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

FORM 10-K

          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.

          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. o

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

          The market value of the voting and non-voting common equity held by non-affiliates was $66,585,618, which was computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter.  Solely for purposes of this calculation, the shares held by the directors and officers of the registrant are deemed to be affiliates.

          As of February 26, 2003, there were 3,622,325 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

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PART I

Item 1. Business.

          Woronoco Bancorp, Inc. (the “Corporation”) has no significant assets other than all of the outstanding shares of Woronoco Savings Bank (the “Bank”).  Management of the Corporation and the Bank are substantially similar and the Corporation neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report for Woronoco Bancorp, Inc. and its subsidiaries (the “Company’), including the consolidated financial statements and related financial data, relates primarily to the Bank.

          The Bank is a Massachusetts stock savings bank, which was organized in 1871.  The Bank’s principal business consists of the acceptance of retail deposits from the general public and the investment of those deposits, together with funds generated from borrowings, retail operations, investment management and insurance services into a broad line of lending products including 1-4 family, multi-family, commercial real estate, construction and development and other types of consumer loans including home equity lines of credit and automobile loans.  The Bank originates loans primarily for investment.  However, the Bank may sell some loans from time to time in the secondary market, while generally retaining the servicing rights.  The Bank also purchases conforming 1-4 family residential loans from time to time and invests in mortgage-backed securities and other permissible investments.  The Bank’s revenues are derived from the generation of interest and fees on loans originated, interest and dividends on investment securities and fees from its retail banking operation, investment management and insurance services.  The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments 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.  Located in the region known as New England’s knowledge corridor, the Bank benefits from a concentration of 116,000 students at 32 higher education institutions including some of the most prestigious in the nation. Additional economic support is gained from the presence of large employers such as Hasbro Games, Smith & Wesson, Solutia, N.E. Utilities, Yankee Candle, Spalding Sports Worldwide, Friendly Ice Cream, Bay State Health Systems and United Technologies.  Other economic activity is provided by the U.S. Air Force Reserve and Massachusetts Air National Guard, Bradley International Airport and significant tourist attractions such as the Basketball Hall of Fame and Six Flags New England.

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,  mortgage brokers, mortgage banking companies and insurance companies.  Its most direct competition for deposits has historically come from savings 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, 401(k) plans and annuities. The Company expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the industry.  Technological advances, for example, have lowered barriers to market entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. The Gramm-Leech-Bliley Act, which permits affiliation among banks, securities firms and insurance companies, also has changed the competitive environment in which the Company conducts business.  Competition has also increased as a result of the removal of restrictions on the interstate operations of financial institutions. The Company has also experienced significant competition from credit unions, which have applied for and received, in some cases, regulatory approval to expand beyond the traditional definition of a group to include, for instance, an entire community versus a particular company.

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In addition, credit unions are exempt from taxation.  Such competitive advantages have placed increased pressure on the Company with respect to its loan and deposit pricing.

Lending Activities

          Loan Portfolio Composition.   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. Most of the Company’s loans, with the exception of certain purchased one- to four-family residential mortgage loans and home equity loans and lines of credit, are located in the Company’s primary market area.

(1) Includes committed but unadvanced loan amounts.

          Origination, Purchase, Sale and Servicing of Loans.  The Company’s mortgage lending activities are conducted primarily by its salaried loan representatives operating at its ten full service banking offices (nine after the sale of the Bank’s Boston Road supermarket branch in February 2003) and its commissioned, offsite loan originators. All loans originated by the Company are underwritten in accordance with the Company’s policies and procedures. The Company originates both adjustable-rate (“ARM”) and fixed-rate mortgage loans. The Company’s ability to originate fixed or ARM loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future level of interest rates.  From time to time, the Company also purchases ARM loans from various financial institutions.

          The Company is primarily a portfolio lender, originating substantially all of its loans for investment.  However, the Company may sell or securitize a portion of its outstanding loans in order to improve, among other factors, interest rate risk and liquidity.  The Company sold longer-term, low coupon, fixed-rate residential mortgages with outstanding balances totaling $30.4 million in 2002 and $17.5 million in 2001. In 2001, the Company sold $14.3 million of loans that were held for sale in 2000.  The Company utilized the proceeds from these sales to fund loan originations and to pay-down certain borrowings.  In 1998, the Company completed the securitization of $19.1 million of 30-year fixed-rate one- to four-family mortgage loans with Fannie Mae to improve liquidity.  Such loans are serviced as mortgage-backed securities for Fannie Mae. The Company may sell and/or 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 mortgage loans sold or securitized.

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          At December 31, 2002, the Company was servicing $61.8 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.   The balance of capitalized servicing rights related to these loans, net of valuation allowances, was $520,000 and $250,000 at December 31, 2002 and 2001, respectively, and is included in other assets. The fair value of these rights approximates carrying amounts.  Amortization of mortgage servicing rights totaled $67,000, $27,000 and $14,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

          During the years ended December 31, 2002, 2001 and 2000, the Company originated $88.5 million, $62.1 million and $4.1 million of fixed-rate one- to four-family loans, respectively, of which $66.0 million, $55.8 million and $4.1 million, respectively, were retained by the Company.  During these same periods, the Company also originated $27.4 million, $30.0 million and $21.9 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, commercial real estate, construction and development and commercial business loans and, at December 31, 2002, had $3.1 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. 

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          Loan Maturity.  The following table shows the remaining contractual maturity of the Company’s loan portfolio at December 31, 2002.  The table does not include prepayments or scheduled principal amortization.  Prepayments and scheduled principal amortization on loans totaled $136.2 million, $140.3 million and $89.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.

          The following table sets forth at December 31, 2002, the dollar amount of gross loans receivable contractually due after December 31, 2003, and whether such loans have fixed interest rates or adjustable interest rates.

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          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 originators, 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, 2002, the Company’s one- to four-family mortgage loans totaled $271.0 million, or 56.0% of total loans.  Of the one- to four-family mortgage loans outstanding at that date, 61.3% were fixed-rate mortgage loans and 38.7% were ARM loans.

          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’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’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.  These purchased loans are generally serviced by the seller.

          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 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.  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 a 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%.  The Company also offers first-time home buyer loans through the Federal Housing Authority and Massachusetts Housing Finance Agency programs.

          Home Equity Lines of Credit and Loans.  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 largely 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 and 2000.  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

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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.  A prepayment penalty may be assessed if the home equity line of credit is discharged within three years from the date of the note.

          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 to a fixed-rate, fixed-term home equity loan.  The interest rate for the term loan is based on rates offered by the Company at the time the conversion request is received.  Maturities offered on home equity term loans are five, ten and 15 years. When the term loan is repaid in full, the original principal balance becomes available under the home equity credit line.  The Company also offers fixed-rate, fixed-term equity loans that are not tied to a line of credit.  Repayment terms are the same as the aforementioned home equity term loans.  At December 31, 2002, home equity loans and lines of credit totaled $83.2 million, or 17.2% of the Company’s total loans and 87.9% of consumer loans.

          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 mainly 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, 2002 was $8.0 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 or the one, three or five year CMT Index.  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, 2002 was $34.1 million, or 7.0% of total loans, and the Company’s commercial real estate loan portfolio at such date was $53.5 million, or 11.1% of total loans.  The largest multi-family or commercial real estate loan in the Company’s portfolio at December 31, 2002 was a $4.1 million real estate loan secured by a 54-unit apartment building and 36,000 square feet of commercial/retail space located in Northampton, Massachusetts.  This loan was performing according to its terms at December 31, 2002.

          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, 2002, $896,400, or 1.7% of the commercial real estate loan portfolio, were participation loans of this nature.  

          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

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estate properties located in the Company’s primary market area.  Construction loans typically 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 LTV 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, 2002, the Company’s largest construction and development loan was a $7.0 million construction/permanent mortgage to build a 60,000 square foot medical office building in Springfield, Massachusetts. To date, $6.5 million has been disbursed and the building is fully occupied.  At December 31, 2002, construction and development loans totaled $19.8 million, or 4.1%, 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 four 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.

          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, 2002, $2.0 million, or 10.0% of the construction and development loan portfolio, were participation loans of this nature.  

          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 terms of up to 72 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).  At December 31, 2002, automobile loans totaled $8.8 million, or 1.8% of the Company’s total loans and 9.3% of consumer loans. Other consumer loans at December 31, 2002 amounted to $2.7 million, or 0.6% of the Company’s total loans and 2.8% 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, 2002, the Company had $11.1 million in commercial loans which amounted to 2.3% of total loans. In addition, at such date, the Company had $4.6 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.   Term loans are generally offered with initial fixed rates of interest for the first five years and with

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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 adjustable 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, 2002, $205,000, or 1.8% of the commercial loan portfolio, were participation loans of this nature. In an effort to increase its emphasis on commercial loans, in 2002 the Company hired an experienced commercial loan officer with the primary responsibility of increasing commercial business 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, 2002, the Company’s largest commercial loan relationship consisted of eight term loans totaling $3.6 million and a revolving line of credit for $150,000 to a fast food franchisee.  These loans were performing according to their original terms at December 31, 2002.

          Loan Approval Procedures and Authority.   The lending policies and loan approval limits of the Company are established through the Executive Lending Committee (the “Committee”) of the Board of Directors.  The Committee, in accordance with authority delegated by the Board of Directors, reviews and approves and/or ratifies all loans made or acquired, all changes in security pledged, rates of interest charged for loans, all purchases of loans, all foreclosures on mortgages of real estate and sale of property held in foreclosure, liquidation of secured assets and interim changes to the loan policy.  In connection with one- to four-family mortgage loans, the Committee has authorized the following persons to approve the loans up to the amounts indicated: one assistant vice president and one 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 $322,700; and the Chief Executive Officer and the Executive Vice President, Lending may approve loans up to $500,000.

          With respect to consumer loans, the Committee has authorized the following persons to approve loans up to the amounts indicated: 10 assistant branch managers may approve secured and unsecured loans of up to $15,000 and $5,000, respectively; branch managers, loan origination and underwriting officers and the vice president of operations and two vice presidents may approve secured and unsecured loans of up to $30,000 and $10,000, respectively; and the Chief Executive Officer and the Executive Vice President, Lending may approve loans up to $75,000 and $50,000, respectively.

          The Committee has authorized the following individuals to approve home equity loans and lines of credit up to the amounts indicated: two lending vice presidents, an assistant vice president and loan origination and underwriting officers may approve loans up to $100,000; and the Chief Executive Officer and the Executive Vice President, Lending may approve loans up to $200,000.

          All loans in excess of these approval amounts must be approved by either the Executive Vice President, Lending, the Officers’ Loan Committee and/or the Committee.  The Officers’ Loan Committee, which currently consists of five lending officers, is selected by the 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 $500,000 may be approved by the Executive Vice President, Lending.  Those loan commitments or other extensions of credit, either alone or in the aggregate, which are greater than $500,000 but are less than $1.5 million 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 $1.5 million must be approved by the Committee.  Additionally, those loans less than $1.5 million must be ratified by

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the 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.

          With respect to commercial loans, the 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 officers 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 Executive Vice President, Lending may approve commercial real estate loans, commercial secured and unsecured loans in amounts of up to $500,000, $300,000 and $150,000, respectively. 

          All loans in excess of these approval amounts for commercial loans must be approved by either the Officers’ Loan Committee and/or the Committee.  Specifically, all loans, commitments or other extensions of credit, either alone or in the aggregate which exceed $500,000 or $1.5 million must be approved by the Officers’ Loan Committee and the 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 Lending 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, 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.

          Management of the Company and the Executive Lending 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.  

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          The following table sets forth the Company’s classified assets at December 31, 2002.