UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
- --- TRANSITION REPORT UNDER 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)
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 6, 2003
----- --------------------------------
Common Stock, par value $0.01 1,584,374
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
Forward Looking Statements
Westborough Financial Services, Inc. (the "Company") and The
Westborough Bank (the "Bank") may from time to time make written or oral
"forward-looking statements" which may be identified by the use of such
words as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar expressions that are
intended to identify forward-looking statements.
Forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, which are subject to significant risks and
uncertainties. The following factors, many of which are subject to change
based on various other factors beyond the Company's control, and other
factors identified in the Company's filings with the Securities and
Exchange Commission and those presented elsewhere by management from time
to time, could cause its financial performance to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements. Examples of forward-looking statements
include, but are not limited to, estimates with respect to our financial
condition, results of operations and business that are subject to various
factors which would cause actual results to differ materially from these
estimates. These factors include, but are not limited to:
* conditions which effect general and local economies;
* changes in interest rates, deposit flows, demand for mortgages
and other loans, real estate values and competition;
* changes in accounting principles, policies, or guidelines;
* changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing,
products and services.
This list of important factors is not exclusive. The Company or the
Bank does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company or the Bank.
WESTBOROUGH FINANCIAL SERVICES, INC.
AND SUBSIDIARY
(unaudited)
INDEX
<s> <c>
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
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION 20
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
June 30, September 30,
2003 2002
-------- -------------
(unaudited)
ASSETS
<s> <c> <c>
Cash and due from banks $ 3,851 $ 5,295
Federal funds sold 7,047 11,136
Short-term investments 3,586 2,822
-------- --------
Total cash and cash equivalents 14,484 19,253
Securities available for sale 84,469 75,638
Federal Home Loan Bank stock, at cost 1,250 1,250
Loans, net 138,425 132,880
Banking premises and equipment, net 6,731 5,524
Accrued interest receivable 1,274 1,341
Deferred income taxes 116 22
Bank owned life insurance 4,330 4,122
Other assets 1,451 1,243
-------- --------
Total assets $252,530 $241,273
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $212,283 $202,063
Federal Home Loan Bank advances 9,500 9,500
Mortgagors' escrow accounts 159 198
Accrued expenses and other liabilities 1,862 1,523
-------- --------
Total liabilities 223,804 213,284
======== ========
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, 1,584,374 and 1,581,574 issued and
outstanding, respectively 16 16
Additional paid-in capital 4,661 4,583
Retained earnings 23,122 22,676
Accumulated other comprehensive income 1,573 1,439
Unearned compensation-RRP (14,659 and 18,159 shares,
respectively) (307) (365)
Unearned compensation-ESOP (33,886 and 36,096 shares,
respectively) (339) (360)
-------- --------
Total stockholders' equity 28,726 27,989
-------- --------
Total liabilities and stockholders' equity $252,530 $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 Nine Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 1,886 $ 2,347 $ 5,981 $ 7,216
Interest and dividends on securities 969 994 3,070 3,035
Interest on federal funds sold 17 32 76 101
Interest on short term investments 5 14 36 53
---------- ---------- ---------- ----------
Total interest and dividend income 2,877 3,387 9,163 10,405
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 757 1,068 2,592 3,481
Interest on borrowings 156 199 467 597
---------- ---------- ---------- ----------
Total interest expense 913 1,267 3,059 4,078
---------- ---------- ---------- ----------
Net interest income 1,964 2,120 6,104 6,327
Provision for loan losses 0 0 0 8
---------- ---------- ---------- ----------
Net interest income, after provision for loan losses 1,964 2,120 6,104 6,319
---------- ---------- ---------- ----------
Other income:
Customer service fees 166 88 445 352
Gain (loss) on sales of securities available for sale, net 132 (10) 129 (6)
Gain on sales of mortgages 24 0 29 5
Miscellaneous 49 42 134 131
---------- ---------- ---------- ----------
Total other income 371 120 737 482
---------- ---------- ---------- ----------
Operating expenses:
Salaries and employee benefits 1,108 1,009 3,069 2,912
Occupancy and equipment 318 285 945 788
Data processing expenses 135 236 445 506
Marketing and advertising 61 66 147 164
Professional fees 70 77 219 231
Other general and administrative 316 318 996 1,017
---------- ---------- ---------- ----------
Total operating expenses 2,008 1,991 5,821 5,618
---------- ---------- ---------- ----------
Income before provision for income taxes 327 249 1,020 1,183
Provision for income taxes 100 45 336 270
---------- ---------- ---------- ----------
Net income $ 227 $ 204 $ 684 $ 913
========== ========== ========= ==========
Number of weighted average shares outstanding-Basic 1,534,061 1,536,853 1,528,857 1,541,457
Earnings per share-Basic $ 0.15 $ 0.13 $ 0.45 $ 0.59
Number of weighted average shares outstanding-Dilutive 1,554,311 1,556,574 1,546,989 1,559,496
Earnings per share-Dilutive $ 0.15 $ 0.13 $ 0.44 $ 0.59
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
------ ---------- -------- ------------- ------------- ------------- -----
(Unaudited)
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2001 $16 $4,549 $22,013 $ 724 $ 0 $(390) $26,912
-------
Comprehensive income:
Net income 0 0 913 0 0 0 913
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment and
tax effects 0 0 0 (5) 0 0 (5)
-------
Total comprehensive income 908
-------
Cash dividends declared and paid
($.15 per share) 0 0 (237) 0 0 0 (237)
ESOP shares released and committed
to be released 0 20 0 0 0 22 42
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 5 0 0 0 0 5
--- ------ ------- ------ ----- ----- -------
Balance at June 30, 2002 $16 $4,574 $22,689 $ 719 $(229) $(368) $27,401
=== ====== ======= ====== ===== ===== =======
Balance at September 30, 2002 $16 $4,583 $22,676 $1,439 $(365) $(360) $27,989
-------
Comprehensive income:
Net income 0 0 684 0 0 0 684
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment and
tax effects 0 0 0 134 0 0 134
-------
Total comprehensive income 818
-------
Cash dividends declared and paid
($.15 per share) 0 0 (238) 0 0 0 (238)
ESOP shares released and committed
to be released 0 33 0 0 0 21 54
Amortization of RRP stock 0 0 0 0 58 0 58
Issuance of common stock under stock
option plan, net of income tax benefits 0 45 0 0 0 0 45
--- ------ ------- ------ ----- ----- -------
Balance at June 30, 2003 $16 $4,661 $23,122 $1,573 $(307) $(339) $28,726
=== ====== ======= ====== ===== ===== =======
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, 2003 June 30, 2002
------------- -------------
(unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 684 $ 913
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 0 8
Net amortization on securities 219 53
Amortization of net deferred loan costs and (discounts) 43 (56)
Depreciation expense 485 356
(Gain) loss on sales of securities available for sale, net (129) 6
Gain on sales of mortgages (29) 0
Decrease (increase) in accrued interest receivable 67 (80)
Deferred income tax benefit (161) (121)
ESOP shares released and committed to be released 54 44
Amortization of RRP Stock 58 69
Increase in bank-owned life insurance (208) (373)
Other, net 131 (53)
------- -------
Net cash provided by operating activities 1,214 766
------- -------
Cash flows from investing activities:
Activity in available for sale securities:
Sales and calls 9,104 4,676
Maturities 3,495 4,632
Purchases (31,050) (19,300)
Principal payments 9,731 5,573
Purchase of Federal Home Loan Bank stock 0 (150)
Loan (originations) principal payments, net (5,559) (1,112)
Purchase of banking premises and equipment (1,698) (2,796)
Retirement of banking premises and equipment 6 0
Net cash used by investing activities (15,971) (8,477)
------- -------
Cash flows from financing activities:
Net increase in deposits 10,220 10,863
Net decrease in mortgagors escrow accounts (39) (47)
Purchase of RRP Stock 0 (298)
Issuance of common stock under stock option plan,
net of income tax benefits 45 3
Dividends paid (238) (237)
------- -------
Net cash provided by financing activities 9,988 10,284
------- -------
Net change in cash and cash equivalents (4,769) 2,573
Cash and cash equivalents at beginning of period 19,253 15,108
------- -------
Cash and cash equivalents at end of period $14,484 $17,681
======= =======
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 June 30, 2003, the Bank had loan commitments to borrowers of $6.1
million, commitments for home equity loans of $295 thousand, available home
equity lines of credit of $11.4 million, unadvanced funds on commercial
lines of credit, overdrafts and participation loans of $1.7 million,
unadvanced funds on construction mortgages of $1.5 million and personal
overdraft lines of credit of approximately $472 thousand.
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.
On January 25, 2001, the Company's stockholders approved the
Westborough Financial Services, Inc. 2001 Stock Option Plan (the "Stock
Option Plan"). Under the Stock Option Plan, the Company may grant options
to its directors, officers and employees for up to 55,348 shares of common
stock. Both incentive stock options and non-qualified stock options may be
granted under the Stock Option Plan. The exercise price of each option
equals the market price of the Company's stock on the date of grant and an
option's maximum term is ten years. Options generally vest over a five-
year period.
The Company applies APB Opinion 25 and related Interpretations in
accounting for the Stock Option Plan. Accordingly, no compensation cost
has been recognized. Had compensation cost for the
5
Company's Stock Option Plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method prescribed
by SFAS No. 123, the Company's net income and earning per share would have
been adjusted to the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Net income As reported $ 227 $ 204 $ 684 $ 913
Pro forma $ 222 $ 199 $ 668 $ 897
Basic earnings per share As reported $0.15 $0.13 $0.45 $0.59
Pro forma $0.14 $0.13 $0.44 $0.58
Diluted earnings per share As reported $0.15 $0.13 $0.44 $0.59
Pro forma $0.14 $0.13 $0.43 $0.58
6
Item 2. Management's Discussion and Analysis.
General
The following discussion compares the financial condition of the
Company and its wholly owned subsidiary, the Bank, at June 30, 2003 and
September 30, 2002, and the results of operations for the three and nine
month periods ended June 30, 2003, compared to the same period in 2002.
This discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and related notes that are
included within this report.
The Company's principal business is its investment in the Bank, which
is a community-oriented financial institution providing a variety of
financial services to the communities which it serves. The business of the
Bank consists of attracting deposits from the general public and using
these funds to originate various types of loans primarily in the towns of
Westborough, Northborough and Shrewsbury, Massachusetts, including
residential and commercial real estate mortgage loans and, to a lesser
extent, consumer and commercial loans.
The Bank's results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income
the Bank earns on its interest-earning assets and the interest it pays on
its interest-bearing liabilities. Interest-earning assets primarily
consist of mortgage loans, mortgage-backed securities and investment
securities. Interest-bearing liabilities consist primarily of certificates
of deposit, savings accounts and borrowings. The Bank's results of
operations are also affected by its provision for loan losses, income from
security transactions, other income and operating expenses. Operating
expenses consist primarily of salaries and employee benefits, occupancy,
data processing, marketing, professional fees and other general and
administrative expenses. Other income consists mainly of service fees and
charges, income from 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.
7
Comparison of Financial Condition at June 30, 2003 and September 30, 2002
As a result of continued growth in deposits, the Company's total
assets increased by $11.3 million, or 4.7%, to $252.5 million at June 30,
2003 from $241.3 million at September 30, 2002. Securities available for
sale increased by $8.8 million, or 11.7%, to $84.5 million, at June 30,
2003 as compared to $75.6 million at September 30, 2002. Growth in
securities available for sale occurred primarily in U.S. Government and
Agency securities and also in FNMA and FHLMC mortgage-backed securities.
Loans increased by $5.5 million, or 4.2%, to $138.4 million at June 30,
2003 from $132.9 million at September 30, 2002 primarily as a result of
increased 15 year, fixed-rate lending on residential properties. As a
result of the Bank's construction of a new branch office in the town of
Shrewsbury and renovations made to our existing loan servicing area,
building premises and equipment increased by $1.2 million, or 21.9%, to
$6.7 million at June 30, 2003.
Total deposits increased by $10.2 million, or 5.1%, to $212.3 million
at June 30, 2003 from $202.1 million at September 30, 2002. 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. Non-performing loans increased to $664 thousand at June 30,
2003 as compared to $140 thousand at September 30, 2002 primarily as a
result of the addition of one commercial loan delinquency.
Total stockholders' equity increased by $737 thousand, to $28.7
million at June 30, 2003 from $28.0 million at September 30, 2002 primarily
as a result of current period net income.
Comparison of Operating Results for the Three Months Ended June 30, 2003
and 2002
Net Income: The Company reported earnings per share (dilutive) for
the quarter ended June 30, 2003 of $0.15 on net income of $227 thousand.
For the current quarter ended June 30, 2003, net income increased by $23
thousand, or 11.3%, as compared to $204 thousand, or $0.13 per share
(dilutive), for the quarter ended June 30, 2002. The Company's return on
average assets was 0.36% for the quarter ended June 30, 2003 as compared to
0.35% for the quarter ended June 30, 2002. The increased net income was
primarily due to increases in gains from the sale of securities and income
from customer service fees, offset, to a lesser extent, by a decline in net
interest income. During the most recent quarter ended June 30, 2003, the
Bank sold securities and realized net pre-tax gains of $132 thousand, as
compared to net pre-tax losses of $10 thousand for the comparative quarter
ended June 30, 2002. Income from customer service fees increased by $78
thousand, or 88.6%, to $166 thousand for the quarter ended June 30, 2003 as
compared to $88 thousand for the quarter ended June 30, 2002 primarily from
an increase in fees on the use of ATM's and increased fees on the sale of
non-deposit investment products. The Bank's net interest income declined
by $156 thousand, or 7.4%, to $2.0 million for quarter ended June 30, 2003
as compared to $2.1 million for the quarter ended June 30, 2002. The
decline in net interest income was due primarily to a decline in the rate
of interest earned on the Bank's investments and loans, offset, to a lesser
extent, by a decline in the rate of interest paid on the Bank's deposits
and borrowing. The rate of interest earned on the Company's short-term
investments, investment securities and loans declined and reflects the
general decline in interest rates and the desire of loan customers to
refinance or renegotiate their loans to lower rates. For the current
quarter ended June 30, 2003, the Company's net interest margin, expressed
as a percentage of average interest-earning assets, declined by .58%, to
3.35%, from 3.93%, for the comparative quarter ended June 30, 2002. While
rates of interest paid on interest-bearing liabilities for the current
quarter ended June 30, 2003 declined by .90%, to 1.81%, from 2.71% for the
comparative quarter ended June 30, 2002, the rates of interest earned on
interest-earning assets declined by 1.37%, to 4.91%, for the current
quarter ended June 30, 2003 as compared to 6.28% for the comparative
quarter ended June 30, 2002.
8
The Bank's net interest rate spread and net interest margin for the
periods indicated are as follows and such information will aid in the
subsequent discussion of interest and dividend income, interest expense and
net interest income:
9
For Three Months Ended
June 30,
---------------------- Increase
2003 2002 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 0.94% 1.66% -0.72%
Investment securities (2) 4.30% 5.79% -1.49%
Loans (3) 5.60% 6.90% -1.30%
Total interest-earning assets 4.91% 6.28% -1.37%
Interest-bearing liabilities:
NOW accounts 0.12% 0.45% -0.33%
Savings accounts (4) 1.34% 2.09% -0.75%
Money market deposit accounts 1.12% 1.62% -0.50%
Certificate of deposit accounts 2.53% 3.57% -1.04%
Total interest-bearing deposits 1.57% 2.44% -0.87%
Borrowed funds 6.57% 6.63% -0.06%
Total interest-bearing liabilities 1.81% 2.71% -0.90%
Net interest rate spread (5) 3.11% 3.57% -0.46%
Net interest margin (6) 3.35% 3.93% -0.58%
<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>
10
Interest and Dividend Income: The Bank's interest and dividend
income declined by $510 thousand, or 15.1%, to $2.9 million for the quarter
ended June 30, 2003 as compared to $3.4 million for the quarter ended June
30, 2002. 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 interest rates, the Bank's average interest rate
earned on all interest-earning assets declined in the recent quarter. The
average volume of interest-earning assets for the three-months ended June
30, 2003 increased to $234.2 million earning an average rate of 4.91% as
compared to an average volume of $215.8 million earning an average rate of
6.28% for the three-months ending June 30, 2002. 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 June 30, 2003 increased to
$90.1 million, earning 4.30% as compared to an average balance of $68.7
million, earning 5.79% for the three-months ending June 30, 2002. The
average balance of short-term investments for the three-months ended June
30, 2003 declined to $9.4 million earning 0.94% as compared to an average
balance of $11.1 million earning 1.66% for the three-months ending June 30,
2002 while the average balance of loans for the three-months ended June 30,
2003 declined to $134.7 million earning 5.60% as compared to an average
balance of $136.0 million earning 6.90% for the three-months ending June
30, 2002. 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
renegotiation of the current rate charged by the Bank.
Interest Expense: Total interest expense declined by $354 thousand,
or 27.9%, to $913 thousand for the three-months ended June 30, 2003, from
$1.3 million for the three-months ended June 30, 2002. 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 $202.2 million with a cost of 1.81% for the three-months ended
June 30, 2003 as compared to $186.8 million with a cost of 2.71% for the
three-months ending June 30, 2002. The average volume of interest-bearing
deposits increased to $192.7 million with a cost of 1.57% for the three-
months ending June 30, 2003 as compared to $174.8 million with a cost of
2.44% for three-months ending June 30, 2002. Some of the funds from
increased deposit flows and loan payoffs 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 6.57% for the three-months ending June 30, 2003
as compared to $12.0 million with a cost of 6.63% for three-months ending
June 30, 2002.
Net Interest Income: The Bank's net interest income declined by $156
thousand for the quarter ended June 30, 2003, or 7.4%, to $2.0 million from
$2.1 million for the quarter ending June 30, 2002. For the reasons noted
above, the decline was attributed to the combination of a decrease in
interest and dividend income of $510 thousand and a decline in interest
expense of $354 thousand. The Bank's net interest rate spread, which
represents the difference between the weighted average yield on interest-
earning assets and the weighted average cost of interest-bearing
liabilities, declined by .46%, to 3.11% for the quarter ended June 30, 2003
as compared to 3.57% for the quarter ending June 30, 2002. In addition,
the Bank's net interest margin, which represents net interest income as a
11
percentage of average interest-earning assets, declined by .58% to 3.35%
for the quarter ending June 30, 2003 as compared to 3.93% for the quarter
ending June 30, 2002.
Provision for Loan Losses: The Bank had no provision for loan losses
for each of the quarters ended June 30, 2003 and June 30, 2002. 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 believes it has excellent loan
quality, 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. 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
mortgages and income from bank-owned life insurance. Total other income
increased by $251 thousand or 209.2% to $371 thousand for the quarter ended
June 30, 2003, from $120 thousand for the comparative quarter ended June
30, 2002. The primary reason for the increase was a $142 thousand increase
in net gains on the sale of securities available for sale. For the quarter
ended June 30, 2003, the Bank sold, at a net pre-tax gain, a number of
common stock and bond issues. 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. While management had no common stock holdings that
met such criteria during the recent quarter, it did, however, decide that
some common stock holdings be sold. 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 $78
thousand, or 88.6% to $166 thousand for the quarter ended June 30, 2003 as
compared to $88 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 and an
increase in fees charged for ATM usage.
Operating Expenses: The level of operating expenses increased by
0.9%, or $17 thousand and mainly reflects an increase in salary and
benefits expenses and occupancy and equipment expenses, offset, to a lesser
extent, by a decline in data processing expenses. Salary and employee
benefits expenses increased by 9.8%, or $99 thousand, due primarily to
increases in employee retirement expenses associated with the Company's
defined benefit plan, increases in health insurance expenses and costs
associated with the early retirement of an employee. Data processing
expenses declined by
12
42.8%, or $101 thousand, due primarily to the payment of a one-time data
processing conversion fee during the quarter ending June 30, 2002.
Occupancy and equipment expenses increased 11.6%, or $33 thousand, due
mainly to depreciation and other costs associated with renovations to the
Bank's main office and the re-location of the Bank's branch office on Maple
Avenue in Shrewsbury.
Income Taxes. The provision for income taxes increased by $55
thousand to $100 thousand for the quarter ended June 30, 2003 as compared
to $45 thousand for the quarter ended June 30, 2002, resulting in an
effective tax rate of 30.6% and 18.1% for the quarter ended June 30, 2003
and 2002, respectively. The Bank utilizes security investment subsidiaries
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. The
increase in the tax provision over last year is primarily due to a decrease
in the amount of dividend income eligible for the federal dividends
received deduction.
Comparison of Operating Results for the Nine-Months ended
June 30, 2003 and 2002
Net Income: For the nine-month period ended June 30, 2003, the
Company reported earnings per share (dilutive) of $0.44 on net income of
$684 thousand. For the nine-months ended June 30, 2003, net income
decreased by $229 thousand, or 25.1%, as compared to $913 thousand, or
$0.59 per share (dilutive), for the comparative nine-months ended June 30,
2002. The Company's return on average assets was .37% for the nine-month
period ended June 30, 2003 as compared to .53% for the nine-month period
ended June 30, 2002. The decrease in net income was due primarily to a
decline in the Bank's net interest income and an increase in operating
expenses, offset, to a lesser extent, by an increase in net gains on the
sale of securities and an increase in income from customer service fees.
The decline in net interest income was due primarily to a decline in the
rate of interest earned on the Bank's investments and loans, offset, to a
lesser extent, by a decline in the rate of interest paid on the Bank's
deposits and borrowing. The rate of interest earned on the Company's
short-term investments, investment securities and loans declined and
reflects the general decline in interest rates and the desire of loan
customers to refinance or renegotiate their loans to lower rates. For the
nine-months ended June 30, 2003, the Company's net interest margin,
expressed as a percentage of average interest-earning assets, declined by
..41%, to 3.52%, from 3.93%, for the comparative period ended June 30, 2002.
While the rate of interest paid on interest-bearing liabilities for the
nine-months ended June 30, 2003 declined by .92%, to 2.05%, from 2.97% for
the comparative period ended June 30, 2002, the rate of interest earned on
interest-earning assets for the nine-month period ended June 30, 2003
declined by 1.18%, to 5.28%, from 6.46% for the comparative period ended
June 30, 2002.
The Bank's net interest rate spread and net interest margin for the
periods indicated are as follows and such information will aid in the
subsequent discussion of interest and dividend income, interest expense and
net interest income:
13
Nine Months Ended
June 30,
----------------- Increase
2003 2002 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 1.17% 1.80% -0.63%
Investment securities (2) 4.70% 6.05% -1.35%
Loans (3) 6.06% 7.05% -0.99%
Total interest-earning assets 5.28% 6.46% -1.18%
Interest-bearing liabilities:
NOW accounts 0.18% 0.48% -0.30%
Savings accounts (4) 1.50% 2.21% -0.71%
Money market deposit accounts 1.32% 1.84% -0.52%
Certificate of deposit accounts 2.90% 4.03% -1.13%
Total interest-bearing deposits 1.82% 2.71% -0.89%
Borrowed funds 6.55% 6.63% -0.08%
Total interest-bearing liabilities 2.05% 2.97% -0.92%
Net interest rate spread (5) 3.23% 3.49% -0.26%
Net interest margin (6) 3.52% 3.93% -0.41%
<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>
14
Interest and Dividend Income: Interest and dividend income declined
by $1.2 million, or 11.9%, to $9.2 million for the nine-months ended June
30, 2003 as compared to $10.4 million for the nine-months ended June 30,
2002. The decrease was due mainly to a decline in the average rate earned
on interest-earning assets. The average volume of interest-earning assets
for the nine-months ended June 30, 2003 was $231.4 million earning an
average rate of 5.28% as compared to an average volume of $214.9 million
earning an average rate of 6.46% for the nine-months ending June 30, 2002.
The Bank experienced a decline in average loan balances and average loan
rates of interest. The average balance of loans for the nine-months ended
June 30, 2003 was $131.5 million earning 6.06% as compared to an average
balance of $136.5 million earning 7.05% for the nine-months ending June 30,
2002. The decline in the interest rate earned on loans was primarily the
result of a 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 rate adjustment or a renegotiation of the current
interest rate charged by the Bank. Reflecting additional cash flows
primarily from deposit growth, the average balance of investment securities
for the nine-months ended June 30, 2003 increased to $87.1 million, earning
4.70% as compared to an average balance of $66.9 million, earning 6.05% for
the nine-months ending June 30, 2002. The average balance of short-term
investments for the nine-months ended June 30, 2003 was $12.8 million
earning 1.17% as compared to an average balance of $11.4 million earning
1.80% for the nine-months ending June 30, 2002.
Interest Expense: Total interest expense declined by $1.0 million,
or 25.0%, to $3.1 million for the nine-months ended June 30, 2003, from
$4.1 million for the nine-months ending June 30, 2002. The decline in
interest expense was mainly due to the Bank's response to the general
decline in interest rates. Interest rates offered to new or existing
savings and certificate of deposit account customers declined during the
recent nine-month period. The average volume of all interest-bearing
liabilities (which includes interest-bearing deposits and interest-bearing
borrowings) was $199.0 million with a cost of 2.05% for the nine-months
ended June 30, 2003 as compared to $183.2 million with a cost of 2.97% for
the nine-months ending June 30, 2002. The average volume of interest-
bearing deposits was $189.5 million with a cost of 1.82% for the nine-
months ending June 30, 2003 as compared to $171.2 million with a cost of
2.71% for nine-months ending June 30, 2002. 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 $9.5 million
with a cost of 6.55% for the nine-months ending June 30, 2003 as compared
to $12.0 million with a cost of 6.63% for nine-months ending June 30, 2002.
Net Interest Income: Net interest income declined by $223 thousand,
or 3.5%, for the nine-months ended June 30, 2003, to $6.1 million from $6.3
million for the nine-months ending June 30, 2002. The decline was
attributed to the decline in interest income of $1.2 million offset, to a
lesser extent, by a decline in interest expense of $1.0 million. The
Bank's net interest rate spread, which represents the difference between
the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities, declined by .26%, to 3.23%,
for the nine-months ended June 30, 2003 as compared to 3.49% for the nine-
months ending June 30, 2002. In addition, the Bank's net interest margin,
which represents net interest income as a percentage of average interest-
earning assets, declined by .41%, to 3.52%, for the nine-months ending June
30, 2003 as compared to 3.93% for the nine-months ending June 30, 2002.
Provision for Loan Losses: The Bank had no provision for loan losses
the nine-months ended June 30, 2003 compared to $8 thousand for the nine-
months ended June 30, 2002. 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
15
provide valuation allowances for estimated losses on loans based upon past
loss experience, current trends in the level of delinquent and specific
problem loans, loan concentrations to single borrowers, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current and anticipated economic conditions in
our market area. Accordingly, the evaluation of the adequacy of the
allowance for loan losses is not based directly on the level of non-
performing loans. The allowance for loan losses, in management's opinion,
is sufficient to cover losses in the Bank's loan portfolio at this time. As
the Bank expands its commercial lending activities, management believes
that growth in the provision for loan losses may be likely. Additionally,
while the Bank believes it has excellent loan quality, 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 and
income recognized from bank-owned life insurance. Total other income
increased $255 thousand, or 52.9%, to $737 thousand, for the nine-months
ended June 30, 2003, as compared to $482 thousand for nine-months ending
June 30, 2002. Net gains on the sale of securities available for sale
increased by $135 thousand for the nine-months ended June 30, 2003 compared
to the nine-months ending June 30, 2002. For the nine months ended June
30, 2003, the Bank sold, at a net pre-tax gain, a number of common stock
and bond issues. 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. While management had no common stock holdings that met
such criteria, it did, however, decide that some common stock holdings be
sold. 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. Customer service fees
increased by $93 thousand, or 26.4%, to $445 thousand, for the nine-months
ended June 30, 2003, from $352 thousand for the nine-months ended June 30,
2002 primarily due to an increase in the volume of fees earned on the sale
of non-insured investment products such as mutual funds and annuities.
Operating Expenses: For the nine-months ended June 30, 2003,
operating expenses increased by $203 thousand, or 3.6%, to $5.8 million
from $5.6 million for nine-months ending June 30, 2002. The level of
operating expenses mainly reflects a $157 thousand, or 19.9%, increase in
occupancy and equipment, depreciation and other costs associated with
renovations to the Bank's main office and the re-location of the Bank's
branch office on Maple Avenue in Shrewsbury as well as an increase in snow
removal and security-related expenses. Salary and employee benefits
expenses increased by 5.4%, or $157 thousand, due primarily to increases in
employee retirement expenses associated with the Company's defined benefit
plan, costs associated with the early retirement of an employee and
increases in health insurance expenses. Data processing expenses declined
by 12.1%, or $61 thousand, due primarily to the payment of a one-time data
processing conversion fee during the nine-month period ending June 30,
2002.
16
Income Taxes. The provision for income taxes increased by $66
thousand to $336 thousand for the nine-months ended June 30, 2003 as
compared to $270 thousand for the nine-months ended June 30, 2002,
resulting in an effective tax rate of 32.9% and 22.8% for the nine-months
ended June 30, 2003 and 2002, respectively. The Bank utilizes security
investment subsidiaries 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. The increase in the tax provision over last year is primarily due
to a decrease in the amount of dividend income eligible for the federal
dividends received deduction.
17
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 June 30, 2003, the Bank had $9.5 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 securities.
During the nine-months ended June 30, 2003, the Bank originated loans of
$61.3 million and experienced principal repayments of loans of $55.8
million. The Bank purchased securities of $31.1 million. Sales and calls
on investments provided $9.1 million and principal payments on mortgage-
backed securities provided an additional $9.7 million. There were $3.5
million of investment maturities for the nine-month period ended June 30,
2003. The investment in banking premises and equipment utilized $1.7
million. These investing activities were financed primarily by a net
increase in deposits of $10.2 million. Net cash and cash equivalents
decreased by $4.8 million during the nine-months ended June 30, 2003.
Total deposits increased $10.2 million during the nine-months ended
June 30, 2003. The level of interest rates and products offered by
competitors and other factors affect deposit flows. Certificate of deposit
accounts scheduled to mature within one year were $44.2 million at June 30,
2003. 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
completed the renovation of the older portion of its main office. The Bank
most recently has also completed the construction and occupancy of a branch
in Shrewsbury for the relocation of its current Maple Avenue branch office.
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.
At June 30, 2003, the Company's capital to assets ratio was 11.38%
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.
Item 3. Controls and Procedures.
18
Management, including the Company's President and Chief Executive
Officer and Senior Vice President, Treasurer and Clerk, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(e)) as of the end of the
period covered by this report. Based upon that evaluation, the Company's
President and Chief Executive Officer and Senior Vice President, Treasurer
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 changes in the Company's internal control over
financial reporting identified in connection with the evaluation that
occurred during the Company's last fiscal quarter that has materially
affected, or that is reasonably likely to materially affect, the Company's
internal control over financial reporting.
19
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 31.1: Certifications furnished pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1: Statements furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on 8-K.
On July 29, 2003, the registrant filed an 8-K Report regarding
announced earnings for the third quarter of the 2003 fiscal
year, under Item 12.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Westborough Financial Services, Inc.
Date: August 14, 2003 By: /s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: August 14, 2003 By: /s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Treasurer
and Clerk
21