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, 2003
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 registrant 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)
(Registrant'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 February 12, 2004
----- -----------------------------------
Common Stock, par value $0.01 1,587,974
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
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,
2003 2003
------------ -------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 3,131 $ 4,190
Federal funds sold 3,057 6,024
Short-term investments 791 1,687
-------- --------
Total cash and cash equivalents 6,979 11,901
Securities available for sale 88,674 87,590
Federal Home Loan Bank stock, at cost 1,250 1,250
Loans, net 143,269 141,557
Banking premises and equipment, net 6,586 6,708
Accrued interest receivable 1,294 1,179
Deferred income taxes 297 93
Cash surrender value of life insurance 4,418 4,365
Other assets 1,285 1,479
-------- --------
Total assets $254,052 $256,122
======== ========
Liabilities and Stockholders' Equity
Deposits $213,881 $215,898
Federal Home Loan Bank advances 9,500 9,500
Mortgagors' escrow accounts 237 208
Accrued expenses and other liabilities 1,766 1,798
-------- --------
Total liabilities 225,384 227,404
-------- --------
Commitments and Contingencies
Preferred stock, $.01 par value, 1,000,000
shares authorized, none outstanding
Common stock, $.01 par value, 5,000,000 shares authorized,
1,586,374 and 1,586,174 issued and outstanding, respectively 16 16
Additional paid-in capital 4,726 4,706
Retained earnings 23,595 23,325
Accumulated other comprehensive income 923 1,290
Unearned compensation-RRP (14,659 shares) (268) (288)
Unearned compensation-ESOP (32,412 and 33,149 shares, respectively) (324) (331)
-------- --------
Total stockholders' equity 28,668 28,718
-------- --------
Total liabilities and stockholders' equity $254,052 $256,122
======== ========
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,
-----------------------
2003 2002
(unaudited)
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,016 $ 2,102
Interest and dividends on investment securities 943 1,065
Interest on federal funds sold 6 35
Interest on short term investments 4 8
--------- ---------
Total interest and dividend income 2,969 3,210
--------- ---------
Interest expense:
Interest on deposits 626 985
Interest on borrowings 133 157
--------- ---------
Total interest expense 759 1,142
--------- ---------
Net interest income 2,210 2,068
Provision for loan losses 30 0
--------- ---------
Net interest income, after provision for loan losses 2,180 2,068
--------- ---------
Other income:
Customer service fees 175 165
(Loss) gain on sales of securities available for sale, net (1) 4
Gain on sales of mortgages 4 0
Miscellaneous 55 59
--------- ---------
Total other income 233 228
--------- ---------
Operating expenses:
Salaries and employee benefits 1,003 967
Occupancy and equipment 290 305
Data processing 174 163
Marketing 28 53
Professional fees 52 65
Other general and administrative 350 347
--------- ---------
Total operating expenses 1,897 1,900
--------- ---------
Income before provision for income taxes 516 396
Provision for income taxes 167 118
--------- ---------
Net income $ 349 $ 278
========= =========
Number of weighted average shares outstanding-Basic 1,538,835 1,527,688
Earnings per share - Basic $ 0.23 $ 0.18
Number of weighted average shares outstanding-Dilutive 1,560,727 1,547,905
Earnings per share-Dilutive $ 0.22 $ 0.18
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 RRP Compensation
Stock Capital Earnings Income (Loss) Stock ESOP Total
------ ---------- -------- ------------- -------- ------------ -----
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2002 $16 $4,583 $22,676 $1,439 $(365) $(360) $27,989
-------
Comprehensive income:
Net income 0 0 278 0 0 0 278
Change in net unrealized gain
on securities available for sale, net
of reclassification adjustment and
tax effects 0 0 0 111 0 0 111
-------
Total comprehensive income 389
-------
Cash dividends declared ($.05 per share) 0 0 (79) 0 0 0 (79)
ESOP shares released and committed to
to be released (8,841 shares) 0 9 0 0 0 6 15
Amortization of RRP stock 0 0 0 0 19 0 19
--- ------ ------- ------ ----- ----- -------
Balance at December 2002 $16 $4,592 $22,875 $1,550 $(346) $(354) $28,333
=== ====== ======= ====== ===== ===== =======
Balance September 30, 2003 $16 $4,706 $23,325 $1,290 $(288) $(331) $28,718
-------
Comprehensive income:
Net income 0 0 349 0 0 0 349
Change in net unrealized gain
on securities available for sale, net
of reclassification adjustment and
tax effects 0 0 0 (367) 0 0 (367)
-------
Total comprehensive income (18)
-------
Cash dividends declared ($.05 per share) 0 0 (79) 0 0 0 (79)
ESOP shares released and committed
to be released (11,788 shares) 0 17 0 0 0 7 24
Amortization of RRP stock 0 0 0 0 20 0 20
Issuance of common stock under
stock option plan, net of
income tax benefits 0 3 0 0 0 0 3
--- ------ ------- ------ ----- ----- -------
Balance at December 31, 2003 (unaudited) $16 $4,726 $23,595 $ 923 $(268) $(324) $28,668
=== ====== ======= ====== ===== ===== =======
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,
--------------------
2003 2002
---- ----
(unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 349 $ 278
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 30 0
Net amortization on securities 132 39
Amortization of net deferred loan costs and discounts (1) 0
Depreciation and amortization expense 138 159
Loss (gain) on sales and calls of securities, net 1 (4)
Gain on sales of mortgages (4) 0
Increase in accrued interest receivable (115) (88)
Deferred income tax benefit (72) (49)
ESOP shares released and committed to be released 24 15
Amortization of RRP stock 20 19
Increase in bank-owned life insurance (53) (104)
Other, net 162 (301)
------- -------
Net cash provided (used) by operating activities 611 (36)
------- -------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls 4,750 1,000
Maturities 500 0
Purchases (9,361) (16,042)
Principal payments 2,395 2,453
Loan (originations) principal payments, net (1,737) 4,306
Purchase of banking premises and equipment, net (16) (607)
------- -------
Net cash used by investing activities (3,469) (8,890)
------- -------
Cash flows from financing activities:
Net (decrease) increase in deposits (2,017) 7,088
Issuance of common stock under stock option plan,
net of tax benefits 3
Net increase (decrease) in mortgagors' escrow accounts 29 (31)
Dividends paid (79) (79)
------- -------
Net cash (used) provided by financing activities (2,064) 6,978
------- -------
Net change in cash and cash equivalents (4,922) (1,948)
Cash and cash equivalents at beginning of period 11,901 19,253
------- -------
Cash and cash equivalents at end of period $ 6,979 $17,305
======= =======
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, 2003, 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
2003 Annual Report to Stockholders.
2) Contingencies.
At December 31, 2003, the Bank had residential and commercial loan
commitments to borrowers of $5.0 million, commitments for home equity loans
of $155 thousand, available home equity lines of credit of $11.5 million,
unadvanced funds on commercial lines of credit, overdrafts and
participation loans of $3.0 million, unadvanced funds on construction
mortgages of $3.0 million and personal overdraft lines of credit of
approximately $490 thousand. The Bank had no commitments to purchase or
sell securities at December 31, 2003.
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.
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, 2003 and
September 30, 2003, and the results of operations for three-months ended
December 31, 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 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 customer 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 and Shrewsbury,
Massachusetts. Accordingly, the Bank's results of operations are affected
by regional market and economic conditions.
6
Comparison of Financial Condition at December 31, 2003 and September 30,
2003
Total assets declined by $2.1 million, or 0.8%, to $254.1 million at
December 31, 2003 from $256.1 million at September 30, 2003 and primarily
reflected the internal funding of a $2.0 million decline in deposits. Total
cash and cash equivalents declined by $4.9 million, or 41.4%, to $7.0
million at December 31, 2003 from $11.9 million at September 30, 2003 and
primarily reflects cash flows utilized to fund deposit outflows of $2.0
million, growth in securities available for sale of $1.1 million and growth
in loans, net of $1.7 million. Regarding the growth in loans, the Company
experienced net loan growth of 1.2%. The primary categories of loan growth
were in home equity lines-of-credit, which increased approximately 11%, to
$10.6 million, and commercial loans, which increased approximately 9%, to
$20.9 million. Other loan categories were generally flat and reflected the
general decline in home refinancing and the seasonal aspects of the local
housing market.
Total deposits declined $2.0 million, or 0.9%, to $213.9 million at
December 31, 2003 from $215.9 million at September 30, 2003. Most of this
decrease occurred in the Company's regular savings and certificates of
deposit accounts. Regular savings accounts declined 1.5%, to $115.9 million
at December 31, 2003 and certificates of deposit accounts declined 5.4%, to
$51.2 million at December 31, 2003. While management believes it is
competitive in the rates of interest offered to current and prospective
customers, the recent general improvement in the stock market most likely
motivated some Bank customers to shift their liquid and maturing deposits
to their outside brokerage accounts.
Total stockholders' equity decreased by $50 thousand, or 0.2%, to
$28.7 million at December 31, 2003 from $28.7 million at September 30, 2003
primarily as a result of a $367 thousand decline in the after-tax market
value of the Bank's net unrealized gain on securities available for sale
and the payment of a $79 thousand dividend to stockholders during this
period. Most of the securities available for sale are sensitive to changes
in market interest rates and, as a result of a general increase in interest
rates during this period and the maturity or call of higher yielding
securities, the underlying market value of securities available for sale
declined accordingly. The decline in stockholders' equity was offset, to a
lesser extent, by net income of $349 thousand for three-months ended
December 31, 2003.
Comparison of Operating Results for Three-Months Ended December 31, 2003
and 2002
Net Income: The Company reported earnings per share (dilutive) for
three-months ended December 31, 2003 of $0.22 on net income of $349
thousand, as compared to $278 thousand, or $0.18 per share (dilutive), for
three-months ended December 31, 2002. The Company's annualized return on
average assets was 0.54% for three-months ended December 31, 2003, as
compared to 0.45% for three-months ended December 31, 2002.
The increase in net income was primarily due to an increase in the
Company's net interest income. Net interest income increased by $142
thousand, or 6.9%, to $2.2 million for three-months ended December 31,
2003, as compared to $2.1 million for three-months ended December 31, 2002.
The increase in net interest income was primarily the result of a decline
in the rates of interest paid on the Company's interest-bearing
liabilities, offset, to a lesser extent, by a reduction in the rates of
interest earned on the Company's loans and investment securities. Following
the general decline in market interest rates, the rate of interest paid on
interest-bearing liabilities declined 0.89%, to 1.44%, for three-months
ended December 31, 2003, from 2.33% for three-months ended December 31,
2002. The rate of interest earned on the Company's interest-earning assets
declined 0.69%, to 4.95%, for three-months ended December 31, 2003, from
5.64% for three-months ended December 31, 2002 and reflected the general
decline in securities re-investment interest rates and the desire of loan
customers to refinance or renegotiate their loans to lower rates. For
three-months ended December 31, 2003, the Company's net interest rate
spread, which represents the difference between the weighted average yield
on interest-
7
earning assets and the weighted average cost of interest-bearing
liabilities, increased 0.20%, to 3.51%, from 3.31% for the comparative
three-months ended December 31, 2002. Operating expenses remained
relatively flat at $1.9 million for both quarters-ended December 31, 2003
and December 31, 2002 and, expressed as a percent of average assets,
operating expenses declined to 2.95% for three-months ended December 31,
2003 as compared to 3.08% for three-months ended December 31, 2002.
The following schedule of the Bank's net interest rate spread and net
interest margin for the periods indicated is based upon average balances
and will aid in the subsequent discussion of interest and dividend income,
interest expense and net interest income:
8
Three-months Ended
December 31,
------------------ Increase
2003 2002 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 0.81% 1.04% -0.23%
Investment Securities (2) 4.15% 5.20% -1.05%
Loans (3) 5.60% 6.51% -0.91%
Total interest-earning assets 4.95% 5.64% -0.69%
Interest-bearing liabilities:
NOW accounts 0.08% 0.25% -0.17%
Savings accounts (4) 1.08% 1.76% -0.68%
Money market deposit accounts 1.03% 1.62% -0.59%
Certificate of deposit accounts 2.19% 3.22% -1.03%
Total interest-bearing deposits 1.26% 2.11% -0.85%
Borrowed funds 4.89% 6.61% -1.72%
Total interest-bearing liabilities 1.44% 2.33% -0.89%
Net interest rate spread (5) 3.51% 3.31% 0.20%
Net interest margin (6) 3.69% 3.63% 0.06%
<FN>
<F1> Short-term investments include federal funds sold.
<F2> All investment securities are considered available for sale.
<F3> Loans are net of deferred loan origination costs (fees), allowance
for loan losses, discount/premium on purchased loans and unadvanced
funds.
<F4> Savings accounts include the balance in mortgagors' escrow accounts.
<F5> Net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
<F6> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
9
Interest and Dividend Income: The Bank's interest and dividend income
declined by $241 thousand, or 7.5%, to $3.0 million for three-months ended
December 31, 2003 as compared to $3.2 million for three-months ended
December 31, 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. Following
reductions in short-term rates by the Federal Open Market Committee, the
Bank's average interest rate earned on all interest-earning assets declined
to 4.95% for three-months ended December 31, 2003 from 5.64% for three-
months ended December 31, 2002. However, the average volume of interest-
earning assets for three-months ended December 31, 2003 increased to $239.8
million as compared to an average volume of $227.8 million for three-months
ended December 31, 2002. This increase in average volume of interest-earning
assets was primarily the result of positive cash flows from interest-
bearing deposits. This increase in volume was invested in assets with
comparatively lower interest-earning rates. The average balance of
investment securities for three-months ended December 31, 2003 increased to
$90.8 million, earning 4.15% as compared to an average balance of $82.0
million, earning 5.20% for three-months ending December 31, 2002. The
average balance of short-term investments for three-months ended December
31, 2003 declined to $4.9 million earning 0.81% as compared to an average
balance of $16.6 million earning 1.04% for three-months ending December 31,
2002. In this environment of low interest rates, management has chosen to
reduce the balance of short-term investments, and to re-invest such
balances in longer-term investment securities that offer higher rates of
interest and, when necessary, to borrow overnight funds from the Federal
Home Loan Bank of Boston (the "FHLBB"). The average balance of loans for
three-months ended December 31, 2003, increased to $144.0 million earning
5.60%, as compared to an average balance of $129.2 million earning 6.51%
for three-months ending December 31, 2002. While the volume of net new
fixed-rate and home equity loans increased, the Bank continued to
experience a decline in its rate of interest earned on loans primarily due
to the general decline in market-based interest rates offered on new loans
granted during the period, a decline in the rates of interest charged on
adjustable-rate loans which were subject to contractual adjustment, and
unscheduled customer refinancing and renegotiations of existing loan
interest rates.
Interest Expense: Total interest expense declined by $383 thousand,
or 33.5%, to $759 thousand for three-months ended December 31, 2003, from
$1.1 million for three-months ended December 31, 2002. The decline in
interest expense was mainly due to management of the Bank constantly
monitoring and actively reducing rates offered on various deposit 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 borrowings)
increased to $210.4 million, with a cost of 1.44%, for three-months ended
December 31, 2003 as compared to $196.0 million, with a cost of 2.33%, for
three-months ending December 31, 2002. The average volume of interest-
bearing deposits increased to $199.5 million, with a cost of 1.26%, for
three-months ended December 31, 2003 as compared to $186.5 million, with a
cost of 2.11%, for three-months ended December 31, 2002. As noted in the
above discussion of interest and dividend income, when necessary,
management borrows overnight funds from the FHLBB. As a result, the average
balance of borrowings increased to $10.9 million, with an average cost of
4.89%, for three-months ended December 31, 2003, as compared to an average
balance of $9.5 million, with an average cost of 6.61%, for three-months
ended December 31, 2002.
Net Interest Income: The Bank's net interest income increased by $142
thousand, or 6.9%, for three-months ended December 31, 2003, to $2.2
million, from $2.1 million for three-months end December 31, 2002. As noted
above, the increase was primarily attributed to the combination of a
decrease in interest and dividend income of $241 thousand and a decline in
interest expense of $383 thousand. The Bank's reduction in rates paid on
interest-bearing deposit accounts exceeded the effect of lower yields on
interest-earning assets, which resulted in an expanded net interest rate
spread. The Bank's net interest rate spread, which represents the
difference between the weighted average yield on
10
interest-earning assets and the weighted average cost of interest-bearing
liabilities, increased by 0.20%, to 3.51% for three-months ended December
31, 2003 as compared to 3.31% for three-months ending December 31, 2002. In
addition, the Bank's net interest margin, which represents net interest
income as a percentage of average interest-earning assets, increased by
0.06% to 3.69% for three-months ended December 31, 2003 as compared to
3.63% for three-months ended December 31, 2002.
Provision for Loan Losses: The Bank had a $30 thousand provision for
loan losses for three-months ended December 31, 2003 compared to $0 for
three-months ended December 31, 2002. Total loans at December 31, 2003 were
$143.3 million, an increase of $1.7 million, from $141.6 million at
September 30, 3003. The provision for loan losses is a result of
management's periodic analysis of risks inherent in its loan portfolio
as well as the adequacy of the allowance for loan losses. It is the
Bank's policy to provide valuation allowances for estimated losses on loans
based upon past loss experience, current trends in the level of delinquent
and specific problem loans, loan concentrations to single borrowers,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current 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. As the Bank expands its commercial lending activities,
management believes that growth in the provision for loan losses may be
likely. Additionally, while management believes it continues to have
excellent loan quality, with $622 thousand of non-accrual loans and non-
performing assets at December 31, 2003, the Bank recognizes that it is
located in a market and geographic area that is considered in the high
technology and financial services belt and, most likely, the Bank's
allowance for loan loss will reflect the relative health of these economic
sectors. While management believes it's 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 mortgages and the sale
of securities available for sale, and income from bank-owned life insurance
("BOLI"). Total other income increased by $5 thousand, or 2.2%, to $233
thousand for three-months ended December 31, 2003, from $228 thousand for
the comparative three-months ended December 31, 2002. Within the category
of customer service fees, commercial loan fee income was $72 thousand for
three-months ended December 31, 2003, compared to $0 for three-months ended
December 31, 2002, as the result of the receipt of a prepayment penalty on
a large commercial real estate loan. Also, within the category of customer
service fees, for the three-months ended December 31, 2003, ATM fees and
fees from the sale of non-deposit investment products decreased by $16
thousand and $48 thousand, respectively, from the three-months ended
December 31, 2002. ATM fees declined due to a change in the fee structure
for point-of-sale transactions the Bank receives from merchants. With
respect to fees earned from the sale of non-deposit investment products,
the department consists of one sales representative. The Company hired a
new sales representative to replace one who had previously left and it
resulted in a temporary decline in the level of income earned during the
transition period.
With regard to the Company's common stock holdings, the Company's
internal investment policy requires management to either write-down to
market value, or sell, any common stock issue that has sustained a 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
11
Audit Committee and the Company's Board of Directors. For three-months
ended December 31, 2003 and December 31, 2002, no investment in common
stock met the criteria noted above.
Operating Expenses: For three-months ended December 31, 2003,
operating expenses declined by $3 thousand, or 0.2%, to $1.9 million. While
salary and benefit expenses and data processing expenses increased,
occupancy and equipment, marketing and professional expenses declined for
three-months ended December 31, 2003.
Salary and employee benefits expenses increased $36 thousand, or
3.7%, to $1 million for three-months ended December 31, 2003, as compared
to three-months ended December 31, 2002. Some salary and benefit expenses
increased as a result of general salary adjustments, increases in medical
insurance and pension costs. Alternatively, certain salary and benefit
expenses declined. The Bank reduced its use of temporary outside help,
reduced payments of sales incentives (primarily the sale of non-deposit
investment products) and also, as a result of increased lending volume,
was able to defer salary costs associated with the closing of new
residential, commercial and construction loans. In the latter case, these
deferred costs are considered yield adjustments, and are subsequently
charged to interest income over the life of each loan. Data processing
expenses increased $11 thousand, or 6.7%, to $174 thousand for three-months
ended December 31, 2003, as compared to three-months ended December 31,
2002 primarily due to an increase in the volume of transactions. Marketing
expense declined by $25 thousand, to $28 thousand, for three-months ended
December 31, 2003 as compared to $53 thousand, for three-months ended
December 31, 2002, primarily as a result of the in-house production of
material for the 2004 Annual Meeting of Stockholders that had previously
been produced by outside agencies. Professional fees declined by $13
thousand, to $52 thousand for three-months ended December 31, 2003 as
compared to $65 thousand for three-months ended December 31, 2002 primarily
as a result of a decline in legal fees. Occupancy and equipment expenses
declined by $15 thousand, to $290 thousand for three-months ended December
31, 2003 as compared to $305 thousand for three-months ended December 31,
2002 primarily as a result of a decline in the level of depreciation
expenses relating to software and computer equipment which was fully
depreciated in the prior year. During this fiscal year, management expects
to begin a program of replacing certain older generations of personal
computers and software. Lastly, expenses relating to real estate taxes
increased as towns in which the Bank operates increased their rates of
property taxation.
Income Taxes. Primarily as a result of an increase of income before
the provision for income taxes, the provision for income taxes increased by
$49 thousand, to $167 thousand, for three-months ended December 31, 2003 as
compared to $118 thousand for three-months ended December 31, 2002,
resulting in an effective tax rate of 32.4% and 29.8%, respectively. The
Bank also utilizes a wholly-owned security investment subsidiary to
substantially reduce state income taxes, receives the benefit of a
dividends received deduction on common stock held and receives favorable
tax treatment from the increase in the cash surrender value of BOLI.
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 FHLBB as part of its management of interest rate risk. At
December 31, 2003, the Bank had $9.5 million in outstanding borrowings.
Loan repayments and maturing securities are a relatively predictable
source of funds. However,
12
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 three-months ended December 31, 2003, the Bank originated loans of
$17.1 million and experienced principal repayments on loans of $15.4
million. The Bank purchased securities of $9.4 million. Sales and calls on
securities provided $4.8 million and principal payments on mortgage-backed
securities provided an additional $2.4 million. There were $500 thousand of
securities that matured during three-months ended December 31, 2003. During
three-months ended December 31, 2003, the Bank experienced a net decrease
in deposits of $2.0 million as depositors chose to move their money out of
relatively low interest-earning deposit accounts and into the stock market
and other alternative investments. These investing activities were financed
primarily by a net decrease in cash and cash equivalents of $4.9 million
during three-months ended December 31, 2003.
As noted above, deposits declined by $2.0 million during three-months
ended December 31, 2003. The level of interest rates and products offered
by competitors and other general market factors affect deposit flows.
Certificate of deposit accounts scheduled to mature within one year were
$41.4 million at December 31, 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.
At December 31, 2003, the Company's capital to assets ratio was
11.28% and it exceeded 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.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on the
Company's financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
Item 3. Controls and Procedures.
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(e) 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.
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.
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.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: February 13, 2004 By: /s/ Joseph F. MacDonough
------------------------------------------
President and Chief Executive Officer
Date: February 13, 2004 By: /s/ John L. Casagrande
------------------------------------------
Senior Vice-President, Treasurer and Clerk
15