending Activities
At September 30, 2002, the Company’s net loan portfolio was $457.9 million, or 63.8%, of total assets. The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the respective portfolio.

			September 30, 2002						December 31, 2001

			Amount			Percent of Total			Amount			Percent of Total

			(Dollars In Thousands)
Real estate loans
	One- to four-family		$	263,061			55.15	%	$	245,990			55.62	%
	Multi-family			32,393			6.79	%		33,821			7.65	%
	Commercial			53,204			11.15	%		36,221			8.19	%
	Construction and development			19,582			4.11	%		16,145			3.65	%

		Total real estate loans		368,240			77.20	%		332,177			75.11	%

Consumer loans
	Home equity loans			85,189			17.86	%		84,117			19.02	%
	Automobile			9,207			1.93	%		12,174			2.75	%
	Other			3,043			0.64	%		3,382			0.76	%

		Total consumer loans		97,439			20.43	%		99,673			22.53	%

Commercial loans				11,304			2.37	%		10,447			2.36	%

		Total loans		476,983			100.00	%		442,297			100.00	%

Less:
	Unadvanced loan funds (1)			(16,722	)					(13,070	)
	Deferred loan origination costs			760						883
	Allowance for loan losses			(3,144	)					(2,701	)

		Net loans	$	457,877					$	427,409

(1) Includes committed but unadvanced loan amounts.

Loan origination and refinancing volume totaled $134.4 million for the first nine months of 2002, contributing to growth in gross loans of $34.7 million, or 7.8%. The continued strength in the Company’s level of loan closings was due to several factors including promotional and sales activities, a strong housing market, a favorable interest rate environment and a stable local economy. Other factors affecting the Company’s outstanding gross loan balances include prepayments and amortization of the existing portfolio, the transfer of $15.2 million of longer-term fixed-rate one-to four-family residential mortgages to loans held for sale, the sale of $5.1 million of fixed rate one-to four-family residential loans and advances on commercial construction lines.

Non-performing Assets
The following table sets forth information regarding nonaccrual loans, real estate owned and restructured loans.

			September 30, 2002			December 31, 2001

			(Dollars in Thousands)
Nonaccruing loans:
	Real estate:
		One- to four- family	$	880		$	243
		Commercial		—			—
	Home equity loans			58			11
	Other consumer			13			290
	Commercial loans			12			12

		Total		963			556
Other real estate owned, net (1)				—			—

	Total non-performing assets			963			556
Troubled debt restructurings				—			—

Troubled debt restructurings and total non-performing assets			$	963		$	556

Total non-performing loans and troubled debt restructurings as a percentage of total loans (2) (3)				0.21	%		0.13	%
Total non-performing assets and troubled debt restructurings as a percentage of total assets (3)				0.13	%		0.08	%

(1)	Other real estate owned balances are shown net of related allowances.
(2)	Total loans includes loans, less unadvanced loan funds, plus net deferred loan costs
(3)	Non-performing assets consist of nonperforming loans and other real estate owned, net. Non-performing 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.

The Company experienced an increase of $637,000 in one- to four- family residential real estate non-accrual loans during the nine months ended September 30, 2002 from December 31, 2001 as several loans became past due for ninety days or more. These loans are fully secured by real estate. Other consumer non-accrual loans declined $277,000 to $13,000 at September 30, 2002, as the Company used the proceeds from the liquidation of pledged stock collateral to payoff in full two consumer non-accrual loans totaling $290,000.

Allowance for Loan Losses

Management prepares a loan loss sufficiency analysis on a quarterly basis based upon the loan portfolio composition, asset classifications, loan-to-value ratios of loans in portfolio, impairments in the loan portfolio, historical loan loss experience and other relevant factors. This analysis is compared to actual losses, peer group data and economic trends and conditions. The allowance for loan losses is maintained through the provision for loan losses, which is charged to operations.

The allowance for loan losses is maintained at an amount that management considers adequate to cover estimated losses in its loan portfolio based on management’s on-going evaluation of the risks inherent in its loan portfolio, consideration of trends in delinquency and impaired loans, the amount of charge-offs and recoveries, volume of loans, changes in risk selection, credit concentrations, national and regional economies and the real estate market in the Company’s primary lending area. The Company believes that the current allowance for loan losses accurately reflects the level of risk in the current loan portfolio. The Company’s loan loss allowance determinations also incorporate factors and analyses which consider the principal loss associated with the loan. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company’s methodology for assessing the adequacy of the loan loss allowance consists of a review of the components, which includes a specific allowance for identified problem and impaired loans and a general allowance for current performing loans. All loans are considered in the evaluation, whether on an individual or group basis. Changes in the balances of problem and impaired loans affect the specific reserve, while changes in volume and concentrations of current performing loans affects the general reserve and the allocation of the allowance of the loan losses among loan types.

The specific allowance incorporates the results of measuring impairment for specifically identified non-homogeneous problem loans in accordance with SFAS No. 114. In accordance with SFAS No. 114, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the contractual terms of the loan agreement. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the Company expects to collect all amounts due including interest accrued at the contractual rate during the period of delay. Impairment can be measured based on present value of the expected future principal and interest cash flows discounted at the loan’s effective interest rate or the Company may measure impairment based on a loan’s observable market price or the fair market value of the collateral, if the loan is collateral dependent. Larger groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, such as residential real estate mortgages, home equity loans and consumer and installment loans, are not included within the scope of SFAS No. 114.

The general allowance is calculated by applying reserve percentages to outstanding loans by type, excluding loans for which a specific allowance has been determined. As part of this analysis, each quarter management prepares an allowance for loan losses summary worksheet in which the loan portfolio is categorized by risk characteristics such as loan type and loan grade. Changes in the mix of loans and the internal loan grades affect the amount of the formula allowance. Reserve percentages are assigned to each category based on the Company’s assessment of each category’s inherent risk. In determining the reserve percentages to apply to each loan category, management considers historical losses, peer group comparisons, industry data and loss percentages used by banking regulators for similarly graded loans. Reserve percentages may be adjusted for qualitative factors that, in management’s judgement, affect the collectibility of the portfolio as of the evaluation date. Classified loan loss factors are derived from loss percentages utilized by banking regulators for similarly

graded loans. Reserve percentages of 5%, 15% and 50% are applied to the outstanding balance of loans internally classified as special mention, substandard and doubtful, respectively.

Performing loan loss reserve percentages are based on actual losses for the previous three years adjusted for qualitative factors, such as new loan products, credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations and specific industry conditions within portfolio segments that exist at the balance sheet date. The reserve percentages are applied to outstanding loans by loan type.

The Company’s methodologies include several factors that are intended to reduce the difference between estimated and actual losses. The reserve percentages that are used to establish the allowance for current performing loans are designed to be self-correcting by taking into account changes in loan classification, loan concentrations and loan volumes and by permitting adjustments based on management’s judgements of qualitative factors as of the evaluation date. Similarly, by basing the current performing loan reserve percentages on loss experience over the prior three years, the methodology is designed to take the Company’s recent loss experience into account.

The Company’s allowance methodology has been applied on a consistent basis. Based on this methodology, it believes that it has established and maintained the allowance for loan losses at adequate levels. However, future adjustments to the allowance for loan losses may be necessary if economic, real estate, loan growth and portfolio diversification and other conditions differ substantially from the current operating environment, resulting in estimated and actual losses differing substantially.

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 for the Massachusetts Department of Banking, which can order the establishment of additional allocated or general 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 its allowance for loan losses, thereby negatively affecting the Company’s financial condition and earnings.

The following table sets forth activity in the allowance for loan losses for the periods set forth.

			At or for the Nine Months Ended September 30,

			2002			2001

			(Dollars in Thousands)

Allowance for loan losses, beginning of period			$	2,701		$	2,590
Charged-off loans:
	Real estate			—			—
	Consumer			84			85

		Total charged-off loans		84			85

Recoveries on loans previously charged-off:
	Real estate			34			9
	Commercial			4			—
	Consumer			24			20

		Total recoveries		62			29

Net loans charged-off				22			56
Provision for loan losses				465			195

Allowance for loan losses, end of period			$	3,144		$	2,729

Net loans charged-off to average interest-earning loans				0.01	%		0.02	%
Allowance for loan losses to total loans (1)				0.68	%		0.63	%
Allowance for loan losses to non-performing loans and troubled debt restructurings (2)				326.48	%		5149.06	%
Net loans charged-off to allowance for loan losses				0.93	%		2.74	%
Recoveries to charge-offs				73.81	%		34.12	%

(1)	Total loans includes loans, less unadvanced loan funds, plus net deferred loan costs.
(2)	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.

Deposits
The following table sets forth the distribution of deposit accounts for the periods indicated.

		September 30, 2002					December 31, 2001

		Balance		Percent of Total Deposits			Balance		Percent of Total Deposits

		(Dollars In Thousands)
Demand deposits		$	23,478		6.34	%	$	20,077		5.97	%
Savings			76,929		20.78	%		71,490		21.27	%
Money market			42,013		11.35	%		34,289		10.20	%
NOW			67,390		18.20	%		63,426		18.87	%
Brokered deposits			43,107		11.64	%		29,630		8.82	%
Certificates of deposit			117,351		31.69	%		117,148		34.87	%

	Total deposits	$	370,268		100.00	%	$	336,060		100.00	%

Core deposits, which excludes brokered deposits and certificates of deposit, increased $20.5 million, or 10.8%, to $209.8 million at September 30, 2002 from $189.3 million at December 31, 2001. The strong growth in core deposit balances reflects aggressive marketing efforts. Brokered deposits grew $13.5 million to $43.1 million at September 30, 2002 resulting from the net issuance of certificates of deposit. The Company utilizes brokered certificates of deposit to support asset growth when such instruments bear an attractive rate as compared to alternative funding sources.

Comparison of Operating Results for the Three Months Ended September 30, 2002 and 2001

General
The Company reported net income of $1.1 million, or $0.31 per diluted share, for the quarter ended September 30, 2002 compared to net income of $1.1 million, or $0.29 per diluted share, for the same period in 2001. Excluding write-downs of certain equity securities totaling $297,000, a gain of $206,000 from the sale of mortgage loans and the net tax benefit of $27,000 related to these items, net income for the third quarter of 2002 would have been $1.2 million, or $0.33 per diluted share. Net income per diluted share, adjusted for these items, improved $0.04, or 13.8%, to $0.33 in the third quarter of 2002 from $0.29 for the same period in 2001 mainly reflecting growth in average interest-earning assets and core deposits, net interest margin expansion and higher fee income and insurance commissions, offset somewhat by increased other expenses.

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.

The following table sets forth, for the periods indicated, average balances, interest income and expense and yields earned or rates paid on the major categories of assets and liabilities. The average yields and costs are derived by dividing interest income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown. The yields and costs are annualized. Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields. Loan interest and yield data does not include any accrued interest from nonaccruing loans.

												For the Three Months Ended September 30,

												2002								2001

												Average Balance		Interest			Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate

												(Dollars in Thousands)
Interest-earning assets: (1)
				Investments:
							Mortgage-backed securities					$	96,690	$	1,536			6.35	%	$	128,407	$	2,101		6.54	%
							U.S. Government and agency securities						28,924		250			3.46	%		—		—		—
							Equity securities						50,868		801			6.30	%		50,495		799		6.33	%
							State and municipal securities (2)						21,501		374			6.96	%		—		—		—
				Loans: (3)
							Residential real estate loans						297,815		4,927			6.62	%		273,485		4,891		7.15	%
							Commercial real estate loans						57,869		1,079			7.46	%		36,751		735		8.00	%
							Consumer loans						96,787		1,498			6.14	%		100,944		1,694		6.66	%
						Commercial loans							11,480		196			6.68	%		8,226		154		7.33	%

											Loans, net		463,951		7,700			6.64	%		419,406		7,474		7.13	%
			Other										6,710		23			1.34	%		8,150		62		2.98	%

											Total interest-earning assets		668,644		10,684			6.39	%		606,458		10,436		6.88	%

Noninterest-earning assets													39,240								34,559

											Total assets	$	707,884							$	641,017

Interest-bearing liabilities:
			Deposits:
					Money market accounts							$	41,633	$	207			1.97	%	$	30,292	$	210		2.75	%
					Savings accounts (4)								78,632		193			0.97	%		71,087		337		1.88	%
					NOW accounts								65,797		179			1.08	%		60,061		248		1.64	%
					Certificates of deposit (5)								163,604		1,425			3.46	%		165,822		1,939		4.64	%

										Total interest-bearing deposits			349,666		2,004			2.27	%		327,262		2,734		3.31	%
			Borrowings										257,595		3,204			4.87	%		220,157		2,970		5.28	%

										Total interest-bearing liabilities			607,261		5,208			3.40	%		547,419		5,704		4.13	%

			Demand deposits										22,326								17,980
		Other noninterest-bearing liabilities											4,648								3,622

									Total liabilities				634,235								569,021
	Total stockholders’ equity												73,649								71,996

								Total liabilities and stockholders’ equity				$	707,884							$	641,017

Net interest-earning assets												$	61,383							$	59,039


Tax equivalent net interest income/interest rate spread (6)															5,476			2.99	%				4,732		2.75	%

Tax equivalent net interest margin as a percentage of interest-earning assets (7)																		3.28	%						3.12	%

Ratio of interest-earning assets to interest-bearing liabilities																		110.11	%						110.78	%

Less: tax equivalent adjustment (2)															(127	)							—

Net interest income as reported on income statement														$	5,349							$	4,732

(1)	Includes related assets available-for-sale and unamortized discounts and premiums.
(2)	State and municipal securities income and net interest income are presented on a tax equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amount reported in the income statement.
(3)	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.
(4)	Savings accounts include mortgagors’ escrow deposits.
(5)	Certificates of deposit include brokered deposits.
(6)	Tax equivalent net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(7)	Tax equivalent net interest margin represents tax equivalent net interest income divided by average interest-earning assets.

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.

					Three Months Ended September 30, 2002 compared to 2001

					Increase (Decrease) Due to

					Volume			Rate			Net

					(In Thousands)
Interest-earning assets:
	Mortgage-backed securities				$	(506	)	$	(59	)	$	(565	)
	U.S. Government and agency securities					250			—			250
	Equity securities					6			(4	)		2
	State and municipal securities (1)					374			—			374
	Loans:
		Residential real estate loans				418			(382	)		36
		Commercial real estate loans				397			(53	)		344
		Consumer loans				(68	)		(128	)		(196	)
		Commercial loans				57			(15	)		42

			Total loans			804			(578	)		226
	Other					(10	)		(29	)		(39	)

			Total interest-earning assets		$	918		$	(670	)	$	248

Interest-bearing liabilities:
	Deposits:
		Money market accounts			$	66		$	(69	)	$	(3	)
		Savings accounts (2)				33			(177	)		(144	)
		NOW accounts				22			(91	)		(69	)
		Certificates of deposit (3)				(26	)		(488	)		(514	)

			Total deposits			95			(825	)		(730	)
	Borrowings					478			(244	)		234

				Total interest-bearing liabilities		573			(1,069	)		(496	)

Increase in net interest income (4)					$	345		$	399		$	744

(1)	The changes in state and municipal income are reflected on a tax equivalent basis.
(2)	Includes interest on mortgagors’ escrow deposits.
(3)	Includes interest on brokered certificates of deposit.
(4)	The changes in net interest income are reflected on a tax equivalent basis and thus do not correspond to the income statement.

Net interest income, on a tax equivalent basis, totaled $5.5 million for the three months ended September 30, 2002, an increase of $744,000, or 15.7%, compared to $4.7 million for the same period in 2001, mainly driven by growth in average interest-earning assets and improvement in the net interest margin. Net interest margin, on a tax equivalent basis, expanded by 16 basis points to 3.28% for the third quarter of 2002 from the same period in 2001 largely resulting from the lower cost of average interest-bearing liabilities, partially offset by higher average borrowings to fund balance sheet growth and reduced yields on average interest-earning assets. The reduced yields earned and rates paid for the period were principally due to the lower interest rate environment.

Interest and dividend income, on a tax equivalent basis, rose $248,000, or 2.4%, to $10.7 million for the three months ended September 30, 2002 compared to $10.4 million for the same period last year, mainly reflecting growth in average interest-earning assets partially offset by a decrease in the yield on average interest-earning assets. Average interest-earning assets totaled $668.6 million for the third quarter of 2002 compared to $606.5 million for the same period last year, an increase of $62.1 million, or 10.3%. Average loans increased $44.5 million, or 10.6%, primarily due to strong one-to four-family residential real estate and commercial real estate loan origination and refinancing volume, somewhat mitigated by amortization and prepayments of the existing portfolio. The higher levels of refinancing and prepayment activity were due in part to the lower interest rate environment. The increase in the average balances of agency and municipal securities totaling $50.4 million reflects purchases in the fourth quarter of 2001 and first quarter of 2002. Average mortgage-backed securities fell $31.7 million to $96.7 million for the third quarter of 2002, primarily reflecting normal amortization and prepayments. The yield on average interest-earning assets declined 49 basis points to 6.39% in the three months ended September 30, 2002, mainly as a result of the lower interest rate environment which led to reduced yields on new assets as well as the repricing of a portion of the Company’s existing assets.

Total interest expense declined $496,000, or 8.7%, to $5.2 million for the three months ended September 30, 2002 from $5.7 million for the same period in 2001, resulting primarily from lower rates paid on average interest-bearing liabilities, partially offset by growth in average borrowings to fund balance sheet growth and share repurchases. Rates paid on average interest-bearing liabilities fell 73 basis points to 3.40% for the third quarter of 2002, largely reflecting a significant reduction in market interest rates. The lower interest rate environment led to a decrease in rates paid for new deposits and borrowings and the repricing of a portion of the Company’s outstanding deposits and FHLB advances. Average interest-bearing liabilities rose $59.9 million, or 10.9% to $607.3 million for the three months ended September 30, 2002 from $547.4 million for the same period in 2001 reflecting strong growth in core deposits and an increase in FHLB advances.

Provision for Loan Losses
The provision for loan losses was $113,000 for the third quarter of 2002 compared to $110,000 for the same period in 2001. The Company’s provision for loan losses was stable during the periods as a result of similar changes to loan concentrations, including increases in commercial and commercial real estate loans, and comparable reductions in non-performing loans. The allowance for loan losses is maintained through provisions for loan losses.

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 loan losses inherent in the portfolio 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
During the third quarter of 2002, the Company recognized a gain of $206,000 from the sale of residential mortgage loans and write-downs of equity securities totaling $297,000. Excluding these items, total other income rose $114,000, or 12.9%, to $1.0 million for the three months ended September 30, 2002 from $887,000 in the third quarter of 2001 primarily due to higher fee income and insurance commissions, partially offset by lower realized gains on sales of securities. Fee income increased $49,000, or 8.0%, to $660,000 in the third quarter of 2002 from $611,000 in the same period in 2001 reflecting strong expansion in core deposit balances. Insurance commissions totaled $223,000 for the three months ended September 30, 2002, an increase of $109,000, or 95.6%, compared to $114,000 in the third quarter of 2001 mainly resulting from the effect of the November 2001 acquisition of Keyes and Mattson Insurance Agency and new customers obtained in 2002 as a result of successful marketing and business development efforts.

Other Expenses
Other expenses rose $639,000, or 16.5%, to $4.5 million for the third quarter of 2002 compared to $3.9 million for the 2001 period mainly due to increases in several categories of expenses including salaries and benefits, occupancy and equipment, marketing, professional services and other. Total salaries and benefits grew $313,000, or 14.6%, to $2.5 million for the third quarter of 2002 reflecting costs associated with increased staffing levels as a result of the acquisition of Keyes & Mattson Insurance Agency in November 2001, new employees hired to support the general growth of the Company, higher employee stock ownership plan expenses related to an increase in the Company’s average share price and standard wage increases. Occupancy and equipment costs rose $57,000, or 11.3 %, to $561,000 for the three months ended September 30, 2002 primarily due to the impact of an office obtained as part of the November 2001 acquisition of Keyes & Mattson Insurance Agency and increased depreciation costs related to additional investments in technology and other capital assets. Marketing expenses expanded $91,000, or 63.6%, to $234,000 for the third quarter of 2002 as a result of increased promotional activities. Professional service costs were up $81,000, or 33.9%, to $320,000 largely resulting from expenses related to the establishment of a new, directors’ retirement plan. Other expenses increased $90,000, or 14.6%, to $706,000 mainly due to costs associated with the Company’s larger deposit base and higher investor relations expenses.

Income Taxes
The Company’s income tax expense for the third quarter of 2002 included the net tax benefit of $29,000 associated with write-downs of equity securities totaling $297,000 and the gain of $206,000 from loan sales. Excluding this benefit, income tax expense decreased $20,000, or 3.6%, to $543,000 for the third quarter of 2002 compared to the same period in 2001. The decrease in income taxes was primarily attributable to a reduced effective tax rate, partially offset by an increase in income before taxes. The Company’s effective tax rate fell to 31.5% for the third quarter of 2002 from 34.5% in 2001 primarily as a result of the purchase of municipal securities, which are exempt from federal taxes.

Comparison of Operating Results for the Nine Months Ended September 30, 2002 and 2001

General
For the nine months ended September 30, 2002, the Company reported net income of $3.7 million, or $1.01 per diluted share, compared to net income of $2.8 million, or $0.74 per diluted share, for the same period in 2001. Excluding a $644,000 pension termination gain, write-downs of equity securities totaling $468,000, a gain of $206,000 from the sale of mortgage loans and the related net tax expense of $117,000, net income for the first nine months of 2002 would have been $3.4 million, or $0.94 per diluted share. Excluding a loss of $311,000 recognized as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and an associated tax benefit of $108,000, the Company’s net income for the nine months ended September 30, 2001 would have been $3.0 million, or $0.80 per diluted share. Net income per diluted share, adjusted for these items, improved $0.14, or 17.5%, to $0.94 for the nine months ended September 30, 2002 from $0.80 for the same period in 2001 reflecting lower rates paid on deposits and FHLB advances, growth in average earning assets and lower-cost core deposits and higher fee income and insurance commissions, partially offset by increased provision for loan losses and other expenses.

								For the Nine Months Ended September 30,

								2002								2001

								Average Balance		Interest			Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate

								(Dollars in Thousands)
Interest-earning assets: (1)
	Investments:
				Mortgage-backed securities				$	102,824	$	4,969			6.44	%	$	135,915	$	6,746		6.62	%
				U.S. Government and agency securities					25,959		732			3.76	%		—		—		—
				Equity securities					50,657		2,309			6.08	%		49,148		2,444		6.63	%
				State and municipal securities (2)					20,700		1,112			7.16	%		—		—		—
	Loans: (3)
				Residential real estate loans					289,200		14,517			6.69	%		261,379		14,285		7.29	%
				Commercial real estate loans					51,081		2,903			7.58	%		33,945		2,146		8.43	%
				Consumer loans					96,847		4,462			6.16	%		99,725		5,468		7.33	%
				Commercial loans					11,035		568			6.79	%		6,535		388		7.83	%

							Loans, net		448,163		22,450			6.68	%		401,584		22,287		7.40	%
	Other								9,667		111			1.51	%		13,312		432		4.28	%

							Total interest-earning assets		657,970		31,683			6.42	%		599,959		31,909		7.09	%

Noninterest-earning assets									39,004								34,882

							Total assets	$	696,974							$	634,841

Interest-bearing liabilities:
	Deposits:
				Money market accounts				$	38,888	$	611			2.10	%	$	28,653	$	623		2.91	%
				Savings accounts (4)					77,032		744			1.29	%		69,426		982		1.89	%
			NOW accounts						64,467		552			1.14	%		55,989		721		1.72	%
			Certificates of deposit (5)						164,521		4,349			3.53	%		163,746		6,187		5.05	%

						Total interest-bearing deposits			344,908		6,256			2.43	%		317,814		8,513		3.58	%
	Borrowings								254,086		9,431			4.89	%		224,756		9,535		5.59	%

						Total interest-bearing liabilities			598,994		15,687			3.50	%		542,570		18,048		4.45	%

	Demand deposits								21,065								16,841
	Other noninterest-bearing liabilities								4,673								3,876

		Total liabilities							624,732								563,287
	Total stockholders’ equity								72,242								71,554

					Total liabilities and stockholders’ equity			$	696,974							$	634,841

	Net interest-earning assets							$	58,976							$	57,389


	Tax equivalent net interest income/interest rate spread (6)										15,996			2.92	%				13,861		2.64	%

	Tax equivalent net interest margin as a percentage of interest-earning assets (7)													3.24	%						3.08	%

	Ratio of interest earning assets to interest-bearing liabilities													109.85	%						110.58	%

	Less: tax equivalent adjustment (2)										(378	)							—

	Net interest income as reported on income statement									$	15,618							$	13,861

(1)	Includes related assets available-for-sale and unamortized discounts and premiums.
(2)	State and municipal securities income and net interest income are presented on a tax equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amount reported in the income statement.
(3)	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.
(4)	Savings accounts include mortgagors’ escrow deposits.
(5)	Certificates of deposit include brokered deposits.
(6)	Tax equivalent net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(7)	Tax equivalent net interest margin represents tax equivalent net interest income divided by average interest-earning assets.

				Nine Months Ended September 30, 2002 compared to 2001

				Increase (Decrease) Due to

				Volume			Rate			Net

				(In Thousands)
Interest-earning assets:
	Mortgage-backed securities			$	(1,603	)	$	(174	)	$	(1,777	)
	U.S. Government and agency securities				732			—			732
	Equity securities				73			(208	)		(135	)
	State and municipal securities (1)				1,112			—			1,112
	Loans:
		Residential real estate loans			1,450			(1,218	)		232
		Commercial real estate loans			992			(235	)		757
		Consumer loans			(154	)		(852	)		(1,006	)
		Commercial loans			238			(58	)		180

			Total loans		2,526			(2,363	)		163
	Other				(95	)		(226	)		(321	)

			Total interest-earning assets	$	2,745		$	(2,971	)	$	(226	)

Interest-bearing liabilities:
	Deposits:
		Money market accounts		$	188		$	(200	)	$	(12	)
		Savings accounts (2)			99			(337	)		(238	)
		NOW accounts			98			(267	)		(169	)
		Certificates of deposit (3)			29			(1,867	)		(1,838	)

			Total deposits		414			(2,671	)		(2,257	)
	Borrowings				1,165			(1,269	)		(104	)

			Total interest-bearing liabilities		1,579			(3,940	)		(2,361	)

Increase in net interest income (4)				$	1,166		$	969		$	2,135

(1)	The changes in state and municipal income are reflected on a tax equivalent basis.
(2)	Includes interest on mortgagors’ escrow deposits.
(3)	Includes interest on brokered certificates of deposit.
(4)	The changes in net interest income are reflected on a tax equivalent basis and thus do not correspond to the income statement.

Net interest income, on a tax equivalent basis, totaled $16.0 million for the nine months ended September 30, 2002, an increase of $2.1 million, or 15.4%, compared to $13.9 million for the same period in 2001, mainly driven by net interest margin expansion and growth in average interest-earning assets. Net interest margin, on a tax equivalent basis, improved by 16 basis points to 3.24% for the first nine months of 2002 from the same period in 2001, largely due to lower funding costs, offset to some extent by higher average borrowings to fund balance sheet growth and reduced yields on interest-earning assets.

Interest and dividend income, on a tax equivalent basis, declined $226,000, or 0.7%, to $31.7 million for the nine months ended September 30, 2002, compared to the same period last year, mainly reflecting a decrease in the yield on interest-earning assets partially offset by growth in average interest-earning assets. The yield on interest-earning assets declined 67 basis points to 6.42% in the nine months ended September 30, 2002, mainly as a result of the lower interest rate environment which led to reduced yields on new assets, as well as the repricing of a portion of the Company’s existing assets. Average interest-earning assets totaled $658.0 million for the first nine months of 2002 compared to $600.0 million for the same period last year, representing an increase of $58.0 million, or 9.7%. Average loans increased $46.6 million, or 11.6%, primarily due to strong one-to four-family residential real estate and commercial real estate loan origination and refinancing volume, somewhat mitigated by amortization and prepayments of the existing portfolio. The higher levels of refinancing and prepayment activity were due in part to the lower interest rate environment. The increase in the average balances of agency and municipal securities totaling $46.7 million reflects purchases in the fourth quarter of 2001 and the first quarter of 2002. Average mortgage-backed securities fell $33.1 million to $102.8 million for the first nine months of 2002 primarily reflecting normal amortization and prepayments.

Total interest expense declined $2.3 million, or 13.1%, to $15.7 million for the nine months ended September 30, 2002 from $18.0 million for the same period in 2001 resulting primarily from lower rates paid on interest-bearing liabilities, partially offset by growth in average interest-bearing liabilities to fund balance sheet growth and share repurchases. Rates paid on interest-bearing liabilities fell 95 basis points to 3.50% for the first nine months of 2002, largely reflecting a significant reduction in market interest rates and, to a lesser extent, growth in lower-cost core deposits. The lower interest rate environment led to a decrease in rates paid for new deposits and borrowings and the repricing of a portion of the Company’s outstanding deposits and FHLB advances. Average interest-bearing liabilities rose $56.4 million, or 10.4% to $599.0 million for the nine months ended September 30, 2002 from $542.6 million for the same period in 2001 reflecting strong growth in core deposits and an increase in FHLB advances.

Provision for Loan Losses
The Company’s provision for loan losses increased $270,000 to $465,000 for the nine months ended September 30, 2002 from $195,000 for the same period in 2001. This increase was due to several factors including stronger loan growth, changes to loan concentrations including increases in commercial and commercial mortgage loans and the reclassification of several residential 1-4 family mortgage loans to lower credit grades due to delinquency.

Other Income
Excluding the $206,000 gain on sales of loans and the write-downs of equity securities totaling $468,000 in the first nine months of 2002, total other income rose $50,000, or 1.8%, to $2.8 million for the nine months ended September 30, 2002 from the same period in 2001. The expansion in other income was primarily due to higher fee income and insurance commissions, partially offset by lower realized gains on sales of securities and covered call option income. Fee income increased $54,000, or 3.0%, to $1.8 million for the first nine months of 2002 compared to the same period in 2001 reflecting expansion in core deposit balances. Insurance commissions totaled $516,000 for the nine months ended September 30, 2002, an increase of $158,000, or 44.1%, compared to $358,000 in the third quarter of 2001 mainly resulting from the effect of the November

2001 acquisition of Keyes and Mattson Insurance Agency and new customers obtained in 2002 as a result of successful marketing and business development efforts.

Other Expenses
Excluding the $644,000 pension termination gain, other expenses increased $1.2 million, or 10.4%, to $13.1 million for the first nine months of 2002 compared to $11.9 million for the 2001 period, mainly as a result of higher salaries and benefits, and to a lesser extent, occupancy and equipment costs. Total salary and benefits, exclusive of the $644,000 pension termination gain, grew $1.1 million, or 17.5%, to $7.3 million for the nine months ended September 30, 2002, reflecting costs associated with increased staffing levels as a result of the acquisition of Keyes & Mattson Insurance Agency in November 2001, new employees hired to support the general growth of the Company, higher employee stock ownership plan expenses related to an increase in the Company’s average share price and standard wage increases. Occupancy and equipment costs rose $77,000, or 4.8%, to $1.7 million in the first nine months of 2002 primarily due to an office obtained as part of the November 2001 acquisition of Keyes & Mattson Insurance Agency and increased depreciation costs related to additional investments in technology and other capital assets.

Income Taxes
In 2002, the Company recorded a net tax expense of $117,000 associated with the $644,000 pension termination gain, the gain of $206,000 on the sale of loans and write-downs of securities totaling $468,000. During 2001, the Company recognized a tax benefit of $108,000 associated with the adoption of SFAS No. 133. Excluding these items, income tax expense decreased $249,000, or 14.5%, to $1.5 million for the nine months ended September 30, 2002 compared to the same period in 2001. The decrease in income taxes was primarily attributable to a reduced effective tax rate, partially offset by an increase in income before taxes. The Company’s effective tax rate fell to 30.2% for the nine months ended September 30, 2002 from 35.2% in 2001, primarily as a result of the purchase of municipal securities, which are exempt from federal taxes.

Liquidity
Liquidity and funding strategies are the responsibility of the Bank’s Asset/Liability Management Committee (the “ALCO”). The ALCO is responsible for establishing liquidity targets and implementing strategies to meet desired goals. Liquidity is measured by the Bank’s ability to raise cash within 30 days at a reasonable cost and with a minimum of loss. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investment securities and borrowings from the FHLB-Boston. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The primary investing activities of the Bank are the origination of loans, primarily residential one-to four-family mortgage loans and consumer loans, mainly 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, and other types of consumer loans, as well as the purchase of mortgage-backed, agency, municipal and equity securities. During the nine months ended September 30, 2002, the Bank’s loan originations totaled $134.4 million. At September 30, 2002, the Bank’s investments in debt and equity securities totaled $183.0 million. During the nine months ended September 30, 2002, total deposits increased $34.2 million, including the net issuance of approximately $13.5 million of brokered certificates of deposit. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Bank and its local competitors and other factors. The Bank closely monitors its liquidity position on a daily basis. If the Bank requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances. At September 30, 2002, the Bank had $264.0 million of FHLB borrowings.

Outstanding loan commitments totaled $25.8 million at September 30, 2002. Management of the Bank anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit, which are scheduled to mature in one year or less from September 30, 2002, totaled $86.6 million. The Bank relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. From time to time, the Bank will also offer competitive special products to its customers to increase retention and to attract new deposits. Based upon the Bank’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Bank.

The primary sources of funding for Woronoco Bancorp, Inc. (the “Corporation”), the holding company for the Bank, are dividend payments from the Bank, and, to a lesser extent, earnings on deposits of the Corporation. Dividend payments by the Bank have primarily been used to pay dividends and fund stock repurchase programs. The Bank’s ability to pay dividends and other capital distributions to the Corporation is generally limited by the Massachusetts banking regulations and regulations of the Federal Deposit Insurance Corporation. Additionally, the Massachusetts Banking Commissioner and Federal Deposit Insurance Corporation may prohibit the payment of dividends, which are otherwise permissible by regulation, for safety and soundness reasons.

Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk weighted assets and to average assets. Management believes, as of September 30, 2002, that the Bank met all capital adequacy requirements to which it was subject. As of September 30, 2002, 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.

The Company’s and Bank’s actual capital amounts and ratios as of September 30, 2002 and December 31, 2001 are also presented in the table.

		Actual					Minimum for Capital Adequacy Purposes					Minimum to be Well Capitalized Under Prompt Corrective Action Provisions

		Amount		Ratio			Amount		Ratio			Amount		Ratio

		(In Thousands)
As of September 30, 2002:
Total Capital to Risk Weighted Assets
	Company	$	68,067		15.0	%		N/A		N/A			N/A		N/A
	Bank	$	59,147		13.1	%	$	36,242		8.0	%	$	45,302		10.0	%
Tier 1 Capital to Risk Weighted Assets
	Company	$	64,923		14.3	%		N/A		N/A			N/A		N/A
	Bank	$	56,003		12.4	%	$	18,121		4.0	%	$	27,181		6.0	%
Tier 1 Capital to Average Assets
	Company	$	64,923		9.3	%		N/A		N/A			N/A		N/A
	Bank	$	56,003		8.0	%	$	27,968		4.0	%	$	34,960		5.0	%

	As of December 31, 2001:
Total Capital to Risk Weighted Assets
	Company	$	68,973		15.4	%		N/A		N/A			N/A		N/A
	Bank	$	57,930		13.0	%	$	35,779		8.0	%	$	44,724		10.0	%
Tier 1 Capital to Risk Weighted Assets
	Company	$	66,272		14.8	%		N/A		N/A			N/A		N/A
	Bank	$	55,229		12.3	%	$	17,890		4.0	%	$	26,835		6.0	%
Tier 1 Capital to Average Assets
	Company	$	66,272		10.2	%		N/A		N/A			N/A		N/A
	Bank	$	55,229		8.5	%	$	26,016		4.0	%	$	32,520		5.0	%

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information regarding quantitative and qualitative disclosure about market risk is presented in the Securities and Exchange Commission Form 10-K filed by the Company for the year ended December 31, 2001. There have been no material changes in the Company’s market risk since December 31, 2001.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Company’s disclosure controls and procedures were adequate.

(b) Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of evaluation of those controls by the chief executive officer and chief financial officer.

PART II. OTHER INFORMATION

Item 1.	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 2.	Changes in Securities and Use of Proceeds.

None.

Item 3.	Defaults Upon Senior Securities.

None.

Item 4.	Submission of Matters to a Vote of Security Holders.

None.

Item 5.	Other Information.

None.

Item 6.	Exhibits and Reports on Form 8-K (§249.308 of this Chapter).

	(a)	Exhibits

		3.1	Certificate of Incorporation of Woronoco Bancorp, Inc. (1)
		3.2	Amended Bylaws of Woronoco Bancorp, Inc.
		4.0	Stock Certificate of Woronoco Bancorp, Inc. (1)
		11.0	Statement Re: Computation of Per Share Earnings (Incorporated Herein By Reference to Part 1 – Earnings Per Share)
		99.0	Certifications pursuant to 18 U.S.C. Section 1350

	(1)	Incorporated by reference into this document from the Exhibits filed with the Registration Statement on Form S-1, and any amendments thereto, Registration No. 333-67255.

(b)	Reports on Form 8-K

	On September 19, 2002, Woronoco Bancorp, Inc. filed an 8-K announcing that John B. Davies was appointed to the Board of Directors of the Company and the Bank and Mark A. Pumiglia was appointed to the Board of Directors of the Bank. A press release announcing the appointment of the new directors was filed by exhibit.

	On August 27, 2002, Woronoco Bancorp, Inc. filed an 8-K announcing that it had entered into definitive agreements for the sale of three branch offices located inside Big Y World Class Supermarkets and intended to move a fourth supermarket branch to a new location, where it would operate as a full-service location. A press release announcing the transactions was filed by exhibit.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

	WORONOCO BANCORP, INC.


Dated: November 13, 2002	By:	/s/ CORNELIUS D. MAHONEY

		Cornelius D. Mahoney Chairman of the Board, President and Chief Executive Officer (principal executive officer)

Dated: November 13, 2002	By:	/s/ DEBRA L. MURPHY

		Debra L. Murphy Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

CERTIFICATION

I, Cornelius D. Mahoney, certify, that:

1.	I have reviewed this quarterly report on Form 10-Q of Woronoco Bancorp, Inc.;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c.	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a.	all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 13, 2002			/s/ CORNELIUS D. MAHONEY

			Cornelius D. Mahoney President and Chief Executive Officer

CERTIFICATION

I, Debra L. Murphy, certify, that:

1.	I have reviewed this quarterly report on Form 10-Q of Woronoco Bancorp, Inc.;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c.	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a.	all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 13, 2002			/s/ DEBRA L. MURPHY

			Debra L. Murphy Executive Vice President and Chief Financial Officer

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