UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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 number: 000-27997
Westborough Financial Services, Inc.
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-3504121
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 E. Main Street
Westborough, Massachusetts 01581
(508) 366-4111
(Address of principal executive offices)
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
-----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding as of August 14, 2001
----- ---------------------------------
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Common Stock, par value $0.01 1,581,374
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
Forward Looking Statements
Westborough Financial Services, Inc. (the "Company") and The
Westborough Bank (the "Bank") may from time to time make written or oral
"forward-looking statements." These forward-looking statements may be
contained in this Quarterly Report on Form 10-QSB filed with the Securities
and Exchange Commission (the "SEC"), other filings with the SEC, and in
other communications by the Company and the Bank, which are made in good
faith pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, which are subject to significant risks and
uncertainties. The following factors, many of which are subject to change
based on various other factors beyond the Company's control, and other
factors identified in the Company's filings with the SEC and those
presented elsewhere by management from time to time, could cause its
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements:
* the strength of the United States economy in general and the
strength of the local economies in which the Company and the
Bank conduct operations;
* the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the
Federal Reserve Board;
* inflation, interest rate, market and monetary fluctuations;
* the timely development of and acceptance of new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
* the willingness of users to substitute competitors' products
and services for the Company's and the Bank's products and
services;
* the Company's and the Bank's success in gaining regulatory
approval of their products and services, when required;
* the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking,
securities and insurance);
* the impact of technological changes;
* acquisitions;
* changes in consumer spending and saving habits; and
* the Company's and the Bank's success at managing the risks
involved in their business.
This list of important factors is not exclusive. The Company or the
Bank does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company or the Bank.
WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY
INDEX
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PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Consolidated Balance Sheets 1
June 30, 2001 and September 30, 2000
Consolidated Statements of Income 2
For Three and Nine Months Ended June 30, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity 3
For Nine Months Ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows 4
For Nine Months Ended June 30, 2001 and 2000
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 6
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings. 13
Item 2. Changes in Securities and Use of Proceeds. 13
Item 3. Defaults upon Senior Securities. 13
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 5. Other Information. 13
Item 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES 14
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
June 30, September 30,
2001 2000
-------- -------------
(Unaudited)
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Assets
Cash and due from banks $ 8,661 $ 4,599
Federal funds sold 7,091 7,510
Short-term investments 2,280 2,351
-------------------------
Total cash and cash equivalents 18,032 14,460
Securities available for sale 68,549 69,216
Federal Home Loan Bank stock, at cost 1,100 903
Loans, net 128,233 113,559
Banking premises and equipment, net 2,627 2,192
Accrued interest receivable 1,429 1,317
Deferred income taxes 635 881
Cash surrender value of life insurance 4,391 3,133
Other assets 195 315
-------------------------
Total assets $225,191 $205,976
=========================
Liabilities and Stockholders' Equity
Deposits $181,011 $163,405
Federal Home Loan Bank advances 16,500 16,500
Mortgagors' escrow accounts 196 247
Accrued expenses and other liabilities 1,575 1,108
-------------------------
Total liabilities 199,282 181,260
-------------------------
Commitments and Contingencies
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding 0 0
Common stock, $.01 par value, 5,000,000 shares
authorized, 1,581,374 issued and outstanding 16 16
Additional paid-in capital 4,544 4,541
Retained earnings 21,634 20,931
Accumulated other comprehensive income (loss) 113 (352)
Unearned compensation-employee stock ownership plan (398) (420)
-------------------------
Total stockholders' equity 25,909 24,716
-------------------------
Total liabilities and stockholders' equity $225,191 $205,976
=========================
See accompanying notes to unaudited consolidated financial statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
(Dollars in Thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
(unaudited) (unaudited)
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Interest and dividend income:
Interest and fees on loans $2,254 $1,836 $ 6,629 $5,276
Interest and dividends on investment securities 1,084 1,101 3,398 3,152
Interest on federal funds sold 139 82 382 234
Interest on short term investments 26 39 111 111
------------------------------------------------
Total interest and dividend income 3,503 3,058 10,520 8,773
------------------------------------------------
Interest expense:
Interest on deposits 1,472 1,306 4,459 3,837
Interest on borrowings 268 52 805 157
------------------------------------------------
Total interest expense 1,740 1,358 5,264 3,994
------------------------------------------------
Net interest income 1,763 1,700 5,256 4,779
Provision for loan losses 12 0 36 0
------------------------------------------------
Net interest income, after provision for loan losses 1,751 1,700 5,220 4,779
------------------------------------------------
Other income:
Customer service fees 156 92 507 253
Income from covered call options 0 50 16 230
Gain on sales of securities available for sale, net 257 149 573 328
Miscellaneous 33 30 98 88
------------------------------------------------
Total other income 446 321 1,194 899
------------------------------------------------
Operating expenses:
Salaries and employee benefits 1,007 736 2,737 2,229
Occupancy and equipment expenses 234 211 721 625
Data processing expenses 126 78 332 231
Marketing expenses 103 115 231 234
Professional fees 73 79 253 143
Other general and administrative expenses 306 295 1,060 897
------------------------------------------------
Total operating expenses 1,849 1,514 5,334 4,359
------------------------------------------------
Income before income taxes and cumulative change in
accounting principle 348 507 1,080 1,319
Provision for income taxes 89 142 287 369
------------------------------------------------
Income before cumulative effect of change in
accounting principle 259 365 793 950
Cumulative effect of change in accounting principle,
net of $76 of related tax effect, for the adoption of a
new accounting standard for covered call options 0 0 147 0
------------------------------------------------
Net income $ 259 $ 365 $ 940 $ 950
================================================
Number of weighted average shares outstanding 1,541,226 1,538,648 1,540,268 N/A
Earnings per share - Basic $ 0.17 $ 0.24 $ 0.61 N/A
See accompanying notes to unaudited consolidated financial statements.
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Nine months ended June 30, 2001 and 2000
(Dollars in Thousands)
Accumulated
Additional Other Unearned
Common Paid-in Retained Comprehensive Comp -
Stock Capital Earnings Income (Loss) ESOP Total
------ ---------- -------- ------------- -------- -----
(Unaudited)
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Balance at September 30, 1999 $ 0 $ 0 $19,680 ($399) $ 0 $19,281
Comprehensive income:
Net income 0 0 950 0 0 950
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (417) 0 (417)
-------
Total comprehensive income 533
Net proceeds from sale of common stock 16 4,542 0 0 0 4,558
Purchase of ESOP shares; 44,200 shares at $10 0 0 0 0 (442) (442)
ESOP shares committed to be released 0 (1) 0 0 15 14
----------------------------------------------------------------------------
Balance at June 30, 2000 $16 $4,541 $20,630 ($816) ($427) $23,944
============================================================================
Balance at September 30, 2000 $16 $4,541 $20,931 ($352) ($420) $24,716
-------
Comprehensive income:
Net income 0 0 940 0 0 940
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 465 0 465
-------
Total comprehensive income 1,405
-------
Dividends paid, $0.15 per share outstanding 0 0 (237) 0 0 (237)
Increase in stock value 0 3 0 0 0 3
ESOP shares committed to be released 0 0 0 0 22 22
----------------------------------------------------------------------------
Balance at June 30, 2001 $16 $4,544 $21,634 $ 113 ($398) $25,909
============================================================================
See accompanying notes to unaudited consolidated financial statements.
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Nine Months Ended
-------------------------------
June 30, 2001 June 30, 2000
------------- -------------
(Unaudited)
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Cash flows from operating activities:
Net income $ 940 $ 950
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 36 0
Gain on sales of securities available for sale, net (573) (328)
Recognition of income from covered call options (16) (230)
Accretion on securities, net (32) (13)
Depreciation expense 299 258
Amortization of net deferred loan costs (fees), net 547 4
Amortization of unearned compensation - ESOP 22 14
Increase in accrued interest receivable (112) (100)
Increase in cash surrender value of life insurance (258) (180)
Other, net 1,030 569
--------------------------
Net cash provided by operating activities 1,883 944
--------------------------
Cash flows from investing activities:
Purchase of securities available for sale (22,961) (17,174)
Purchase of Federal Home Loan Bank stock (197) (53)
Proceeds from sales and calls of securities available for sale 15,141 5,686
Proceeds from maturities of securities available for sale 7,311 3,602
Principal repayments received on mortgage and asset
backed securities 2,068 2,507
Loans originated, net of payments received (15,257) (8,590)
Purchase of banking premises and equipment (734) (268)
Purchase of life insurance policies (1,000) 0
--------------------------
Net cash used by investing activities (15,629) (14,290)
--------------------------
Cash flows from financing activities:
Net increase in deposits 17,606 9,324
Net decrease in mortgagors escrow accounts (51) (32)
Net proceeds received from stock offering 0 4,558
Purchase of ESOP shares 0 (442)
Dividends paid (237) 0
--------------------------
Net cash provided by financing activities 17,318 13,408
--------------------------
Net increase in cash and cash equivalents 3,572 62
Cash and cash equivalents at beginning of period 14,460 10,718
--------------------------
Cash and cash equivalents at end of period $ 18,032 $ 10,780
==========================
See accompanying notes to unaudited consolidated financial statements.
Westborough Financial Services, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
1) Basis of Presentation and Consolidation.
The unaudited consolidated interim financial statements of
Westborough Financial Services, Inc. and Subsidiary (the "Company")
presented herein should be read in conjunction with the consolidated
financial statements for the year ended September 30, 2000, included in the
Annual Report on Form 10-KSB of the Company, the holding company for The
Westborough Bank (the "Bank").
The unaudited consolidated interim financial statements herein have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with
the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
of America for complete financial statements.
In the opinion of management, the consolidated interim financial
statements reflect all adjustments (consisting solely of normal recurring
accruals) necessary for a fair presentation of such information. Interim
results are not necessarily indicative of results to be expected for the
entire year.
2) Reorganization and Stock Offering.
The Bank was founded in 1869 as a Massachusetts chartered mutual
savings bank. On February 15, 2000, the Bank reorganized into a two-tiered
mutual holding company structure pursuant to the Bank's Plan of
Reorganization from a Mutual Savings Bank to a Mutual Holding Company and
Stock Issuance Plan (the "Reorganization"). In connection with the
Reorganization, (i) the Bank formed Westborough Bancorp, MHC (the "MHC"), a
Massachusetts chartered mutual holding company which is the majority owner
of the Company; (ii) the Bank converted from mutual to stock form, changing
its name from "Westborough Savings Bank" to "The Westborough Bank," and
issued 100% of its capital stock to the Company; and (iii) the Company
issued shares of its common stock, $0.01 par value per share (the "Common
Stock") to the public at a price of $10.00 per share (the "Stock
Offering"). The Company issued 1,581,374 shares of the Common Stock in the
Stock Offering, of which 35% of these shares, or 553,481 shares, were sold
to the public, including depositors of the Bank and the Company's Employee
Stock Ownership Plan, and 65% of these shares, or 1,027,893 shares, were
issued to the MHC.
3) Contingencies.
At June 30, 2001, the Bank had loan commitments to borrowers of $3.9
million, commitments of home equity loans of $365 thousand, available home
equity lines of credit of $8.0 million, unadvanced funds on commercial
lines of credit of $1.7 million, and personal overdraft lines of credit of
approximately $389 thousand. The Bank had no commitments to purchase loans
or securities at June 30, 2001. In order to create a platform for the
accomplishment of the Bank's goals, the Bank has begun to make significant
investments in its physical infrastructure and human and technological
resources. In particular, the Bank is expanding and renovating its main
office. The cost to complete this expansion and renovation is
approximately $1.8 million and it is scheduled to be completed in the Fall
of 2001. The Bank also has a deposit on land in Shrewsbury where it plans
to relocate its current Maple Avenue branch. No formal estimates or
contracts have been entered into for this branch. Such investments have
been and, in the future, will be necessary to ensure that adequate
resources are in place to offer increased products and services. As a
result, for a period of time, the Bank expects operating expenses to
increase and net income to be adversely impacted. The Bank believes,
however, that its long-term profitability should improve as it realizes the
benefits of diversified product lines and market share growth
4) Earnings per Share.
Earnings per share for the three and nine-month periods ended June
30, 2001 is computed using 1,541,226 and 1,540,268 weighted average shares
outstanding, respectively. Earnings per share data for the three-month
period ended June 30, 2000 is computed using 1,538,648 shares outstanding,
however, earning per share data is not presented for the nine-month period
ended June 30, 2000 because shares of common stock were not issued until
February 15, 2000.
5) Adoption of New Accounting Pronouncement.
On October 1, 2000 the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which required the Company to record the after-tax
effects of changes in the fair value of covered call options through
current income. Previously, such changes were included in accumulated
comprehensive income (loss). By adopting this standard, the Bank recorded
pre-tax earnings of $223 thousand for the nine-month period ended June 30,
2001. After related taxes at the rate of 34%, or, $76 thousand, the
standard resulted in additional income of $147 thousand.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The Bank completed its reorganization into a "two-tiered" mutual
holding company structure on February 15, 2000. In connection with this
reorganization: (1) the Bank formed Westborough Bancorp, MHC (the "MHC"), a
Massachusetts-chartered mutual holding company, which is the majority owner
of the Company, a Massachusetts-chartered stock holding company; (2) the
Bank converted from a Massachusetts-chartered mutual savings bank to a
Massachusetts-chartered stock savings bank and issued 100% of its capital
stock to the Company; and (3) the Company issued shares of its common
stock, $0.01 per share, to the public at a price of $10.00 per share in a
subscription, community and syndicated offering (the "Stock Offering").
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes that are
included within this report.
The business of the Bank consists of attracting deposits from the
general public and using these funds to originate various types of loans
primarily in the towns of Westborough, Northborough and Shrewsbury,
Massachusetts, including residential and commercial real estate mortgage
loans and, to a lesser extent, consumer and commercial loans.
The Bank's results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income
the Bank earns on its interest-earning assets and the interest it pays on
its interest-bearing liabilities. Interest-earning assets primarily
consist of mortgage loans, mortgage-backed securities and investment
securities. Interest-bearing liabilities consist primarily of certificates
of deposit, savings accounts and borrowings. The Bank's results of
operations are also affected by its provision for loan losses, income from
security transactions, other income and operating expenses. Operating
expenses consist primarily of salaries and employee benefits, occupancy,
data processing, marketing, professional fees and other general and
administrative expenses. Other income consists mainly of service fees and
charges, income from writing covered call options, gains on sales of
securities and fees from the sale of non-insured investment products.
The Bank's results of operations may also be affected significantly
by general and local economic and competitive conditions, particularly
those with respect to changes in market interest rates, government policies
and actions of regulatory authorities. Future changes in applicable law,
regulations or government policies may materially impact the Bank.
Additionally, the Bank's lending activity is concentrated in loans secured
by real estate located in Westborough, Northborough, Shrewsbury and
Grafton, Massachusetts. Accordingly, the Bank's results of operations are
affected by regional market and economic conditions.
Comparison of Financial Condition at June 30, 2001 and September 30, 2000
The Bank's total assets increased by $19.2 million, or 9.3%, to
$225.2 million at June 30, 2001 from $206.0 million at September 30, 2000.
Much of this increase was due to an increase in net loans. During this
period, net loans increased by $14.7 million, or 12.9%, to $128.2 million
at June 30, 2001, from $113.6 million at September 30, 2000. The loan
increase was primarily due to the purchase of adjustable-rate real estate
loans and the origination of commercial and personal loans. Asset quality
remained strong, with non-performing assets as a percent of total assets of
.03% at June 30, 2001.
Total deposits increased by $17.6 million, or 10.8%, to $181.0
million at June 30, 2001 from $163.4 million at September 30, 2000. Most
of this increase was attributable to increases in interest-bearing
certificates of deposit, NOW and demand deposit accounts and an increase in
variable-rate tiered and regular savings deposits.
Total stockholders' equity increased by $1.2 million to $25.9 million
at June 30, 2001 from $24.7 million at September 30, 2000 primarily as a
result of net income of $940 thousand and an increase of $465 thousand in
accumulated other comprehensive income. Accumulated other comprehensive
income, which measures the after-tax change in the value of securities
considered available for sale, increased as a result of a decline in market
interest rates at June 30, 2001. Also, during the nine-month period ended
June 30, 2001, the Company declared and paid cash dividends of $.15 per
common share, which reduced stockholders' equity by $237 thousand for the
nine-month period.
Comparison of Operating Results for the Three Months Ended June 30, 2001
and 2000
Net Income: The Company reported earnings per share for the quarter
ended June 30, 2001 of $0.17 on net income of $259 thousand as compared to
earnings per share for the quarter ended June 30, 2000 of $0.24 on net
income of $365 thousand. For the quarter ended June 30, 2001, net income
declined by $106 thousand, or 29.0%, to $259 thousand as compared to $365
thousand for the quarter ended June 30, 2000. The quarterly decline was
primarily due to an increase in salary, benefits and other operating
expenses, offset, to a lesser extent, by increases in non-interest income
from security transactions, other fees and by an increase in net interest
income. The Bank's annualized return on average assets for the quarter
ended June 30, 2001 was 0.47% compared to 0.78% for the quarter ended June
30, 2000.
Interest and Dividend Income: The Bank's interest and dividend
income increased by $445 thousand, or 14.6%, to $3.5 million for the
quarter ended June 30, 2001, from $3.1 million for the quarter ended June
30, 2000. The increase was due mainly to a higher level of average
interest-earning assets and to a lesser extent due to a lower average
interest rate earned on such assets. The average volume of interest-earning
assets for the quarter ended June 30, 2001 was $206.9 million earning an
average rate of 6.77% as compared to an average volume of $174.3 million
earning an average rate of 7.02% for the quarter ending June 30, 2000. The
Bank experienced continued growth in real estate and commercial lending and
deployed additional cash flows into investment securities. The real estate
loan increase was primarily due to increased variable rate loans purchased
which were secured by one-to-four family real estate. The average balance
of loans for the quarter ended June 30, 2001 was $122.8 million earning
7.34% as compared to an average balance of $97.9 million earning 7.50% for
the quarter ending June 30, 2000. The average balance of investment
securities for the quarter ended June 30, 2001 was $70.6 million earning
6.14% as compared to an average balance of $68.5 million earning 6.42% for
the quarter ending June 30, 2000. The average balance of short-term
investments for the quarter ended June 30, 2001 was $13.5 million earning
4.89% as compared to an average balance of $7.8 million earning 6.21% for
the quarter ending June 30, 2000.
Interest Expense: Interest expense increased by $382 thousand, or
28.1%, to $1.7 million for the quarter ended June 30, 2001, from $1.4
million for the quarter ending June 30, 2000. Interest expense increased
due to a higher average balance of such interest-bearing liabilities and to
a lesser extent due to a higher average rate paid on interest-bearing
liabilities. The average volume of all interest-bearing liabilities (which
includes interest-bearing deposits and interest-bearing borrowing) was
$175.6 million with a cost of 3.96% for the quarter ended June 30, 2001 as
compared to $147.4 million with a cost of 3.68% for the quarter ending June
30, 2000. The average volume of interest-bearing deposits was $159.1
million with a cost of 3.70% for the quarter ending June 30, 2001 as
compared to $143.4 million with a cost of 3.64% for quarter ending June 30,
2000. As a result of an increase in borrowing from the Federal Home Loan
Bank of Boston to fund the purchase of variable-rate real estate loans, the
average volume of interest-bearing borrowing was $16.5 million with a cost
of 6.50% for the quarter ending June 30, 2001 as compared to $4.0 million
with a cost of 5.20% for quarter ending June 30, 2000.
Net Interest Income: The Bank's net interest income increased by $63
thousand for the quarter ended June 30, 2001, or 3.7%, to $1.8 million from
$1.7 million for the quarter ending June 30, 2000. The increase was
attributed to the combination of an increase in interest and dividend
income of $445 thousand offset by an increase in interest expense of $382
thousand. The Bank's net interest rate spread, which represents the
difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities, declined to
2.81% for the quarter ended June 30, 2001 as compared to 3.33% for the
quarter ending June 30, 2000.
Provision for Loan Losses: The Bank's provision for loan losses was
$12 thousand for the quarter ended June 30, 2001 compared to $0 for the
quarter ending June 30, 2000. As the Bank expands its commercial lending
activities, management believes that increases in the provision are likely
since commercial lending generally has a higher degree of risk compared to
lending secured by residential, one-to-four family dwellings.
Other Income: Other income consists primarily of fee income for Bank
services, gains and losses from the sale of securities and income from the
writing of covered call options on common stock held in the Bank's stock
portfolio. Total other income increased by 38.9% to $446 thousand for the
quarter ended June 30, 2001, as compared to $321 thousand for quarter
ending June 30, 2000. The primary reason for the increase was due to a
significantly higher level of net gains from the sale of securities
available for sale. Such net gains increased by $108 thousand, to $257
thousand for the three-month period ended June 30, 2001, from $149 thousand
for the three-month period ended June 30, 2001. Income from the writing of
covered call option declined to $0 for the quarter ending June 30, 2001
from $50 thousand for the quarter ending June 30, 2000. At June 30, 2001,
the Bank had no outstanding options written on common stock held in its
portfolio. Customer service fees and miscellaneous income increased by $67
thousand, or 54.9%, to $189 thousand for the quarter ended June 30, 2001
from $122 thousand for the quarter ended June 30, 2000. This increase is
primarily due to the increase in commissions earned from the sale of non-
insured investment products and increases in the cash surrender value of
Bank-owned life insurance.
Operating Expenses: For the quarter ended June 30, 2001, operating
expenses increased by $335 thousand, or 22.1%, to $1.8 million from $1.5
million for quarter ending June 30, 2000. The increase was primarily due to
increased salary and benefit expenses associated with additional staff to
support training and information technology, increased supplemental
employee retirement plan expenses and increased incentive commissions to
support a higher level of sales of non-insured investment products. The
increase in operating expenses is also a result of the Bank's efforts to
update its computer equipment along with the associated increases in data
processing costs. The Bank replaced many older computer equipment with
newer equipment in order to allow for the migration to more efficient
transaction processing systems, use of electronic mail and Internet
services and to provide enhanced customer services. Other general and
administrative services increased due to increases in directors' fees,
expenses associated with the development and maintenance of the Bank's web
site, the increased use of the telephone and postage and increased expenses
for office supplies.
Income Taxes. Reflecting the decline in income before income taxes,
the provision for income taxes declined by $53 thousand to $89 thousand for
the quarter ended June 30, 2001 as compared to $142 thousand for the
quarter ended June 30, 2000, resulting in an effective tax rate of 25.6%
and 28.0% for the quarter ended June 30, 2001 and 2000, respectively. The
Bank utilizes security investment subsidiaries to substantially reduce
state income taxes and receives the benefit of a dividends received
deduction on common stock. Additionally, the Bank receives favorable tax
treatment from the increase in the cash surrender value of Bank-owned life
insurance.
Comparison of Operating Results for the Nine-months ended June 30, 2001 and
2000
Net Income: The Company reported earning per share for the nine-
month period ended June 30, 2001 of $0.61 on income of $940 thousand.
Earnings per share data for the nine-month period ended June 30, 2000 is
not applicable since the Company's stock commenced trading on February 16,
2000. For the nine-month period ended June 30, 2001, net income declined by
$10 thousand, or 1.1%, to $940 thousand as compared to $950 thousand for
the nine-month period ended June 30, 2000. The decline was primarily due
to an increase in operating expenses, offset, to a lesser extent, by an
increase in net interest income, customer service fees and net gains from
investment activity. The Bank's annualized return on average assets was
.58% for the nine-month period ended June 30, 2001 as compared to .70% for
the nine-month period ended June 30, 2000.
Interest and Dividend Income: The Bank's interest and dividend
income increased $1.7 million, or 19.9%, to $10.5 million for the nine-
month period ended June 30, 2001, from $8.8 million for the nine-month
period ended June 30, 2000. The increase was due mainly to a higher level
of average interest-earning assets, and, to a lesser extent, by an increase
in the average rate earned on earning assets. The average volume of
interest-earning assets for the nine-month period ended June 30, 2001 was
$201.7 million earning an average rate of 6.95% as compared to an average
volume of $170.2 million earning an average rate of 6.87% for the nine-
month period ending June 30, 2000. The Bank experienced continued growth
in real estate and commercial lending and deployed additional cash flows
into investment securities and short-term investments. The real estate
loan increase was primarily due to increased variable rate loans purchased
in August 2000, which were secured by one-to-four family real estate. The
average balance of loans for the nine-month period ended June 30, 2001 was
$117.5 million earning 7.53% as compared to an average balance of $94.8
million earning 7.42% for the nine-month period ending June 30, 2000. The
average balance of investment securities for the nine-month period ended
June 30, 2001 was $72.0 million earning 6.30% as compared to an average
balance of $67.4 million earning 6.23% for the nine-month period ending
June 30, 2000. The average balance of short-term investments for the nine-
month period ended June 30, 2001 was $12.3 million earning 5.35% as
compared to an average balance of $7.9 million earning 5.82% for the nine-
month period ending June 30, 2000.
Interest Expense: Interest expense increased by $1.3 million, or
31.8%, to $5.3 million for the nine-month period ended June 30, 2001, from
$4.0 million for the nine-month period ending June 30, 2000. Interest
expense increased due to a higher average volume of interest-bearing
liabilities and a higher average interest rate paid on such interest-
bearing liabilities. The average volume of all interest-bearing liabilities
(which includes interest-bearing deposits and interest-bearing borrowing)
was $171.3 million with a cost of 4.10% for the nine-month period ended
June 30, 2001 as compared to $146.0 million with a cost of 3.65% for the
nine-month period ending June 30, 2000. The average volume of interest-
bearing deposits was $154.8 million with a cost of 3.84% for the nine-month
period ending June 30, 2001 as compared to $142.0 million with a cost of
3.60% for nine-month period ending June 30, 2000. As a result of an
increase in borrowing from the Federal Home Loan Bank of Boston to fund the
purchase of variable-rate real estate loans, the average volume of
interest-bearing borrowing was $16.5 million with a cost of 6.51% for the
nine-month period ending June 30, 2001 as compared to $4.0 million with a
cost of 5.19% for nine-month period ending June 30, 2000.
Net Interest Income: The Bank's net interest income increased by
$477 thousand for the nine-month period ended June 30, 2001, or 10.0%, to
$5.3 million from $4.8 million for the nine-month period ending June 30,
2000. The increase was attributed to the combination of an increase in
interest and dividend income of $1.7 million offset to a lesser extent by
an increase in interest expense of $1.3 million. The Bank's net interest
rate spread, which represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities, declined to 2.86% for the nine-month period ended June
30, 2001 as compared to 3.23% for the nine-month period ending June 30,
2000.
Provision for Loan Losses: The Bank's provision for loan losses was
$36 thousand for the nine-month period ended June 30, 2001 compared to $0
for the nine-month period ending June 30, 2000. As the Bank expands its
commercial lending activities, management believes that increases in the
provision are likely since commercial lending generally has a higher degree
of risk compared to lending secured by residential, one-to-four family
dwellings.
Other Income: Other income consists primarily of fee income for Bank
services, gains and losses from the sale of securities and income from the
writing of covered call options on common stock held in the Bank's stock
portfolio. Total other income increased by $0.3 million, or 32.8%, to $1.2
million for the nine-month period ended June 30, 2001, as compared to $0.9
million for nine-month period ending June 30, 2000. The primary reason for
the increase was due to significantly higher levels of customer service
fees earned from the sale of non-insured investment products. Net gains on
the sale of securities available for sale increased by $245 thousand to
$573 thousand for the nine-months ended June 30, 2001 as compared to $328
thousand for the nine-month period ended June 30, 2000. Income from
covered call options declined by 93.0% to $16 thousand from $230 thousand
for the nine-month periods ended June 30, 2001 and 2000, respectively. At
June 30, 2001, the Bank had no outstanding options written on common stock
held in its portfolio.
Operating Expenses: For the nine-month period ended June 30, 2001,
operating expenses increased by $975 thousand, or 22.4%, to $5.3 million
from $4.4 million for nine-month period ending June 30, 2000. The increase
was primarily due to salary and benefit expenses associated with incentive
payments to support the sale of non-insured investment products, plus,
increased supplemental employee retirement plan expenses and expenses for
personnel to support training and information technology. The most recent
nine-month period ending June 30, 2001 also reflects increased expenses
relating to legal, accounting, transfer agent, publishing and other costs
associated with the Company's first annual meeting of its stockholders.
Operating expenses also reflect the increased cost of the Bank's plan
to update its computers along with the associated increases in data
processing costs. The Bank replaced many older computers with newer
equipment in order to allow for the migration to more efficient transaction
processing systems, use of electronic mail and Internet services and to
provide enhanced customer services. Other general and administrative
services increased due to increases in directors' fees, expenses associated
with the development and maintenance of the Bank's web site, the increased
use of the telephone and postage and increased expenses for office
supplies.
Income Taxes. Reflecting the lower level of income before income
taxes and cumulative change in accounting principle, the provision for
income taxes declined by $82 thousand to $287 thousand for the nine-month
period ended June 30, 2001 as compared to $369 thousand for the nine-month
period ended June 30, 2000, resulting in an effective tax rate of 26.6% and
28.0% for the nine-month periods ended June 30, 2001 and 2000,
respectively. The Bank utilizes security investment subsidiaries to
substantially reduce state income taxes and receives the benefit of a
dividends received deduction on common stock. Additionally, the Bank
receives favorable tax treatment from the increase in the cash surrender
value of Bank-owned life insurance.
Change in Accounting Principle. At October 1, 2000 the Bank adopted
a new accounting standard for reporting covered call options. By adopting
this standard, the Bank recorded pre-tax earnings of $223 thousand for the
nine-month period ended June 30, 2001. After related taxes at the rate of
34%, or, $76 thousand, the standard resulted in additional income of $147
thousand. In accordance with SFAS No. 133, the adoption of this statement
was accounted for as a cumulative effect of a change in accounting
principle. At June 30, 2001, the Bank had no outstanding options written
on common stock held in its portfolio.
Liquidity and Capital Resources
The term "liquidity" refers to the Bank's ability to generate
adequate amounts of cash to fund loan originations, deposit withdrawals and
operating expenses. The Bank's primary sources of funds are deposits,
scheduled amortization and prepayments of loan principal and mortgage-
backed securities, maturities and calls of investment securities and funds
provided by the Bank's operations. The Bank also has expanded its use of
borrowings from the Federal Home Loan Bank of Boston as part of its
management of interest rate risk. At June 30, 2001, the Bank had $16.5
million in outstanding borrowings.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are
strongly influenced by interest rates, general and local economic
conditions and competition in the marketplace. These factors reduce the
predictability of the timing of these sources of funds.
The Bank's primary investing activities are the origination or
purchase of one- to four-family real estate and other loans, the purchase
of mortgage-backed securities and the purchase of investment securities.
During the nine months ended June 30, 2001, the Bank originated loans of
$31.2 million, purchased mortgage-backed securities of $7.2 million and
purchased other investment securities of $15.8 million. These investing
activities were funded by deposit growth, principal payments on mortgage
loans and mortgage-backed securities, calls and maturities on investment
securities and funds provided by the Bank's operating activities.
Principal repayments on loans and mortgage-backed securities totaled $18.6
million for the nine months ended June 30, 2001. Maturities of investment
securities totaled $7.3 million during the nine months ended June 30, 2001.
Sales and calls of investment securities provided cash flows of $15.1
million during the nine months ended June 30, 2001.
Total deposits increased $17.6 million, during the nine months ended
June 30, 2001. The level of interest rates and products offered by
competitors and other factors affects deposit flows. Certificate of
deposit accounts scheduled to mature within one year were $53.1 million at
June 30, 2001. Based on the Bank's deposit retention experience and
current pricing strategy, the Bank anticipates that a significant portion
of these certificates of deposit will remain with the Bank. The Bank is
committed to maintaining a strong liquidity position; therefore, it
monitors its liquidity position on a daily basis. The Bank also
periodically reviews liquidity information prepared by the Depositors
Insurance Fund, the Federal Deposit Insurance Corporation and other
available reports, which compare the Bank's liquidity with banks in its
peer group. The Bank anticipates that it will have sufficient funds to
meet its current funding commitments.
The Bank has begun an expansion of its facilities by constructing an
addition to its existing executive office. The construction cost for
this addition is expected to total approximately $1.8 million and is scheduled
to be completed in the fall of 2001. On December 16, 1999, the Bank entered
into a purchase and sale agreement to acquire approximately 0.8 acres of land
and buildings located at 23/25 Maple Avenue, Shrewsbury for the sum of $935
thousand, subject to adjustments and numerous conditions. The site is adjacent
to the Bank's current leased branch office at 19 Maple Avenue, Shrewsbury. If
the sale is completed, the Bank's plan is to relocate its 19 Maple Avenue
branch to a newly constructed building located at 23/25 Maple Avenue. The Bank
anticipates that it will have sufficient funds to meet these planned
capital expenditures throughout 2001.
At June 30, 2001, the Bank exceeded each of the applicable regulatory
capital requirements. The Bank's leverage (tier 1) capital was
approximately $24.3 million, or 11.07% of adjusted total average assets for
the quarter. In order to be classified as "well-capitalized" by the FDIC,
the Bank was required to have leverage (tier 1) capital of $11.0 million,
or 5.0%. To obtain such classification, the Bank must also have a risk-
based total capital ratio of 10.00% of total risk-weighted assets. At June
30, 2001, the Bank had a risk-based total capital ratio of 18.33%.
Further, the Bank does not have any balloon or other payments due on
any long-term obligations or any off-balance sheet items other than the
commitments and unused lines of credit noted above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: August 14, 2001 By: /s/ Joseph F. MacDonough
---------------------------
President and Chief Executive Officer
Date: August 14, 2001 By: /s/ John L. Casagrande
---------------------------
Sr. Vice-President and Treasurer