WORONOCO BANCORP INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2003

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 x No ¨

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

Yes ¨ No x

The issuer had 3,611,271 shares of common stock, par value $0.01 per share, outstanding as of May 6, 2003.

WORONOCO BANCORP, INC.

FORM 10-Q

INDEX

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets at March 31, 2003 and December 31, 2002	1

	Consolidated Income Statements for the Three Months Ended March 31, 2003 and 2002	2

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2003 and 2002	3

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002	4

	Notes to Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II:	OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 2.	Changes in Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Submission of Matters to a Vote of Security Holders	26

Item 5.	Other Information	26

Item 6.	Exhibits and Reports on Form 8-K	27

SIGNATURES		28

CERTIFICATIONS		29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

WORONOCO BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars In Thousands)

	Unaudited March 31, 2003			December 31, 2002
Assets

Cash and due from banks	$	18,040		$	17,600
Interest-bearing balances		1,774			731
Federal funds sold		430			9,470

Total cash and cash equivalents		20,244			27,801

Trading securities		12,242			16,284
Securities available for sale, at fair value		187,657			155,306
Federal Home Loan Bank stock, at cost		13,795			13,795
Loans, net of allowance for loan losses ($3,149 at March 31, 2003 and $3,156 at December 31, 2002)		470,600			470,224
Premises and equipment, net		10,133			10,343
Accrued interest receivable		3,431			3,385
Goodwill and other intangible assets, net		1,873			1,889
Cash surrender value of life insurance		2,652			2,602
Other assets		3,910			4,007

Total assets	$	726,537		$	705,636


Liabilities and Stockholders’ Equity

Deposits	$	397,683		$	370,650
Mortgagors’ escrow accounts		1,953			1,597
Short-term borrowings		44,319			56,235
Long-term debt		200,819			197,000
Net deferred tax liability		626			589
Accrued expenses and other liabilities		5,428			5,155

Total liabilities		650,828			631,226


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 March 31, 2003 and December 31, 2002; shares outstanding: 3,620,010 at March 31, 2003 and 3,567,669 at December 31, 2002)		60			60
Additional paid-in capital		59,243			59,020
Unearned compensation		(3,750	)		(3,951	)
Retained earnings		45,152			44,641
Accumulated other comprehensive income		5,297			5,222
Treasury stock, at cost (2,378,850 shares at March 31, 2003 and 2,431,191 shares at December 31, 2002)		(30,293	)		(30,582	)

Total stockholders’ equity		75,709			74,410

Total liabilities and stockholders’ equity	$	726,537		$	705,636

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 March 31,
	2003			2002
Interest and dividend income:
Loans, including fees	$	7,368		$	7,254
Interest and dividends on securities:
Taxable interest		1,704			1,938
Tax exempt interest		247			237
Dividends		513			717
Trading account securities		190			—
Federal funds sold		13			30
Other		2			16

Total interest and dividend income		10,037			10,192


Interest expense:
Deposits		1,695			2,013
Borrowings		3,053			3,120

Total interest expense		4,748			5,133


Net interest income		5,289			5,059
Provision for loan losses		—			109

Net interest income, after provision for loan losses		5,289			4,950


Other income:
Fee income		755			585
Insurance commissions		363			134
Gain on sales, disposition and impairment of securities available for sale, net		404			154
Net loss on trading account securities		(564	)		—
Gain on sales of loans, net		403			—
Gain on sale of supermarket branch		183			—
Penalty for prepayment of FHLB advances		(539	)		—
Gain (loss) on derivative instruments and hedging activities		5			(2	)
Other income		6			13

Total other income		1,016			884


Other expenses:
Salaries and employee benefits		2,475			2,430
Occupancy and equipment		553			552
Marketing		153			168
Professional services		391			231
Data processing		257			239
Other general and administrative		701			712

Total other expenses		4,530			4,332


Income before income tax expense		1,775			1,502
Income tax expense		493			426

Net income	$	1,282		$	1,076


Earnings per share:
Basic	$	0.39		$	0.32
Diluted	$	0.37		$	0.30

Weighted average shares outstanding:
Basic		3,282,989			3,369,022
Diluted		3,494,120			3,618,990

See accompanying notes to unaudited consolidated financial statements

WORONOCO BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2003 and 2002

(Dollars In Thousands)

(Unaudited)

	Common Stock		Additional Paid-in Capital		Unearned Compensation			Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total
Balance at December 31, 2002	$	60	$	59,020	$	(3,951	)	$	44,641		$	5,222		$	(30,582	)	$	74,410

Comprehensive income:
Net income		—		—		—		$	1,282			—			—			1,282
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects		—		—		—			—			99			—			99
Net loss on derivative instruments		—		—		—			—			(24	)		—			(24	)

Total comprehensive income																		1,357

Decrease in unearned compensation		—		145		201			—			—			—			346
Adjustment for tax benefit related to vesting of stock awards and stock option exercises		—		78		—			—			—			—			78
Treasury stock reissued in connection with stock option exercises (93,232 shares)		—		—		—			(275	)		—			1,181			906
Cash dividends paid		—		—		—			(496	)		—			—			(496	)
Treasury stock purchased (40,891 shares)		—		—		—			—			—			(892	)		(892	)

Balance at March 31, 2003	$	60	$	59,243	$	(3,750	)	$	45,152		$	5,297		$	(30,293	)	$	75,709


Balance at December 31, 2001	$	60	$	58,294	$	(4,834	)	$	41,439		$	1,497		$	(26,607	)	$	69,849

Comprehensive income:
Net income		—		—		—			1,076			—			—			1,076
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects		—		—		—			—			(493	)		—			(493	)

Total comprehensive income																		583

Decrease in unearned compensation		—		92		223			—			—			—			315
Adjustment for tax benefit related to vesting of stock awards and stock option exercises		—		10		—			—			—			—			10
Treasury stock reissued in connection with stock option exercises (3,768 shares)		—		—		—			(5	)		—			44			39
Cash dividends paid		—		—		—			(371	)		—			—			(371	)
Treasury stock purchased (25,900 shares)		—		—		—			—			—			(488	)		(488	)

Balance at March 31, 2002	$	60	$	58,396	$	(4,611	)	$	42,139		$	1,004		$	(27,051	)	$	69,937

See accompanying notes to unaudited consolidated financial statements

WORONOCO BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2003			2002
	(In thousands)
Cash flows from operating activities:
Net income	$	1,282		$	1,076
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		—			109
Net amortization of investments		53			102
Depreciation and amortization		243			274
Amortization of goodwill and other intangible assets		16			13
Amortization of mortgage servicing rights		30			5
Employee stock ownership plan expense		222			191
Stock-based incentive plan expense		124			124
Gain on sales, disposition and impairment of securities, net		(404	)		(154	)
Net decrease in trading account securities		3,478			—
Net loss on trading activities		564			—
Gain on sales of loans, net		(403	)		—
Gain on sale of supermarket branch, net of expenses		(183	)		—
Changes in operating assets and liabilities:
Accrued interest receivable		(46	)		(788	)
Accrued expenses and other liabilities		381			(7,082	)
Other, net		95			1,374

Net cash provided by (used in) operating activities		5,452			(4,756	)


Cash flows from investing activities:
Proceeds from sales of securities available for sale		20,110			1,792
Purchases of securities available for sale		(66,819	)		(25,497	)
Principal payments on mortgage-backed securities		14,815			9,651
Purchases of Federal Home Loan Bank stock		—			(45	)
Loans originations/purchases and principal collections, net		(11,465	)		(13,642	)
Proceeds from sale of loans		11,390			—
Additions to premises and equipment		(122	)		(35	)
Proceeds from sales of premises and equipment, net		100			—

Net cash used in investing activities		(31,991	)		(27,776	)


Cash flows from financing activities:
Net increase in deposits, excluding deposits sold		31,289			38,555
Sale of supermarket branch deposits, net of premium and expenses		(4,084	)		—
Net decrease in short-term borrowings		(11,916	)		(15,816	)
Proceeds from issuance of long-term debt		3,819			10,000
Net increase in mortgagors' escrow accounts		356			659
Cash dividends paid		(496	)		(371	)
Treasury stock purchased		(892	)		(488	)
Reissuance of treasury stock in connection with stock option exercises		906			39

Net cash provided by financing activities		18,982			32,578


Net (decrease) increase in cash and cash equivalents		(7,557	)		46

Cash and cash equivalents at beginning of period		27,801			27,209


Cash and cash equivalents at end of period	$	20,244		$	27,255


Supplemental cash flow information:
Interest paid on deposits	$	1,887		$	2,360
Interest paid on borrowings		3,049			3,080
Income taxes paid		478			527
Transfer from loans to other real estate owned		—			3

See accompanying notes to unaudited consolidated financial statements

WORONOCO BANCORP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

At and for the Three Months Ended March 31, 2003

1. Unaudited Consolidated Financial Statements

The 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, 2002. Management believes that the disclosures contained herein are adequate to make a fair presentation.

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

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

2. Recent Accounting Pronouncements

On January 1, 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires recognition of a liability, when incurred, for a cost associated with an exit or disposal activity. The liability shall be recognized at fair value. The adoption of this Statement did not have a material impact on the consolidated financial statements.

3. Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options, and are determined using the treasury stock method.

Earnings per common share for the three months ended March 31, 2003 and 2002 have been computed based upon the following (dollars in thousands except per share amounts):

	Unaudited
	Three Months Ended March 31,
	2003		2002

Net income applicable to common stock	$	1,282	$	1,076

Average number of common shares outstanding		3,282,989		3,369,022
Effect of dilutive stock options		211,131		249,968

Average number of common shares outstanding used to calculate diluted earnings per share		3,494,120		3,618,990

Net income per share:
Basic	$	0.39	$	0.32
Diluted	$	0.37	$	0.30

For the three months ended March 31, 2003, 30,300 options granted were anti-dilutive and therefore not included in the earnings per share calculation.

4. Stock compensation plans

SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them.

The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied.

The following table illustrates the effect on net income and earnings per share if the Company has applied the fair value recognition provisions of SFAS NO. 123 to stock-based compensation.

	Three Months Ended March 31,
	2003			2002

Net income, as reported	$	1,282		$	1,076
Deduct: Total stock-based employee compensation expense determined under fair value based method for all options, net of related tax effects		(147	)		(175	)

Pro forma net income	$	1,135		$	901


Earnings per share:
Basic—as reported	$	0.39		$	0.32

Basic—pro forma	$	0.35		$	0.27

Diluted—as reported	$	0.37		$	0.30

Diluted—pro forma	$	0.32		$	0.25

5. Dividends

On April 16, 2003 the Company declared a cash dividend of $0.155 per share payable on May 30, 2003 to shareholders of record as of the close of business on May 8, 2003.

6. Loan commitments

Outstanding loan commitments totaled $17.5 million at March 31, 2003 compared to $15.8 million at December 31, 2002. At March 31, 2003 and December 31, 2002, the Company had no commitments to purchase or sell loans.

7. Segment reporting

Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the quarters ended March 31, follows:

						Intersegment			Consolidated
2003	Banking		Insurance			Elimination			Totals

Net interest income	$	5,289	$	—		$	—		$	5,289
Other revenue—external customers		755		363			—			1,118
Other revenue—from other segments		—		1			(1	)		—
Depreciation and amortization		235		8			—			243
Provision for loan losses		—		—			—			—
Profit		1,209		73			—			1,282
Assets		724,511		2,509			(483	)		726,537

2002

Net interest income	$	5,059	$	—		$	—		$	5,059
Other revenue—external customers		585		134			—			719
Other revenue—from other segments		—		—			—			—
Depreciation and amortization		268		6			—			274
Provision for loan losses		109		—			—			109
Profit (loss)		1,136		(60	)		—			1,076
Assets		692,280		2,266			(146	)		694,400

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 months ended March 31, 2003 and 2002, 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.

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 March 31, 2003 and December 31, 2002

The Company’s assets expanded $20.9 million, or 3.0%, to $726.5 million at March 31, 2003 as compared to $705.6 million at December 31, 2002, largely due to purchases of mortgage-backed securities totaling $66.8 million, partially offset by sales of available-for-sale and trading account securities of $20.1 million and $3.5 million, respectively, mortgage-backed securities principal payments amounting to $14.8 million and a $9.0 million reduction in federal funds sold. Trading account securities were sold as part of the Company’s strategy to capitalize on short-term fluctuations in price to reduce its equity and preferred stock portfolios. Federal funds sold were used to repay several short-term FHLB advances.

The balance sheet expansion was funded primarily by an increase in deposits, which grew $27.0 million, or 7.3%, to $397.7 million at March 31, 2003 from $370.7 million at December 31, 2002 as a result of an increase in core deposits and the net issuance of approximately $9.6 million of additional brokered deposits. These increases were partially offset by the sale of approximately $4.1 million of deposits in conjunction with the sale of a supermarket branch. Core deposits, which exclude certificates of deposit and brokered deposits, rose $12.1 million, or 5.7%, to $226.1 million at March 31, 2003 from $214.0 million at December 31, 2002. Short-term borrowings decreased $11.9 million, or 21.2%, to $44.3 million as federal funds sold balances were used to pay down short-term advances.

Total stockholders’ equity was $75.7 million at March 31, 2003, an increase of $1.3 million, or 1.7%, compared to $74.4 million at December 31, 2002, primarily due to net income of $1.3 million, $906,000 of treasury stock reissuances in connection with the exercise of stock options and a reduction of $346,000 in unearned compensation, partially offset by cash dividends of $496,000 and the repurchase of 40,891 shares of stock at a cost of $892,000.

Investments

At March 31, 2003, the Company’s trading account portfolio totaled $12.2 million, or 1.7% of assets, and the available-for-sale portfolio amounted to $187.7 million, or 25.8% of assets. The following table sets forth information regarding the amortized cost and market values of the Company’s investment securities.

	March 31, 2003				December 31, 2002
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Trading account securities:
Preferred stocks	$	4,141	$	4,141	$	4,647	$	4,647
Common stocks		8,101		8,101		11,637		11,637

Total trading account securities	$	12,242	$	12,242	$	16,284	$	16,284


Available-for-sale securities:
Equity securities:
Common stocks	$	110	$	110	$	110	$	110

Total equity securities		110		110		110		110

Debt securities:
Mortgage-backed:
Freddie Mac		35,868		36,543		9,186		9,785
Fannie Mae		78,556		82,234		45,541		49,045
Ginnie Mae		15,233		15,839		18,459		19,153
REMIC		2,514		2,575		4,466		4,590

Total mortgage-backed securities		132,171		137,191		77,652		82,573

Other:
U.S. Agencies		10,104		10,667		28,207		29,135
Municipal bonds		21,452		22,074		21,454		21,950
Trust preferred		15,715		17,615		19,885		21,538

Total other debt securities		47,271		50,356		69,546		72,623

Total debt securities		179,442		187,547		147,198		155,196

Total available-for-sale securities (1)	$	179,552	$	187,657	$	147,308	$	155,306

(1)

Does not include $13.8 million of FHLB stock held by the Company at March 31, 2003 and December 31, 2002

Trading account portfolio balances declined $4.0 million, or 24.8%, to $12.2 million at March 31, 2003 from $16.3 million at December 31, 2002. During the first quarter of 2003, the Company sold equity securities in conjunction with its strategy to significantly reduce the equity portfolio when conditions are favorable.

Securities available-for-sale increased $32.4 million, or 20.8%, primarily due to purchases of mortgage-backed securities totaling $66.8 million, partially offset by sales of agency securities aggregating $16.5 million and mortgage-backed security principal payments amounting to $14.8 million. The Company purchased mortgage-backed securities in response to and in anticipation of accelerated cash flows from existing securities. Management believes these securities will enhance net interest income as a result of positive interest rate spreads and improve liquidity as these securities can be used as collateral for certain borrowings. The proceeds from the sale of agency securities were used to pay down certain FHLB advances in an effort to improve net interest income.

Lending Activities

At March 31, 2003, the Company’s net loan portfolio was $470.6 million, or 64.8%, 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.

	March 31, 2003					December 31, 2002
	Amount			Percent of Total		Amount			Percent of Total
	(Dollars In Thousands)
Real estate loans
One- to four-family	$	269,696		55.98	%	$	271,010		55.96	%
Multi-family		34,537		7.17	%		34,090		7.04	%
Commercial		59,780		12.41	%		53,486		11.05	%
Construction and development		14,691		3.05	%		19,785		4.09	%

Total real estate loans		378,704		78.61	%		378,371		78.14	%


Consumer loans
Home equity loans		80,785		16.77	%		83,222		17.19	%
Automobile		8,027		1.67	%		8,800		1.82	%
Other		2,453		0.51	%		2,676		0.55	%

Total consumer loans		91,265		18.95	%		94,698		19.56	%


Commercial loans		11,753		2.44	%		11,136		2.30	%


Total loans		481,722		100.00	%		484,205		100.00	%


Less:
Unadvanced loan funds (1)		(8,742	)				(11,627	)
Deferred loan origination costs		769					802
Allowance for loan losses		(3,149	)				(3,156	)

Net loans	$	470,600				$	470,224

(1)

Includes committed but unadvanced loan amounts.

The Company’s net loan portfolio grew slightly during the first three months of 2003 largely attributable to origination and refinancing volume totaling $36.1 million and the purchase of $4.3 million in one- to-four family residential mortgages, partially offset by prepayments and amortization of the existing portfolio and the sale of $11.1 million of longer-term fixed rate one-to four-family residential loans. 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. The loan sales should help reduce the Company’s exposure to interest rate risk while improving liquidity. The Company will continue to evaluate the sale of additional longer-term, lower coupon, fixed rate mortgages in 2003.

Non-performing Assets

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

	March 31,			December 31,
	2003			2002
	(Dollars in Thousands)
Nonaccruing loans:
Real estate:
One-to four-family	$	690		$	1,034
Home equity loans		51			58
Other consumer		—			14

Total		741			1,106
Real estate owned, net (1)		—			—

Total nonperforming assets		741			1,106
Troubled debt restructurings		—			—

Troubled debt restructurings and total nonperforming assets	$	741		$	1,106

Total nonperforming loans and troubled debt restructurings as a percentage of total loans (2) (3)		0.16	%		0.23	%
Total nonperforming assets and troubled debt restructurings as a percentage of total assets (3)		0.10	%		0.16	%

(1)

Real estate owned balances are shown net of related loss allowances.

(2)

Total loans includes loans, less unadvanced loan funds, plus net deferred loan costs.

(3)

Nonperforming assets consist of nonperforming loans and real estate owned, net. Nonperforming loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectibility of interest or principal.

The Company experienced a decrease of $344,000 in one- to four- family residential real estate non-accrual loans during the three months ended March 31, 2003 from December 31, 2002 as several loans were paid in full or became current.

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 the 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 local and regional trends in delinquency and impaired loans, the amount of charge-offs and recoveries, the 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. Management 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 loan loss allowance consists of 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 general 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.

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 specific or general loss allowances. The FDIC, in conjunction with the other federal banking agencies, maintains 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 Three Months
	Ended March 31,
	2003			2002
	(Dollars in Thousands)

Allowance for loan losses, beginning of period	$	3,156		$	2,701

Charged-off loans:
Consumer		30			25

Total charged-off loans		30			25


Recoveries on loans previously charged-off:
Real estate		—			7
Consumer		23			5

Total recoveries		23			12

Net loans charged-off		7			13
Provision for loan losses		—			109

Allowance for loan losses, end of period	$	3,149		$	2,797


Net loans charged-off to average loans, net		0.01	%		0.01	%
Allowance for loan losses to total loans (1)		0.66	%		0.63	%
Allowance for loan losses to nonperforming loans and troubled debt restructurings (2)		424.97	%		533.78	%
Net loans charged-off to allowance for loan losses		0.89	%		1.86	%
Recoveries to charge-offs		76.67	%		48.00	%

(1)

Total loans includes loans, less unadvanced loan funds, plus net deferred loan costs.

(2)

Nonperforming loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectibility of interest or principal.

Deposits

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

	March 31, 2003				December 31, 2002
			Percent				Percent
			of Total				of Total
	Balance		Deposits		Balance		Deposits
	(Dollars In Thousands)

Demand deposits	$	25,646	6.45	%	$	22,388	6.04	%
Savings		80,314	20.20	%		77,120	20.81	%
Money market		53,021	13.33	%		47,500	12.82	%
NOW		67,127	16.88	%		66,944	18.06	%
Brokered deposits		52,808	13.28	%		43,205	11.66	%
Certificates of deposit		118,767	29.86	%		113,493	30.61	%

Total deposits	$	397,683	100.00	%	$	370,650	100.00	%

Core deposits, which exclude brokered deposits and certificates of deposit, increased $12.1 million, or 5.7%, to $226.1 million at March 31, 2003 from $214.0 million at December 31, 2002. The growth in core deposits reflects expanded marketing efforts and an enhanced focus on traditional markets as a result of the sale of the Company’s supermarket branches. Brokered deposits grew $9.6 million to $52.8 million at March 31, 2003. 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 March 31, 2003 and 2002

General

The Company reported net income of $1.3 million, or $0.37 per diluted share, for the quarter ended March 31, 2003 compared to net income of $1.1 million, or $0.30 per diluted share, for the same period in 2002. The 23% expansion in earnings per share was achieved through strong growth in average loan and core deposit balances, a stable net interest margin, significant expansion in fee income and insurance commissions, sound asset quality and the effects of share repurchases, somewhat offset by higher other expenses. The results for the three months ended March 31, 2003 also include gains of $404,000 from the sale of available-for-sale securities and $403,000 from the sale of loans, a net gain of $183,000 from the sale of a supermarket branch, a $539,000 penalty for the prepayment of FHLB advances and trading losses totaling $564,000.

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 March 31,
	2003							2002
	Average Balance		Interest			Average Yield/ Rate		Average Balance		Interest			Average Yield/ Rate
	(Dollars in Thousands)
Interest-earning assets: (1)
Available-for-sale investments:
Mortgage-backed securities	$	105,851	$	1,555		5.88	%	$	109,624	$	1,757		6.41	%
U.S. Government and agency securities		16,324		149		3.65	%		20,461		181		3.54	%
Equity securities		35,371		513		5.80	%		50,238		717		5.71	%
State and municipal securities (2)		21,936		374		6.82	%		19,809		359		7.25	%
Trading account securities		14,980		190		5.07	%		—		—		—
Loans: (3)
Residential real estate loans		298,387		4,711		6.32	%		280,252		4,793		6.84	%
Commercial real estate loans		65,205		1,161		7.12	%		43,263		790		7.30	%
Consumer loans		92,505		1,311		5.75	%		97,240		1,486		6.20	%
Commercial loans		11,391		185		6.50	%		10,576		185		7.00	%

Loans, net		467,488		7,368		6.30	%		431,331		7,254		6.73	%
Other		6,678		15		0.90	%		10,428		46		1.76	%

Total interest-earning assets		668,628		10,164		6.08	%		641,891		10,314		6.43	%

Noninterest-earning assets		37,975							38,923

Total assets	$	706,603						$	680,814


Interest-bearing liabilities:
Deposits:
Money market accounts	$	49,394	$	164		1.35	%	$	36,061	$	196		2.20	%
Savings accounts (4)		77,390		189		0.99	%		73,051		270		1.50	%
NOW accounts		63,546		122		0.78	%		62,510		184		1.19	%
Certificates of deposit (5)		163,967		1,220		3.02	%		154,778		1,363		3.57	%

Total interest-bearing deposits		354,297		1,695		1.94	%		326,400		2,013		2.50	%
Borrowings		248,002		3,053		4.92	%		258,077		3,120		4.84	%

Total interest-bearing liabilities		602,299		4,748		3.20	%		584,477		5,133		3.56	%

Demand deposits		23,661							19,168
Other noninterest-bearing liabilities		5,337							6,417

Total liabilities		631,297							610,062
Total stockholders’ equity		75,306							70,752

Total liabilities and stockholders’ equity	$	706,603						$	680,814

Net interest-earning assets	$	66,329						$	57,414

Tax equivalent net interest income/ interest rate spread (6)				5,416		2.88	%				5,181		2.87	%

Tax equivalent net interest margin as a percentage of interest-earning assets (7)						3.24	%						3.23	%

Ratio of interest-earning assets to interest-bearing liabilities						111.01	%						109.82	%

Less: tax equivalent adjustment (2)				(127	)						(122	)

Net interest income as reported on income statement			$	5,289						$	5,059

(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 tax equivalent 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 March 31,
	2003 compared to 2002
	Increase (Decrease)
	Due to
	Volume			Rate			Net
	(In Thousands)
Interest-earning assets:
Mortgage-backed securities	$	(59	)	$	(143	)	$	(202	)
U.S. Government and agency securities		(32	)		—			(32	)
Equity securities		(216	)		12			(204	)
State and municipal securities (1)		15			—			15
Trading account securities		95			95			190
Loans:
Residential real estate loans		299			(381	)		(82	)
Commercial real estate loans		391			(20	)		371
Consumer loans		(70	)		(105	)		(175	)
Commercial loans		13			(13	)		0

Total loans		633			(519	)		114
Other		(13	)		(18	)		(31	)

Total interest-earning assets		423			(573	)		(150	)


Interest-bearing liabilities:

Deposits:
Money market accounts		58			(90	)		(32	)
Savings accounts (2)		15			(96	)		(81	)
NOW accounts		3			(65	)		(62	)
Certificates of deposit (3)		77			(220	)		(143	)

Total deposits		153			(471	)		(318	)
Borrowings		(123	)		56			(67	)

Total interest-bearing liabilities		30			(415	)		(385	)

Increase in net interest income (4)	$	393		$	(158	)	$	235

(1)

The changes in state and municipal income are reflected on a tax equivalent basis using a tax rate of 34%.

(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 $5.4 million for the three months ended March 31, 2003, an increase of $235,000, or 4.5%, compared to $5.2 million for the same period in 2002, mainly driven by growth in average interest-earning assets.

Interest and dividend income, on a tax equivalent basis, fell $150,000, or 1.5%, to $10.2 million for the three months ended March 31, 2003 compared to $10.3 million for the same period last year, mainly reflecting a decrease in the yield on average interest-earning assets partially offset by growth in average interest-earning assets. The yield on average interest-earning assets declined 35 basis points to 6.08% in the three months ended March 31, 2003, largely as a result of the lower market 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 $668.6 million for the first quarter of 2003 compared to $641.9 million for the same period last year, an increase of $26.7 million, or 4.2%. Average loans increased $36.2 million, or 8.4%, 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 market interest rate environment. The changes in the average balances of equity securities available-for-sale and trading account securities was principally due to the reclassification of certain equity securities from available-for-sale to trading in the fourth quarter of 2002.

Total interest expense declined $385,000, or 7.5%, to $4.7 million for the three months ended March 31, 2003 from $5.1 million for the same period in 2002, resulting primarily from reduced rates paid on average interest-bearing deposits, partially offset by growth in average interest-bearing liabilities. Rates paid on average interest-bearing deposits fell 56 basis points to 1.94% for the first quarter of 2003, largely reflecting a significant reduction in market interest rates and a greater reliance on core money market, savings and NOW accounts to fund the balance sheet. The lower market interest rate environment led to a decrease in rates paid for new deposits as well as the repricing of a portion of the Company’s outstanding deposits. Average interest-bearing liabilities rose $17.8 million, or 3.0%, to $602.3 million for the three months ended March 31, 2003 from $584.5 million for the same period in 2002 reflecting strong growth in interest-bearing deposits, offset by a slight decrease in FHLB advances.

Provision for Loan Losses

The provision for loan losses declined $109,000 to zero for the first quarter of 2003 from $109,000 for the same period in 2002. The primary factors contributing to the lower provision in 2003 include loan sales totaling $11.1 million, a large reduction in non-performing loans and continued low levels of net charge-offs. The allowance for loan losses is maintained through provisions for loan losses.

Other Income

Total other income was $1.0 million for the first quarter of 2003 compared to $884,000 for the same period in 2002. This increase is attributable to several factors including growth in fee income and insurance commissions. Fee income increased $170,000, or 29.1%, to $755,000 in the first quarter of 2003 from $585,000 in the same period in 2002 reflecting expansion in core deposits and sales of non-deposit investment products. Insurance commissions totaled $363,000 for the three months ended March 31, 2003, an increase of $229,000 compared to $134,000 in the first quarter of 2002 mainly resulting from new customers gained as a result of successful marketing and business development efforts and a change in the accounting method used to record income. The 2002 results for Keyes, Mattson & Agan Insurance Agency, Inc. were affected by the recognition of commissions on an accrual basis rather than the cash basis the agency had utilized prior to being acquired. The results for 2003 also include gains of $404,000 from the sale of available-for-sale securities and a $539,000 penalty for the prepayment of FHLB advances. The Company elected to sell several agency securities and prepay certain FHLB advances to enhance net interest income. Other income for the

first quarter of 2003 also include gains on loan sales totaling $403,000, a net gain of $183,000 from the sale of a supermarket branch and trading losses totaling $564,000. The gains on loan sales were realized as a result of the sale of $11.1 million in longer-term, lower coupon, fixed-rate mortgages and the retention of the mortgage service rights. The trading losses are indicative of the volatile stock market during the first quarter of 2003.

Other Expenses

Other expenses rose $198,000, or 4.6%, to $4.5 million for the first quarter of 2003 compared to $4.3 million for the 2002 period mainly due to a $160,000 increase in professional services. Professional service costs were up 69.3%, to $391,000, largely resulting from consulting costs associated with employee benefit plans, an information technology audit and a new deposit service to be offered in the second quarter of 2003, as well as increased expenses related to the directors’ retirement plan.

Income Taxes

The Company’s income tax expense increased $67,000, or 15.7%, to $493,000 for the first quarter of 2003 compared to $426,000 in 2002. The increase in income taxes was primarily attributable to higher income before taxes, somewhat mitigated by a reduced effective tax rate. The Company’s effective tax rate fell to 27.8% for the first quarter of 2003 from 28.4% in 2002 primarily as a result of an increase in municipal security balances, which are exempt from federal taxes.

Liquidity

Liquidity and funding strategies are the responsibility of the Company’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 Company’s ability to raise cash within 30 days at a reasonable cost and with a minimum of loss. The Company’s primary sources of funds are deposits, principal and interest payments on loans and investment securities and borrowings from the FHLB-Boston. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The primary investing activities of the Company are the origination of one-to four-family mortgage loans and consumer loans, mainly home equity loans and lines of credit, and, to a lesser extent, the origination of multi-family and commercial real estate loans, construction and development loans, commercial business loans, and other types of consumer loans, as well as investments in mortgage-backed, other debt and equity securities. During the three months ended March 31, 2003, the Company’s loan originations totaled $36.1 million. At March 31, 2003, the Company’s investments in trading account and available-for-sale securities totaled $12.2 million and $187.7 million, respectively. During the three months ended March 31, 2003, total deposits increased $27.0 million, including the net issuance of approximately $9.6 million of brokered certificates of deposit. The Company closely monitors its liquidity position on a daily basis. If the Company requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances. At March 31, 2003, the Company had $245.0 million of FHLB borrowings.

Outstanding loan commitments totaled $17.5 million at March 31, 2003. Management of the Company anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit, which are scheduled to mature in one year or less from March 31, 2003, totaled $82.0 million. The Company relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. From time to time, the Company will also offer competitive special products to its customers to increase retention and to attract new deposits. Based upon the Company’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Company.

The primary source of funding for Woronoco Bancorp, Inc. is dividend payments from the Bank. These funds have been used to pay dividends and fund stock repurchase programs. The Bank’s ability to pay dividends and other capital distributions to the Woronoco Bancorp, Inc. is generally limited by 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 by the Bank to Woronoco Bancorp, Inc., 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. Prompt corrective action provisions are not applicable to savings and loan holding companies.

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 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2003 and December 31, 2002, that the Bank met all capital adequacy requirements to which it was subject.

As of March 31, 2003, the most recent notification from the Federal Deposit Insurance Company categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. 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 March 31, 2003 and December 31, 2002 are 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 March 31, 2003:

Total Capital to Risk Weighted Assets
Company	$	71,629	16.0	%		N/A	N/A			N/A	N/A
Bank	$	64,896	14.5	%	$	35,768	8.0	%	$	44,711	10.0	%

Tier 1 Capital to Risk Weighted Assets
Company	$	68,480	15.3	%		N/A	N/A			N/A	N/A
Bank	$	61,747	13.8	%	$	17,884	4.0	%	$	26,826	6.0	%

Tier 1 Capital to Average Assets
Company	$	68,480	9.8	%		N/A	N/A			N/A	N/A
Bank	$	61,747	8.9	%	$	27,813	4.0	%	$	34,766	5.0	%

As of December 31, 2002:

Total Capital to Risk Weighted Assets
Company	$	70,403	15.8	%		N/A	N/A			N/A	N/A
Bank	$	63,074	14.1	%	$	35,671	8.0	%	$	44,589	10.0	%

Tier 1 Capital to Risk Weighted Assets
Company	$	67,247	15.1	%		N/A	N/A			N/A	N/A
Bank	$	59,918	13.4	%	$	17,836	4.0	%	$	26,753	6.0	%

Tier 1 Capital to Average Assets
Company	$	67,247	9.6	%		N/A	N/A			N/A	N/A
Bank	$	59,918	8.6	%	$	27,882	4.0	%	$	34,853	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, 2002. There have been no material changes in the Company’s market risk since December 31, 2002.

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. (2)

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.

(2)

Incorporated by reference into this document from the Exhibits filed with the 10-Q of November 14, 2002.

(b) Reports on Form 8-K

On February 19, 2003, the Company filed a Form 8-K in which it announced that it had sold a supermarket branch office. The Company also announced that an additional supermarket branch will be relocated to a new site in the third quarter of 2003, where it will operate as a full-service branch location. A press release announcing the branch sale was filed by exhibit.

On January 13, 2003, the Company filed a Form 8-K in which it announced that the Company’s annual meeting of stockholders will be held on April 23, 2003. A press release announcing the annual meeting date 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, thereunto duly authorized.

	WORONOCO BANCORP, INC.

Dated: May 14, 2003	By:	/S/ CORNELIUS D. MAHONEY

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

Dated: May 14, 2003	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:

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

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;

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;

The registrant’s other certifying officer 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:

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;

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

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;

The registrant’s other certifying officer 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):

all significant deficiencies in the design or operation of 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

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

The registrant’s other certifying officer 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 internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 14, 2003		/S/ CORNELIUS D. MAHONEY

		Cornelius D. Mahoney
		President and Chief Executive Officer

CERTIFICATION

I, Debra L. Murphy, certify that:

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

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

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;

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


Date: May 14, 2003		/S/ DEBRA L. MURPHY

		Debra L. Murphy
		Executive Vice President and Chief Financial Officer