UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 14, 2003
----- -----------------------------------
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 6
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
December 31, September 30,
2002 2002
------------ -------------
(unaudited)
<s> <c> <c>
ASSETS
Cash and due from banks $ 5,272 $ 5,295
Federal funds sold 9,297 11,136
Short-term investments 2,736 2,822
-------- --------
Total cash and cash equivalents 17,305 19,253
Securities available for sale, at fair value 88,360 75,638
Federal Home Loan Bank stock, at cost 1,250 1,250
Loans, net 128,574 132,880
Banking premises and equipment, net 5,972 5,524
Accrued interest receivable 1,429 1,341
Deferred income taxes 14 22
Bank-owned life insurance 4,226 4,122
Due from broker 0 0
Other assets 1,480 1,243
-------- --------
Total assets $248,610 $241,273
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $209,151 $202,063
Federal Home Loan Bank advances 9,500 9,500
Mortgagors' escrow accounts 167 198
Accrued expenses and other liabilities 1,459 1,523
-------- --------
Total liabilities 220,277 213,284
-------- --------
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 issued and outstanding 16 16
Additional paid-in capital 4,592 4,583
Retained earnings 22,875 22,676
Accumulated other comprehensive income 1,550 1,439
Unearned compensation-RRP (22,139 shares) (346) (365)
Unearned compensation-ESOP (36,096 and 39,043
shares, respectively) (354) (360)
-------- --------
Total stockholders' equity 28,333 27,989
-------- --------
Total liabilities and stockholders' equity $248,610 $241,273
======== ========
See accompanying notes to unaudited consolidated financial statements
1
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended
December 31,
----------------------
2002 2001
(unaudited)
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,173 $ 2,469
Interest and dividends on securities 1,065 993
Interest on federal funds sold 35 41
Interest on short term investments 25 14
--------- ---------
Total interest and dividend income 3,298 3,517
--------- ---------
Interest expense:
Interest on deposits 985 1,299
Interest on borrowings 157 201
--------- ---------
Total interest expense 1,142 1,500
--------- ---------
Net interest income 2,156 2,017
Provision for loan losses 0 8
--------- ---------
Net interest income, after provision for loan losses 2,156 2,009
--------- ---------
Other income:
Customer service fees 165 155
Gain on sales of securities available for sale, net 4 30
Miscellaneous 42 46
--------- ---------
Total other income 211 231
--------- ---------
Operating expenses:
Salaries and employee benefits 1,038 934
Occupancy and equipment 305 237
Data processing 163 122
Marketing and advertising 53 47
Professional fees 65 77
Other general and administrative 347 376
--------- ---------
Total operating expenses 1,971 1,793
--------- ---------
Income before provision for income taxes 396 447
Provision for income taxes 118 116
--------- ---------
Net Income $ 278 $ 331
========= =========
Number of weighted average shares outstanding-Basic 1,527,688 1,542,700
Earnings per share - Basic $ 0.18 $ 0.21
Number of weighted average shares outstanding-Dilutive 1,547,905 1,558,404
Earnings per share-Dilutive $ 0.18 $ 0.21
See accompanying notes to unaudited consolidated financial statements.
2
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Compensation Compensation
Stock Capital Earnings Income (Loss) RRP ESOP Total
------ ---------- -------- ------------- ------------ ------------ -----
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2001 $16 $4,549 $22,013 $ 724 $ 0 $(390) $26,912
-------
Comprehensive income:
Net income 0 0 331 0 0 0 331
Change in net unrealized gain (loss)
on securities available for sale, net
of reclassification adjustment and
tax effects 0 0 0 (236) 0 0 (236)
-------
Total comprehensive income 95
Cash dividends declared ($.05 per share) 0 0 (79) 0 0 0 (79)
ESOP shares committed to be released 0 6 0 0 0 7 13
--- ------ ------- ------ ----- ----- -------
Balance at December 31, 2001 $16 $4,555 $22,265 $ 488 $ 0 $(383) $26,941
=== ====== ======= ====== ===== ===== =======
Balance at September 30, 2002 $16 $4,583 $22,676 $1,439 $(365) $(360) $27,989
-------
Comprehensive income:
Net income 0 0 278 0 0 0 278
Change in net unrealized gain (loss)
on securities available for sale, net
of reclassification adjustment and
tax effects 0 0 0 111 0 0 111
-------
Total comprehensive income 389
-------
Cash dividends declared ($.05 per share) 0 0 (79) 0 0 0 (79)
ESOP shares committed to be released 0 9 0 0 0 6 15
Amortization of RRP stock 0 0 0 0 19 0 19
--- ------ ------- ------ ----- ----- -------
Balance at December 31, 2002 $16 $4,592 $22,875 $1,550 $(346) $(354) $28,333
=== ====== ======= ====== ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(dollars in thousands)
Three Months Ended
December 31,
------------------
2002 2001
---- ----
<s> <c> <c>
Cash flows from operating activities:
Net income $ 278 $ 331
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 0 8
Net amortization on securities 39 7
Amortization of net deferred discounts 0 (1)
Depreciation expense 159 106
Gains on sales and calls of securities, net (4) (30)
Decrease (increase) in accrued interest receivable (88) 120
Deferred income tax benefit (49) (80)
ESOP shares committed to be released 15 13
Amortization of RRP Stock 19 0
Increase in bank-owned life insurance (104) (112)
Other, net (301) 353
------- -------
Net cash provided (used) by operating activities (36) 715
------- -------
Cash flows from investing activities:
Activity in available for sale securities:
Sales and calls 1,000 2,542
Maturities 0 3,600
Purchases (16,042) (8,071)
Principal Payments 2,453 1,458
Loan (originations) principal payments, net 4,306 (1,182)
Purchase of banking premises and equipment, net (607) (645)
------- -------
Net cash used by investing activities (8,890) (2,298)
------- -------
Cash flows from financing activities:
Net increase in deposits 7,088 3,455
Net decrease in mortgagors escrow accounts (31) (29)
Dividends paid (79) (79)
------- -------
Net cash provided by financing activities 6,978 3,347
------- -------
Net change in cash and cash equivalents (1,948) 1,764
Cash and cash equivalents at beginning of period 19,253 15,108
------- -------
Cash and cash equivalents at end of period $17,305 $16,872
======= =======
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, 2002, 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
2002 annual report to stockholders.
2) Contingencies.
At December 31, 2002, the Bank had loan commitments to borrowers of
$9.4 million, commitments for home equity loans of $321 thousand, available
home equity lines of credit of $10.2 million, unadvanced funds on
commercial lines of credit, overdrafts and participation loans of $1.7
million, unadvanced funds on construction mortgages of $3.0 million and
personal overdraft lines of credit of approximately $476 thousand. The Bank
had no commitments to purchase or sell securities at December 31, 2002.
3) Earnings per Share.
Basic earnings per share represent income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated in
accordance with Statement of Financial Accounting Standards No. 128 and
reflects additional common shares (common stock equivalents) that would
have been outstanding if only dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the
assumed issuance. For the periods presented, the Company has no potential
common shares outstanding that are considered anti-dilutive. If applicable,
the Company would exclude from the diluted earnings per share calculation
any potential common shares that would increase earnings per share.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options and grants and are determined using the treasury
stock method. For the periods indicated, there were no potentially anti-
dilutive common shares.
5
Item 2. Management's Discussion and Analysis.
General
The following discussion compares the financial condition of the
Company and its wholly owned subsidiary, the Bank, at December 31, 2002 and
September 30, 2002, and the results of operations for the three months
ended December 31, 2002, compared to the same period 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 and Shrewsbury, Massachusetts, including
residential and commercial real estate mortgage loans and, to a lesser
extent, consumer and commercial loans.
The Bank's results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income
the Bank earns on its interest-earning assets and the interest it pays on
its interest-bearing liabilities. Interest-earning assets primarily consist
of mortgage loans, mortgage-backed securities and investment securities.
Interest-bearing liabilities consist primarily of certificates of deposit,
savings accounts and borrowings. The Bank's results of operations are also
affected by its provision for loan losses, income from security
transactions, other income and operating expenses. Operating expenses
consist primarily of salaries and employee benefits, occupancy, data
processing, marketing, professional fees and other general and
administrative expenses. Other income consists mainly of service fees and
charges, gains on sales of securities, income from bank-owned life
insurance 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.
6
Comparison of Financial Condition at December 31, 2002 and September 30, 2002
Primarily as a result of deposit growth, the Company's total assets
grew by $7.3 million, or 3.0%, to $248.6 million at December 31, 2002 from
$241.3 million at September 30, 2002. The primary areas of change were from
increases in securities available for sale of $12.7 million, offset, to a
lesser extent, by a decline in loans of $4.3 million and a decline in cash
and cash equivalents of $1.9 million. The decline in loans was the result
of a large commercial real estate loan payoff and was also due to the
general effects of the current low interest rate environment that
encouraged residential loan payoffs and refinancing. While purchases of
securities available for sale were $16 million for the three months ended
December 31, 2002, loan originations, net of principal payments, declined
by $4.3 million for the similar period. The Company's primary objective is
to prudently increase its loan portfolio, primarily in residential and
commercial loans. Asset quality remained strong, with non-performing assets
as a percent of total assets of .06% at December 31, 2002 and September 30,
2002.
Total deposits increased by $7.1 million, or 3.5%, to $209.2 million
at December 31, 2002 from $202.1 million at September 30, 2002. Most of
this increase was attributable to increases in non-time deposit accounts
such as tiered-rate saving accounts and checking accounts. In the current
low interest rate and cautious investment environment, deposit customers
preferred to place their deposits in non-time deposit accounts with high
liquidity and deposit insurance. In response to such deposit customer
preference toward non-time deposit accounts, the Bank has increased the
liquidity of its assets with higher levels of cash and cash equivalents.
Total stockholders' equity increased by $344 thousand, or 1.2%, to
$28.3 million at December 31, 2002 as compared to $28.0 million at
September 30, 2002. This increase was primarily the result of net income of
$278 thousand for the quarter ended December 31, 2002, an increase in
accumulated other comprehensive income of $111 thousand, offset, to a
lesser extent, by dividends paid to stockholders of $79 thousand. Also
stockholders' equity increased due to ESOP shares committed to be released
of $15 thousand and the amortization of 2001 Recognition and Retention Plan
stock of $19 thousand.
Comparison of Operating Results for the Three Months Ended December 31,
2002 and 2001
Net Income: The Company reported earnings per share (dilutive) for
the quarter ended December 31, 2002 of $0.18 on net income of $278
thousand. For the quarter ended December 31, 2001, net income was $331
thousand, or $0.21 per share. The 16.0% decline in net income was primarily
due to an increase in operating expenses and a decline in gains on the sale
of securities, offset, to a lesser extent, by an increase in net interest
income. Operating expenses increased primarily due to a higher level of
salary and employee benefits, depreciation associated with the Bank's
addition to its main office and additional costs associated with the Bank's
conversion to a new data processing system. The Company's return on average
assets for the quarter ended December 31, 2002 was .45% as compared to .58%
for the quarter ended December 31, 2001.
The following schedule of the Bank's net interest rate spread and net
interest margin for the periods indicated will aid in the subsequent
discussion of interest and dividend income, interest expense and net
interest income:
7
Three Months Ended
December 31,
------------------ Increase
2002 2001 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 1.45% 1.85% -0.40%
Investment securities (2) 5.20% 6.08% -0.88%
Loans (3) 6.73% 7.20% -0.47%
Total interest-earning assets 5.79% 6.56% -0.77%
Interest-bearing liabilities:
NOW accounts 0.25% 0.50% -0.25%
Savings accounts (4) 1.76% 2.40% -0.64%
Money market deposit accounts 1.62% 2.02% -0.40%
Certificate of deposit accounts 3.22% 4.67% -1.45%
Total interest-bearing deposits 2.11% 3.08% -0.97%
Borrowed funds 6.61% 6.70% -0.09%
Total interest-bearing liabilities 2.33% 3.32% -0.99%
Net interest rate spread (5) 3.46% 3.24% 0.22%
Net interest margin (6) 3.79% 3.76% 0.03%
<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>
8
Interest and Dividend Income: The Bank's interest and dividend income
declined by $219 thousand, or 6.2%, to $3.3 million for the quarter ended
December 31, 2002 as compared to the quarter ended December 31, 2001. The
decline was due to the combination of lower rates earned on average
interest-earning assets offset, to a lesser extent, by an increase in the
average volume of interest-earning assets. As a result of the substantial
reductions in short-term rates by the Federal Open Market Committee, the
Bank's average interest rate earned on all interest-earning assets
declined. The average volume of interest-earning assets for the three-
months ended December 31, 2002 increased to $227.8 million earning an
average rate of 5.79% as compared to an average volume of $214.4 million
earning an average rate of 6.56% for the three-months ending December 31,
2001. This increase in average volume of interest-earning assets was a
primarily the result of positive cash flows from interest bearing and non-
interest bearing deposits. These deposits, plus additional cash generated
from loan prepayments, provided funds to be invested in investment
securities and short-term investments. As noted above, this increase in
volume was invested in assets with comparatively lower interest-earning
rates. The average balance of investment securities for the three-months
ended December 31, 2002 increased to $82.0 million, earning 5.20% as
compared to an average balance of $65.3 million, earning 6.08% for the
three-months ending December 31, 2001. The average balance of short-term
investments for the three-months ended December 31, 2002 increased to $16.6
million earning 1.45% as compared to an average balance of $11.9 million
earning 1.85% for the three-months ending December 31, 2001. In contrast,
the average balance of loans for the three-months ended December 31, 2002
declined to $129.2 million earning 6.73% as compared to an average balance
of $137.2 million earning 7.20% for the three-months ending December 31,
2001. During the most recent period, the Bank continued to experience a
decline in the volume of new loans and an increase in commercial and
residential loan payoffs and customer interest rate renegotiations. 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.
Interest Expense: Total interest expense declined by $358 thousand,
or 23.9%, to $1.1 million for the three-months ended December 31, 2002,
from $1.5 million for the three-months ended December 31, 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 competitive loan, investment and deposit
interest rates. The average volume of all interest-bearing liabilities
(which includes interest-bearing deposits and interest-bearing borrowings)
increased to $196.0 million with a cost of 2.33% for the three-months ended
December 31, 2002 as compared to $180.8 million with a cost of 3.32% for
the three-months ending December 31, 2001. The average volume of interest-
bearing deposits increased to $186.5 million with a cost of 2.11% for the
three-months ending December 31, 2002 as compared to $168.8 million with a
cost of 3.08% for three-months ending December 31, 2001. In response to the
increased deposit flows and loan payoffs, some of these funds were used to
pay down scheduled maturities of borrowings from the Federal Home Loan Bank
of Boston. Accordingly, the average volume of interest-bearing borrowing
declined to $9.5 million with a cost of 6.61% for the three-months ending
December 31, 2002 as compared to $12.0 million with a cost of 6.70% for
three-months ending December 31, 2001.
Net Interest Income: The Bank's net interest income increased by $139
thousand for the quarter ended December 31, 2002, or 6.9%, to $2.2 million
from $2.0 million for the quarter ending December 31, 2001. For the reasons
noted above, the increase was attributed to the combination of an decrease
in interest and dividend income of $219 thousand and a decline in interest
expense of $358 thousand. The Bank's reduction in rates on deposit accounts
exceeded the effect of lower yields on earning assets, which resulted in an
expanded interest rate spread. The Bank's net interest rate spread, which
represents the difference between the weighted average yield on interest-
earning assets and the
9
weighted average cost of interest-bearing liabilities, increased by .22%,
to 3.46% for the quarter ended December 31, 2002 as compared to 3.24% for
the quarter ending December 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 .03% to 3.79% for the quarter ending
December 31, 2002 as compared to 3.76% for the quarter ending December 31,
2001.
Provision for Loan Losses: The Bank had no provision for loan losses
for the quarter ended December 31, 2002 compared to $8 thousand for the
quarter ended December 31, 2001. The provision for loan losses is a result
of management's periodic analysis of risks inherent in our loan portfolio
from time to time, as well as the adequacy of the allowance for loan
losses. It is our policy to provide valuation allowances for estimated
losses on loans based upon past loss experience, current trends in the
level of delinquent and specific problem loans, loan concentrations to
single borrowers, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, and current and
anticipated economic conditions in our market area. Accordingly, the
evaluation of the adequacy of the allowance for loan losses is not based
directly on the level of non-performing loans. The allowance for loan
losses, in management's opinion, is at a level sufficient to cover losses
in the Bank's loan portfolio at this time. As the Bank expands its
commercial lending activities, management believes that growth in the
provision for loan losses may be likely. Additionally, while the Bank has
excellent loan quality with $157 thousand of non-performing loans
representing .12% of loans and an allowance for loan losses of $929
thousand, the Bank recognizes that it is located in a market and geographic
area that is considered in the high technology and financial services belt.
The Bank's loan portfolio is representative of such demographics.
Unemployment rates in Massachusetts and our area have increased and
commercial property vacancy rates have also risen. Much uncertainty
surrounds the length and depth of the current recession and other external
factors, and, 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, gains and losses from the sale of securities and income
from bank-owned life insurance. Total other income declined by $20 thousand
or 8.7% to $211 thousand for the quarter ended December 31, 2002, from $231
thousand for the comparative quarter ended December 31, 2001. The primary
reason for the decline was a $26 thousand or 86.7% reduction in net gains
on the sale of securities available for sale. For the quarter ended
December 31, 2002, the Bank experienced a $1 million call of an agency
security that resulted in a gain of $4 thousand. For the comparative
quarter ended December 31, 2001, net gains on the sale of securities
available for sale were $30 thousand. For the quarter ended December 31,
2001, the Bank sold a number of agency bonds, corporate bonds and common
stocks for approximately $2.5 million. With regard to the Company's common
stock holdings, our internal investment policy requires us to either write-
down to market value, or sell, any common stock issue that has sustained a
continuous decline in market value of 50% or more, for a continuous period
of nine-months or more. Although management believes that it has
established and maintained an adequate accounting policy as it relates to
investment impairment, such judgments involve a higher degree of complexity
and require management to make difficult and subjective judgments that
often require assumptions or estimates about highly uncertain matters.
Changes in these judgments, assumptions or estimates could cause reported
results to differ materially. This critical policy and its application are
periodically reviewed with the Audit Committee and our Board of Directors.
Lastly, customer service fees increased by $10 thousand, or 6.5% to $165
thousand for the quarter ended December 31, 2002 as compared to $155
thousand for the comparative quarter last year. The primary reason for the
increase was an increase in income from the sale of non-deposit investment
products such as mutual funds and annuities.
10
Operating Expenses: For the quarter ended December 31, 2002,
operating expenses increased by $178 thousand, or 9.9%, to $2.0 million
from $1.8 million for the quarter ending December 31, 2001. The increase
was primarily due to salary and benefit expenses associated with general
salary adjustments for the current staff, plus additions to staff. At
December 31, 2002, the level of full-time equivalent staff was 75 people as
compared to 68 people at December 31, 2001. Additional staff have been
added to support the Bank's efforts in individual retirement accounts,
operations, accounting and customer service areas. Additionally, in
accordance the Financial Accounting Standard (FAS) number 91, the Bank is
able to defer salary costs associated with the closing of new residential,
commercial and construction loans. Based upon internal cost estimates, the
deferral of salary expense ranges from $495 for a residential loan to
$1,038 for commercial and construction loans. Thus, when a new loan is
processed, salary expense is reduced by anywhere from $495 to $1,038. These
deferred costs are considered yield adjustments, and are subsequently
charged to interest income over the life of each loan. As previously noted,
during the most recent quarter ended December 31, 2002, the Bank's volume
of new loans declined as compared to the previous quarter ended December
31, 2001. Accordingly, this recent decline in new loan volume results in
higher levels of salary expenses for the quarter ended December 31, 2002 as
compared to the relatively higher loan volume levels for the quarter ended
December 31, 2001.
Occupancy and equipment expenses increased by $68 thousand, or 28.7%,
to $305 thousand for the quarter ended December 31, 2002 as compared to
$237 thousand for quarter ended December 31, 2001. The Company moved into
its addition to the main office in early 2002 and, as a result,
depreciation, maintenance, equipment, utility and related costs increased
from the previous year. Data processing expenses increased by $41 thousand,
or 33.6%, to $163 thousand for the quarter ended December 31, 2002 as
compared to $122 thousand for the quarter ended December 31, 2001 as a
result of the Company's conversion to a new data processing system in March
2002. Marketing expenses increased by $6 thousand or 12.8%, to $53 thousand
for the quarter ended December 31, 2002 due primarily to increased
promotion expenses relating to non-deposit investment products.
Professional expenses decreased by $12 thousand or 15.6%, to $65 thousand
for the quarter ended December 31, 2002 due primarily to a decline in legal
expenses. Other general and administrative expenses decreased by $29
thousand or 7.7%, to $347 thousand for the quarter ended December 31, 2002
due primarily to a decline in consulting expenses and net teller losses.
Income Taxes. The provision for income taxes increased by $2 thousand
to $118 thousand for the quarter ended December 31, 2002 as compared to
$116 thousand for the quarter ended December 31, 2001, resulting in an
effective tax rate of 29.8% and 26.0% for the quarter ended December 31,
2002 and 2001, respectively. The Bank utilizes a security investment
subsidiary 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.
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 money from time to
time from the Federal Home Loan Bank of Boston as part of its management of
interest rate risk. At December 31, 2002, the Bank had $9.5 million in
outstanding borrowings.
11
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. As noted in previous sections of this report,
during the most current low interest rate environment, the Bank continued
to experience an increase in commercial and residential loan payoffs and
customer interest rate renegotiations.
The Bank's primary investing activities are the origination of one-to
four-family real estate and other loans and the purchase of securities.
During the three months ended December 31, 2002, the Bank originated loans
of $17.5 million and experienced principal repayments of loans of $21.8
million. The Bank purchased securities of $16.0 million. Sales and calls on
investments provided $1.0 million and principal payments on mortgage-backed
securities provided an additional $2.5 million. There were no maturity of
securities for the quarter ended December 31, 2002. The investment in
banking premises and equipment utilized $607 thousand. These investing
activities were financed primarily by a net increase in deposits of $7.1
million. Net cash and cash equivalents decreased by $1.9 million during the
three months ended December 31, 2002.
Total deposits increased $7.1 million, during the three months ended
December 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 $37.1 million
at December 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 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 made significant investments in its physical
infrastructure and human and technological resources. In particular, the
Bank completed the construction of an addition to its main office and is in
the process of completing a renovation of the older portion of its main
office. The total cost of this renovation is estimated to be approximately
$310 thousand. The Bank also has been in the process of constructing a
branch in Shrewsbury for the relocation of its current Maple Avenue branch
office. When completed, the approximate costs for land will be $1.0
million, building will be $1.2 million and furniture and fixtures will be
$300 thousand. The Bank expects to depreciate the building over 35 years
and the furniture and equipment over 3-to-7 years, both utilizing the
straight-line method of depreciation. Such investments have been and, in
the future, may be necessary to insure that adequate resources are in place
to offer increased products and services. As a result, for a period of
time, the Bank expects operating expenses to increase and net income to be
adversely impacted. The Bank believes, however, that its long-term
profitability should improve as it realizes the benefits of diversified
product lines and market share growth.
At December 31, 2002, the Company's capital to assets ratio was
11.40% and it exceeded each of the applicable regulatory capital
requirements. Further, it 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.
12
Item 3. Controls and Procedures.
During the 90-day period prior to the filing date of this report,
management, including the Company's President and Chief Executive Officer
and Senior Vice President and Clerk, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures.
Based upon and as of the date of that evaluation, the President and Chief
Executive Officer and Senior Vice President and Clerk concluded that the
disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
There were no significant deficiencies or material weaknesses identified in
the evaluation and therefore, no corrective actions were taken.
13
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
The Company's Chief Executive Officer and Chief Financial
Officer have furnished statements relating to its Form 10-QSB
for the quarter ended December 31, 2002 pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002. The statements are attached hereto
as Exhibits 99.1 and 99.2.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 99.1: Statement furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 99.2: Statement furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on 8-K.
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: February 14, 2002 By: /s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: February 14, 2002 By: /s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Treasurer
and Clerk
CERTIFICATIONS
I, Joseph F. MacDonough, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Westborough
Financial Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ Joseph F. MacDonough
-----------------------------------------
Joseph F. MacDonough
President and Chief Executive Officer
15
I, John L. Casagrande, certify that
1. I have reviewed this quarterly report on Form 10-QSB of Westborough
Financial Services, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ John L. Casagrande
-----------------------------------------
John L. Casagrande
Senior Vice President and Clerk
16