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 March 31, 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 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 May 15, 2002
----- ------------------------------
Common Stock, par value $0.01 1,581,574
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 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
March 31, September 30,
2002 2001
--------- -------------
(Unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 4,816 $ 5,040
Federal funds sold 9,792 7,668
Short-term investments 2,250 2,400
------------------------
Total cash and cash equivalents 16,858 15,108
Securities available for sale 66,773 64,414
Federal Home Loan Bank stock, at cost 1,250 1,100
Loans, net 135,649 134,957
Banking premises and equipment, net 4,056 2,859
Accrued interest receivable 1,394 1,315
Deferred income taxes 736 285
Cash surrender value of life insurance 4,748 4,449
Due from broker 0 1,032
Other assets 186 156
------------------------
Total assets $231,650 $225,675
========================
Liabilities and Stockholders' Equity
Deposits $191,168 $185,098
Federal Home Loan Bank advances 12,000 12,000
Mortgagors' escrow accounts 192 229
Accrued expenses and other liabilities 1,608 1,436
------------------------
Total liabilities 204,968 198,763
------------------------
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,
1,581,574 and 1,581,374 issued and outstanding, respectively 16 16
Additional paid-in capital 4,565 4,549
Retained earnings 22,564 22,013
Accumulated other comprehensive income 62 724
Unearned RRP.stock (150) 0
Unearned compensation-employee stock ownership plan (375) (390)
------------------------
Total stockholders' equity 26,682 26,912
------------------------
Total liabilities and stockholders' equity $231,650 $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 Six Months Ended
March 31, March 31,
--------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,400 $ 2,190 $ 4,869 $ 4,375
Interest and dividends on investment securities 1,048 1,171 2,041 2,314
Interest on federal funds sold 28 115 69 242
Interest on short term investments 25 30 39 85
-----------------------------------------------------
Total interest and dividend income 3,501 3,506 7,018 7,016
-----------------------------------------------------
Interest expense:
Interest on deposits 1,114 1,498 2,413 2,987
Interest on borrowings 197 265 398 537
-----------------------------------------------------
Total interest expense 1,311 1,763 2,811 3,524
-----------------------------------------------------
Net interest income 2,190 1,743 4,207 3,492
Provision for loan losses 0 12 8 24
-----------------------------------------------------
Net interest income, after provision for loan losses 2,190 1,731 4,199 3,468
-----------------------------------------------------
Other income:
Customer service fees 108 166 264 351
Income from covered call options 0 0 0 16
Gain (loss) on sales of securities available for sale, net (26) 264 4 315
Gain on sales of mortgages 5 0 5 0
Miscellaneous 44 33 89 66
-----------------------------------------------------
Total other income 131 463 362 748
-----------------------------------------------------
Operating expenses:
Salaries and employee benefits 969 891 1,903 1,730
Occupancy and equipment expenses 266 260 503 487
Data processing expenses 148 111 270 206
Marketing expenses 51 61 98 127
Professional fees 77 104 154 180
Other general and administrative expenses 323 380 699 754
-----------------------------------------------------
Total operating expenses 1,834 1,807 3,627 3,484
-----------------------------------------------------
Income before income taxes and cumulative effect of change in
accounting principle 487 387 934 732
Provision for income taxes 109 106 225 198
-----------------------------------------------------
Income before cumulative effect of change in
accounting principle 378 281 709 534
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 0 147
-----------------------------------------------------
Net income $ 378 $ 281 $ 709 $ 681
=====================================================
Number of weighted average shares outstanding-Basic 1,541,970 1,540,489 1,542,544 1,540,016
Earnings per share - Basic $ 0.25 $ 0.18 $ 0.46 $ 0.44
Number of weighted average shares outstanding-Dilutive 1,560,287 1,542,445 1,559,615 1,541,972
Earnings per share-Dilutive $ 0.24 $ 0.18 $ 0.45 $ 0.44
See accompanying notes to unaudited consolidated financial statements.
2
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended March 31, 2002 and 2001
(Dollars in thousands, except per share data)
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive RRP Compensation
Stock Capital Earnings Income (Loss) Stock ESOP Total
------ ---------- -------- ------------- -------- ------------ -----
(Unaudited)
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2000 $16 $4,541 $20,931 $(352) $ 0 $(420) $24,716
Comprehensive income:
Net income 0 0 681 0 0 0 681
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 649 0 0 649
---
Total comprehensive income 1,330
Cash dividends declared ($.10 per share) 0 0 (158) 0 0 0 (158)
ESOP shares committed to be released 0 0 0 0 0 15 15
--------------------------------------------------------------------------------
Balance at March 31, 2001 $16 $4,541 $21,454 $ 297 $ 0 $(405) $25,903
================================================================================
Balance at September 30, 2001 16 4,549 22,013 724 0 (390) 26,912
Comprehensive income:
Net income 0 0 709 0 0 0 709
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (662) 0 0 (662)
---
Total comprehensive income 47
Cash dividends declared ($.10 per share) 0 0 (158) 0 0 0 (158)
ESOP shares released and committed to be
released 0 13 0 0 0 15 28
Purchase of RRP shares (9,000 shares) 0 0 0 0 (184) 0 (184)
Amortization of RRP stock 0 0 0 0 34 0 34
Issuance of common stock under stock option
plan, net of income tax benefits 0 3 0 0 0 0 3
--------------------------------------------------------------------------------
Balance at March 31, 2002 $16 $4,565 $22,564 $ 62 $(150) $(375) $26,682
================================================================================
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Six Months Ended
-----------------------
March 31, March 31,
2002 2001
--------- ---------
(Unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 709 $ 681
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 8 24
Net amortization (accretion) on securities 26 (28)
Amortization of net deferred loan costs and premiums (discounts) (24) 30
Depreciation and amortization expense 221 200
Gain on sales and calls of securities, net (4) (315)
Recognition of expired covered call options 0 (16)
Decrease (increase) in accrued interest receivable (79) 13
Deferred income tax benefit (96) 0
ESOP shares released and committed to be released 28 15
Amortization of RRP stock 34 0
Increase in cash surrender value of life insurance (299) (157)
Other, net 142 85
----------------------
Net cash provided by operating activities 666 532
----------------------
Cash flows from investing activities:
Activity in available for sale securities:
Sales and calls 2,616 9,994
Maturities 4,132 3,811
Purchases (13,191) (13,324)
Principal Payments 4,077 1,149
Purchase of Federal Home Loan Bank stock (150) (197)
Loans originated, net of principal payments (676) (3,180)
Purchase of banking premises and equipment (1,418) (462)
----------------------
Net cash used by investing activities (4,610) (2,209)
----------------------
Cash flows from financing activities:
Net increase in deposits 6,070 14,067
Net decrease in mortgagors escrow accounts (37) (36)
Purchase of RRP stock (184) 0
Issuance of common stock under stock option plan,
net of income tax benefits 3 0
Dividends paid (158) (158)
----------------------
Net cash provided by financing activities 5,694 13,873
----------------------
Net increase in cash and cash equivalents 1,750 12,196
Cash and cash equivalents at beginning of period 15,108 14,460
----------------------
Cash and cash equivalents at end of period $ 16,858 $ 26,656
======================
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 March 31, 2002, the Bank had loan commitments to borrowers of $4.9
million, commitments of home equity loans of $875 thousand, available home
equity lines of credit of $9.6 million, unadvanced funds on commercial
lines of credit of $3.9 million, unadvanced funds on construction mortgages
of $1.9 million and personal overdraft lines of credit of approximately
$466 thousand. The Bank had no commitments to purchase or sell securities
at March 31, 2002.
In order to create a platform for the accomplishment of the Bank's
goals, the Bank has been making significant investments in its physical and
data processing infrastructure. In particular, the Bank recently completed,
and is now occupying, an addition to its main office that added
approximately 13,000 square feet of office space that will be utilized to
support operations, marketing, finance, human resources and administration.
The cost to build this addition was approximately $2.5 million and that
amount will be depreciated over 35 years, utilizing the straight-line
method of depreciation. The bank had previously been renting office space,
on a month-to-month basis, to house its finance, operations and marketing
departments. The Bank is in the process of receiving formal estimates for
the renovation of the older portion of its main office. In April, the Bank,
through its wholly owned subsidiary The Hundredth Corporation, completed a
$935 thousand acquisition of land in Shrewsbury where it plans to relocate
its current Maple Avenue branch. As it relates to the proposed building on
the Shrewsbury site, the Bank is in the process of receiving formal
estimates for construction of the branch office. Additionally, in March,
the Bank converted its data processing operation to a new service bureau.
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
5
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-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 Company
recorded pre-tax earnings of $223 thousand for the six-months ended March
31, 2001. After related taxes at the rate of 34%, or, $76 thousand, the
standard resulted in additional income of $147 thousand for the six-months
ended March 31, 2001.
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 March 31, 2002 and
September 30, 2001, and the results of operations for the three and six
month periods ended March 31, 2002, compared to the same periods in 2001.
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, Grafton 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 and securities available for sale. 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 March 31, 2002 and September 30, 2001
As a result of continued growth in deposits, the Company's total
assets increased by $6.0 million, or 2.6%, to $231.7 million at March 31,
2002 from $225.7 million at September 30, 2001. Much of the cash flow from
this deposit growth was invested in federal funds sold and securities
available for sale. Federal funds sold during this period increased $2.1
million, or 27.7%, to $9.8 million at March 31, 2002 from $7.7 million at
September 30, 2001. Securities available for sale increased by $2.4
million, to $66.8 million, at March 31, 2002 as compared to $64.4 million
at September 30, 2001. As a result of the expansion of the Bank's main
office, building premises and equipment increased by $1.2 million to $4.1
million at March 31, 2002. Net loans grew by $0.7 million to $135.6
million. This moderate increase was primarily a result of the current low
interest rate environment that encouraged increased loan payoffs and re-
financings.
Total deposits increased by $6.1 million, or 3.3%, to $191.2 million
at March 31, 2002 from $185.1 million at September 30, 2001. Most of this
increase was attributable to increases in variable-rate tiered accounts and
regular savings accounts. In the current low interest rate environment,
deposit customers preferred to place their deposits in accounts with higher
liquidity.
Total stockholders' equity declined by $0.2 million to $26.7 million
at March 31, 2002 from $26.9 million at September 30, 2001 primarily as a
result of a decrease in accumulated other comprehensive income, partially
offset by an increase in net income. Accumulated other comprehensive
income, which measures the after-tax change in the value of securities
considered available for sale, declined primarily as a result of a decline
in the market value of equity securities available for sale. Additionally,
during this period, the Company purchased 9,000 shares of the Company's
common stock to fund its Recognition and Retention Plan. Lastly, during the
six-month period ended March 31, 2002, the Company declared and paid cash
dividends of $0.10 per common share.
Comparison of Operating Results for the Three-months ended March 31,
2002 and 2001
Net Income: The Company reported dilutive earnings per share for the
quarter ended March 31, 2002 of $0.24 on net income of $378 thousand. For
the current quarter ended March 31, 2002, net income increased by $97
thousand, or 34.5%, as compared to $281 thousand, or $0.18 dilutive
earnings per share, for the previous quarter ended March 31, 2001. The
increased earnings were primarily due to a decline in interest expenses,
offset, to a lesser extent, by a decline in net gains on the sale of
securities. The Company's return on average assets for the quarter ended
March 31, 2002 was .66% compared to .52% for the quarter ended March 31,
2001.
The Bank's net interest rate spread and net interest margin for the
periods indicated are as follows and will aid in the subsequent discussion
of interest and dividend income, interest expense and net interest income:
8
For Three Months Ended
March 31,
---------------------- Increase
2002 2001 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 1.87% 4.58% -2.71%
Investment securities (2) 6.30% 6.31% -0.01%
Loans (3) 7.03% 7.59% -0.56%
Total interest-earning assets 6.53% 6.93% -0.40%
Interest-bearing liabilities:
NOW accounts 0.50% 0.51% -0.01%
Savings accounts (4) 2.15% 3.32% -1.17%
Money market deposit accounts 1.94% 1.95% -0.01%
Certificate of deposit accounts 3.83% 5.57% -1.74%
Total interest-bearing deposits 2.62% 3.86% -1.24%
Borrowed funds 6.57% 6.42% 0.15%
Total interest-bearing liabilities 2.88% 4.11% -1.23%
Net interest rate spread (5) 3.65% 2.82% 0.83%
Net interest margin (6) 4.09% 3.44% 0.65%
<FN>
- --------------------
<F1> Short-term investments include federal funds sold.
<F2> All investment securities are considered available for sale.
<F3> Loans are net of deferred loan origination costs (fees), allowance
for loan losses, discount/premium on purchased loans and unadvanced
funds.
<F4> Savings accounts include the balance in mortgagors' escrow
accounts.
<F5> Net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
<F6> Net interest margin represents net interest income as a percentage
of average interest-earning assets.
</FN>
9
Interest and Dividend Income: The Bank's interest and dividend income
declined by $5 thousand, or 0.14%, to $3.5 million for the three-months
ended March 31, 2002. Although the average volume of interest-earning
assets increased, the average rate earned on interest-earning assets
declined. The average volume of interest-earning assets for the three-
months ended March 31, 2002 was $214.4 million earning an average rate of
6.53% as compared to an average volume of $202.4 million earning an average
rate of 6.93% for the three-months ending March 31, 2001. The Bank
experienced continued growth in real estate, commercial lending and other
loans, funding from which was supported mainly by internally generated
growth in deposits. The average balance of loans for the three-months ended
March 31, 2002 was $136.5 million earning 7.03% as compared to an average
balance of $115.5 million earning 7.59% for the three-months ending March
31, 2001. 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 of investment
securities for the three-months ended March 31, 2002 was $66.6 million,
earning 6.30% as compared to an average balance of $74.3 million, earning
6.31% for the three-months ending March 31, 2001. 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
three-months ended March 31, 2002 was $11.3 million earning 1.87% as
compared to an average balance of $12.7 million earning 4.58% for the
three-months ending March 31, 2001.
Interest Expense: Total interest expense declined by $452 thousand,
or 25.6%, to $1.3 million for the three-months ended March 31, 2002, from
$1.8 million for the three-months ending March 31, 2001. The decline in
interest expense was mainly due to the Bank's response to the general
decline in interest rates. Interest rates offered to new or existing
savings and certificate of deposit account customers declined during the
recent three-month period. The average volume of all interest-bearing
liabilities (which includes interest-bearing deposits and interest-bearing
borrowings) was $181.9 million with a cost of 2.88% for the three-months
ended March 31, 2002 as compared to $171.8 million with a cost of 4.11% for
the three-months ending March 31, 2001. The average volume of interest-
bearing deposits was $169.9 million with a cost of 2.62% for the three-
months ending March 31, 2002 as compared to $155.3 million with a cost of
3.86% for three-months ending March 31, 2001. 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 6.57% for the three-months ending March 31, 2002 as compared
to $16.5 million with a cost of 6.42% for three-months ending March 31,
2001.
Net Interest Income: The Bank's net interest income increased by $447
thousand for the three-months ended March 31, 2002, or 25.6%, to $2.2
million from $1.7 million for the three-months ending March 31, 2001. The
increase was mainly attributed to the decline in interest expense of $452
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
...83%, to 3.65%, for the three-months ended March 31, 2002 as compared to
2.82% for the three-months ending March 31, 2001. In addition, the Bank's
net interest margin, which represents net interest income as a percentage
of average interest-earning assets, increased .65%, to 4.09%, for the
three-months ending March 31, 2002 as compared to 3.44% for the three-
months ending March 31, 2001.
Provision for Loan Losses: The Bank's provision for loan losses was
$0 for the three-months ended March 31, 2002 compared to $12 thousand for
the three-months ended March 31, 2001. The provision for loan losses is a
result of management's periodic analysis of risks inherent in its loan
portfolio from time to time, as well as the adequacy of the allowance for
loan losses. It is the Bank's
10
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 allowance for loan losses, in management's opinion,
is 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 believes it has excellent loan quality, with $218 thousand
of non-accrual loans and non-performing assets at March 31, 2002, 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 its area have increased and commercial property
vacancy rates have also risen. While Bank management believes that its
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 and gains and losses from the sale of securities. Total
other income declined by 71.7%, to $131 thousand, for the three-months
ended March 31, 2002, as compared to $463 thousand for three-months ending
March 31, 2001. For the three-months ended March 31, 2002, the Bank
incurred a $26 thousand net loss on sales of securities as compared to a
net gain on sales of securities of $264 thousand for the comparative three-
month period ended March 31, 2001. Customer service fees declined by $58
thousand, or 34.9%, to $108 thousand, for the three-months ended March 31,
2002 from $166 thousand for the three-months ended March 31, 2001 primarily
due to a decline in the volume of fees earned on the sale of non-insured
investment products such as mutual funds and annuities. For the three-
months ended March 31, 2002, there was no income from covered call options
since the Bank has discontinued its activity in this program.
Operating Expenses: For the three-months ended March 31, 2002,
operating expenses increased by $27 thousand, or 1.5%, to $1.8 million
three-months ending March 31, 2001. Salary and employee benefits expense
increased 8.8%, to $969 thousand for the three-months ended March 31, 2002
compared to $891 thousand for the similar period last year. The increase
was primarily due to salary and benefit expenses associated with general
salary adjustments for the current staff, compensation expense associated
with the periodic calculation of the value of stock grants and for deferred
compensation due a retiring director. The increase in operating expenses is
also a result of the Bank's payment of costs associated with the Bank's
efforts to convert to a new data processing servicing company. Marketing
expenses declined by 16.4%, to $51 thousand for the three-months ended
March 31, 2002 from $61 thousand for the three-months ended March 31, 2001
in conjunction with the Bank's efforts to produce some marketing materials
in-house, rather than purchasing such services from third party vendors.
Professional fees, which mainly include legal and accounting expenses,
declined by $27 thousand, to $77 thousand, for the three months ended March
31, 2002, as compared to $104 thousand for the comparable quarter last
year. Legal expenses associated with various filings and with the Company's
annual stockholders' meeting declined from the previous year. Other general
and administrative expenses declined by 15%, or $57 thousand, to $323
thousand for the three-months ended March 31, 2002 as compared to $380
thousand for the comparable quarter last year as a result of a decline in
the use of outside consultants in the areas of professional development,
investment advisory services and compensation and benefit surveys.
11
Income Taxes. The provision for income taxes increased by $3 thousand
to $109 thousand for the three-months ended March 31, 2002 as compared to
$106 thousand for the three-months ended March 31, 2001, resulting in an
effective tax rate of 22.4% and 27.4% for the three-months ended March 31,
2002 and 2001, 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. Depending upon
the timing and magnitude of such income items, changes in the Company's
effective tax rate can vary from period to period.
Comparison of Operating Results for the Six-months ended March 31, 2002
and 2001
Net Income: The Company reported dilutive earnings per share for the
six-month period ended March 31, 2002 of $0.45 on net income of $709
thousand. For the six-month period ended March 31, 2002, net income
increased by $28 thousand, or 4.1%, as compared to $681 thousand, or $0.44
dilutive earnings per share, for the comparable period ended March 31,
2001. The increased earnings was primarily due to a decline in interest
expenses, offset, to a lesser extent, by a decline in net gains on the sale
of securities, a decline in the cumulative effect of a change in accounting
principle for covered call options, a decline in customer service fee
income and an increase in operating expenses. The Company's return on
average assets for the six-month period ended March 31, 2002 was .62%
compared to .64% for the comparable period ended March 31, 2001.
The Bank's net interest rate spread and net interest margin for the
periods indicated are as follows and will aid in the subsequent discussion
of interest and dividend income, interest expense and net interest income:
12
For Six Months Ended
March 31,
-------------------- Increase
2002 2001 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 1.89% 5.60% -3.71%
Investment securities (2) 6.23% 6.37% -0.14%
Loans (3) 7.11% 7.62% -0.51%
Total interest-earning assets 6.56% 7.05% -0.49%
Interest-bearing liabilities:
NOW accounts 0.49% 0.50% -0.01%
Savings accounts (4) 2.34% 3.46% -1.12%
Money market deposit accounts 1.89% 1.94% -0.05%
Certificate of deposit accounts 4.23% 5.58% -1.35%
Total interest-bearing deposits 2.87% 3.91% -1.04%
Borrowed funds 6.63% 6.51% 0.12%
Total interest-bearing liabilities 3.12% 4.17% -1.05%
Net interest rate spread (5) 3.44% 2.88% 0.56%
Net interest margin (6) 3.93% 3.51% 0.42%
<FN>
- --------------------
<F1> Short-term investments include federal funds sold.
<F2> All investment securities are considered available for sale.
<F3> Loans are net of deferred loan origination costs (fees), allowance
for loan losses, discount/premium on purchased loans and
unadvanced funds.
<F4> Savings accounts include the balance in mortgagors' escrow
accounts.
<F5> Net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
<F6> Net interest margin represents net interest income as a percentage
of average interest-earning assets.
</FN>
13
Interest and Dividend Income: Interest and dividend income increased
by $2 thousand, or 0.03%, to $7.0 million for the six-months ended March
31, 2002. 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 six-months ended March 31, 2002 was $214.0 million earning
an average rate of 6.56% as compared to an average volume of $199.1 million
earning an average rate of 7.05% for the six-months ending March 31, 2001.
The Bank experienced continued growth in real estate, commercial and other
loans, funding from which was supported mainly by internally generated
growth in deposits and from the sale or maturity of investment securities.
The average balance of loans for the six-months ended March 31, 2002 was
$137.0 million earning 7.11% as compared to an average balance of $114.8
million earning 7.62% for the six-months ending March 31, 2001. 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 of investment securities for the six-months ended
March 31, 2002 declined to $65.5 million, earning 6.23% as compared to an
average balance of $72.6 million, earning 6.37% for the six-months ending
March 31, 2001. 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 six-months ended March 31, 2002 was $11.4 million
earning 1.89% as compared to an average balance of $11.7 million earning
5.60% for the six-months ending March 31, 2001.
Interest Expense: Total interest expense declined by $713 thousand,
or 20.2%, to $2.8 million for the six-months ended March 31, 2002, from
$3.5 million for the six-months ending March 31, 2001. The decline in
interest expense was mainly due to the Bank's response to the general
decline in interest rates. Interest rates offered to new or existing
savings and certificate of deposit account customers declined during the
recent six-month period. The average volume of all interest-bearing
liabilities (which includes interest-bearing deposits and interest-bearing
borrowings) was $180.0 million with a cost of 3.12% for the six-months
ended March 31, 2002 as compared to $169.2 million with a cost of 4.17% for
the six-months ending March 31, 2001. The average volume of interest-
bearing deposits was $168.0 million with a cost of 2.87% for the six-months
ending March 31, 2002 as compared to $152.7 million with a cost of 3.91%
for six-months ending March 31, 2001. 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 6.63% for the six-months ending March 31, 2002 as compared
to $16.5 million with a cost of 6.51% for six-months ending March 31, 2001.
Net Interest Income: Net interest income increased by $715 thousand,
or 20.5%, for the six-months ended March 31, 2002, to $4.2 million from
$3.5 million for the six-months ending March 31, 2001. The increase was
mainly attributed to the decline in interest expense of $713 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 3.44% for the
six-months ended March 31, 2002 as compared to 2.88% for the six-months
ending March 31, 2001. In addition, the Bank's net interest margin, which
represents net interest income as a percentage of average interest-earning
assets, increased by .42%, to 3.93%, for the six-months ending March 31,
2002 as compared to 3.51% for the six-months ending March 31, 2001.
Provision for Loan Losses: The Bank's provision for loan losses was
$8 thousand for the six-months ended March 31, 2002 compared to $24
thousand for the six-months ended March 31, 2001. Although there were no
significant increases in payment delinquencies or non-performing assets,
the Bank believes that the additional provision for losses is prudent,
given weaknesses in the general
14
economic environment. The provision for loan losses is a result of
management's periodic analysis of risks inherent in its loan portfolio from
time to time, as well as the adequacy of the allowance for loan losses. It
is the Bank's 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 believes it has
excellent loan quality, with $218 thousand of non-accrual loans and non-
performing assets at March 31, 2002, 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 its area have
increased and commercial property vacancy rates have also risen. While Bank
management believes that its 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 and gains and losses from the sale of securities. Total
other income declined 51.6%, to $362 thousand, for the six-months ended
March 31, 2002, as compared to $748 thousand for six-months ending March
31, 2001. Net gains on the sale of securities available for sale declined
by $311 thousand, or 98.7%, to $4 thousand for the six-months ended March
31, 2002, as compared to $315 thousand for six-months ending March 31,
2001. Customer service fees declined by $87 thousand, or 24.8%, to $264
thousand, for the six-months ended March 31, 2002, from $351 thousand for
the six-months ended March 31, 2001 primarily due to a decline in the
volume of fees earned on the sale of non-insured investment products such
as mutual funds and annuities. For the six-months ended March 31, 2002,
there was no income from covered call options since the Bank has
discontinued its activity in this program. The comparative six-months ended
March 31, 2001 resulted in income of $16 thousand from this program.
Lastly, miscellaneous income, increased by $23 thousand, or 34.9%, to $89
thousand for the six-months ended March 31, 2002, from $66 thousand for the
six-months ended March 31, 2001 primarily due to increases in the cash
surrender value of Bank-owned life insurance.
Operating Expenses: For the six-months ended March 31, 2002, operating
expenses increased by $143 thousand, or 4.1%, to $3.6 million from $3.5
million for six-months ending March 31, 2001. The increase was primarily
due to salary and benefit expenses associated with general salary
adjustments for the current staff, compensation expense associated with the
periodic calculation of the value of stock grants and for deferred
compensation due a retiring director. The increase in operating expenses is
also a result of the Bank's payment of costs associated with the Bank's
efforts to convert to a new data processing servicing company. Marketing
expenses declined by 22.8%, to $98 thousand for the six-months ended March
31, 2002 from $127 thousand for the six-months ended March 31, 2001 in
conjunction with the Bank's efforts to produce some marketing material in-
house, rather than purchasing such services from third party vendors.
Professional fees, which mainly includes legal and accounting expenses,
declined by $26 thousand, to $154 thousand, for the six-months ended March
31, 2002, as compared to $180 thousand for the comparable period last year.
Legal expenses associated with various filings and with the Company's
annual stockholders' meeting declined from the previous year. Other general
and administrative expenses declined by 7.3%, or $55 thousand, to $699
thousand
15
for six-months ended March 31, 2002 as compared to $754 thousand for the
comparable period last year as a result of a decline in the use of outside
consultants in the areas of professional development, investment advisory
services and compensation and benefit surveys.
Income Taxes. The provision for income taxes increased by $27
thousand to $225 thousand for the six-months ended March 31, 2002 as
compared to $198 thousand for the six-months ended March 31, 2001,
resulting in an effective tax rate of 24.1% and 27.0% for the six-months
ended March 31, 2002 and 2001, 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.
Depending upon the timing and magnitude of such income items, changes in
the Company's effective tax rate can vary from period to period.
Change in Accounting Principle. At October 1, 2000, the Company
adopted a new accounting standard for reporting covered call options. By
adopting this standard, the Company recorded pre-tax earnings of $223
thousand for the six-months ended March 31, 2001. After related taxes at
the rate of 34%, or, $76 thousand, the standard resulted in additional
income of $147 thousand for the six-months ended March 31, 2001.
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 borrows funds from time to
time from the Federal Home Loan Bank of Boston as part of its management of
interest rate risk. At March 31, 2002, 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 and the purchase of investment
securities. During the six-months ended March 31, 2002, the Bank originated
loans of $28.2 million and purchased investment securities of $13.2
million. The purchase of banking premises and equipment utilized $1.4
million. These investing activities were funded by net deposit growth of
$6.1 million, sales and calls on securities of $2.6 million, investment
maturities of $4.1 million and principal payments on mortgage-backed
securities of $4.1 million. Net cash and cash equivalents increased by $1.8
million during the six-months ended March 31, 2002.
Total deposits increased $6.1 million, during the six-months ended
March 31, 2002. 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 $52.8 million
at March 31, 2002. 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 ("FDIC") 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.
16
In order to create a platform for the accomplishment of the Bank's
goals, the Bank has been making significant investments in its physical
infrastructure. In particular, the Bank expanded its main office. The cost
to complete this expansion and renovation was approximately $2.5 million
and it was completed in March 2002. In April, the Bank, through its wholly
owned subsidiary The Hundredth Corporation, completed a $935 thousand
acquisition of land in Shrewsbury where it plans to relocate its current
Maple Avenue branch. As it relates to the proposed building on the Maple
Avenue site, no contracts have been entered into and the Bank is in the
process of receiving formal estimates on construction of this branch.
Additionally, in March, the Bank converted its data processing operation to
a new service bureau. Such investments have been, and, in the future, will
be, necessary to ensure that adequate resources are in place to offer a
full array of 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 March 31, 2002, the Bank exceeded each of the applicable
regulatory capital requirements and was considered "well capitalized" under
relevant FDIC regulations. 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%. The Bank's leverage (tier 1) capital was
approximately $24.5 million, or 10.70% of adjusted total average assets for
the quarter. To obtain such classification, the Bank must also have a risk-
based total capital ratio of 10.0% of total risk-weighted assets. At March
31, 2002, the Bank had a risk-based total capital ratio of 17.97%.
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.
17
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Although the Bank and the Company, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Bank or the Company, its directors
or its officers is a party or to which any of its property is subject as of
the date of this Form 10-QSB.
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.
Westborough Financial Services, Inc. held its annual meeting of
shareholders on January 31, 2002 (the "Meeting"). All of the proposals
submitted to the shareholders at the Meeting were approved. The proposals
submitted to shareholders and the tabulation of votes for each proposal is
as follows:
1. Election of five directors of the Company. The number of votes cast
with respect to this matter was as follows:
Nominee For Withheld Broker Non-Votes
------- --- -------- ----------------
Edward S. Bilzerian 1,477,751 3,305 0
Paul F. McGrath 1,450,451 605 0
Charlotte C. Spinney 1,450,881 175 0
Phyllis A. Stone 1,450,881 335 0
James E. Tashjian 1,450,601 455 0
2. Approval of Article IX of the Westborough Financial Services, Inc.
2001 Stock Option Plan.
For Against Abstain Broker Non-Votes MHC Non-Vote
---- ------- ------- ---------------- ------------
362,118 54,975 6,070 0 1,027,893
3. Approval of Article X of the Westborough Financial Services, Inc.
2001 Recognition and Retention Plan.
For Against Abstain Broker Non-Votes MHC Non-Vote
--- ------- ------- ---------------- ------------
361,093 56,000 6,070 0 1,027,893
18
4. Ratification of the appointment of Wolf & Company, P.C. as the
Company's independent public accountants for the fiscal year ending
September 30, 2002.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
1,447,056 330 3,670 0
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on 8-K.
None
19
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: May 15, 2002 By: /s/ Joseph F. MacDonough
------------------------
President and Chief Executive
Officer
Date: May 15, 2002 By: /s/ John L. Casagrande
------------------------
Senior Vice-President,
Treasurer and Clerk
20