10-Q/A 1 b44867wbe10vqza.txt WARREN BANCORP, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or the quarterly period ended SEPTEMBER 30, 2002 or ------------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from __________________ to ___________________ Commission File No. 0-17222 WARREN BANCORP, INC. (Exact Name of registrant as specified in the charter) MASSACHUSETTS 04-3024165 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 MAIN STREET, PEABODY, MASSACHUSETTS 01960 (Address of principal executive offices) (Zip Code) (978) 531-7400 (Registrant's telephone number, including area code) 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 report(s), and (2) has been subject to such filing requirement for the past 90 days. Yes [x] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 4, 2002 --------------------------------------- ----------------------------------- Common Stock, par value $.10 per share 7,487,161 NOTE: This amendment is filed to reference in Part II that a current report on Form 8-K was filed during the period ending September 30, 2002. This reference was inadvertently omitted from Part II, Item 6 in the original Form 10-Q filed on November 8, 2002. WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

See accompanying notes to consolidated financial statements. WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per-share data) (Unaudited)

See accompanying notes to consolidated financial statements. WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2002 (Dollars in thousands) (Unaudited)

See accompanying notes to consolidated financial statements. WARREN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

See accompanying notes to consolidated financial statements. WARREN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The consolidated financial statements of Warren Bancorp, Inc. (the "Corporation" or "Warren") presented herein should be read in conjunction with the consolidated financial statements of the Corporation as of and for the year ended December 31, 2001. The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, but the Corporation believes that the disclosures are adequate to make the information presented not misleading. The consolidated balance sheet as of September 30, 2002, the consolidated statement of stockholders' equity for the nine months ended September 30, 2002, the consolidated statements of cash flows for the nine months ended September 30, 2002 and September 30, 2001, and the related consolidated statements of operations for the three months ended and nine months ended September 30, 2002 and September 30, 2001 are unaudited. In the opinion of management, the consolidated financial statements reflect all adjustments necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for the full year. EARNINGS PER SHARE The components of basic and diluted EPS for the quarters and nine months ended September 30, 2002 and 2001 are as follows:

BUSINESS SEGMENTS For internal reporting, planning and business purposes, the Corporation segments its operations into distinct business groups. An individual business group's profit contribution to the Corporation as a whole is determined based upon the Corporation's profitability reporting system which assigns capital and other balance sheet items and income statement items to each of the business groups. This segmentation mirrors the Corporation's organizational structure. Management accounting policies are in place for assigning revenues and expenses that are not directly incurred by the business groups, such as overhead, the results of asset allocations, and transfer revenues and expenses. Accordingly, the Corporation's business-segment operating results will differ with other similar information published by other financial institutions. In 1 addition, management accounting concepts are periodically refined and results may change to reflect these refinements. For purposes of this disclosure, operating segments are defined as components of an enterprise that are evaluated regularly by chief operating decision maker in deciding how to allocate resources and in assessing performance. The Corporation's chief operating decision maker is the President and Chief Executive Officer of the Corporation. This disclosure has no effect on the Corporation's primary financial statements. The Corporation has identified its reportable operating business segments as the Corporate Banking Business, the Personal Banking Business and the Residential Mortgage Business. A description of each reportable business segment is discussed below: CORPORATE BANKING BUSINESS The Corporate Banking Business provides services to business customers in the Corporation's market area. These services include, but are not limited to, commercial real estate and construction loans, asset-based financing and cash management/deposit services. It services all loans in its business. PERSONAL BANKING BUSINESS The Personal Banking Business provides services to consumers in the Corporation's market area through its branch and ATM network. These services include, but are not limited to, home equity loans, installment loans, safe deposit boxes and an array of deposit services. RESIDENTIAL MORTGAGE BUSINESS The Residential Mortgage Business provides services to consumers in the Corporation's market area. These services include making adjustable-rate and fixed-rate mortgage loans. This group also services all loans held in its business and sells fixed-rate loans into the secondary market. NON-REPORTABLE SEGMENTS Non-reportable operating segments of the Corporation's operations that do not meet the qualitative and quantitative thresholds requiring disclosure are included in the Other category in the disclosure of business segments below. Revenues in these segments consist mainly of interest income. 2 Specific reportable segment information as of and for the quarters and nine-month periods ended September 30, 2002 and 2001 is as follows (in thousands):

3 MERGER AGREEMENT WITH BANKNORTH GROUP, INC. On August 8, 2002, Banknorth Group, Inc. ("Banknorth") and Warren Bancorp, Inc. entered into an Agreement and Plan of Merger (the "Agreement") pursuant to which Warren will be merged with and into Banknorth (the "Merger"). The Agreement provides, among other things, that as a result of the Merger each outstanding share of common stock of Warren (subject to certain exceptions) will be converted into the right to receive $15.75 in cash or a number of whole shares of common stock of Banknorth determined by dividing $15.75 by the average closing prices of the Banknorth common stock during a specified period preceding the Merger, plus cash in lieu of any fractional share interest, subject to election and allocation procedures set forth in the Agreement, which are intended to ensure that 50% of the outstanding shares of Warren common stock will be converted into the right to receive Banknorth common stock and 50% of the outstanding shares of Warren common stock will be converted into the right to receive cash. The Merger is subject to all required regulatory approvals, the approval of Warren stockholders, and other customary conditions. OTHER Warren Five Cents Savings Bank established as a subsidiary company in 1999 a real estate investment trust ("REIT"). The Corporation has received from the Massachusetts Department of Revenue ("DOR") a Notice of Assessment of additional state taxes, and it is aware that the DOR has sent a Notice of Assessment to a number of other banks that have REIT subsidiaries. The DOR contends that dividend distributions from the REITs to the banks are fully taxable in Massachusetts. The Corporation contends that Massachusetts law provides for a dividends-received deduction equal to 95% of certain of those dividend distributions. Warren Five Cents Savings Bank applies the 95% deduction to the dividends it receives from its REIT subsidiary. The amount of assessment to the Corporation was $690,000 for tax-return years 1999 and 2000, plus penalties and interest of $121,000, all before taking into consideration federal tax benefits. The total amount of state tax benefit received by the Corporation (before federal tax) by applying the aforementioned 95% dividends-received deduction from inception of the REIT through September 30, 2002, is $1,984,000 (including the $690,000 above). The Corporation is vigorously challenging the assessment. If the DOR prevails, it could assess the remaining $1,294,000 plus penalty and interest. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Form 10-Q constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate," "intend," "estimate," "plan," "assume" and other similar expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the control of the Corporation and may cause the actual results, performance or achievements of the Corporation to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the following: interest rates may increase, adversely affecting the ability of borrowers to repay adjustable-rate loans and the Corporation's earnings and income which derive in significant part from loans to borrowers; unemployment in the Corporation's market area may increase, adversely affecting the ability of individual borrowers to repay loans; property values may decline, adversely affecting the ability of borrowers to repay loans and the value of real estate securing repayment of loans; and general economic and market conditions in the Corporation's market area may decline, adversely affecting the ability of borrowers to repay loans, the value of real estate securing repayment of loans and the Corporation's ability to make profitable loans. Any of the above may also result in lower interest income, increased loan losses, additional charge-offs and writedowns and higher operating expenses. In addition, if the Corporation does not prevail in its challenge to an assessment of state taxes, penalties and interest discussed below 4 under "Other," a required payment would adversely affect the income, capital adequacy and liquidity of the Corporation and the Bank. These and other factors that might cause differences between actual and anticipated results, performance and achievements are discussed in greater detail in this Form 10-Q. GENERAL Warren Bancorp, Inc.'s (the "Corporation" or "Warren") operating results for the three and nine months ended September 30, 2002 (the "2002 quarter" and "2002 period") reflect the operations of its only subsidiary, Warren Five Cents Savings Bank (the "Bank"). The Bank, which is wholly owned by the Corporation, operates as a community bank and is in the business of making individual and commercial loans to customers in its market area. The Corporation recorded a decreased profit for the 2002 period ended September 30, 2002 due to increased non-interest expenses. Included in the 2002 period is $483,000 of expenses related to a merger with Banknorth Group, Inc. (See "Merger Agreement with Banknorth Group, Inc." below.) Also included in the 2001 period was the receipt of state-tax refunds plus interest for the resolution of certain tax matters of prior years. Nonperforming loans increased to $84,000 in the 2002 period from zero at December 31, 2001. Management continues to monitor the nonperforming loan portfolio closely. If conditions in the Massachusetts' real estate market become unstable and values deteriorate, the amount of nonaccrual loans and real estate acquired through foreclosure would be expected to increase, resulting in lower interest income and increased loan losses, which could require additional loan loss provisions to be charged to operating income. Moreover, real estate acquired through foreclosure may give rise to additional charge-offs and writedowns and higher expenses for property taxes and other carrying costs. MERGER AGREEMENT WITH BANKNORTH GROUP, INC. On August 8, 2002, Banknorth Group, Inc. ("Banknorth") and Warren Bancorp, Inc. entered into an Agreement and Plan of Merger (the "Agreement") pursuant to which Warren will be merged with and into Banknorth (the "Merger"). The Agreement provides, among other things, that as a result of the Merger each outstanding share of common stock of Warren (subject to certain exceptions) will be converted into the right to receive $15.75 in cash or a number of whole shares of common stock of Banknorth determined by dividing $15.75 by the average closing prices of the Banknorth common stock during a specified period preceding the Merger, plus cash in lieu of any fractional share interest, subject to election and allocation procedures set forth in the Agreement which are intended to ensure that 50% of the outstanding shares of Warren common stock will be converted into the right to receive Banknorth common stock and 50% of the outstanding shares of Warren common stock will be converted into the right to receive cash. The Merger is subject to all required regulatory approvals, the approval of Warren stockholders, and other customary conditions. OTHER Warren Five Cents Savings Bank (the "Bank") established as a subsidiary company in 1999 a real estate investment trust ("REIT"). The Corporation has received from the Massachusetts Department of Revenue ("DOR") a Notice of Assessment of additional state taxes, and it is aware that the DOR has sent a Notice of Assessment to a number of other banks that have REIT subsidiaries. The DOR contends that dividend distributions from the REITs to the banks are fully taxable in Massachusetts. The Corporation contends that Massachusetts law provides for a dividends-received deduction equal to 95% of certain of those dividend distributions. Warren Five Cents Savings Bank applies the 95% deduction to the dividends it receives from its REIT subsidiary. The amount of assessment to the Corporation was $690,000 for tax-return years 1999 and 2000, plus penalties and interest of $121,000, all before taking into consideration federal tax benefits. The total amount of state tax benefit received by the Corporation (before federal tax) by applying the aforementioned 95% dividends-received deduction from inception of the REIT through September 30, 2002, is $1,984,000 (including the $690,000 above). 5 The Corporation is vigorously challenging the assessment. If the DOR prevails, it could assess the remaining $1,294,000 plus penalty and interest. Payments required to be made by the Corporation if the DOR prevails would adversely affect the income, capital adequacy and liquidity of the Corporation and the Bank. ASSET/LIABILITY MANAGEMENT A primary objective of the Corporation's asset/liability management policy is to manage interest-rate risk over time to achieve a prudent level of net interest income in changing interest-rate environments. Management's strategies are intended to be responsive to changes in interest rates and to recognize market demands for particular types of deposit and loan products. These strategies are overseen by an internal Asset/Liability Management Committee and by the Bank's Board of Directors, and the risks are managed with techniques such as simulation analysis, which measures the effect on net interest income of possible changes in interest rates, and "gap" analysis, using models similar to the one shown on the following page. The Corporation uses simulation analysis to measure exposure of net interest income to changes in interest rates over a one-year period. This period is measured because the Corporation is most vulnerable to changes in short-term (one year and under) rates. Simulation analysis involves projecting future interest income and expense under various rate scenarios. The Corporation's policy on interest-rate risk specifies that if short-term interest rates were to shift immediately up or down 200 basis points, estimated net interest income for the next 12 months should decline by less than 15%. This policy remained in effect during the quarter, and in management's opinion there were no material changes in interest rate risk since December 31, 2001, the date as of which the simulation analysis was performed. Certain shortcomings are inherent in a simulation analysis. Estimates of customer behavior to changing interest rates may differ significantly from actual. Areas of these estimates include loan prepayment speeds, shifting between adjustable-rate and fixed-rate loans, and activity within different categories of deposit products. Also, the ability of some borrowers to repay their adjustable-rate loans may decrease in the event of interest-rate increases. The following table summarizes the Corporation's interest-rate sensitivity position as of September 30, 2002. Assets and liabilities are classified as interest-rate sensitive if they have a remaining term to maturity of 0-12 months, or are subject to interest-rate adjustments within those time periods. Adjustable-rate loans and mortgage-backed securities are shown as if the entire balance came due on the repricing date. Nonaccruing loans are not included in this analysis due to their status as non-earning assets. Estimates of fixed-rate loan and fixed-rate mortgage-backed security amortization and prepayments are included with rate sensitive assets. The following types of deposit accounts are assumed to have effective maturities as follows based on their past retention characteristics: NOW accounts -up to five years; cash manager and passbook plus accounts -up to six months; and regular savings accounts -up to greater than five years. None of these assets is considered a trading asset. 6 INTEREST-RATE SENSITIVITY POSITION

---------- (a) Other deposits consist of regular savings and N.O.W. accounts. Interest-rate sensitivity statistics are static measures that do not necessarily take into consideration external factors which might affect the sensitivity of assets and liabilities and consequently cannot be used alone to predict the operating results of a financial institution in a changing environment. However, these measurements do reflect major trends and thus the Corporation's sensitivity to interest rates changes over time. LIQUIDITY The Bank seeks to ensure sufficient liquidity is available to meet cash requirements while earning a return on liquid assets. The Bank uses its liquidity primarily to fund loan and investment commitments, to supplement deposit flows and to meet operating expenses. The primary sources of liquidity are interest and amortization from loans, mortgage-backed securities and investments, maturities of investments, loan sales, deposits and Federal Home Loan Bank of Boston ("FHLBB") advances, which include a $15 million overnight line of credit as well as other overnight borrowings vehicles. The Bank also has access to the Federal Reserve Bank's discount window and may borrow from the Depositors Insurance Fund Liquidity Fund. During the 2002 period, the Bank did not use the Federal Reserve Bank discount window and did not borrow from the Depositors Insurance Fund Liquidity Fund. 7 The Bank also uses the longer term borrowings facilities within its total available credit line with the FHLBB. Advances from the FHLBB, other than the overnight facility, were $2.7 million at September 30, 2002. During the 2002 period, the primary sources of liquidity were $65.8 million in loan sales, loan paydowns and amortization of $74.0 million, proceeds from maturities of investment securities of $37.6 million, a $17.2 million increase in borrowed funds, and proceeds from payments of mortgage-backed securities of $2.7 million. Primary uses of funds were $142.4 million in residential, commercial real estate, commercial, and consumer loan originations, a $3.0 million decrease in FHLBB advances, a $1.7 million decrease in deposits and $52.9 million of purchases of investment securities. At September 30, 2002, the Bank had $9.6 million in overnight investments. The primary source of liquidity for the Corporation is dividends from the Bank. Dividends paid and, when applicable, stock repurchases by the Corporation are the primary use of this liquidity. From time to time, the Bank has obtained time deposits in denominations of $100,000 and over. The following table summarizes maturities of time deposits of $100,000 or more outstanding at September 30, 2002: WITHIN ONE YEAR (IN THOUSANDS) --------------- Less than 3 months......................... $ 2,785 3 to 6 months.............................. 6,823 6 to 12 months............................. 4,559 -------- 14,167 More than 12 months........................ 8,747 -------- $ 22,914 ======== CAPITAL ADEQUACY Total stockholders' equity at September 30, 2002 was $45.5 million, an increase of $3.1 million from $42.4 million at December 31, 2001. Included in stockholders' equity at September 30, 2002 is an unrealized gain on securities available for sale of $1.1 million as compared to $660,000 at December 31, 2001. Future interest-rate increases could reduce the fair value of these securities and reduce stockholders' equity. As a percentage of total assets, stockholders' equity was 9.47% at September 30, 2002 compared to 9.15% at December 31, 2001. The FRB's leverage capital-to-assets guidelines require the strongest and most highly rated bank holding companies to maintain at least a 3.00% ratio of Tier I capital to average consolidated assets. All other bank holding companies are required to maintain at least 4.00% to 5.00%, depending on how the FRB evaluates their condition. The FRB may require a higher capital ratio. At September 30, 2002, the FRB leverage capital ratio was 9.45% compared to 9.02% at December 31, 2001. The FDIC's leverage capital-to-assets ratio guidelines are substantially similar to those adopted by the FRB and described above. At September 30, 2002, the Bank's leverage capital ratio, under FDIC guidelines, was 8.97% compared to 8.66% at December 31, 2001. The FRB and the FDIC have also imposed risk-based capital requirements on the Corporation and the Bank, respectively, which give different risk weightings to assets and to off-balance sheet assets such as loan commitments and loans sold with recourse. Both the FRB and FDIC guidelines require the Corporation and the Bank to have an 8.00% risk-based capital ratio. The Corporation's and the Bank's risk-based capital ratios were 13.17% and 12.56%, respectively, at September 30, 2002 compared to 12.43% and 11.98%, respectively, at December 31, 2001, thus exceeding their risk-based capital requirements. As of September 30, 2002, the Bank's total risk-based capital ratio, Tier I risk-based capital ratio and leverage capital ratio were 12.56%, 11.30%, and 8.97%, respectively. Based on these capital ratios, the Bank is considered to be "well capitalized." 8 FINANCIAL CONDITION The Corporation's total assets increased to $480.4 million at September 30, 2002 from $463.6 million at December 31, 2001. Decreases occurred in mortgage-backed securities and receivables due from mortgage investors, while increases occurred in U.S. Government and related obligations, cash and cash equivalents, consumer loans, commercial real estate loans and commercial loans. DUE FROM MORTGAGE INVESTORS Due from mortgage investors was zero at September 30, 2002 compared to $13.0 million at December 31, 2001. This represented the amount owed to the Corporation by mortgage investors for loans sold. INVESTMENTS AND MORTGAGE-BACKED SECURITIES Investment securities and mortgage-backed securities consisting of available-for-sale, held-to-maturity and cost-basis investments, increased to $77.7million at September 30, 2002 from $64.4 million at December 31, 2001. The increase is the result of a net increase of the amortized cost of U.S. Government and related obligations and an increase in the market value of investment securities available for sale. The amortized cost of mortgage-backed securities decreased to $7.1 million at September 30, 2002 from $9.8 million at December 31, 2001 due to principal paydowns. Future increases in interest rates could reduce the value of these investments. INVESTMENTS AT SEPTEMBER 30, 2002 ARE AS FOLLOWS:

LOANS AND LOANS HELD FOR SALE Loans held for sale decreased by $595,000 during the 2002 period to $12.9 million at September 30, 2002. 9 Loans increased by $16.2 million during the 2002 period to $357.8 million at September 30, 2002. This increase is the result of increases in commercial real estate, commercial and consumer loans with decreases in residential mortgage and commercial construction loans. Commercial real estate, commercial construction, and commercial loans typically earn higher yields than residential mortgage loans, but usually carry higher risk due to loan size. The following table sets forth the classification of the Corporation's loans as of September 30, 2002 and December 31, 2001 (in thousands): SEPTEMBER 30, 2002 DECEMBER 31, 2001 ------------------ ----------------- Residential mortgages........... $ 48,595 $ 48,762 Commercial real estate.......... 212,449 200,890 Commercial construction ........ 12,767 13,192 Commercial loans................ 49,842 49,225 Consumer loans.................. 34,189 29,570 -------- -------- $357,842 $341,639 ======== ======== Residential mortgage loan originations during the 2002 period were $70.6 million compared to $87.0 million in the 2001 period. The Corporation originated $46.4 million in fixed-rate loans during the 2002 period compared to $72.1 million during the 2001 period. Adjustable-rate loans totaling $24.2 million were originated during the 2002 period compared to $14.9 million during the 2001 period. The Corporation sold loans totaling $52.3 million during the 2002 period compared to $76.0 million sold in the 2001 period. ......... CREDIT QUALITY IMPAIRED AND NONPERFORMING LOANS Loans are deemed by the Corporation to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Generally, nonaccruing loans are deemed impaired. Large groups of homogeneous loans, such as smaller balance residential mortgage and consumer installment loans are collectively evaluated for impairment. Typically, the maximum delay in receiving payments according to the contractual terms of the loan that can occur before a loan is considered impaired is ninety days. Impaired loans are analyzed and categorized by level of credit risk and collectibility in order to determine their related allowance for loan losses. At September 30, 2002 there were five loans considered impaired and performing totaling $5.0 million and one loan for $84,000 considered impaired and nonperforming, compared to three loans considered impaired and performing totaling $1.8 million and no loans considered impaired and nonperforming at December 31, 2001. Loans past due 90 days or more, or past due less than 90 days but in nonaccrual status were $84,000 at September 30, 2002 compared to zero at December 31, 2001. Accrual of interest on loans is discontinued either when a reasonable doubt exists as to that the full, timely collection of principal or interest or when the loans become contractually past due by ninety days or more, unless they are adequately secured and are in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is recognized to the extent that cash is received and where the ultimate collection of principal and interest is probable. Following collection procedures, the Corporation generally institutes appropriate action to foreclose the property or acquire it by deed in lieu of foreclosure. 10 The table below details nonperforming loans at: SEPTEMBER 30, 2002 DECEMBER 31, 2001 ------------------ ----------------- (DOLLARS IN THOUSANDS) Accruing loans 90 days or more in arrears.. $ -- $ -- Nonaccrual loans........................... 84 -- ----- ----- Total nonperforming loans.................. $ 84 $ -- ===== ===== Percentage of nonperforming loans to: Total loans................................ 0.02% N/A ===== ===== Total assets............................... 0.02% N/A ===== ===== ALLOWANCE FOR LOAN LOSSES The following table presents the activity in the allowance for loan losses for the nine months ended September 30 (dollars in thousands): 2002 2001 ------- -------- Balance at beginning of period.......................... $ 4,973 $ 4,781 Losses charged to the allowance: Residential mortgage................................ -- -- Commercial mortgage and construction................ -- -- Commercial loans.................................... -- -- Consumer loans...................................... 1 1 ------- -------- 1 1 ------- -------- Loan recoveries: Residential mortgage................................ 17 21 Commercial mortgage and construction................ 41 66 Commercial loans.................................... 2 5 Consumer loans...................................... 8 9 ------- -------- 68 101 ------- -------- Net recoveries.......................................... (67) (100) (Recovery of) provision for loan losses (credited) charged to income.................................... (38) 47 ------- -------- Balance at end of period................................ $ 5,002 $ 4,928 ======= ======== Allowance to total loans at end of period............... 1.40% 1.35% ======= ======== Allowance to nonperforming loans at end of period....... 5,954.8% 1,408.00% ======= ======== Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is doubtful. Balances in the allowance for loan losses are determined on a periodic basis by management and the Loan Committee of the Board of Directors with assistance from a third-party credit-review consulting firm. Management uses a consistent systematic process that takes into consideration specific and general portfolio risk, economic conditions and the current regulatory environment. For impaired loans, management quantifies potential losses. For all other loans a grading system is used based on assessed credit risk, and loss percentages are applied to these loans. The loss percentages are determined by reviewing historic loss trends in each grade category and taking into consideration industry and regulatory norms, current economic conditions, delinquency levels, experience of staff and other trends. In addition to the above components, management applies an unallocated allowance that is not attributable to any specific loan or loan grade. This allowance is based on various factors. Among the factors are: the risk characteristics of the loan portfolio generally; general economic trends; assessment of the current business cycle; credit quality trends in relation to current economic conditions; trends in the outlook of banking regulators with respect to allowance for loan losses and supervisory concerns in general; and industry trends with respect to levels of allowance for loan losses. 11 Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon management's evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighting the above factors. Because the allowance for loan losses is based on various estimates and includes a high degree of judgment, subsequent changes in general economic conditions and the economic prospects of the borrowers may require changes in those estimates. The associated provision for loan losses is the amount required to bring the allowance for loan losses to the balance considered necessary by management at the end of the period after accounting for the effect of loan charge-offs (which decrease the allowance) and loan-loss recoveries (which increase the allowance). The allowance for loan losses included above attributable to $5.1 million of impaired loans, all of which is measured using the fair value method, is $365,000 at September 30, 2002. OTHER ASSETS Included in other assets at September 30, 2002 and December 31, 2001 is $1.0 million of deferred income taxes receivable. LIABILITIES Deposits decreased to $396.7 million at September 30, 2002 from $398.3 million at December 31, 2001. The following table sets forth the classification of the Corporation's deposits as of September 30, 2002 and December 31, 2001 (in thousands): SEPTEMBER 30, 2002 DECEMBER 31, 2001 ------------------ ----------------- Noninterest bearing............... $ 46,788 $ 30,640 NOW............................... 58,772 54,029 Money market...................... 62,160 53,726 Savings........................... 112,792 106,319 Time.............................. 116,143 153,633 -------- -------- $396,655 $398,347 ======== ======== Federal Home Loan Bank of Boston advances were $2.7 million at September 30, 2002 and $5.7 million at December 31, 2001. Securities sold under agreement to repurchase were $30.6 million at September 30, 2002 and $13.4 million at December 31, 2001. LEGAL AND OFF-BALANCE SHEET RISKS Various legal claims arise from time to time in the course of business of the Corporation and its subsidiaries. At September 30, 2002, there were no material legal claims against the Corporation or its subsidiaries. The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations of interest rates. These financial instruments include commitments to originate loans, unused lines of credit, standby letters of credit, recourse arrangements on sold assets and forward commitments to sell loans. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. 12 RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001 GENERAL The Corporation recorded a profit for the 2002 quarter of $1.5 million compared to a profit for the 2001 quarter of $1.7 million. The decrease in the 2002 quarter profit is due to increased non-interest expenses, which included $483,000 of merger-related expenses, and a decrease in gains on sales of mortgage loans due to lower volume of residential mortgage loans sold. Net interest income for the 2002 and 2001 quarters was $5.2 million and $4.9 million, respectively. The weighted average interest rate spread for the 2002 quarter was 4.60% compared to 4.24% for the 2001 quarter. The net yield on average earning assets was 4.72% for the 2002 quarter and 4.45% for the 2001 quarter. The return on average assets and the return on average stockholders' equity were 1.30% and 13.73%, respectively, for the 2002 quarter compared to 1.45% and 16.53%, respectively, for the 2001 quarter. INTEREST AND DIVIDEND INCOME Total interest and dividend income was $6.9 million for the 2002 quarter compared to $8.4 million for the 2001 quarter. Interest on loans decreased to $6.2 million for the 2002 quarter from $7.6 million for the 2001 quarter. The average loan yield decreased to 6.89% for the 2002 quarter from 7.79% for the 2001 quarter and average loans outstanding decreased during the 2002 quarter as compared to the 2001 quarter. Interest and dividends on investments was $628,000 for the 2002 quarter and $656,000 in the 2001 quarter. The average amount of investments held increased while the average yield on investments decreased to 2.97% for the 2002 quarter from 5.32% for the 2001 quarter. Mortgage-backed securities income decreased to $104,000 in the 2002 quarter from $183,000 in the 2001 quarter due to a decrease in the average amount of mortgage-backed securities held and a decreased yield of 5.59% in the 2002 quarter from 6.69% in the 2001 quarter. INTEREST EXPENSE Interest on deposits was $1.5 million for the 2002 quarter compared to $3.2 million for the 2001 quarter. The average balance of deposits decreased in the 2002 quarter and the average cost of deposits decreased to 1.56% for the 2002 quarter from 3.23% for the 2001 quarter. Interest on borrowed funds and escrow deposits of borrowers decreased to $149,000 from $317,000 for the 2002 and 2001 quarters, respectively. The average cost decreased to 1.58% for the 2002 quarter from 3.63% in the 2001 quarter, while the average balances increased. NON-INTEREST INCOME Total non-interest income for the 2002 quarter was $703,000 compared to $628,000 for the 2001 quarter. Customer service fees increased to $561,000 in the 2002 quarter from $332,000 in the 2001 quarter due to an increase in commissions for selling annuities and an increase in general deposit fees due to increases in prices and deposit account activity. The gain from the sale of mortgage loans was $141,000 in the 2002 quarter compared to $292,000 in the 2001 quarter. Because fewer residential mortgage loans were sold in the 2002 quarter, gains on sale of mortgage loans decreased. NON-INTEREST EXPENSE Total non-interest expense increased to $3.8 million in the 2002 quarter from $3.0 million in the 2001 quarter. Salaries and employee benefits were $2.0 million in the 2002 quarter and $1.9 million in the 2001 quarter. This increase is primarily due to salary increases, the filling of vacant positions, and increases in benefits-related expenses. Other expenses increased to $638,000 in the 2002 quarter from $535,000 in the 2001 quarter due to increases in costs associates with the general operations of the Corporation including ATM expense, check processing, and other volume-related expenses. Also included in non-interest expense in the 2002 quarter is $483,000 of expenses related to the merger with Banknorth Group, Inc. (See "Merger Agreement with Banknorth Group, Inc." above.) 13 INCOME TAX EXPENSE The Corporation's tax rate decreased to 30.1% in the 2002 quarter from 33.4% in the 2001 quarter. Included in income tax expense for the 2002 quarter is a decrease in tax valuation reserves. RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 GENERAL The Corporation recorded a profit for the 2002 period of $4.6 million compared to a profit for the 2001 period of $5.5 million. The decrease in the 2002 period profit is primarily due to increased non-interest expenses. Included in the 2002 period is $483,000 of merger-related expenses. During the 2002 period, there was a decrease in gains on sales of mortgage-loans due to lower volume of residential mortgage loans sold. Also included in the 2001 period was the receipt of $467,000 of state-tax refunds plus interest ($294,000, or $.04 per share, net of applicable taxes) for the resolution of certain tax matters of prior years. Net interest income for the 2002 and 2001 periods was $14.9 million. The weighted average interest rate spread for the 2002 period was 4.44% compared to 4.42% for the 2001 period. The net yield on average earning assets was 4.56% for the 2002 period and 4.63% for the 2001 period. The return on average assets and the return on average stockholders' equity were 1.34% and 14.09%, respectively, for the 2002 period compared to 1.62% and 18.48%, respectively, for the 2001 period. INTEREST AND DIVIDEND INCOME Total interest and dividend income decreased to $20.7 million for the 2002 period from $25.4 million for the 2001 period. Interest on loans decreased to $18.5 million for the 2002 period from $22.6 million for the 2001 period. Average loans outstanding decreased during the 2002 period and the average loan yield decreased to 7.00% for the 2002 period compared to 8.09% for the 2001 period. Interest and dividends on investments was $1.8 and $2.2 million for the 2002 and 2001 periods, respectively. The average amount of investments held increased while the average yield on investments decreased to 3.20% for the 2002 period from 6.07% for the 2001 period. Mortgage-backed securities income decreased to $362,000 in the 2002 period from $599,000 in the 2001 period due to a decrease in the average amount of mortgage-backed securities held and a decreased yield to 5.75% in the 2002 period from 7.25% in the 2001 period. INTEREST EXPENSE Interest on deposits decreased to $5.5 million for the 2002 period from $9.7 million for the 2001 period. This decrease was related to a decrease in the average cost of deposits to 1.89% for the 2002 period from 3.38% for the 2001 period. Interest on borrowed funds and escrow deposits of borrowers decreased to $377,000 in the 2002 period from $840,000 for the 2001 period due to the average cost having decreased to 1.82% in the 2002 period from 4.04% in the 2001 period. NON-INTEREST INCOME Total non-interest income for the 2002 period was $1.9 million compared to $1.8 million for the 2001 period. The gain from the sale of mortgage loans was $439,000 in the 2002 period compared to $660,000 in the 2001 period. Because fewer residential mortgage loans were sold in the 2002 period, gains on sale of mortgage loans decreased. Customer service fees increased to $1.4 million in the 2002 period from $942,000 in the 2001 period due to an increase in commissions for selling annuities and an increase in general deposit fees due to increases in prices and deposit account activity. Also included in non-interest income in the 2001 period is $200,000 of pre-tax interest for the resolution of certain tax matters of prior years. NON-INTEREST EXPENSE Total non-interest expense was $10.1 million in the 2002 period and $8.7 million in the 2001 period. Salaries and employee benefits were $5.9 million in the 2002 period and $5.4 million for the 2001 period. This increase is primarily due to salary increases, the filling of vacant positions, and increases in benefits- 14 related expenses. Occupancy and equipment increased in the 2002 period to $1.0 million from $962,000 in the 2001 period due to write offs of existing computer equipment, which was retired during the period. Other expenses increased to $1.8 million in the 2002 period from $1.5 million in the 2001 period due to increases in costs associated with the general operations of the Corporation including ATM expense, check processing, and other volume-related expenses. Also included in non-interest expense for the 2002 period is $483,000 of expenses related to the merger with Banknorth Group, Inc. (See "Merger Agreement with Banknorth Group, Inc." above.) INCOME TAX EXPENSE The Corporation's tax rate decreased in the 2002 period to 30.4% from 31.6% in the 2001 period. Included in income tax expense for the 2002 period is a decrease in tax valuation reserves. Included in income tax expense in the 2001 period is $176,000 reduction of state tax expense, net of federal tax, due to resolution of certain tax matters of prior years. 15 CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Corporation carried out an evaluation under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the new rules, we currently are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. (b) Changes in internal controls. None. 16 WARREN BANCORP, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES 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 On August 15, 2002, the Corporation filed a current report on Form 8-K announcing that the Corporation entered into an Agreement and Plan of Merger with Banknorth Group, Inc. 17 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. WARREN BANCORP, INC. DATE: December 2, 2002 By: /s/ John R. Putney -------------------------------- John R. Putney President and Chief Executive Officer DATE: December 2, 2002 By: /s/ Paul M. Peduto -------------------------------- Paul M. Peduto Treasurer (Principal Financial Officer and Principal Accounting Officer) 18 CERTIFICATIONS CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, John R. Putney, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Warren Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this quarterly report; 4. The registrant's other certifying 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: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent valuation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying 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: December 2, 2002 By: /s/ John R. Putney ---------------------------- John R. Putney President and Chief Executive Officer CERTIFICATIONS - (CONTINUED) CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Paul M. Peduto, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Warren Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this quarterly report; 4. The registrant's other certifying 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: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent valuation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and c) 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: December 2, 2002 By: /s/ Paul M. Peduto ------------------------------- Paul M. Peduto Treasurer (Principal Financial Officer and Principal Accounting Officer)

WARREN BANCORP INC 10-Q/A