UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 14, 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. 18
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
June 30, September 30,
2002 2001
-------- -------------
(Unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 4,749 $ 5,040
Federal funds sold 10,782 7,668
Short-term investments 2,150 2,400
-------- --------
Total cash and cash equivalents 17,681 15,108
Securities available for sale 69,794 64,414
Federal Home Loan Bank stock, at cost 1,250 1,100
Loans, net 136,117 134,957
Banking premises and equipment, net 5,299 2,859
Accrued interest receivable 1,395 1,315
Deferred income taxes 413 285
Cash surrender value of life insurance 4,822 4,449
Due from broker 0 1,032
Other assets 395 156
-------- --------
Total assets $237,166 $225,675
======== ========
Liabilities and Stockholders' Equity
Deposits $195,961 $185,098
Federal Home Loan Bank advances 12,000 12,000
Mortgagors' escrow accounts 182 229
Accrued expenses and other liabilities 1,622 1,436
-------- --------
Total liabilities 209,765 198,763
======== ========
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 4,574 4,549
Retained earnings 22,689 22,013
Accumulated other comprehensive income 719 724
Unearned RRP stock (229) 0
Unearned compensation-employee stock ownership plan (368) (390)
-------- --------
Total stockholders' equity 27,401 26,912
-------- --------
Total liabilities and stockholders' equity $237,166 $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 Nine Months Ended
June 30, June 30,
--------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,347 $ 2,254 $ 7,216 $ 6,629
Interest and dividends on securities 994 1,084 3,035 3,398
Interest on federal funds sold 32 139 101 382
Interest on short-term investments 14 26 53 111
---------- ---------- ---------- ----------
Total interest and dividend income 3,387 3,503 10,405 10,520
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 1,068 1,472 3,481 4,459
Interest on borrowings 199 268 597 805
---------- ---------- ---------- ----------
Total interest expense 1,267 1,740 4,078 5,264
---------- ---------- ---------- ----------
Net interest income 2,120 1,763 6,327 5,256
Provision for loan losses 0 12 8 36
---------- ---------- ---------- ----------
Net interest income, after provision for loan losses 2,120 1,751 6,319 5,220
---------- ---------- ---------- ----------
Other income:
Customer service fees 88 156 352 507
Income from covered call options 0 0 0 16
Gain (loss) on sales of securities available for sale, net (10) 257 (6) 573
Gain on sales of mortgages 0 0 5 0
Miscellaneous 42 33 131 98
---------- ---------- ---------- ----------
Total other income 120 446 482 1,194
---------- ---------- ---------- ----------
Operating expenses:
Salaries and employee benefits 1,009 1,077 2,912 2,737
Occupancy and equipment expenses 285 234 788 721
Data processing expenses 236 126 506 332
Marketing expenses 66 103 164 231
Professional fees 77 73 231 253
Other general and administrative expenses 318 306 1,017 1,060
---------- ---------- ---------- ----------
Total operating expenses 1,991 1,849 5,618 5,334
---------- ---------- ---------- ----------
Income before income taxes and cumulative effect of
change in accounting principle 249 348 1,183 1,080
Provision for income taxes 45 89 270 287
---------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle 204 259 913 793
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 $ 204 $ 259 $ 913 $ 940
========== ========== ========== ==========
Number of weighted average shares outstanding-Basic 1,536,853 1,541,226 1,541,457 1,540,268
Earnings per share - Basic $ 0.13 $ 0.17 $ 0.59 $ 0.61
Number of weighted average shares outstanding-Dilutive 1,556,574 1,550,324 1,559,496 1,546,748
Earnings per share-Dilutive $ 0.13 $ 0.17 $ 0.59 $ 0.61
See accompanying notes to unaudited consolidated financial statements.
2
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 30, 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) $24,716
-------
Comprehensive income:
Net income 0 0 940 0 0 0 940
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 465 0 0 465
-------
Total comprehensive income 1,405
Cash dividends declared ($.15 per share) 0 0 (237) 0 0 0 (237)
ESOP shares committed to be released 0 3 0 0 0 22 25
-----------------------------------------------------------------------------
Balance at June 30, 2001 $16 $4,544 $21,634 $ 113 $ 0 $(398) $25,909
=============================================================================
Balance at September 30, 2001 16 4,549 22,013 724 0 (390) 26,912
-------
Comprehensive income:
Net income 0 0 913 0 0 0 913
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (5) 0 0 (5)
-------
Total comprehensive income 908
Cash dividends declared ($.15 per share) 0 0 (237) 0 0 0 (237)
ESOP shares released and committed to be
released 0 22 0 0 0 22 44
Purchase of RRP shares (14,000 shares) 0 0 0 0 (298) 0 (298)
Amortization of RRP stock 0 0 0 0 69 0 69
Issuance of common stock under stock option plan,
net of income tax benefits 0 3 0 0 0 0 3
-----------------------------------------------------------------------------
Balance at June 30, 2002 $16 $4,574 $22,689 $ 719 $(229) $(368) $27,401
=============================================================================
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Nine Months Ended
---------------------
June 30, June 30,
2002 2001
-------- --------
(Unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 913 $ 940
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 8 36
Net amortization (accretion) on securities 53 (32)
Amortization of net deferred loan costs and premiums (discounts) (56) 547
Depreciation and amortization expense 356 299
(Gain) loss on sales and calls of securities, net 6 (573)
Recognition of expired covered call options 0 (16)
Increase in accrued interest receivable (80) (112)
Deferred income tax benefit (121) 0
ESOP shares released and committed to be released 44 25
Amortization of RRP stock 69 0
Increase in cash surrender value of life insurance (373) (258)
Other, net (53) 1,027
-------- --------
Net cash provided by operating activities 766 1,883
-------- --------
Cash flows from investing activities:
Activity in available for sale securities:
Sales and calls 4,676 15,141
Maturities 4,632 7,311
Purchases (19,300) (22,961)
Principal Payments 5,573 2,068
Purchase of Federal Home Loan Bank stock (150) (197)
Loans originated, net of principal payments (1,112) (15,257)
Purchase of banking premises and equipment (2,796) (734)
Purchase of life insurance policies 0 (1,000)
-------- --------
Net cash used by investing activities (8,477) (15,629)
-------- --------
Cash flows from financing activities:
Net increase in deposits 10,863 17,606
Net decrease in mortgagors escrow accounts (47) (51)
Purchase of RRP stock (298) 0
Issuance of common stock under stock option plan,
net of income tax benefits 3 0
Dividends paid (237) (237)
-------- --------
Net cash provided by financing activities 10,284 17,318
-------- --------
Net increase in cash and cash equivalents 2,573 3,572
Cash and cash equivalents at beginning of period 15,108 14,460
-------- --------
Cash and cash equivalents at end of period $ 17,681 $ 18,032
======== ========
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 June 30, 2002, the Bank had loan commitments to borrowers of $3.1
million, commitments of home equity loans of $698 thousand, available home
equity lines of credit of $10.0 million, unadvanced funds on commercial
lines of credit of $2.8 million, unadvanced funds on construction mortgages
of $878 thousand and personal overdraft lines of credit of approximately
$442 thousand. The Bank had no commitments to purchase or sell securities
at June 30, 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 calculated in
accordance with Statement of Financial Accounting Standards No. 128 and
reflects
5
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 nine-months ended June
30, 2001. After related taxes at the rate of 34%, or, $76 thousand, the
standard resulted in additional income of $147 thousand for the nine-months
ended June 30, 2001.
6
Item 2. Management's Discussion and Analysis.
Critical Accounting Policies
The Notes to our Unaudited Financial Statement for the Quarter ended
June 30, 2002, contain a summary of our significant accounting policies.
We believe our policies with respect to the methodology for our
determination of the allowance for loan losses and asset impairment
judgments, including other than temporary declines in the value of our
securities involve a higher degree of complexity and require management to
make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could cause reported results to differ materially.
These critical policies and their application are periodically reviewed
with the Audit Committee and out Board of Directors.
General
The following discussion compares the financial condition of the
Company and its wholly owned subsidiary, the Bank, at June 30, 2002 and
September 30, 2001, and the results of operations for the three and nine
month periods ended June 30, 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, gains and losses 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 June 30, 2002 and September 30, 2001
As a result of continued growth in deposits, the Company's total
assets increased by $11.5 million, or 5.1%, to $237.2 million at June 30,
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 $3.1
million, or 40.6%, to $10.8 million at June 30, 2002 from $7.7 million at
September 30, 2001. Securities available for sale increased by $5.4
million, to $69.8 million, at June 30, 2002 as compared to $64.4 million at
September 30, 2001. As a result of the expansion of the Bank's main office
and purchase of land in Shrewsbury for a branch office, building premises
and equipment increased by $2.4 million to $5.3 million at June 30, 2002.
Net loans increased by $1.2 million to $136.1 million at June 30, 2002.
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 $10.9 million, or 5.9%, to $196.0 million
at June 30, 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 increased by $489 thousand to $27.4
million at June 30, 2002 from $26.9 million at September 30, 2001 primarily
as a result of an increase in retained earnings from net income, offset to
some extent by the amortization of the unearned portion of the Company's
Recognition and Retention Plan. During this period, the Company purchased
14,000 shares of the Company's common stock to fund the Recognition and
Retention Plan. Lastly, during the nine-month period ended June 30, 2002,
the Company declared and paid cash dividends of $0.15 per common share.
Comparison of Operating Results for the Three-months ended June 30,
2002 and 2001
Net Income: The Company reported dilutive earnings per share for the
quarter ended June 30, 2002 of $0.13 on net income of $204 thousand. For
the current quarter ended June 30, 2002, net income decreased by $55
thousand, or 21.2%, as compared to $259 thousand, or $0.17 dilutive
earnings per share, for the previous quarter ended June 30, 2001. The
decrease in earnings was primarily due to a decline in net gains on the
sale of securities and an increase in operating expenses, offset by an
increase in net interest income. The Company's return on average assets
for the quarter ended June 30, 2002 was .35% compared to .47% for the
quarter ended June 30, 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
June 30,
---------------------- Increase
2002 2001 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 1.66% 4.89% -3.23%
Investment securities (2) 5.79% 6.14% -0.35%
Loans (3) 6.90% 7.34% -0.44%
Total interest-earning assets 6.28% 6.77% -0.49%
Interest-bearing liabilities:
NOW accounts 0.45% 0.49% -0.04%
Savings accounts (4) 2.09% 3.01% -0.92%
Money market deposit accounts 1.62% 1.98% -0.36%
Certificate of deposit accounts 3.57% 5.52% -1.95%
Total interest-bearing deposits 2.44% 3.70% -1.26%
Borrowed funds 6.63% 6.50% 0.13%
Total interest-bearing liabilities 2.71% 3.96% -1.25%
Net interest rate spread (5) 3.57% 2.81% 0.76%
Net interest margin (6) 3.93% 3.41% 0.52%
<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 $116 thousand, or 3.31%, to $3.4 million for the three-
months ended June 30, 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 June 30, 2002 was $215.8 million earning an average rate of
6.28% as compared to an average volume of $206.9 million earning an average
rate of 6.77% for the three-months ending June 30, 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
June 30, 2002 was $136.0 million earning 6.90% as compared to an average
balance of $122.8 million earning 7.34% for the three-months ending June
30, 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 June 30, 2002 was $68.7 million,
earning 5.79% as compared to an average balance of $70.6 million, earning
6.14% for the three-months ending June 30, 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 June 30, 2002 was $11.1 million earning 1.66% as
compared to an average balance of $13.5 million earning 4.89% for the
three-months ending June 30, 2001.
Interest Expense: Total interest expense declined by $473 thousand,
or 27.2.%, to $1.3 million for the three-months ended June 30, 2002, from
$1.7 million for the three-months ending June 30, 2001. The decline in
interest expense was mainly due to the Bank's constantly monitoring and
actively reducing rates offered on various savings accounts to coincide
with the general decline in interest rates. The average volume of all
interest-bearing liabilities (which includes interest-bearing deposits and
interest-bearing borrowings) was $186.8 million with a cost of 2.71% for
the three-months ended June 30, 2002 as compared to $175.6 million with a
cost of 3.96% for the three-months ending June 30, 2001. The average volume
of interest-bearing deposits was $174.8 million with a cost of 2.44% for
the three-months ending June 30, 2002 as compared to $159.1 million with a
cost of 3.70% for three-months ending June 30, 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 declined
to $12.0 million with a cost of 6.63% for the three-months ending June 30,
2002 as compared to $16.5 million with a cost of 6.50% for three-months
ending June 30, 2001.
Net Interest Income: The Bank's net interest income increased by
$357 thousand for the three-months ended June 30, 2002, or 20.3%, to $2.1
million from $1.8 million for the three-months ending June 30, 2001. The
increase was mainly attributed to the decline in interest expense of $473
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
..76%, to 3.57%, for the three-months ended June 30, 2002 as compared to
2.81% for the three-months ending June 30, 2001. In addition, the Bank's
net interest margin, which represents net interest income as a percentage
of average interest-earning assets, increased .52%, to 3.93%, for the
three-months ending June 30, 2002 as compared to 3.41% for the three-months
ending June 30, 2001.
Provision for Loan Losses: The Bank had no provision for loan losses
for the three-months ended June 30, 2002 compared to $12 thousand for the
three-months ended June 30, 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 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
10
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 $229 thousand
of non-accrual loans and non-performing assets at June 30, 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 73.1%, to $120 thousand, for the three-months
ended June 30, 2002, as compared to $446 thousand for three-months ending
June 30, 2001. For the three-months ended June 30, 2002, the Bank incurred
a $10 thousand net loss on sales of securities as compared to a net gain on
sales of securities of $257 thousand for the comparative three-month period
ended June 30, 2001. Customer service fees declined by $68 thousand, or
43.6%, to $88 thousand, for the three-months ended June 30, 2002 from $156
thousand for the three-months ended June 30, 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
June 30, 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 June 30, 2002,
operating expenses increased by $142 thousand, or 7.7%, to $2.0 million
compared to 1.9 million for the three-months ending June 30, 2001. In
conjunction with the increase in banking premises and equipment, occupancy
and equipment expenses have increased $51 thousand or 21.8%. As a result
of the Bank's conversion to a different processing center, data processing
expenses increased $110 thousand to $236 thousand for the three-months
ended June 30, 2002, compared to $126 thousand for the three-months ended
June 30, 2001. Marketing expenses declined by 35.9%, to $66 thousand for
the three-months ended June 30, 2002 from $103 thousand for the three-
months ended June 30, 2001 in conjunction with the Bank's efforts to
produce some marketing materials in-house, rather than purchasing such
services from third party vendors.
Income Taxes. The provision for income taxes decreased by $44
thousand to $45 thousand for the three-months ended June 30, 2002 as
compared to $89 thousand for the three-months ended June 30, 2001,
resulting in an effective tax rate of 18.1% and 25.6% for the three-months
ended June 30, 2002 and 2001, respectively. The Bank utilizes security
corporations 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.
11
Comparison of Operating Results for the Nine-months ended June 30,2002
and 2001
Net Income: The Company reported dilutive earnings per share for the
nine-month period ended June 30, 2002 of $0.59 on net income of $913
thousand. For the nine-month period ended June 30, 2002, net income
decreased by $27 thousand, or 2.9%, as compared to $940 thousand, or $0.61
dilutive earnings per share, for the comparable period ended June 30, 2001.
The decreased earnings was primarily due to 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 offset to some
extent by an increase in net interest income. The Company's return on
average assets for the nine-month period ended June 30, 2002 was .53%
compared to .58% for the comparable period ended June 30, 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
Nine Months Ended
June 30,
----------------- Increase
2002 2001 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 1.80% 5.35% -3.55%
Investment securities (2) 6.05% 6.30% -0.25%
Loans (3) 7.05% 7.53% -0.48%
Total interest-earning assets 6.46% 6.95% -0.49%
Interest-bearing liabilities:
NOW accounts 0.48% 0.51% -0.03%
Savings accounts (4) 2.21% 3.30% -1.09%
Money market deposit accounts 1.84% 1.95% -0.11%
Certificate of deposit accounts 4.03% 5.56% -1.53%
Total interest-bearing deposits 2.71% 3.84% -1.13%
Borrowed funds 6.63% 6.51% 0.12%
Total interest-bearing liabilities 2.97% 4.10% -1.13%
Net interest rate spread (5) 3.49% 2.86% 0.63%
Net interest margin (6) 3.93% 3.47% 0.46%
<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 decreased
by $115 thousand, or 1.19%, to $10.4 million for the nine-months ended June
30, 2002. The decrease was due mainly to the decline in the average rate
earned on interest-earning assets offset by a higher volume of average
interest-earning assets. The average volume of interest-earning assets for
the nine-months ended June 30, 2002 was $214.9 million earning an average
rate of 6.46% as compared to an average volume of $201.7 million earning an
average rate of 6.95% for the nine-months ending June 30, 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 nine-months ended June 30, 2002 was $136.5
million earning 7.05% as compared to an average balance of $117.5 million
earning 7.53% for the nine-months ending June 30, 2001. The decline in the
interest rates 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 nine-months ended June 30,
2002 declined to $66.9 million, earning 6.05% as compared to an average
balance of $72.0 million, earning 6.30% for the nine-months ending June 30,
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 nine-months ended June 30, 2002 was $11.4 million
earning 1.80% as compared to an average balance of $12.3 million earning
5.35% for the nine-months ending June 30, 2001.
Interest Expense: Total interest expense declined by $1.2 million,
or 22.5%, to $4.1 million for the nine-months ended June 30, 2002, from
$5.3 million for the nine-months ending June 30, 2001. The decline in
interest expense was mainly due to the Bank's constantly monitoring and
actively reducing rates offered on various savings accounts to coincide
with the general decline in interest rates. The average volume of all
interest-bearing liabilities (which includes interest-bearing deposits and
interest-bearing borrowings) was $183.2 million with a cost of 2.97% for
the nine-months ended June 30, 2002 as compared to $171.3 million with a
cost of 4.10% for the nine-months ending June 30, 2001. The average volume
of interest-bearing deposits was $171.2 million with a cost of 2.71% for
the nine-months ending June 30, 2002 as compared to $154.8 million with a
cost of 3.84% for three-months ending June 30, 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 nine-months ending June 30, 2002 as
compared to $16.5 million with a cost of 6.51% for nine-months ending June
30, 2001.
Net Interest Income: Net interest income increased by $1.1 million,
or 20.4%, for the nine-months ended June 30, 2002, to $6.3 million from
$5.3 million for the nine-months ending June 30, 2001. The increase was
mainly attributed to the decline in interest expense of $1.2 million. The
Bank's net interest rate spread, which represents the difference between
the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities, increased to 3.49% for the
nine-months ended June 30, 2002 as compared to 2.86% for the nine-months
ending June 30, 2001. In addition, the Bank's net interest margin, which
represents net interest income as a percentage of average interest-earning
assets, increased by .46%, to 3.93%, for the nine-months ending June 30,
2002 as compared to 3.47% for the nine-months ending June 30, 2001.
Provision for Loan Losses: The Bank's provision for loan losses was
$8 thousand for the nine-months ended June 30, 2002 compared to $36 thousand
for the nine-months ended June 30, 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 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
14
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 $229 thousand of non-accrual
loans and non-performing assets at June 30, 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 59.6%, to $482 thousand, for the nine-months ended
June 30, 2002, as compared to $1.2 million for nine-months ending June 30,
2001. Net losses on the sale of securities available for sale declined by
$579 thousand, or 101.1%, to a loss of $6 thousand for the nine-months
ended June 30, 2002, as compared to a $573 thousand gain for nine-months
ending June 30, 2001. Customer service fees declined by $155 thousand, or
30.6%, to $352 thousand, for the nine-months ended June 30, 2002, from $507
thousand for the nine-months ended June 30, 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 nine-months ended June 30,
2002, there was no income from covered call options since the Bank has
discontinued its activity in this program. The comparative nine-months
ended June 30, 2001 resulted in income of $16 thousand from this program.
Lastly, miscellaneous income, increased by $33 thousand, or 33.7%, to $131
thousand for the nine-months ended June 30, 2002, from $98 thousand for the
nine-months ended June 30, 2001 primarily due to increases in the cash
surrender value of Bank-owned life insurance.
Operating Expenses: For the nine-months ended June 30, 2002,
operating expenses increased by $284 thousand, or 5.3%, to $5.6 million
from $5.3 million for nine-months ending June 30, 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 and increase
the Bank's infrastructure. Marketing expenses declined by 29.0%, to $164
thousand for the nine-months ended June 30, 2002 from $231 thousand for the
nine-months ended June 30, 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 $22 thousand, to $231
thousand, for the nine-months ended June 30, 2002, as compared to $253
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 4.1%, or $43 thousand, to $1.0 million for nine-months ended
June 30, 2002 as compared to $1.1 million 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
15
compensation and benefit surveys.
Income Taxes. The provision for income taxes decreased by $17
thousand to $270 thousand for the nine-months ended June 30, 2002 as
compared to $287 thousand for the nine-months ended June 30, 2001,
resulting in an effective tax rate of 22.8% and 26.6% for the nine-months
ended June 30, 2002 and 2001, respectively. The Bank utilizes security
corporations 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 nine-months ended June 30, 2001. After related taxes at
the rate of 34%, or, $76 thousand, the standard resulted in additional
income of $147 thousand for the nine-months ended June 30, 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 June 30, 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 nine-months ended June 30, 2002, the Bank
originated loans of $38.5 million and purchased investment securities of
$19.3 million. The purchase of banking premises and equipment utilized
$2.8 million. These investing activities were funded by net deposit growth
of $10.9 million, sales and calls on securities of $4.7 million, investment
maturities of $4.6 million and principal payments on mortgage-backed
securities of $5.6 million. Net cash and cash equivalents increased by
$2.6 million during the nine-months ended June 30, 2002.
Total deposits increased $10.9 million, during the nine-months ended
June 30, 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 June 30, 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.
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
16
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 June 30, 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 $11.7
million, or 5.0%. The Bank's leverage (tier 1) capital was approximately
$23.3 million, or 10.4% 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 June 30, 2002,
the Bank had a risk-based total capital ratio of 18.2%.
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.
None.
Item 5. Other Information.
The Company's Chief Executive Officer and acting interim Chief Financial
Officer have furnished a statement relating to its Form 10-QSB for the
quarter ended June 30, 2002 pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002. The statement
is attached hereto as Exhibit 99.1.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 99.1: Certification of CEO and CFO.
(b) Reports on 8-K.
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: August 14, 2002 By: /s/ Joseph F. MacDonough
-------------------------------
President and Chief Executive
Officer
Date: August 14, 2002 By: /s/ Joseph F. MacDonough
-------------------------------
Acting Interim Chief Financial
Officer
19