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 December 31, 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 January 25, 2002
----- ----------------------------------
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" which may be identified by the use of such
words as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar expressions that 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 Securities and
Exchange Commission 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. Examples of forward-looking statements
include, but are not limited to, estimates with respect to our financial
condition, results of operations and business that are subject to various
factors which would cause actual results to differ materially from these
estimates. These factors include, but are not limited to:
* conditions which effect general and local economies;
* changes in interest rates, deposit flows, demand for mortgages and
other loans, real estate values and competition;
* changes in accounting principles, policies, or guidelines;
* changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products
and services.
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
(unaudited)
INDEX
PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Changes in Stockholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 7
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)
December 31, September 30,
2001 2001
------------ -------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 5,168 $ 5,040
Federal funds sold 8,403 7,668
Short-term investments 3,301 2,400
-------------------------
Total cash and cash equivalents 16,872 15,108
Securities available for sale 65,543 64,414
Federal Home Loan Bank stock, at cost 1,100 1,100
Loans, net 136,132 134,957
Banking premises and equipment, net 3,398 2,859
Accrued interest receivable 1,195 1,315
Deferred income taxes 494 285
Cash surrender value of life insurance 4,561 4,449
Due from broker 0 1,032
Other assets 32 156
-------------------------
Total assets $229,327 $225,675
=========================
Liabilities and Stockholders' Equity
Deposits $188,553 $185,098
Federal Home Loan Bank advances 12,000 12,000
Mortgagors' escrow accounts 200 229
Accrued expenses and other liabilities 1,633 1,436
-------------------------
Total liabilities 202,386 198,763
-------------------------
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 4,555 4,549
Retained earnings 22,265 22,013
Accumulated other comprehensive income 488 724
Unearned compensation-employee stock ownership plan (383) (390)
-------------------------
Total stockholders' equity 26,941 26,912
-------------------------
Total liabilities and stockholders' equity $229,327 $225,675
=========================
See accompanying notes to unaudited consolidated financial statements
1
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended
December 31,
-----------------------
2001 2000
---- ----
(Unaudited)
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,469 $ 2,185
Interest and dividends on securities:
Taxable interest 889 1,027
Non-taxable interest 16 16
Dividends 88 100
Interest on federal funds sold 41 127
Interest on short term investments 14 55
-----------------------
Total interest and dividend income 3,517 3,510
-----------------------
Interest expense:
Interest on deposits 1,299 1,489
Interest on borrowings 201 271
-----------------------
Total interest expense 1,500 1,760
-----------------------
Net interest income 2,017 1,750
Provision for loan losses 8 12
-----------------------
Net interest income, after provision for loan losses 2,009 1,738
-----------------------
Other income:
Customer service fees 155 184
Income from covered call options 0 16
Gain on sales of securities available for sale, net 30 52
Miscellaneous 46 33
-----------------------
Total other income 231 285
-----------------------
Operating expenses:
Salaries and employee benefits 934 839
Occupancy and equipment expenses 237 227
Data processing expenses 122 96
Marketing expenses 47 66
Professional fees 77 76
Other general and administrative expenses 376 374
-----------------------
Total operating expenses 1,793 1,678
-----------------------
Income before income taxes and cumulative effect
of change in accounting principle 447 345
Provision for income taxes 116 92
-----------------------
Income before cumulative effect of change in
accounting principle 331 253
-----------------------
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 0 147
-----------------------
Net Income $ 331 $ 400
=======================
Number of weighted average shares outstanding-Basic 1,542,700 1,539,753
Earnings per share - Basic $ 0.21 $ 0.26
Number of weighted average shares outstanding-Dilutive 1,558,404 1,539,753
Earnings per share - Dilutive $ 0.21 $ 0.26
See accompanying notes to unaudited consolidated financial statements.
2
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
Accumulated
Additional Other Unearned
Common Paid-in Retained Comprehensive Compensation
Stock Capital Earnings Income (Loss) ESOP Total
------ ---------- -------- ------------- ------------ -----
(unaudited)
<s> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2000 $16 $4,541 $20,931 $(352) $(420) $24,716
-------
Comprehensive income:
Net income 0 0 400 0 0 400
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 469 0 469
-------
Total comprehensive income 869
Dividends paid, $.05 per share 0 0 (79) 0 0 (79)
ESOP shares committed to be released 0 0 0 0 8 8
---------------------------------------------------------------------------
Balance at December 31, 2000 $16 $4,541 $21,252 $ 117 $(412) $25,514
===========================================================================
Balance at September 30, 2001 $16 $4,549 $22,013 $ 724 $(390) $26,912
-------
Comprehensive income:
Net income 0 0 331 0 0 331
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (236) 0 (236)
-------
Total comprehensive income 95
-------
Dividends paid, $0.05 per share 0 0 (79) 0 0 (79)
ESOP shares committed to be released 0 6 0 0 7 13
---------------------------------------------------------------------------
Balance at December 31, 2001 $16 $4,555 $22,265 $ 488 $(383) $26,941
===========================================================================
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(dollars in thousands)
Three Months Ended
---------------------------------------
December 31, 2001 December 31, 2000
----------------- -----------------
(unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 331 $ 400
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 8 12
Net amortization (accretion) on securities 7 (17)
Amortization of net deferred loan costs and premiums (discounts) (1) 1
Depreciation and amortization 106 102
Gain on sales and calls of securities, net (30) (52)
Recognition of expired covered call options - (16)
Decrease (increase) in accrued interest receivable 120 (166)
Deferred income tax benefit (80) -
ESOP shares released and committed to be released 13 8
Increase in cash surrender value of life insurance (112) (96)
Other, net 353 745
-----------------------------
Net cash provided by operating activities 715 921
-----------------------------
Cash flows from investing activities:
Activity in available for sale securities:
Sales and calls 2,542 2,917
Maturities 3,600 1,999
Purchases (8,071) (9,700)
Principal Payments 1,458 590
Loans originated, net of principal payments (1,182) (2,000)
Purchase of banking premises and equipment (645) (178)
-----------------------------
Net cash used by investing activities (2,298) (6,372)
-----------------------------
Cash flows from financing activities:
Net increase in deposits 3,455 6,626
Net decrease in mortgagors escrow accounts (29) (34)
Dividends Paid (79) (79)
-----------------------------
Net cash provided by financing activities 3,347 6,513
-----------------------------
Net increase in cash and cash equivalents 1,764 1,062
Cash and cash equivalents at beginning of period 15,108 14,460
-----------------------------
Cash and cash equivalents at end of period $16,872 $15,522
=============================
See accompanying notes to unaudited consolidated financial statements.
4
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, 2001, 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 ("GAAP") 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 GAAP for complete consolidated 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.
A summary of significant accounting policies followed by the Company is set
forth in the Notes to Consolidated Financial Statements of the Company's
2001 annual report to stockholders.
2) Contingencies.
At December 31, 2001, the Bank had loan commitments to borrowers of
$4.6 million, commitments of home equity loans of $431 thousand, available
home equity lines of credit of $9.3 million, unadvanced funds on commercial
lines of credit of $2.1 million, and personal overdraft lines of credit of
approximately $419 thousand. The Bank had no commitments to purchase
securities at December 31, 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 $2.2 million and it is scheduled for completion in February
2002. 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.
3) Earnings per Share.
Basic earnings per share represent income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated in
accordance with Statement of Financial Accounting Standards No. 128 and
reflects additional common shares (common stock equivalents) that would
have been outstanding if only dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the
assumed issuance. For the periods presented, the Company has no potential
common shares outstanding that are considered anti-dilutive. If
applicable, the Company would exclude from the diluted earnings per share
calculation any potential common shares that would increase earnings per
share. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and grants and are determined using the
treasury stock method. For the periods indicated, there were no
potentially anti-
5
dilutive common shares.
4) 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 quarter ended December 31, 2000.
After related taxes at the rate of 34%, or, $76 thousand, the standard
resulted in additional income of $147 thousand for the quarter ended
December 31, 2000.
6
Item 2. Management's Discussion and Analysis.
General
The following discussion compares the financial condition of the
Company and its wholly owned subsidiary, the Bank, at December 31, 2001 and
September 30, 2001, and the results of operations for the three months
ended December 31, 2001, compared to the same period in 2000. This
discussion and analysis should be read in conjunction with the unaudited
consolidated financial statements and related notes that are included
within this report.
The Company's principal business is its investment in the Bank, which
is a community-oriented financial institution providing a variety of
financial services to the communities which it serves. 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.
7
Comparison of Financial Condition at December 31, 2001 and September 30,
2001
The Company's total assets grew by $3.7 million, or 1.62%, to $229.3
million at December 31, 2001 from $225.7 million at September 30, 2001.
The primary areas of growth were from increases in cash and cash
equivalents of $1.8 million, securities available for sale of $1.1 million
and loans of $1.2 million. Alternatively, amounts due from broker, which
represented a security that matured on Sunday, September 30, 2001, the
proceeds of which were not available for investment until the next business
day, declined by $1.0 million during this period.
Total deposits increased by $3.5 million, or 1.87%, to $188.6 million
at December 31, 2001 from $185.1 million at September 30, 2001. Most of
this increase was attributable to increases in non-interest bearing
checking accounts, short-term interest-bearing certificates of deposits
less than one year and regular savings accounts. Savings interest rates
declined dramatically over the three-month period ending December 31, 2001
and, in general, our customers chose to place maturing certificates of
deposit in term deposit accounts of one year or less.
Total stockholders' equity increased by $29 thousand, or 0.11%, to
$26.9 million at December 31, 2001. This increase was a result of net
income of $331 thousand for the quarter ended December 31, 2001 offset by a
decline in accumulated other comprehensive income of $236 thousand and
dividends paid to stockholders of $79 thousand. The decline in accumulated
other comprehensive income was due to a reduction in net unrealized gains
on securities considered available for sale. At December 31, 2001,
stockholders' equity as a percent of assets was 11.75% as compared to
11.93% at September 30, 2001.
Comparison of Operating Results for the Three Months Ended December 31,
2001 and 2000
Net Income: The Company reported earnings per share (basic and
dilutive) for the quarter ended December 31, 2001 of $0.21 on net income of
$331 thousand. For the quarter ended December 31, 2000, net income was
$400 thousand, or $0.26 per share, (basic and dilutive). The $69 thousand,
or 17.3%, decline in net income was primarily due to a reduction in income
from the cumulative, after-tax, effect of a change in accounting principle,
an increase in operating expenses, a decrease in customer service fees, and
decline in securities gains. These amounts were partially offset by an
increase in the net interest margin. The Company's after tax income before
the cumulative effect of a change in accounting for covered call options
increased by $78 thousand, or 30.83%, to $331 thousand, for the quarter
ended December 31, 2001 as compared to $253 thousand for the comparative
quarter ended December 31, 2000. Net income as a percent of average assets
(return on average assets) for the three months ended December 31, 2001,
was 0.58% as compared to 0.76% for the three months ended December 31,
2000.
Interest and Dividend Income: The Bank's interest and dividend
income increased by $7 thousand, or 0.2%, to $3.5 million for the quarter
ended December 31, 2001. The small increase was due mainly to the
combination of a higher volume of average interest-earning assets and a
decline in the average rate earned on interest-earning assets. The average
volume of interest-earning assets for the quarter ended December 31, 2001
was $214.4 million earning an average rate of 6.56% as compared to an
average volume of $195.8 million earning an average rate of 7.18% for the
quarter ending December 31, 2000. The Bank experienced continued growth in
real estate and commercial lending, funding from which was supported mainly
by internally generated growth in deposits. The average balance of loans
for the quarter ended December 31, 2001 was $137.2 million earning 7.20% as
compared to an average balance of $114.1 million earning 7.66% for the
quarter ending December 31, 2000. The decline in the interest rate earned
on loans was, in large part, a result of the general decline in market-
based interest rates offered on new loans granted during the period and
also due to a decline in the rates of interest charged on variable-rate
loans held in our portfolio which were subject to periodic adjustment or a
re-negotiation of the current rate charged by the Bank. The average balance
8
of securities for the quarter ended December 31, 2001 was $65.3 million,
earning 6.08% as compared to an average balance of $71.0 million, earning
6.44% for the quarter ending December 31, 2000. As a result of the
substantial declines in short-term rates by the Federal Open Market
Committee, the Bank's average interest rate earned on short-term
investments declined. The average balance of short-term investments for
the quarter ended December 31, 2001 was $11.9 million earning 1.85% as
compared to an average balance of $10.7 million earning 6.81% for the
quarter ending December 31, 2000.
Interest Expense: Interest expense declined by $260 thousand, or
14.8%, to $1.5 million for the quarter ended December 31, 2001, from $1.8
million for the quarter ending December 31, 2000. The decline in interest
expense was mainly due to our response to the general decline in interest
rates. Interest rates offered to new or existing deposit customers
declined. As a result, the average volume of all interest-bearing
liabilities (which includes interest-bearing deposits and interest-bearing
borrowings) was $180.8 million with a cost of 3.32% for the quarter ended
December 31, 2001 as compared to $166.6 million with a cost of 4.23% for
the quarter ending December 31, 2000. The average volume of interest-
bearing deposits was $168.8 million with a cost of 3.08% for the quarter
ending December 31, 2001 as compared to $150.1 million with a cost of 3.97%
for quarter ending December 31, 2000. As a result of the payment of
scheduled maturities of borrowings from the Federal Home Loan Bank of
Boston, the average volume of interest-bearing borrowing was $12.0 million
with a cost of 6.70% for the quarter ending December 31, 2001 as compared
to $16.5 million with a cost of 6.57% for quarter ending December 31, 2000.
Net Interest Income: The Bank's net interest income increased by
$267 thousand for the quarter ended December 31, 2001, or 15.3%, to $2.0
million from $1.8 million for the quarter ending December 31, 2000. The
increase was attributed to the combination of an increase in interest and
dividend income of $7 thousand and a decline in interest expense of $260
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, increased to
3.24% for the quarter ended December 31, 2001 as compared to 2.95% for the
quarter ending December 31, 2000. In addition, the Bank's net interest
margin, which represents net interest income as a percentage of average
interest-earning assets, increased to 3.76% for the quarter ending December
31, 2001 as compared to 3.58% for the quarter ending December 31, 2000.
Provision for Loan Losses: The Bank's provision for loan losses was
$8 thousand for the quarter ended December 31, 2001 compared to $12
thousand for the quarter ended December 31, 2000. The provision for loan
losses is a result of management's periodic analysis of risks inherent in
our loan portfolio from time to time, as well as the adequacy of the
allowance for loan losses. It is our policy to provide valuation
allowances for estimated losses on loans based upon past loss experience,
current trends in the level of delinquent and specific problem loans, loan
concentrations to single borrowers, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current and anticipated economic conditions in our market
area. Accordingly, the evaluation of the adequacy of the allowance for
loan losses is not based directly on the level of non-performing loans.
The current addition of $8 thousand to the allowance for loan losses, in
management's opinion, brings the allowance to a level sufficient to cover
losses in the Bank's loan portfolio at this time. As the Bank expands its
commercial lending activities, management believes that growth in the
provision for loan losses may be likely. Additionally, while the Bank has
excellent loan quality, with no non-accrual and no non-performing loans for
the periods presented, the Bank recognizes that it is located in a market
and geographic area that is considered in the high technology and financial
services belt. The Bank's loan portfolio is representative of such
demographics. Unemployment rates in Massachusetts and our area have
increased and commercial property vacancy rates have also risen. Much
uncertainty surrounds the length and depth of the
9
current recession, and, while Bank management believes that our current
level of allowance for loan losses is adequate, there can be no assurance
that the allowance will be sufficient to cover loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of
the allowance.
Other Income: Other income consists primarily of fee income for
customer 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 declined 18.9%, to $231 thousand, for
the quarter ended December 31, 2001, as compared to $285 thousand for
quarter ending December 31, 2000. Customer service fees declined by $29
thousand, to $155 thousand, for the quarter ended December 31, 2001, or
15.8%, from $184 thousand for the quarter ended December 31, 2000 primarily
due to a decline in fees earned on the sale of non-insured investment
products such as mutual funds and annuities. Net gains on the sale of
securities available for sale declined by $22 thousand, or 42.3%, to $30
thousand for the quarter ended December 31, 2001, as compared to $52
thousand for quarter ending December 31, 2000. For the quarter ended
December 31, 2001, there was no income from covered call options since the
Bank has discontinued its activity in this program. The comparative
quarter ended December 31, 2000 resulted in income of $16 thousand from
this program. Lastly, miscellaneous income, increased by $13 thousand, to
$46 thousand for the quarter ended December 31, 2001, or 39.4%, from $33
thousand for the quarter ended December 31, 2000 primarily due to increases
in the cash surrender value of Bank-owned life insurance.
Operating Expenses: For the quarter ended December 31, 2001,
operating expenses increased by $115 thousand, or 6.9%, to $1.8 million
from $1.7 million for quarter ending December 31, 2000. The increase was
primarily due to salary and benefit expenses associated with general salary
adjustments for the current staff and compensation expense associated with
the periodic calculation of the value of stock grants. The increase in
operating expenses is also a result of the Bank's efforts to update its
computers along with the associated increases in data processing costs. The
Bank has replaced, and will continue to replace, many older computers with
newer equipment in order to allow for the conversion to a more efficient
transaction processing system that is scheduled to occur in March 2002.
Marketing expenses declined by 28.8%, to $47 thousand for the quarter ended
December 31, 2001 from $66 thousand for the quarter ended December 31,
2000. Much of this variance can be associated with the timing of expenses
associated with marketing material, advertising and promotions.
Income Taxes. The provision for income taxes increased by $24
thousand to $116 thousand for the quarter ended December 31, 2001 as
compared to $92 thousand for the quarter ended December 31, 2000, resulting
in an effective tax rate of 26.0% and 26.7% for the quarter ended December
31, 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 held.
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
quarter ended December 31, 2000. After related taxes at the rate of 34%,
or, $76 thousand, the standard resulted in additional income of $147
thousand for the quarter ended December 31, 2000.
10
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 December 31, 2001, the Bank had $12.0
million in outstanding borrowings.
Loan repayments and maturing securities are a relatively predictable
source of funds. However, deposit flows, calls of 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 of one-
to four--family real estate and other loans, the purchase of mortgage--
backed securities and the purchase of investment securities. During the
three months ended December 31, 2001, the Bank originated loans of $13.2
million and purchased mortgage-backed securities and investment securities
of $8.1 million. The purchase of banking premises and equipment utilized
$645 thousand. These investing activities were funded by net deposit
growth of $3.5 million, sales and calls on investments of $2.5 million,
investment maturities of $3.6 million and principal payments on mortgage--
backed securities of $1.5 million. Net cash and cash equivalents increased
by $1.8 million during the three months ended December 31, 2001.
Total deposits increased $3.5 million, during the three months ended
December 31, 2001. The level of interest rates, interest rates and products
offered by competitors and other factors affect deposit flows. Certificate
of deposit accounts scheduled to mature within one year were $53.8 million
at December 31, 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.
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 total cost of this
expansion and renovation is estimated to be approximately $2.2 million and
it is scheduled for completion in February 2002. The Bank also has a
deposit on land in Shrewsbury for relocation of its current Maple Avenue
branch office. No formal estimates or contracts have been entered into for
this branch. Such investments have been and, in the future, will be
necessary to insure 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.
At December 31, 2001, the Bank exceeded each of the applicable
regulatory capital requirements. The Bank's leverage (tier 1) capital was
approximately $24.2 million, or 10.63% 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 $11.4 million,
or 5.0%. To obtain such classification, the Bank must also have a risk--
based total capital ratio of 10.0% of total risk-weighted assets. At
December 31, 2001,
11
the Bank had a risk--based total capital ratio of 18.16%.
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.
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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.
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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: February 14, 2002 By: /s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: February 14, 2002 By: /s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Treasurer
and Clerk
14