UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
------- -------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding as of May 5, 2004
----- -----------------------------
Common Stock, par value $0.01 1,588,674
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. 7
Item 3. Controls and Procedures 20
PART II. OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
March 31, September 30,
2004 2003
--------- -------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 2,733 $ 4,190
Federal funds sold 3,931 6,024
Short-term investments 1,635 1,687
-------- --------
Total cash and cash equivalents 8,299 11,901
Securities available for sale 93,646 87,590
Federal Home Loan Bank stock, at cost 1,250 1,250
Loans, net of allowance for loan losses of
$951 and $911, respectively 141,241 141,557
Banking premises and equipment, net 6,560 6,708
Accrued interest receivable 1,148 1,179
Deferred income taxes 182 93
Cash surrender value of life insurance 5,609 5,293
Due from broker 220 0
Other assets 621 551
-------- --------
Total assets $258,776 $256,122
======== ========
Liabilities and Stockholders' Equity
Deposits $211,969 $215,898
Federal Home Loan Bank advances 15,500 9,500
Mortgagors' escrow accounts 224 208
Accrued expenses and other liabilities 1,864 1,798
-------- --------
Total liabilities 229,557 227,404
-------- --------
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, 1,588,674 and 1,586,174
issued and outstanding, respectively 16 16
Additional paid-in capital 4,790 4,706
Retained earnings 23,815 23,325
Accumulated other comprehensive income 1,163 1,290
Unearned compensation-RRP (14,659 shares) (248) (288)
Unearned compensation-ESOP (31,675 and 33,149
shares, respectively) (317) (331)
-------- --------
Total stockholders' equity 29,219 28,718
-------- --------
Total liabilities and stockholders'
equity $258,776 $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 Six Months Ended
March 31, March 31,
------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 1,881 $ 1,993 $ 3,897 $ 4,095
Interest and dividends on securities 857 1,036 1,801 2,101
Interest on federal funds sold 9 24 15 59
Interest on short term investments 2 6 6 31
---------- ---------- ---------- ----------
Total interest and dividend income 2,749 3,059 5,719 6,286
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 572 850 1,198 1,835
Interest on borrowings 128 154 261 311
---------- ---------- ---------- ----------
Total interest expense 700 1,004 1,459 2,146
---------- ---------- ---------- ----------
Net interest income 2,049 2,055 4,260 4,140
Provision for loan losses 10 0 40 0
---------- ---------- ---------- ----------
Net interest income, after provision for
loan losses 2,039 2,055 4,220 4,140
---------- ---------- ---------- ----------
Other income:
Customer service fees 202 114 378 279
Gain (loss) on sales of securities available
for sale, net 60 (7) 58 (3)
Gain on sales of mortgages 84 5 87 5
Miscellaneous 43 43 98 85
---------- ---------- ---------- ----------
Total other income 389 155 621 366
---------- ---------- ---------- ----------
Operating expenses:
Salaries and employee benefits 1,051 994 2,054 1,961
Occupancy and equipment 330 322 620 627
Data processing expenses 174 147 348 310
Marketing and advertising 46 33 74 86
Professional fees 87 84 139 149
Other general and administrative 309 333 659 680
---------- ---------- ---------- ----------
Total operating expenses 1,997 1,913 3,894 3,813
---------- ---------- ---------- ----------
Income before provision for income taxes 431 297 947 693
Provision for income taxes 132 118 299 236
---------- ---------- ---------- ----------
Net income $ 299 $ 179 $ 648 $ 457
========== ========== ========== ==========
Number of weighted average shares
outstanding-Basic 1,540,821 1,528,424 1,539,469 1,527,951
Earnings per share-Basic $0.19 $0.12 $0.42 $0.30
Number of weighted average shares
outstanding-Dilutive 1,562,570 1,549,370 1,560,713 1,548,519
Earnings per share-Dilutive $0.19 $0.12 $0.42 $0.30
See accompanying notes to unaudited consolidated financial statements.
2
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Compensation- Compensation-
Stock Capital Earnings Income (Loss) RRP ESOP Total
------ ---------- -------- ------------- ------------- ------------- -----
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2002 $16 $4,583 $22,676 $1,439 $(365) $(360) $27,989
-------
Comprehensive income:
Net income 0 0 457 0 0 0 457
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects 0 0 0 (10) 0 0 (10)
-------
Total comprehensive income 447
-------
Cash dividends declared and paid
$(.10 per share) 0 0 (158) 0 0 0 (158)
ESOP shares released and committed
to be released (1,474 shares) 0 19 0 0 0 13 32
Amortization of RRP stock 0 0 0 0 38 0 38
--- ------ ------- ------ ----- ----- -------
Balance at March 31, 2003 $16 $4,602 $22,975 $1,429 $(327) $(347) $28,348
=== ====== ======= ====== ===== ===== =======
Balance at September 30, 2003 $16 $4,706 $23,325 $1,290 $(288) $(331) $28,718
-------
Comprehensive income:
Net income 0 0 648 0 0 0 648
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects 0 0 0 (127) 0 0 (127)
-------
Total comprehensive income 521
-------
Cash dividends declared and paid
$(.10 per share) 0 0 (158) 0 0 0 (158)
ESOP shares released and committed
to be released (1,474 shares) 0 36 0 0 0 14 50
Amortization of RRP stock 0 0 0 0 40 0 40
Issuance of common stock under stock
option plan, net of income tax benefits 0 48 0 0 0 0 48
--- ------ ------- ------ ----- ----- -------
Balance at March 31, 2004 (unaudited) $16 $4,790 $23,815 $1,163 $(248) $(317) $29,219
=== ====== ======= ====== ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(dollars in thousands)
Six Months Ended
March 31,
----------------------
2004 2003
---- ----
(unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 648 $ 457
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 40 0
Net amortization on securities 265 98
Amortization of net deferred loan costs and discounts (7) (26)
Depreciation expense 278 318
(Gain) loss on sales and calls of securities available
for sale, net (58) 3
Gain on sales of mortgages (87) (5)
Decrease in accrued interest receivable 31 49
Deferred income tax benefit (105) (105)
ESOP shares released and committed to be released 50 32
Amortization of RRP Stock 40 38
Increase in bank-owned life insurance (316) (353)
Other, net (224) (320)
-------- --------
Net cash provided by operating activities 555 186
-------- --------
Cash flows from investing activities:
Activity in available for sale securities:
Sales and calls 9,322 2,007
Maturities 3,000 1,495
Purchases (22,453) (21,101)
Principal payments 3,757 5,869
Loan sales 4,884 0
Loan (originations) principal payments, net (4,514) 856
Purchase of banking premises and equipment (130) (1,217)
-------- --------
Net cash used by investing activities (6,134) (12,091)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (3,929) 10,623
Increase in FHLB advances 6,000 0
Net increase (decrease) in mortgagors' escrow accounts 16 (34)
Issuance of common stock under stock option plan, net of
tax benefits 48 0
Dividends paid (158) (158)
-------- --------
Net cash provided by financing activities 1,977 10,431
-------- --------
Net change in cash and cash equivalents (3,602) (1,474)
Cash and cash equivalents at beginning of period 11,901 19,253
-------- --------
Cash and cash equivalents at end of period $ 8,299 $ 17,779
======== ========
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 March 31, 2004, the Bank had residential and commercial loan commitments
to borrowers of $5.7 million, commitments for home equity loans of $541
thousand, available home equity lines of credit of $11.8 million,
unadvanced funds on commercial lines of credit, overdrafts and
participation loans of $3.0 million, unadvanced funds on construction
mortgages of $1.6 million and personal overdraft lines of credit of
approximately $498 thousand. The Bank had a commitment at March 31, 2004
to purchase on April 20, 2004, a $5.0 million, 15-yr fixed-rate mortgage-
backed security. Also, at March 31, 2004, the Bank was committed to borrow
$3.0 million from the FHLBB to settle on April 1, 2004.
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.
5
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 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 earnings per share would have been adjusted to the
pro forma amounts indicated below:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Net income As reported $ 299 $ 179 $ 648 $ 457
Pro forma $ 293 $ 173 $ 635 $ 444
Basic earnings per share As reported $0.19 $0.12 $0.42 $0.30
Pro forma $0.19 $0.11 $0.41 $0.29
Diluted earnings per share As reported $0.19 $0.12 $0.42 $0.30
Pro forma $0.19 $0.11 $0.41 $0.29
6
Item 2. Management's Discussion and Analysis.
General
The following discussion compares the financial condition of the
Company and its wholly owned subsidiary, the Bank, at March 31, 2004 and
September 30, 2003, and the results of operations for three and six-months
ended March 31, 2004, compared to the same periods in 2003. 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 and mortgage transactions,
income from the sale of non-deposit investment products, 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.
7
Comparison of Financial Condition at March 31, 2004 and September 30, 2003
The Company's total assets increased by $2.7 million, or 1.0%, to
$258.8 million at March 31, 2004 from $256.1 million at September 30, 2003.
While deposits declined by $3.9 million, or 1.8%, to $212.0 million from
$215.9 million, advances from the Federal Home Loan Bank of Boston (the
"FHLBB") increased by $6.0 million, or 63.2%, to $15.5 million at March 31,
2004. Management believes the recent decline in deposits is generally
related to customer desires to invest in equity securities and to reduce
personal debt. Management continually compares offering rates on retail
certificates of deposits and other deposit rates with rates of advances
from the FHLBB.
During this period, management deemed it prudent to borrow money,
rather than offer above-market rates on deposit products. Accordingly, the
increase in advances was used primarily to fund the maturities of
relatively higher-rate certificates of deposits and also to fund the
purchases of securities available for sale. Securities available for sale
increased by $6.1 million, or 6.9%, to $93.6 million, at March 31, 2004 as
compared to $87.6 million at September 30, 2003. Much of the increase in
securities available for sale was in the categories of federal agency
mortgage-backed securities and bonds. During March 2004, the Company
borrowed $5 million from the FHLBB to fund one-half of a $10 million
purchase of 15-year, fixed-rate federal agency mortgage-backed securities
with an average borrowing term selected to somewhat match the estimated
life and other characteristics of the underlying securities. Also, at March
31, 2004, the Company had committed to borrow an additional $3 million from
the FHLBB to partially fund the remaining $5 million of the aforementioned
15-year security.
Loans declined by 0.2%, or $316 thousand, to $141.2 million. Within
the category of loans, while commercial loans increased by $3.3 million
from September 30, 2003 to March 31, 2004, residential real estate and home
equity lines-of-credit declined by $3.4 million for the same period and
primarily reflect the sale of $4.9 million fixed-rate mortgage loans,
offset, to a lesser extent, by originations of new residential mortgage and
home equity lines-of-credit. Regarding asset quality, non-performing loans
declined to $561 thousand, or 0.40% of loans at March 31, 2004 as compared
to $634 thousand, or 0.45% of total loans at September 30, 2003. Total
stockholders' equity increased by $501 thousand, to $29.2 million at March
31, 2004 from $28.7 million at September 30, 2003 primarily as a result of
current period net income, net of common stock dividends paid, changes in
accumulated comprehensive income relating to the change in after-tax value
in securities available for sale, the issuance of common stock relating to
the Company's stock option plan, and due to recognition of earned
compensation on the Company's employee stock ownership and recognition and
retention plans.
Comparison of Operating Results for Three-Months Ended March 31, 2004
and 2003
Net Income: The Company reported earnings per share (dilutive) for
three-months ended March 31, 2004 of $0.19 on net income of $299 thousand,
as compared to $0.12 per share (dilutive) on net income of $179 thousand
for three-months ended March 31, 2003. The Company's annualized return on
average assets was 0.48% for three-months ended March 31, 2004 as compared
to 0.29% for three-months ended March 31, 2003.
The increase in net income for three-months ended March 31, 2004 was
primarily due to an increase in customer service fees, plus net gains on
the sale of securities available for sale and mortgages, offset, to a
lesser extent, by an increase in operating expenses. Income from customer
service fees increased by $88 thousand, or 77.2%, to $202 thousand for
three-months ended March 31, 2004 as compared to $114 thousand for three-
months ended March 31, 2003, primarily from an increase in fee income from
the sale of non-deposit investment products, such as mutual funds and
annuities. Additionally, for three-months ended March 31, 2004, the Company
sold securities available for sale,
8
primarily common stocks, and realized net pre-tax gains of $60 thousand, as
compared to net pre-tax losses of $7 thousand for three-months ended March
31, 2003. Also, during three-months ended March 31, 2004, the Company sold
30 year fixed-rate mortgage loans, with servicing retained by the Bank, and
recognized a pre-tax gain on the sale of $84 thousand, as compared to a
pre-tax gain of $5 thousand, on a substantially reduced volume of loans
sold, for three-months ended March 31, 2003. For three-months ended March
31, 2004, operating expenses increased by $84 thousand, or 4.4%, to $2.0
million, from $1.9 million for three-months ended March 31, 2003. The
primary reasons for the increase were due to general increases in staff
salaries and also due to a decline in mortgage lending volume. As it
relates to mortgage lending volume, the Bank is allowed to defer certain
operating costs, primarily salaries, related to originating loans. As a
result of the decline in originated loans during the current period, such
cost deferrals also declined accordingly. With regard to the Bank's net
interest income, it declined by $6 thousand, or 0.3% for three-months ended
March 31, 2004, as compared to three-months ended March 31, 2003. The
Company's net interest margin, expressed as a percentage of average
interest-earning assets, declined by .05%, to 3.49%, from 3.54%, for three-
months ended March 31, 2003.
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:
9
Three Months Ended
March 31,
------------------ Increase
2004 2003 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 0.82% 0.98% -0.16%
Investment securities (2) 3.82% 4.64% -0.82%
Loans (3) 5.39% 6.11% -0.72%
Total interest-earning assets 4.68% 5.27% -0.59%
Interest-bearing liabilities:
NOW accounts 0.11% 0.16% -0.05%
Savings accounts (4) 1.03% 1.43% -0.40%
Money market deposit accounts 0.98% 1.26% -0.28%
Certificate of deposit accounts 2.05% 2.93% -0.88%
Total interest-bearing deposits 1.21% 1.80% -0.59%
Borrowed funds 5.16% 6.48% -1.32%
Total interest-bearing liabilities 1.40% 2.02% -0.62%
Net interest rate spread (5) 3.28% 3.25% 0.03%
Net interest margin (6) 3.49% 3.54% -0.05%
<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 $310 thousand, or 10.1%, to $2.7 million for three-
months ended March 31, 2004 as compared to $3.1 million for three-months
ended March 31, 2003. The decline was primarily 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.
The Bank's average interest rate earned on all interest-earning assets
declined by 0.59%, to 4.68% for three-months ended March 31, 2004 from
5.27% for three-months ended March 31, 2003. However, the average volume
of interest-earning assets for three-months ended March 31, 2004 increased
to $234.8 as compared to an average volume of $232.2 million for three-
months ended March 31, 2003. The increase in the average volume of
interest-earning assets was primarily the result of increases in the
average volume of interest-bearing deposits, interest-bearing borrowings
and non-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 March 31, 2004
increased to $89.9 million, earning 3.82% as compared to an average balance
of $89.3 million, earning 4.64% for three-months ending March 31, 2003.
The average balance of short-term investments for three-months ended March
31, 2004 declined to $5.3 million earning 0.82% as compared to an average
balance of $12.3 million earning 0.98% for three-months ending March 31,
2003. 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 FHLBB for
cash management purposes. The average balance of loans for three-months
ended March 31, 2004, increased to $139.6 million earning 5.39%, as
compared to an average balance of $130.6 million earning 6.11% for three-
months ending March 31, 2003. While the average volume of real estate and
commercial loans increased, the Bank continued to experience a decline in
its rate of interest earned on loans primarily in response 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, loan sales and
unscheduled customer refinancing and renegotiations of existing loan
interest rates.
Interest Expense: Total interest expense declined by $304 thousand,
or 30.3%, to $700 thousand for three-months ended March 31, 2004, from $1.0
million for three-months ended March 31, 2003. 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 during the most recent three-month period. The average
volume of all interest-bearing liabilities (which includes interest-bearing
deposits and borrowings) increased to $199.7 million, with a cost of 1.40%,
for three-months ended March 31, 2004 as compared to $198.7 million, with a
cost of 2.02%, for three-months ending March 31, 2003. The average volume
of interest-bearing deposits increased to $189.8 million, with a cost of
1.21%, for three-months ended March 31, 2004 as compared to $189.2 million,
with a cost of 1.80%, for three-months ended March 31, 2003. The average
balance of borrowings increased to $9.9 million, with an average cost of
5.16%, for three-months ended March 31, 2004, as compared to an average
balance of $9.5 million, with an average cost of 6.48%, for three-months
ended March 31, 2003.
Net Interest Income: The Bank's net interest income declined by $6
thousand, or 0.3%, for three-months ended March 31, 2004, to $2.0 million
compared to three-months ended March 31, 2003. As noted above, the decline
was primarily attributed to the combination of a decrease in interest and
dividend income of $310 thousand and a decline in interest expense of $304
thousand. The Bank's reduction in rates paid on interest-bearing
liabilities was exceeded by the effect of lower yields earned on interest-
earning assets, which resulted in a declined net interest rate margin. The
Bank's net interest rate margin, which represents net interest income as a
percentage of average interest-earning
11
assets declined to 3.49% for three-months ended March 31, 2004 as compared
to 3.54% for three-months ended March 31, 2003.
Provision for Loan Losses: The Bank had a $10 thousand provision for
loan losses for three-months ended March 31, 2004 compared to $0 for three-
months ended March 31, 2003. Total loans at March 31, 2004 were $141.2
million, $141.6 million at September 30, 3003 and $132.1 million at March
31, 2003. 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 $561
thousand of non-accrual loans and non-performing assets and an allowance
for loan losses of $951 thousand at March 31, 2004, 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 $234 thousand, or 151.0%, to $389
thousand for three-months ended March 31, 2004, from $155 thousand for the
comparative three-months ended March 31, 2003. Income from customer
service fees increased by $88 thousand, or 77.2%, to $202 thousand for
three-months ended March 31, 2004 as compared to $114 thousand for three-
months ended March 31, 2003, primarily from an increase in fee income from
the sale of non-deposit investment products, such as mutual funds and
annuities. Additionally, for three-months ended March 31, 2004, the
Company sold securities available for sale, primarily common stocks, and
realized net pre-tax gains of $60 thousand, as compared to net pre-tax
losses of $7 thousand for three-months ended March 31, 2003. Also, during
three-months ended March 31, 2004, the Company sold fixed-rate mortgage
loans, with servicing retained by the Bank, and recognized a pre-tax gain
on the sale of $84 thousand, as compared to a pre-tax gain of $5 thousand,
on a substantially reduced volume of loans sold, for three-months ended
March 31, 2003.
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 Audit Committee and the Company's Board of Directors. For three-months
ended March 31, 2004 and March 31, 2003, no investment in common stock met
the criteria noted above.
12
Operating Expenses: For three-months ended March 31, 2004, operating
expenses increased by $84 thousand, or 4.4%, to $2.0 million, from $1.9
million for three-months ended March 31, 2003. Salary and employee benefit
expenses increased $57 thousand, or 5.7%, to $1.1 million for three-months
ended March 31, 2004, as compared to $994 thousand for three-months ended
March 31, 2003. Some salary and benefit expenses increased as a result of
general salary adjustments, however, certain salary and benefit expenses
declined. The Bank reduced its use of temporary outside help and reduced
some sales incentive compensation payments. The Bank also experienced a
reduction in employee retirement expenses relating to its defined-benefit
pension plan. The Bank is allowed to defer certain operating costs,
primarily salaries, related to originating loans. As a result of a general
decline in lending volume, the reduction in salary costs associated with
the closing of new residential, commercial and construction loans declined
to $19 thousand for three-months ended March 31, 2004 as compared to $86
thousand for three-months ended March 31, 2003. These deferred costs are
considered yield adjustments, and are subsequently charged to interest
income over the life of each loan. Data processing expenses increased $27
thousand, or 18.4%, to $174 thousand for three-months ended March 31, 2004,
as compared to $147 thousand for three-months ended March 31, 2003
primarily due to a higher level of services provided by the data processing
vendor. Marketing and advertising expense increased by $13 thousand, to $46
thousand, for three-months ended March 31, 2004 as compared to $33
thousand, for three-months ended March 31, 2003, primarily as a result of
an increase in expenses relating to print and cable TV advertising.
Professional fees increased by $3 thousand, to $87 thousand, for three-
months ended March 31, 2004 as compared to $84 thousand for three-months
ended March 31, 2003 primarily as a result of an increase in financial
printing costs. Occupancy and equipment expenses increased by $8 thousand,
to $330 thousand for three-months ended March 31, 2004 as compared to $322
thousand for three-months ended March 31, 2003 primarily as a result of an
increase in real estate tax rates. As it relates to occupancy and
equipment expenses, during this fiscal year, management expects to begin a
program of replacing certain older generation personal computers and
software. Additionally, in April 2004, the Bank closed its branch office
located in the Shaw's Supermarket in the town of Shrewsbury. The Company
expects that the increase in occupancy and equipment expenses resulting
from the replacement of older generation personal computers and software
will be offset by the decline in occupancy expenses resulting from the
closing of the supermarket branch.
Income Taxes. Primarily as a result of increased pre-tax income, the
provision for income taxes increased by $14 thousand, to $132 thousand, for
three-months ended March 31, 2004 as compared to $118 thousand for three-
months ended March 31, 2003, resulting in an effective tax rate of 30.6%
and 39.7%, 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.
Comparison of Operating Results for Six-Months Ended March 31, 2004 and
2003
Net Income: The Company reported earnings per share (dilutive) for
six-months ended March 31, 2004 of $0.42 on net income of $648 thousand, as
compared to $0.30 per share (dilutive) on net income of $457 thousand for
six-months ended March 31, 2003. For six-months ended March 31, 2004, net
income increased by $191 thousand, or 41.8%, to $648 thousand, as compared
to $457 thousand, for six-months ended March 31, 2003. The Company's
return on average assets was 0.51% for six-months ended March 31, 2004 as
compared to 0.37% for six-months ended March 31, 2003.
The increase in net income for six-months ended March 31, 2004 was
due primarily to an increase in net interest income, customer service fees,
net gains on the sales of mortgages and securities available for sale,
offset, to a lesser extent, by an increase in operating expenses and
provisions for
13
income taxes and loan losses. Net interest income increased by $120
thousand, or 2.9%, to $4.3 million, for six-months ended March 31, 2004, as
compared to $4.1 million for six-months ended March 31, 2003. While the
average rate earned on interest-earning assets declined by 0.65%, to 4.82%
for six-months ended March 31, 2004 from 5.47% for six-months ended March
31, 2003, the average cost of interest-bearing liabilities declined by
0.74%, to 1.44% for six-months ended March 31, 2004 from 2.18% for six-
months ended March 31, 2003. The decline in rates of interest paid on
interest-bearing liabilities was primarily the result of maturing
certificates of deposits reinvested at lower rates and also due to an
increase in the amount of low-cost borrowing from the FHLBB. Income from
customer service fees increased by $99 thousand, or 35.5%, to $378 thousand
for six-months ended March 31, 2004 as compared to $279 thousand for six-
months ended March 31, 2003, primarily due to the recognition of a non-
refundable $71 thousand prepayment fee from the payment in full of a $2.6
million commercial loan. Also for six-months ended March 31, 2004, the
Company sold fixed-rate mortgage loans, with servicing retained by the
Bank, and recognized a pre-tax gain on the sale of $87 thousand, as
compared to a pre-tax gain of $5 thousand, on a substantially reduced
volume of loans sold, for six-months ended March 31, 2003. Additionally,
for six-months ended March 31, 2004, the Company sold securities available
for sale, primarily common stocks, and realized net pre-tax gains of $58
thousand, as compared to net pre-tax losses of $3 thousand for six-months
ended March 31, 2003. For six-months ended March 31, 2004, operating
expenses increased by $81 thousand, or 2.1%, to $3.9 million, from $3.8
million for six-months ended March 31, 2003. The primary reasons for the
increase were due to general increases in staff salaries and also due to a
decline in deferred costs related to the decrease in new mortgage loans.
As a result of a higher level of services provided, data processing
expenses increased by $38 thousand, or 12.3%, to $348 thousand for six-
months ended March 31, 2004 as compared to $310 thousand. Other general
and administrative expenses declined by $21 thousand, to $659 thousand, for
six-months ended March 31, 2004, mainly due to a decline in printing and
other variable expenses relating to the decline in mortgage loan volume.
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:
14
Six Months Ended
March 31,
---------------- Increase
2004 2003 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 0.82% 1.25% -0.43%
Investment securities (2) 3.99% 4.91% -0.92%
Loans (3) 5.50% 6.31% -0.81%
Total interest-earning assets 4.82% 5.47% -0.65%
Interest-bearing liabilities:
NOW accounts 0.10% 0.20% -0.10%
Savings accounts (4) 1.06% 1.59% -0.53%
Money market deposit accounts 1.00% 1.44% -0.44%
Certificate of deposit accounts 2.12% 3.07% -0.95%
Total interest-bearing deposits 1.24% 1.95% -0.71%
Borrowed funds 5.02% 6.55% -1.53%
Total interest-bearing liabilities 1.44% 2.18% -0.74%
Net interest rate spread (5) 3.38% 3.29% 0.09%
Net interest margin (6) 3.59% 3.60% -0.01%
<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>
15
Interest and Dividend Income: The Bank's interest and dividend
income declined by $567 thousand, or 9.0%, to $5.7 million for six-months
ended March 31, 2004 as compared to $6.3 million for six-months ended March
31, 2003. 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. The Bank's average
interest rate earned on all interest-earning assets declined by 0.65%, to
4.82% for six-months ended March 31, 2004 from 5.47% for six-months ended
March 31, 2003. However, the average volume of interest-earning assets for
six-months ended March 31, 2004 increased to $237.3 as compared to an
average volume of $230.0 million for six-months ended March 31, 2003. This
$7.3 million increase in average volume of interest-earning assets was
primarily the result of positive cash flows from interest-bearing deposits
and FHLBB advances. This new earning asset volume was invested in assets
with comparatively lower interest-earning rates than the portfolio as a
whole.
The average balance of investment securities for six-months ended
March 31, 2004 increased to $90.3 million, earning 3.99% as compared to an
average balance of $85.7 million, earning 4.91% for six-months ending March
31, 2003. The average balance of short-term investments for six-months
ended March 31, 2004 declined to $5.1 million earning 0.82% as compared to
an average balance of $14.4 million earning 1.25% for six-months ending
March 31, 2003. 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 FHLBB
for cash management purposes. The average balance of loans for six-months
ended March 31, 2004, increased to $141.8 million earning 5.50%, as
compared to an average balance of $129.9 million earning 6.31% for six-
months ending March 31, 2003. The average volume of real estate and
commercial loans increased, however, the Bank continued to experience a
decline in its rate of interest earned on loans primarily in response 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, loan
sales and unscheduled customer refinancing and renegotiations of existing
loan interest rates.
Interest Expense: Total interest expense declined by $687 thousand,
or 32.0%, to $1.5 million for six-months ended March 31, 2004, from $2.1
million for six-months ended March 31, 2003. 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 and to a decline in the cost of borrowing from the FHLBB.
The average volume of all interest-bearing liabilities (which includes
interest-bearing deposits and borrowings) increased to $202.9 million, with
a cost of 1.44%, for six-months ended March 31, 2004 as compared to $197.3
million, with a cost of 2.18%, for six-months ending March 31, 2003. Within
this category of interest-bearing liabilities, the average volume of
interest-bearing deposits increased to $192.5 million, with a cost of
1.24%, for six-months ended March 31, 2004 as compared to $187.8 million,
with a cost of 1.95%, for six-months ended March 31, 2003. As noted in the
above discussion of interest and dividend income, when necessary,
management borrows funds from the FHLBB. As a result, the average balance
of borrowings increased to $10.4 million, with an average cost of 5.02%,
for six-months ended March 31, 2004, as compared to an average balance of
$9.5 million, with an average cost of 6.55%, for six-months ended March 31,
2003.
Net Interest Income: The Bank's net interest income increased by
$120 thousand, or 2.9%, for six-months ended March 31, 2004, to $4.3
million, from $4.1 million for six-months end March 31, 2003. As noted
above, the increase was primarily attributed to the combination of a
decrease in interest and dividend income of $567 thousand and a decline in
interest expense of $687 thousand. The Bank's reduction in rates paid on
interest-bearing deposit accounts exceeded the effect of lower
16
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 interest-
earning assets and the weighted average cost of interest-bearing
liabilities, increased by 0.09%, to 3.38% for six-months ended March 31,
2004 as compared to 3.29% for six-months ending March 31, 2003.
Provision for Loan Losses: The Bank had a $40 thousand provision for
loan losses for six-months ended March 31, 2004 compared to $0 for six-
months ended March 31, 2003. Total loans at March 31, 2004 were $141.2
million, $141.6 million at September 30, 3003 and $132.1 million at March
31, 2003. 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 $561
thousand of non-accrual loans and non-performing assets and an allowance
for loan losses of $951 thousand at March 31, 2004, 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 $255 thousand, or 69.7%, to $621
thousand for six-months ended March 31, 2004, from $366 thousand for the
comparative six-months ended March 31, 2003. Income from customer service
fees increased by $99 thousand, or 35.5%, to $378 thousand for six-months
ended March 31, 2004 as compared to $279 thousand for six-months ended
March 31, 2003, due primarily from the recognition of a non-refundable $71
thousand prepayment fee from the payment in full of a $2.6 million
commercial loan. Also for six-months ended March 31, 2004, the Company
sold fixed-rate mortgage loans, with servicing retained by the Bank, and
recognized a pre-tax gain on the sale of $87 thousand, as compared to a
pre-tax gain of $5 thousand, on a substantially reduced volume of loans
sold, for six-months ended March 31, 2003. Additionally, for six-months
ended March 31, 2004, the Company sold securities available for sale,
primarily common stocks, and realized net pre-tax gains of $58 thousand, as
compared to net pre-tax losses of $3 thousand for six-months ended March
31, 2003.
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
17
Audit Committee and the Company's Board of Directors. For six-months ended
March 31, 2004 and March 31, 2003, no investment in common stock met the
criteria noted above.
Operating Expenses: For six-months ended March 31, 2004, operating
expenses increased by $81 thousand, or 2.1%, to $3.9 million, from $3.8
million for six-months ended March 31, 2003. While salary and benefit
expenses and data processing expenses increased, expenses relating to
marketing and advertising, professional fees, occupancy and equipment and
other general and administrative expenses declined for six-months ended
March 31, 2004 as compared to six-months ended March 31, 2003. Salary and
employee benefit expenses increased $93 thousand, or 4.7%, to $2.1 million
for six-months ended March 31, 2004, as compared to $2.0 million for six-
months ended March 31, 2003. Salary and benefit expenses increased as a
result of general salary adjustments, a decrease in lending volume that
resulted in a reduction of salary cost deferrals, and increased
compensation expense relating to the Company's Employee Stock Ownership
Plan. Some areas did, however, decrease. Decreases in salary and benefit
expenses occurred due to a decline in retirement expenses relating to the
defined-benefit pension plan, and declines in the use of temporary help and
the payment of overtime. Data processing expenses increased 12.3%, or $38
thousand, to $348 thousand for six-months ended March 31, 2004 as compared
to $310 thousand for six-months ended March 31, 2003 primarily as a result
of an increase in the level of services provided. Marketing and
advertising expenses declined by 14.0%, or $12 thousand, to $74 thousand
for six-months ended March 31, 2004 primarily due to a delay in the timing
and nature of marketing and advertising placement. Professional fees
declined by 6.7%, to $139 thousand for six-months ended March 31, 2004 as
compared to $149 thousand for six-months ended March 31, 2003 due to a
decline in legal and accounting expenses. Other general and administrative
expenses declined by 3.1%, to $659 thousand for six-months ended March 31,
2004 as compared to $680 thousand for six-months ended March 31, 2003
primarily due to a decline in state examination expenses and a decline in
variable costs relating to a decline in mortgage lending. To a lesser
extent, other general and administrative costs relating to reviews of
commercial loan quality and loan compliance increased by $24 thousand for
six-months ended March 31, 2004 as compared to six-months ended March 31,
2003. Occupancy and equipment expenses declined by $7 thousand, to $620
thousand for six-months ended March 31, 2004 as compared to $627 thousand
for six-months ended March 31, 2003 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. Also, occupancy
expenses relating to real estate taxes increased as towns in which the Bank
operates increased their rates of property taxation. During this fiscal
year, management expects to begin a program of replacing certain older
generations of personal computers and software. Additionally, in April
2004, the Bank closed its branch office located in the Shaw's Supermarket
in the town of Shrewsbury. The Company expects that the increase in
occupancy and equipment expenses resulting from the replacement of older
generation personal computers and software will be offset by the decline in
occupancy expenses resulting from the closing of the supermarket branch.
Income Taxes. Primarily as a result of an increase of income before
the provision for income taxes, the provision for income taxes increased by
$63 thousand, to $299 thousand, for six-months ended March 31, 2004 as
compared to $236 thousand for six-months ended March 31, 2003, resulting in
an effective tax rate of 31.6% and 34.1%, 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
18
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.
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 six-months ended March 31, 2004, the Bank originated loans of $26.6
million, experienced principal repayments on loans of $22.0 million and
sold $4.9 million of 30-yr fixed-rate loans. The Bank purchased securities
of $22.5 million and sales and calls on securities provided $9.3 million
and principal payments on mortgage-backed securities provided an additional
$3.8 million. There were $3.0 million of securities that matured during
six-months ended March 31, 2004. During six-months ended March 31, 2004,
the Bank experienced a net decrease in deposits of $3.9 million as
depositors chose to move their money out of relatively low interest-earning
deposit accounts to pay down debt or place funds into the stock market and
other alternative investments. These investing activities were financed
primarily by an increase in FHLBB borrowing of $6.0 million and by a net
decrease in cash and cash equivalents of $3.6 million during six-months
ended March 31, 2004.
As noted above, deposits declined by $3.9 million during six-months
ended March 31, 2004. Most of this deposit decline occurred in certificates
of deposits. The level of interest rates, products offered by competitors
and other general market factors, such as the relative attractiveness of
equity investments and mutual fund investments, affect deposit flows.
Certificate of deposit accounts scheduled to mature within one year were
$38.2 million at March 31, 2004. Based on the Bank's deposit historical
retention experience and current pricing strategy and enhanced product
offerings, the Bank anticipates that a significant portion of these
certificates of deposit will remain with the Bank. Recently, the Bank
introduced a new certificate of deposit that will permit the certificate
holder a one-time option to have the interest rate "stepped-up" to the then
current rate offered by the Bank on a similar certificate for the remaining
term of the original certificate of deposit. Management has recently begun
promoting this new certificate of deposit and believes it will
significantly improve retention and attract new depositors as well.
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 March 31, 2004, the Bank had $15.5
million in outstanding borrowings and, based upon estimated eligible
collateral that could be pledged with the FHLBB, the Bank had additional
borrowing capacity of $63.7 million at March 31, 2004.
At March 31, 2004, the Company's capital to assets ratio was 11.29%
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.
19
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.
20
PART II. OTHER INFORMATION
----------------
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Small Business Issuer Purchases of
Equity Securities.
The following table provides information with respect to purchases
made by or on behalf of the Company or any "affiliated purchaser" (as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of
the Company's common stock during the three months ended March 31, 2004.
(d) Maximum
Number (or
(c) Total Approximate
Number of Dollar
Shares (or Value) of
Units) Shares (or
Purchased as Units) that
(a) Total Part of may yet be
Number of (b) Average Publicly Purchased
Shares (or Price Paid Announced under the
Units) per Share Plans or Plans or
Period Purchased (or Unit) Programs Programs
- ------ --------- ----------- ------------ -----------
<s> <c> <c> <c> <c>
January 1, 2004 through
January 31, 2004 0 0 0 79,069(1)
February 1, 2004 through
February 29, 2004 0 0 0 79,069
March 1, 2004 through
March 31, 2004 0 0 0 79,069
Total 0 0 0 79,069
<FN>
<F1> In September 2000, the Massachusetts Division of Banks approved a
share repurchase program which authorized the repurchase of up to
79,069 shares. The program will continue until the repurchase of the
79,069 shares is complete.
</FN>
21
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Westborough Financial Services, Inc. (the "Company") held its annual
meeting of shareholders on January 29, 2004 (the "Meeting"). All of the
proposals submitted to the shareholders at the Meeting were approved. The
proposals submitted to shareholders and the tabulation of votes for each
proposal is as follows:
1. Election of six directors of the Company. The number of votes cast
with respect to this matter was as follows:
Nominee For Withheld Broker Non-Votes
James N. Ball 1,421,897 3,656 0
Nelson F. Ball 1,423,847 1,706 0
Nancy M. Carlson 1,421,802 3,751 0
Benjamin H. Colonero, Jr. 1,424,102 1,451 0
Roger B. Leland 1,423,002 2,551 0
Joseph F. MacDonough 1,424,352 1,201 0
2. Ratification of the appointment of Wolf & Company, P.C. as the
Company's independent public accountants for the fiscal year ending
September 30, 2004.
For Against Abstain Broker Non-Votes
1,425,328 150 75 0
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 31.1: Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1: Section 1350 Certifications
(b) Reports on 8-K.
On April 27, 2004, the registrant filed with the SEC a form 8-K
Report dated April 27, 2004 furnishing its press release announcing
earnings for the second quarter of the 2004 fiscal year, under Item 12.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: May 17, 2004 By: /s/ Joseph F. MacDonough
------------------------------
President and Chief Executive
Officer
Date: May 17, 2004 By: /s/ John L. Casagrande
------------------------------
Senior Vice-President,
Treasurer and Clerk
23