WORONOCO BANCORP INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2004

¨	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 x No ¨

As of April 30, 2004, there were 3,683,427 shares of the Registrant’s Common Stock outstanding.

WORONOCO BANCORP, INC.

FORM 10-Q

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets at March 31, 2004 and December 31, 2003.	1

	Consolidated Income Statements for the Three Months Ended March 31, 2004 and 2003	2

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2004 and 2003	3

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003	4

	Notes to Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

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, Use of Proceeds and Issuer Purchases of Equity Securities	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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

WORONOCO BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars In Thousands)


	Unaudited March 31, 2004			December 31, 2003
Assets

Cash and due from banks	$	18,050		$	18,110
Interest-bearing deposits		1,041			1,069
Federal funds sold		—			7,115

Cash and cash equivalents		19,091			26,294

Securities available for sale, at fair value		225,612			233,376
Federal Home Loan Bank stock, at cost		15,774			15,373
Loans, net of allowance for loan losses ($3,486 at March 31, 2004 and $3,280 at December 31, 2003)		540,641			497,962
Premises and equipment, net		9,913			10,131
Accrued interest receivable		3,308			3,156
Goodwill and other intangible assets, net		1,823			1,835
Cash surrender value of life insurance		6,207			6,143
Other assets		3,089			1,782

Total assets	$	825,458		$	796,052

Liabilities and Stockholders’ Equity

Deposits	$	412,553		$	419,473
Mortgagors’ escrow accounts		2,052			1,825
Short-term borrowings		41,001			42,466
Long-term debt		283,420			248,598
Net deferred tax liability		1,145			551
Accrued expenses and other liabilities		3,901			4,396

Total liabilities		744,072			717,309

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; 5,998,860 shares issued; shares outstanding: 3,673,393 at March 31, 2004 and 3,631,974 at December 31, 2003)		60			60
Additional paid-in capital		61,011			60,337
Unearned compensation		(2,858	)		(3,087	)
Retained earnings		48,970			48,365
Accumulated other comprehensive income		4,812			3,731
Treasury stock, at cost (2,325,467 shares at March 31, 2004 and 2,366,886 shares at December 31, 2003)		(30,609	)		(30,663	)

Total stockholders’ equity		81,386			78,743

Total liabilities and stockholders’ equity	$	825,458		$	796,052

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,
	2004		2003
Interest and dividend income:
Loans, including fees	$	6,993	$	7,368
Interest and dividends on securities:
Taxable interest		1,987		1,704
Tax exempt interest		247		247
Dividends		514		513
Trading account securities		—		190
Federal funds sold		4		13
Other		1		2

Total interest and dividend income		9,746		10,037

Interest expense:
Deposits		1,532		1,695
Borrowings		3,052		3,053

Total interest expense		4,584		4,748

Net interest and dividend income		5,162		5,289
Provision for loan losses		150		—

Net interest and dividend income, after provision for loan losses		5,012		5,289

Non-interest income:
Fee income		1,040		755
Insurance commissions		423		363
Gain on sales, disposition and impairment of securities available for sale, net		—		404
Net loss on trading account activities		—		(564	)
Gain on sales of loans, net		80		403
Gain on sale of supermarket branch		—		183
Penalty for prepayment of FHLB advances		—		(539	)
Gain on derivative instruments and hedging activities		—		5
Other income		70		6

Total non-interest income		1,613		1,016

Non-interest expenses:
Salaries and employee benefits		2,784		2,475
Occupancy and equipment		545		553
Marketing		80		153
Professional services		271		391
Data processing		270		257
Other general and administrative		634		701

Total non-interest expenses		4,584		4,530

Income before income taxes		2,041		1,775
Provision for income taxes		608		493

Net income	$	1,433	$	1,282

Earnings per share:
Basic	$	0.42	$	0.39
Diluted	$	0.40	$	0.37

Weighted average shares outstanding:
Basic		3,390,398		3,282,989
Diluted		3,611,181		3,494,120

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, 2004 and 2003

(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, 2003	$	60	$	60,337	$	(3,087	)	$	48,365		$	3,731		$	(30,663	)	$	78,743

Comprehensive income:
Net income		—		—		—			1,433			—			—			1,433
Change in net unrealized gain on securities available for sale		—		—		—			—			1,058			—			1,058
Net gain on derivative instruments		—		—		—			—			23			—			23

Total comprehensive income																		2,514

Decrease in unearned compensation		—		277		229			—			—			—			506
Adjustment for tax benefit related to vesting of stock awards and stock option exercises		—		331		—			—			—			—			331
Reissuance of treasury shares in connection with stock option exercises (62,981 shares)		—		66		—			(183	)		—			819			702
Cash dividends paid ($0.19 per share)		—		—		—			(645	)		—			—			(645	)
Treasury stock purchased (21,562 shares)		—		—		—			—			—			(765	)		(765	)

Balance at March 31, 2004	$	60	$	61,011	$	(2,858	)	$	48,970		$	4,812		$	(30,609	)	$	81,386

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		—		—		—			—			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
Reissuance of treasury shares in connection with stock option exercises (93,232 shares)		—		—		—			(275	)		—			1,181			906
Cash dividends paid ($0.15 per share)		—		—		—			(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

See accompanying notes to unaudited consolidated financial statements

WORONOCO BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended March 31,
	2004			2003
	(In thousands)
Cash flows from operating activities:
Net income	$	1,433		$	1,282
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		150			—
Net amortization of investments		272			53
Depreciation and amortization		243			243
Amortization of other intangible assets		12			16
Amortization of mortgage servicing rights		23			30
Employee stock ownership plan expense		375			222
Stock-based incentive plan expense		131			124
Gain on sales and disposition of available-for-sale securities, net		—			(404	)
Net decrease in trading account securities		—			3,478
Net loss on trading activities		—			564
Gain on sales of loans, net		(80	)		(403	)
Gain on sale of supermarket branch, net of expenses		—			(183	)
Loans originated and held for sale		(2,881	)		(11,135	)
Proceeds from sale of loans held for sale		2,928			11,390
Changes in operating assets and liabilities:
Accrued interest receivable		(152	)		(46	)
Accrued expenses and other liabilities		(164	)		381
Other, net		(1,369	)		95

Net cash provided by operating activities		921			5,707

Cash flows from investing activities:
Proceeds from sales of securities available for sale		—			20,110
Purchases of securities available for sale		(31	)		(66,819	)
Principal payments on mortgage-backed securities		9,159			14,815
Purchases of Federal Home Loan Bank stock		(401	)		—
Loans originations/purchases and principal collections, net		(42,782	)		(330	)
Additions to premises and equipment		(25	)		(122	)
Proceeds from sales of premises and equipment, net		—			100

Net cash used in investing activities		(34,080	)		(32,246	)

Cash flows from financing activities:
Net (decrease) increase in deposits, excluding deposits sold		(6,920	)		31,289
Sale of supermarket branch deposits, net of premium and expenses		—			(4,084	)
Net decrease in short-term borrowings		(1,465	)		(14,097	)
Proceeds from issuance of long-term debt		36,500			20,000
Repayments of long-term debt		(1,678	)		(14,000	)
Net increase in mortgagors’ escrow accounts		227			356
Cash dividends paid		(645	)		(496	)
Treasury stock purchased		(765	)		(892	)
Reissuance of treasury stock in connection with stock option exercises		702			906

Net cash provided by financing activities		25,956			18,982

Net decrease in cash and cash equivalents		(7,203	)		(7,557	)
Cash and cash equivalents at beginning of period		26,294			27,801

Cash and cash equivalents at end of period	$	19,091		$	20,244

Supplemental cash flow information:
Interest paid on deposits	$	1,883		$	1,887
Interest paid on borrowings		3,059			3,049
Income taxes paid		32			478

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, 2004

1.	Unaudited Consolidated Financial Statements

Woronoco Bancorp, Inc. (the “Corporation”) has no significant assets other than all of the outstanding shares of its wholly-owned subsidiaries, Woronoco Savings Bank (the “Bank”) and WRO Funding Corporation (collectively, the “Company”). The accounts of the Bank include all of its wholly-owned subsidiaries. The Consolidated Financial Statements of 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, changes in stockholders’ equity 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 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, 2003. 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.	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, 2004 and 2003 have been computed based upon the following (dollars in thousands except per share amounts):


	Unaudited
	Three Months Ended March 31,
	2004		2003
Net income	$	1,433	$	1,282

Average number of common shares outstanding		3,390,398		3,282,989
Effect of dilutive stock options		220,783		211,131

Average number of common shares outstanding used to calculate diluted earnings per share		3,611,181		3,494,120

Net income per share:
Basic	$	0.42	$	0.39
Diluted	$	0.40	$	0.37

For the three months ended March 31, 2004 and 2003, the Company had 46,000 and 19,500 options outstanding, respectively, that were anti-dilutive and therefore not included in the earnings per share calculation.

3.	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 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-based plans 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 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.


	Three Months Ended March 31,
	2004			2003
Net income, as reported	$	1,433		$	1,282
Deduct: Total stock-based employee compensation expense determined under fair value based method for all options, net of related tax effects		(449	)		(240	)

Pro forma net income	$	984		$	1,042

Earnings per share:
Basic-as reported	$	0.42		$	0.39

Basic-pro forma	$	0.29		$	0.32

Diluted-as reported	$	0.40		$	0.37

Diluted-pro forma	$	0.27		$	0.30

4.	Dividends

On April 21, 2004, the Company declared a cash dividend of $0.1975 per share payable on June 4, 2004 to shareholders of record as of the close of business on May 13, 2004.

5.	Loan commitments

Outstanding loan commitments totaled $19.4 million at March 31, 2004 compared to $8.4 million at December 31, 2003. At March 31, 2004 and December 31, 2003, the Company had commitments to purchase loans of $6.7 million and $57.7 million, respectively.

6.	Segment reporting

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


	Banking		Insurance		Intersegment Elimination			Consolidated Totals
	(In Thousands)
2004

Net interest and dividend income	$	5,162	$	—	$	—		$	5,162
Other revenue - external customers		1,040		423		—			1,463
Other revenue - from other segments		—		1		(1	)		—
Depreciation and amortization		235		8		—			243
Provision for loan losses		150		—		—			150
Profit		1,348		86		(1	)		1,433
Assets		823,545		2,728		(815	)		825,458

2003

Net interest and dividend 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

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, 2004 and 2003, 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, 2004 and December 31, 2003

The Company’s assets expanded $29.4 million, or 3.7%, to $825.5 million at March 31, 2004 as compared to $796.1 million at December 31, 2003, largely due to growth in net loans, partially offset by lower investments in securities available-for-sale and federal funds sold. Total net loans rose $42.7 million, or 8.6%, to $540.6 million at March 31, 2004 primarily as a result of purchases of adjustable-rate residential mortgages and solid loan origination activity, partially offset by refinancing and prepayment activity in the existing portfolio as well as loan sales. Investments in securities available-for-sale declined $7.8 million, or 3.3%, to $225.6 million at March 31, 2004 mainly attributable to principal payments on mortgage-backed securities. Federal funds sold balances fell $7.1 million as these funds were used to pay down short-term Federal Home Loan Bank (the “FHLB”) advances.

The balance sheet expansion was funded primarily by growth in core deposits and long-term debt, partially mitigated by a reduction in brokered deposits and certificates of deposit. Core deposits, which exclude brokered deposits and certificates of deposit, grew $6.2 million, or 2.7%, to $239.1 million at March 31, 2004 from $232.9 million at December 31, 2003 reflecting the success of promotional and sales activities associated with several relationship-banking packages. Long-term debt increased $34.8 million, or 14.0%, to $283.4 million at March 31, 2004 principally to fund loan purchases. The decrease in brokered deposits of $9.7 million was due to the redemption of a callable certificate of deposit with a coupon rate higher than the current market. Certificates of deposit balances fell $3.4 million, or 2.5%, to $130.9 million at March 31, 2004 largely due to the maturity of certain accounts with promotional rates.

Total stockholders’ equity was $81.4 million at March 31, 2004, an increase of $2.6 million, or 3.4%, compared to $78.7 million at December 31, 2003, primarily due to net income of $1.4 million, an increase of $1.1 million in net unrealized gains on securities available for sale, treasury share reissuances totaling $702,000 in connection with the exercise of stock options, a reduction of $506,000 in unearned compensation resulting from continued vesting in stock benefit plans and tax benefit adjustments in the amount of $331,000 related to the vesting of stock awards and stock option exercises. These items were partially offset by the repurchase of 21,562 shares of stock at a cost of $765,000 and cash dividends of $645,000.

Investment Activities

At March 31, 2004, the Company’s available-for-sale portfolio amounted to $225.6 million, or 27.3% of assets. The following table sets forth at the dates indicated information regarding the amortized cost and market values of the Company’s investment securities.


	March 31, 2004				December 31, 2003
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In Thousands)
Available-for-sale securities:
Equity securities:
Mutual funds	$	5,085	$	5,252	$	5,054	$	5,114
Common stocks		115		115		115		115

Total equity securities		5,200		5,367		5,169		5,229

Debt securities:
Mortgage-backed:
Freddie Mac		62,701		63,153		66,723		66,702
Fannie Mae		96,591		98,957		100,987		102,855
Ginnie Mae		7,130		7,441		8,088		8,428
REMIC		72		73		80		80

Total mortgage-backed securities		166,494		169,624		175,878		178,065

Other:
U.S. agency		5,072		5,376		5,081		5,369
Municipal bonds		21,439		22,342		21,442		22,277
Trust preferred		20,116		22,903		20,151		22,436

Total other debt securities		46,627		50,621		46,674		50,082

Total debt securities		213,121		220,245		222,552		228,147

Total available-for-sale securities (1)	$	218,321	$	225,612	$	227,721	$	233,376

(1)	Does not include investments in FHLB-Boston stock totaling $15.8 million at March 31, 2004 and $15.4 million at December 31, 2003.

Securities available-for-sale decreased $7.8 million, or 3.3%, to $225.6 million at March 31, 2004 primarily due to mortgage-backed security principal payments amounting to $9.2 million, partially offset by an increase of $1.6 million in net unrealized gains on available-for-sale securities.

Lending Activities

At March 31, 2004, the Company’s net loan portfolio was $540.6 million, or 65.5% 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 at the dates indicated.


	March 31, 2004					December 31, 2003
	Amount			Percent of Total		Amount			Percent of Total
	(Dollars In Thousands)
Real estate loans:
One- to four-family	$	326,335		59.54	%	$	279,889		55.20	%
Multi-family		36,392		6.64	%		41,178		8.12	%
Commercial		62,817		11.46	%		61,342		12.10	%
Construction and development		18,032		3.29	%		20,106		3.96	%

Total real estate loans		443,576		80.93	%		402,515		79.38	%

Consumer loans:
Home equity		79,826		14.57	%		80,168		15.81	%
Automobile		6,754		1.23	%		7,151		1.41	%
Other		2,311		0.42	%		2,333		0.46	%

Total consumer loans		88,891		16.22	%		89,652		17.68	%

Commercial loans		15,599		2.85	%		14,931		2.94	%

Total loans		548,066		100.00	%		507,098		100.00	%

Less:
Unadvanced loan funds (1)		(4,744	)				(6,673	)
Net deferred loan origination costs		805					817
Allowance for loan losses		(3,486	)				(3,280	)

Loans, net	$	540,641				$	497,962

(1)	Includes committed but unadvanced loan amounts.

The Company’s net loan portfolio grew $42.7 million, or 8.6%, during the first three months of 2004 largely reflecting the purchase of $52.7 million in adjustable-rate residential mortgages and origination volume totaling $18.5 million. Management believes these loan purchases will enhance net interest income as a result of positive interest rate spreads and will position the balance sheet for expected future interest rate increases. The Company’s level of loan closings was solid as a result of several factors including promotional and sales activities, a strong housing market and a stable local economy. However, origination volume was not as strong as in prior quarters reflecting the typical slowdown experienced during the winter season and the impact of higher interest rates. These factors were somewhat mitigated by refinancing and prepayment activity totaling $18.6 million, amortization of the existing portfolio amounting to $9.0 million and the sale of $2.9 million of longer-term fixed rate one-to four-family residential loans. 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 during the remainder of 2004.

Non-performing Assets

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


	March 31, 2004			December 31, 2003
	(Dollars in Thousands)
Nonaccrual loans:
One- to four- family real estate	$	403		$	388
Other consumer		27			29

Total		430			417
Real estate owned, net (1)		—			—

Total nonperforming assets		430			417
Troubled debt restructurings		—			—

Troubled debt restructurings and total nonperforming assets	$	430		$	417

Total nonperforming loans and troubled debt restructurings as a percentage of total loans (2) (3)		0.08	%		0.08	%
Total nonperforming assets and troubled debt restructurings as a percentage of total assets (3)		0.05	%		0.05	%

(1)	REO balances are shown net of related loss allowances.

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

(3)	Nonperforming assets consist of nonperforming loans and REO. Nonperforming loans consist of all loans 90 days or more past due and other loans that have been identified by the Company as presenting uncertainty with respect to the collectibility of interest or principal.

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 the loan portfolio based on management’s on-going evaluation of the risks inherent in the 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 is sufficient to cover losses inherent 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 affect 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, 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 and inherent risk, 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. 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 judgment, affect the collectibility of the portfolio as of the evaluation date.

Performing loan loss reserve percentages are also 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. These factors are intended to reduce the difference between estimated and actual losses and are designed to be self-correcting. 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 (the “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 Company’s allowance for loan losses for the periods set forth.


	At or for the Three Months Ended March 31,
	2004			2003
	(Dollars in Thousands)
Allowance for loan losses, beginning of period	$	3,280		$	3,156

Charged-off loans:
Consumer		30			30

Total charged-off loans		30			30

Recoveries on loans previously charged-off:
Real estate		60			—
Consumer		26			23

Total recoveries		86			23

Net loan (recoveries) charge-offs		(56	)		7
Provision for loan losses		150			—

Allowance for loan losses, end of period	$	3,486		$	3,149

Net loan (recoveries) charge-offs to average loans, net		(0.04	)%		0.01	%
Allowance for loan losses to total loans (1)		0.64	%		0.66	%
Allowance for loan losses to nonperforming loans and troubled debt restructurings (2)		810.70	%		424.97	%
Net loan (recoveries) charge-offs to allowance for loan losses		(6.43	)%		0.89	%
Recoveries to charge-offs		286.67	%		76.67	%

(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.

In the first quarter of 2004, the Company recorded a $60,000 recovery related to the payoff of a real estate loan.

Deposits

The following table sets forth the Company’s deposit accounts for the periods indicated.


	March 31, 2004				December 31, 2003
	Balance		Percent of Total Deposits		Balance		Percent of Total Deposits
	(Dollars In Thousands)
Demand	$	27,619	6.69	%	$	28,121	6.70	%
Savings		86,492	20.97	%		83,768	19.97	%
Money market		63,047	15.28	%		60,179	14.35	%
NOW		61,907	15.01	%		60,802	14.49	%
Brokered deposits		42,543	10.31	%		52,232	12.45	%
Certificates of deposit		130,945	31.74	%		134,371	32.04	%

Total deposits	$	412,553	100.00	%	$	419,473	100.00	%

Core deposits, which exclude brokered deposits and certificates of deposit, grew $6.2 million, or 2.7%, to $239.1 million at March 31, 2004 from $232.9 million at December 31, 2003. The growth in core deposits reflects the success of sales and marketing efforts associated with several relationship banking packages. The decrease in brokered deposits of $9.7 million was due to the redemption of a callable certificate of deposit with a coupon rate higher than the current market. Certificates of deposit balances fell $3.4 million, or 2.5%, to $130.9 million at March 31, 2004 largely due to the maturity of certain accounts with promotional rates.

Comparison of Operating Results for the Three Months Ended March 31, 2004 and 2003

General

Net income increased $151,000, or 11.8%, to $1.4 million for the quarter ended March 31, 2004 compared to $1.3 million for the same quarter last year. Diluted earnings per share grew 8.1% to $0.40 for the three months ended March 31, 2004 from $0.37 for the same period in 2003. Several factors influenced the improved financial results in the first quarter of 2004 including growth in average loans, investment securities and lower-costing core deposits and expansion in fee income and insurance commissions, somewhat offset by net interest margin compression and higher provisions for loan losses.

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 average balances, interest income and expense and yields earned or rates paid on the major categories of assets and liabilities for the periods indicated. 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. 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,
	2004							2003
	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	$	174,227	$	1,927		4.42	%	$	105,851	$	1,555		5.88	%
U.S. Government and agency securities		5,370		60		4.47	%		16,324		149		3.65	%
Equity securities		43,302		514		4.75	%		35,371		513		5.80	%
State and municipal securities (2)		22,360		374		6.69	%		21,936		374		6.82	%
Trading securities		—		—		—			14,980		190		5.07	%
Loans: (3)
Residential real estate loans		336,244		4,574		5.44	%		298,387		4,711		6.32	%
Commercial real estate loans		69,841		1,104		6.32	%		65,205		1,161		7.12	%
Consumer loans		89,170		1,118		5.04	%		92,505		1,311		5.75	%
Commercial loans		15,096		197		5.16	%		11,391		185		6.50	%

Loans, net		510,351		6,993		5.48	%		467,488		7,368		6.30	%
Other		3,156		5		0.63	%		6,678		15		0.90	%

Total interest-earning assets		758,766		9,873		5.20	%		668,628		10,164		6.08	%

Noninterest-earning assets		40,342							37,975

Total assets	$	799,108						$	706,603

Interest-bearing liabilities:
Deposits:
Money market accounts	$	61,141	$	162		1.07	%	$	49,394	$	164		1.35	%
Savings accounts (4)		85,537		112		0.53	%		77,390		189		0.99	%
NOW accounts		59,591		61		0.41	%		63,546		122		0.78	%
Certificates of deposit (5)		184,111		1,197		2.61	%		163,967		1,220		3.02	%

Total interest-bearing deposits		390,380		1,532		1.58	%		354,297		1,695		1.94	%
Borrowings		297,649		3,052		4.06	%		248,002		3,053		4.92	%

Total interest-bearing liabilities		688,029		4,584		2.68	%		602,299		4,748		3.20	%

Demand deposits		26,703							23,661
Other noninterest-bearing liabilities		4,447							5,337

Total liabilities		719,179							631,297
Total stockholders’ equity		79,929							75,306

Total liabilities and stockholders’ equity	$	799,108						$	706,603

Net interest-earning assets	$	70,737						$	66,329

Tax equivalent net interest income/interest rate spread (6)				5,289		2.52	%				5,416		2.88	%

Tax equivalent net interest margin as a percentage of interest-earning assets (7)						2.79	%						3.24	%

Ratio of interest-earning assets to interest-bearing liabilities						110.28	%						111.01	%

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

Net interest income as reported on income statement			$	5,162						$	5,289

(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, 2004 compared to 2003
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In Thousands)
Interest-earning assets:
Mortgage-backed securities	$	825		$	(453	)	$	372
U.S. Government and agency securities		(117	)		28			(89	)
Equity securities		103			(102	)		1
State and municipal securities (1)		7			(7	)		—
Trading securities		(95	)		(95	)		(190	)
Loans:
Residential real estate loans		558			(695	)		(137	)
Commercial real estate loans		79			(136	)		(57	)
Consumer loans		(44	)		(149	)		(193	)
Commercial loans		54			(42	)		12

Total loans		647			(1,022	)		(375	)
Other		(6	)		(4	)		(10	)

Total interest-earning assets		1,364			(1,655	)		(291	)

Interest-bearing liabilities:
Deposits:
Money market accounts		35			(37	)		(2	)
Savings accounts (2)		19			(96	)		(77	)
NOW accounts		(7	)		(54	)		(61	)
Certificates of deposit (3)		146			(169	)		(23	)

Total interest-bearing deposits		193			(356	)		(163	)
Borrowings		578			(579	)		(1	)

Total interest-bearing liabilities		771			(935	)		(164	)

(Decrease) increase in net interest income (4)	$	593		$	(720	)	$	(127	)

(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, decreased $127,000, or 2.3%, to $5.3 million for the three months ended March 31, 2004 compared to $5.4 million for the same period in 2003, mainly driven by net interest margin contraction, partially offset by growth in average interest-earning assets. Net interest margin, on a tax equivalent basis, compressed 45 basis points to 2.79% for the first quarter of 2004 from the comparable period in 2003 primarily resulting from reduced yields on interest-earning assets, somewhat mitigated by a lower cost of funds.

Interest and dividend income, on a tax equivalent basis, fell $291,000, or 2.9%, to $9.9 million for the three months ended March 31, 2004 compared to $10.2 million for the same period last year, largely 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 88 basis points to 5.20% for the three months ended March 31, 2004, principally as a result of lower market rates of interest. The lower interest rate environment led to significant levels of loan prepayments and refinancings as well as accelerated cash flows and premium amortization in the existing mortgage-backed securities portfolio. The proceeds from these activities were used to support loan growth and to purchase investment securities at lower yields. In addition, a portion of the Company’s existing interest-sensitive assets repriced to reduced rates. Average interest-earning assets totaled $758.8 million for the first quarter of 2004 compared to $668.6 million for the same period last year, an increase of $90.2 million, or 13.5%. Average mortgage-backed securities rose $68.4 million, or 64.6%, mainly attributable to additional purchases, somewhat offset by principal payments. Average loans increased $42.9 million, or 9.2%, primarily due to strong origination and refinancing volume and purchases of one- to-four-family adjustable-rate mortgages, somewhat mitigated by amortization and prepayments of existing loans and sales of longer-term, fixed-rate residential mortgages. The higher levels of refinancing and prepayment activity were due in large part to the lower market interest rate environment. Average equity securities expanded $7.9 million, or 22.4%, principally reflecting purchases of FHLB stock and mutual funds. Average U.S. Government and agency securities balances fell $11.0 million as a result of sales in the first quarter of 2003. The reduction of $15.0 million in average trading securities reflects the liquidation of the portfolio during 2003 as a result of favorable market conditions.

Total interest expense declined $164,000, or 3.5%, to $4.6 million for the three months ended March 31, 2004 from $4.7 million for the same period in 2003, resulting primarily from reduced rates paid on average interest-bearing liabilities, partially offset by growth in average interest-bearing liabilities. Rates paid on average interest-bearing liabilities fell 52 basis points to 2.68% for the first quarter of 2004, largely reflecting a significant reduction in market interest rates. The lower market interest rate environment led to a decrease in rates paid for new deposits and borrowings as well as the repricing of a portion of the Company’s outstanding deposits and borrowings. Average interest-bearing liabilities rose $85.7 million, or 14.2%, to $688.0 million for the three months ended March 31, 2004 from $602.3 million for the comparable period in 2003 reflecting solid growth in interest-bearing deposits and an increase in FHLB advances to fund balance sheet expansion.

Provision for Loan Losses

The provision for loan losses was $150,000 in the first quarter of 2004 compared to zero for the same period in 2003, due primarily to the purchase of adjustable-rate residential loans totaling $52.7 million in 2004 and a large reduction in non-performing loans in 2003. The allowance for loan losses is maintained through provisions for loan losses.

Non-interest Income

Total non-interest income rose $597,000, or 58.8%, to $1.6 million for the first quarter of 2004 compared to $1.0 million for the same period in 2003. This increase was attributable to several factors including growth in fee income and insurance commissions. Fee income increased $285,000, or 37.7%, to $1.0 million in the first quarter of 2004 from $755,000 for the comparable period in 2003 reflecting expansion in core deposits, the impact of a new deposit service introduced in the second quarter of 2003. Insurance commissions totaled $423,000 for the three months ended March 31, 2004 compared to $363,000 in the second quarter of 2003, an increase of $60,000, or 16.5%, mainly resulting from new customers gained as a result of successful marketing and business development efforts. Gain on sales of loans declined $323,000 to $80,000 for the first

quarter of 2004 compared to $403,000 for the same period in 2003 as only $2.8 million of one-to four-family loans were sold in 2004 compared to $11.1 million in 2003. The gains from loan sales realized in both periods are indicative of the Company’s strategy to sell longer-term, lower coupon, fixed-rate mortgages. Other income increased $64,000 to $70,000 for the first three months of 2004 due to revenue recognized in 2004 associated with rental property and bank-owned life insurance. The results for 2003 included net gains of $404,000 from the sale of available-for-sale securities and $183,000 from the sale of a supermarket branch, a $539,000 penalty for the prepayment of FHLB advances and net trading losses totaling $564,000.

Non-interest Expenses

Non-interest expenses increased $54,000, or 1.2%, to $4.6 million for the three months ended March 31, 2004 compared to $4.5 million in the first quarter of 2003 attributable to higher salaries and benefits, partially offset by lower marketing, professional services and other expenses. Salaries and benefits expenses rose $309,000, or 12.5%, to $2.8 million for first quarter of 2004 reflecting additional staffing costs for the new full-service branch in Chicopee, standard wage increases and increased benefit costs associated with the Company’s higher stock price in 2004 compared to 2003. Marketing costs dropped $73,000, or 47.7%, to $80,000 in the first quarter of 2004 primarily due to less promotional activities. Professional services expenses fell $120,000, or 30.7%, to $271,000 for the three months ended March 31, 2004 largely resulting from consulting costs incurred in 2003 in connection with employee benefit plans, an information technology audit and a new deposit service initiated in 2003. Other general and administrative expenses declined $67,000, or 9.6%, mainly due to lower trust management fees, reduced postage expenses in connection with less promotional activities and decreased correspondent banking payments.

Income Taxes

The Company’s income tax expense increased $115,000, or 23.3%, to $608,000 for the first quarter of 2004 compared to $493,000 in 2003 primarily attributable to higher income before taxes and the effective tax rate. The Company’s effective tax rate rose to 29.8% for the first quarter of 2004 from 27.8% in 2003 principally as a result of the impact of the dividends received deduction realized in 2003. As a result of the liquidation of the trading securities portfolio in 2003, the Company no longer receives the benefit of the preferential treatment for such income.

Liquidity

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

The primary source of funding for the Corporation is dividends from the Bank. These funds have been used to pay dividends and to repurchase the Corporation’s common stock. The Bank’s ability to pay dividends and other capital distributions to the Corporation is generally limited by Massachusetts banking regulations and regulations of the Federal Deposit Insurance Corporation. Additionally, the Massachusetts Banking Commissioner and the Federal Deposit Insurance Corporation may prohibit the payment of dividends by the Bank to the Corporation that are otherwise permissible by regulation for safety and soundness reasons.

The primary investing activities of the Company are the origination of one-to four-family mortgage loans and consumer loans, primarily home equity loans and lines of credit, and, to a lesser extent, the origination of other types of loans, purchases of one-to four-family adjustable-rate mortgages and investments in mortgage-backed, debt and equity securities. During the three months ended March 31, 2004, the Company’s loan originations and purchases totaled $18.5 million and $52.7 million, respectively. At March 31, 2004, the Company’s investments in mortgage-backed, other debt and equity securities totaled $225.6 million.

These activities are funded primarily by principal and interest payments on loans and investment securities, deposit growth, the utilization of FHLB advances and proceeds from loan sales. The Company experienced a $6.9 million net decrease in total deposits during the three months ended March 31, 2004, including the redemption of $10 million in brokered deposits. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Company and its local competitors, as well as other factors. The Company closely monitors its liquidity position on a daily basis. If the Company requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances. At March 31, 2004, the Company had $313.2 million of outstanding FHLB borrowings.

During the three months ended March 31, 2004, the Company sold $2.9 million of longer-term, lower-coupon, fixed rate residential mortgages. The Company normally originates fixed and adjustable rate loans for its portfolio. However, an analysis of the Company’s interest rate profile and the low rates at which these loans were originated led management to determine that these assets should be sold and the proceeds redeployed. The sale of these loans reduced the amount of high quality collateral available to be pledged as security for borrowings in the secondary market. The Company will continue to evaluate the sale of additional longer-term, lower coupon, fixed-rate residential mortgages during the remainder of 2004.

At March 31, 2004, the Company has outstanding commitments to originate $19.4 million of loans and to purchase $6.7 million of one- to four-family adjustable-rate mortgages. Management of the Company anticipates that it will have sufficient funds available to meet its current loan commitments. Retail certificates of deposit scheduled to mature in one year or less from March 31, 2004 totaled $97.9 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.

Off-Balance Sheet Arrangements

Information relating to Off-Balance Sheet Arrangements is presented in the Securities and Exchange Commission Form 10-K filed by the Company for the year ended December 31, 2003. There have been no material changes in the Company’s off-balance sheet arrangements since December 31, 2003.

Payments Due Under Contractual Obligations

Information relating to payments due under contractual obligations is presented in the Securities and Exchange Commission Form 10-K filed by the Company for the year ended December 31, 2003. Since December 31, 2003, the Company has entered into a lease agreement for a new branch in Longmeadow, Massachusetts. The operating lease requires payments of $201,000 due within one year, $402,000 in years 1-3, $424,000 in years 3-5 and $2,453,000 in more than 5 years. The Company has the right to extend this agreement for two five-year periods. There were no other material changes in the Company’s payments due under contractual obligations.

Regulatory Capital

Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as the Bank, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be in general a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System (the “Rating System”) established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For all other institutions, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and a percentage of certain nonfinancial equity investments.

The Bank must also comply with FDIC risk-based capital guidelines. The FDIC guidelines require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as the Bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk. For example, under the FDIC’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight, loans secured by one- to four-family residential properties generally have a 50% risk weight and commercial loans have a risk weighting of 100%.

State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, a portion of the net unrealized gain on equity securities and other capital instruments. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital. Management believes, as of March 31, 2004 and December 31, 2003, that the Bank met all capital adequacy requirements to which it was subject.

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. Banks with specified amounts of trading activity may be subject to adjustments to its risk-based capital requirement to ensure adequate capital to support market risk.

As of March 31, 2004, 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. As a savings and loan holding company regulated by the Office of Thrift Supervision, the Company is not, under current law, subject to any separate regulatory capital requirements.

The Company’s and Bank’s actual capital amounts and ratios as of March 31, 2004 and December 31, 2003 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, 2004

Total Capital to Risk Weighted Assets
Company	$	78,242	15.6	%		N/A	N/A			N/A	N/A
Bank	$	67,854	13.5	%	$	40,155	8.0	%	$	50,194	10.0	%

Tier 1 Capital to Risk Weighted Assets
Company	$	74,681	14.9	%		N/A	N/A			N/A	N/A
Bank	$	64,293	12.8	%	$	20,078	4.0	%	$	30,117	6.0	%

Tier 1 Capital to Average Assets
Company	$	74,681	9.5	%		N/A	N/A			N/A	N/A
Bank	$	64,293	8.1	%	$	31,585	4.0	%	$	39,482	5.0	%

As of December 31, 2003:

Total Capital to Risk Weighted Assets
Company	$	76,414	15.9	%		N/A	N/A			N/A	N/A
Bank	$	65,200	13.5	%	$	38,504	8.0	%	$	48,130	10.0	%

Tier 1 Capital to Risk Weighted Assets
Company	$	73,107	15.2	%		N/A	N/A			N/A	N/A
Bank	$	61,893	12.9	%	$	19,252	4.0	%	$	28,878	6.0	%

Tier 1 Capital to Average Assets
Company	$	73,107	9.3	%		N/A	N/A			N/A	N/A
Bank	$	61,893	7.9	%	$	31,327	4.0	%	$	39,159	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, 2003. There have been no material changes to the Company’s market risk since December 31, 2003.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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, Use of Proceeds and Issuer Purchases of Equity Securities.

The following table provides information regarding the Company’s purchases of its equity securities during the three months ended March 31, 2004.


Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid Per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 - 31, 2004	355	$	37.70	355	51,902
February 1 - 29, 2004	15,700		35.34	15,700	36,202
March 1 - 31, 2004	5,507		35.59	5,507	30,695
Total	21,562	$	35.44	21,562	NA

(1)

The Company has purchased all shares in open market purchases pursuant to a publicly announced repurchase plan, announced on November 2, 2001. In accordance with this plan, the Company intends to purchase up to 373,952 shares, from time to time, subject to market conditions. This plan will continue until it is completed or terminated by the Board of Directors. No plans expired during the three months ended March 31, 2004. The Company has no plans that it has elected to terminate prior to expiration or under which it does not intend to make further purchases.

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)

31.0		Certifications pursuant to Rule 13a-14(a)/15d-14(a)

32.0		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 Form 10-Q filed on November 14, 2002.

(b)

Reports on Form 8-K

On January 22, 2004, Woronoco Bancorp, Inc. furnished a Form 8-K in which it announced the financial results for the quarter and year ended December 31, 2003. The press release announcing the financial results for the quarter and year ended December 31, 2003 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 10, 2004	By:	/s/ Cornelius D. Mahoney
		Cornelius D. Mahoney
		Chairman of the Board, President and
		Chief Executive Officer
		(principal executive officer)

Dated: May 10, 2004	By:	/s/ Debra L. Murphy
		Debra L. Murphy
		Executive Vice President and
		Chief Financial Officer
		(principal financial and accounting officer)

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