UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 issuer as specified in its charter)
Massachusetts 04-3504121
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 E. Main Street
Westborough, Massachusetts 01581
(508) 366-4111
(Address of principal executive offices)
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding as of August 12, 2004
----- ---------------------------------
Common Stock, par value $0.01 1,589,574
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
Forward Looking Statements
Westborough Financial Services, Inc. (the "Company") and The
Westborough Bank (the "Bank") may from time to time make written or oral
"forward-looking statements" which may be identified by the use of such
words as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar expressions that are
intended to identify forward-looking statements.
Forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, which are subject to significant risks and
uncertainties. The following factors, many of which are subject to change
based on various other factors beyond the Company's control, and other
factors identified in the Company's filings with the Securities and
Exchange Commission and those presented elsewhere by management from time
to time, could cause its financial performance to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements. Examples of forward-looking statements
include, but are not limited to, estimates with respect to our financial
condition, results of operations and business that are subject to various
factors which would cause actual results to differ materially from these
estimates. These factors include, but are not limited to:
* conditions which effect general and local economies;
* changes in interest rates, deposit flows, demand for mortgages
and other loans, real estate values and competition;
* changes in accounting principles, policies, or guidelines;
* changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing,
products and services.
This list of important factors is not exclusive. The Company or the
Bank does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company or the Bank.
WESTBOROUGH FINANCIAL SERVICES, INC.
AND SUBSIDIARY
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)
June 30, September 30,
2004 2003
--------------------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 3,400 $ 4,190
Federal funds sold 3,469 6,024
Short-term investments 1,770 1,687
-------- --------
Total cash and cash equivalents 8,639 11,901
Securities available for sale 91,987 87,590
Federal Home Loan Bank stock, at cost 1,614 1,250
Loans, net of allowance for loan losses of
$950 and $911, respectively 145,853 141,557
Banking premises and equipment, net 6,546 6,708
Accrued interest receivable 1,195 1,179
Deferred income taxes 1,074 93
Cash surrender value of life insurance 5,697 5,293
Other assets 625 551
-------- --------
Total assets $263,230 $256,122
======== ========
Liabilities and Stockholders' Equity
Deposits $214,710 $215,898
Federal Home Loan Bank advances 18,500 9,500
Mortgagors' escrow accounts 214 208
Accrued expenses and other liabilities 1,902 1,798
-------- --------
Total liabilities 235,326 227,404
-------- --------
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, 1,589,574 and 1,586,174
issued and outstanding, respectively 16 16
Additional paid-in capital 4,829 4,706
Retained earnings 23,945 23,325
Accumulated other comprehensive (loss) income (348) 1,290
Unearned compensation-RRP (10,859 and 14,659
shares, respectively) (229) (288)
Unearned compensation-ESOP (30,939 and 33,149
shares, respectively) (309) (331)
-------- --------
Total stockholders' equity 27,904 28,718
-------- --------
Total liabilities and
stockholders' equity $263,230 $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 Nine Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 1,890 $ 1,886 $ 5,786 $ 5,981
Interest and dividends on securities 938 969 2,739 3,070
Interest on federal funds sold 7 17 22 76
Interest on short term investments 3 5 9 36
--------- --------- --------- ---------
Total interest and dividend income 2,838 2,877 8,556 9,163
--------- --------- --------- ---------
Interest expense:
Interest on deposits 557 757 1,756 2,592
Interest on borrowings 177 156 437 467
--------- --------- --------- ---------
Total interest expense 734 913 2,193 3,059
--------- --------- --------- ---------
Net interest income 2,104 1,964 6,363 6,104
Provision for loan losses 30 0 70 0
--------- --------- --------- ---------
Net interest income, after provision for
loan losses 2,074 1,964 6,293 6,104
--------- --------- --------- ---------
Other income:
Customer service fees 159 166 536 445
Gain on sales and calls of securities
available for sale, net 31 132 89 129
Gain on sales of mortgages 0 24 88 29
Miscellaneous 43 49 141 134
--------- --------- --------- ---------
Total other income 233 371 854 737
--------- --------- --------- ---------
Operating expenses:
Salaries and employee benefits 1,067 1,108 3,121 3,069
Occupancy and equipment 300 318 920 945
Data processing 166 135 514 445
Marketing and advertising 80 61 154 147
Professional fees 53 70 192 219
Other general and administrative 348 316 1,006 996
--------- --------- --------- ---------
Total operating expenses 2,014 2,008 5,907 5,821
--------- --------- --------- ---------
Income before provision for income taxes 293 327 1,240 1,020
Provision for income taxes 83 100 382 336
--------- --------- --------- ---------
Net income $ 210 $ 227 $ 858 $ 684
========= ========= ========= =========
Number of weighted average shares
outstanding-Basic 1,546,958 1,534,061 1,540,744 1,528,857
Earnings per share-Basic $0.14 $0.15 $0.56 $0.45
Number of weighted average shares
outstanding-Dilutive 1,567,339 1,555,498 1,561,491 1,548,075
Earnings per share-Dilutive $0.13 $0.15 $0.55 $0.44
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 (Loss) Income 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) $27,989
Comprehensive income:
Net income 0 0 684 0 0 0 684
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects 0 0 0 134 0 0 134
Total comprehensive income 818
Cash dividends declared and paid
($.15 per share) 0 0 (238) 0 0 0 (238)
ESOP shares released and committed
to be released (2,210 shares) 0 33 0 0 0 21 54
Amortization of RRP stock 0 0 0 0 58 0 58
Issuance of common stock under
stock option plan, net of
income tax benefits 0 45 0 0 0 0 45
--- ------ ------- ------ ----- ----- -------
Balance at June 30, 2003 (unaudited) $16 $4,616 $23,122 $1,573 $(307) $(339) $28,726
=== ====== ======= ====== ===== ===== =======
Balance at September 30, 2003 $16 $4,706 $23,325 $1,290 $(288) $(331) $28,718
Comprehensive income (loss):
Net income 0 0 858 0 0 0 858
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects 0 0 0 (1,638) 0 0 (1,638)
Total comprehensive income (loss) (780)
Cash dividends declared and paid
($.15 per share) 0 0 (238) 0 0 0 (238)
ESOP shares released and committed
to be released (2,210 shares) 0 53 0 0 0 22 75
Amortization of RRP stock 0 0 0 0 59 0 59
Issuance of common stock under
stock option plan,net of
income tax benefits 0 70 0 0 0 0 70
--- ------ ------- ------ ----- ----- -------
Balance at June 30, 2004 (unaudited) $16 $4,829 $23,945 $ (348) $(229) $(309) $27,904
=== ====== ======= ====== ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended
June 30,
---------------------
2004 2003
---- ----
(unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 858 $ 684
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 70 0
Net amortization on securities 406 219
Amortization of net deferred loan costs and discounts 6 43
Depreciation expense 416 485
Gain on sales and calls of securities
available for sale, net (89) (129)
Gain on sales of mortgages (26) (29)
(Increase) decrease in accrued interest receivable (16) 67
Deferred income tax benefit (122) (161)
ESOP shares released and committed to be released 75 54
Amortization of RRP Stock 59 58
Increase in bank-owned life insurance (404) (208)
Other, net 30 131
-------- --------
Net cash provided by operating activities 1,263 1,214
-------- --------
Cash flows from investing activities:
Activity in available for sale securities:
Sales and calls 11,350 9,104
Maturities 5,015 3,495
Purchases (30,307) (31,050)
Principal payments 6,731 9,731
Proceeds from loan sales 4,884 3,738
Loan originations, net (9,230) (9,297)
Purchase of FHLB stock (364) 0
Purchase of banking premises and equipment (266) (1,698)
Retirement of banking premises and equipment 12 6
-------- --------
Net cash used by investing activities (12,175) (15,971)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in deposits (1,188) 10,220
Proceeds from FHLB advances 22,250 0
Repayment of FHLB advances (13,250) 0
Net increase (decrease) in mortgagors' escrow accounts 6 (39)
Issuance of common stock under stock option plan,
net of tax benefits 70 45
Dividends paid (238) (238)
-------- --------
Net cash provided by financing activities 7,650 9,988
-------- --------
Net change in cash and cash equivalents (3,262) (4,769)
Cash and cash equivalents at beginning of period 11,901 19,253
-------- --------
Cash and cash equivalents at end of period $ 8,639 $ 14,484
======== ========
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) Commitments and Contingencies.
At June 30, 2004, the Bank had residential and commercial loan
commitments to borrowers of $11.0 million, commitments for home equity
lines of $150 thousand, available home equity lines of credit of $13.0
million, unadvanced funds on commercial lines of credit, overdrafts and
participation loans of $2.2 million, unadvanced funds on construction
mortgages of $529 thousand and personal overdraft lines of credit of
approximately $496 thousand.
3) Earnings per Share.
Basic earnings per share represent income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated in
accordance with Statement of Financial Accounting Standards No. 128 and
reflects additional common shares (common stock equivalents) that would
have been outstanding if only dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the
assumed issuance. For the periods presented, the Company has no potential
common shares outstanding that are considered anti-dilutive. If applicable,
the Company would exclude from the diluted earnings per share calculation
any potential common shares that would increase earnings per share.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options and grants and are determined using the treasury
stock method.
On January 25, 2001, the Company's stockholders approved the
Westborough Financial Services, Inc. 2001 Stock Option Plan (the "Stock
Option Plan"). Under the Stock Option Plan, the Company may grant options
to its directors, officers and employees for up to 55,348 shares of common
stock. Both incentive stock options and non-qualified stock options may be
granted under the Stock Option Plan. The exercise price of each option
equals the market price of the Company's stock on the date of grant and an
option's maximum term is ten years. Options generally vest over a five-year
period.
The Company applies APB Opinion 25 and related Interpretations in
accounting for the Stock Option Plan. Accordingly, no compensation cost has
been recognized. Had compensation cost for the
5
Company's Stock Option Plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method prescribed
by SFAS No. 123, the Company's net income and earnings per share would have
been adjusted to the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Net income As reported $ 210 $ 227 $ 858 $ 684
Pro forma $ 204 $ 221 $ 839 $ 665
Basic earnings per share As reported $0.14 $0.15 $0.56 $0.45
Pro forma $0.13 $0.14 $0.54 $0.43
Diluted earnings per share As reported $0.13 $0.15 $0.55 $0.44
Pro forma $0.13 $0.14 $0.54 $0.43
6
Item 2. Management's Discussion and Analysis.
General
The following discussion compares the financial condition of the
Company and its wholly owned subsidiary, the Bank, at June 30, 2004 and
September 30, 2003, and the results of operations for three and nine-months
ended June 30, 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 June 30, 2004 and September 30, 2003
The Company's total assets increased by $7.1 million, or 2.8%, to
$263.2 million at June 30, 2004 from $256.1 million at September 30, 2003.
Securities available for sale increased by $4.4 million, or 5.0%, to $92.0
million, at June 30, 2004 as compared to $87.6 million at September 30,
2003 and loans increased by $4.3 million, or 3.0%, to $145.9 million at
June 30, 2004. While deposits declined by $1.2 million, or 0.6%, to $214.7
million from $215.9 million, advances from the Federal Home Loan Bank of
Boston (the "FHLB") increased by $9.0 million, or 94.7%, to $18.5 million
at June 30, 2004 from $9.5 million at September 30, 2003. During the recent
quarter, some financial institutions paid above-market rates of interest
which, management believes, enticed some maturing certificate of deposit
customers to move their deposit to other financial institutions. Management
continually compares offering rates on retail certificates of deposits and
other deposit rates with rates of advances from the FHLB. 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, to fund the purchases of securities available for sale and to fund
increased loan demand. Securities available for sale increased by $4.4 million,
or 5.0%, to $92.0 million, at June 30, 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. Loans increased by $4.3 million, or 3.0%, to $145.9 million at June
30, 2004 primarily as a result of growth in adjustable-rate commercial real
estate loans. During March and April 2004, the Company borrowed $10 million
from the FHLB to fund a $10 million purchase of 15-year, fixed-rate federal
agency mortgage-backed securities. The average life of the borrowing was
selected to somewhat match the estimated life and other characteristics of
the underlying securities.
Regarding asset quality, non-performing loans declined to $312
thousand, or 0.21% of net loans at June 30, 2004 as compared to $634
thousand, or 0.45% of net loans at September 30, 2003. Total stockholders'
equity declined by $814 thousand, to $27.9 million at June 30, 2004 from
$28.7 million at September 30, 2003 primarily as a result of a decline in
the market value of securities available for sale. Accumulated other
comprehensive after-tax loss at June 30, 2004 was $348 thousand, as
compared to after-tax income of $1.3 million at September 30, 2003. The
Company's securities consist primarily of interest-rate sensitive
securities whose market value changes inversely with changes in market
interest rates. Interest rates at June 30, 2004 were generally higher than
rates at September 30, 2003 and, accordingly, the market value of
securities available for sale declined. Deferred income tax benefits
associated with this market value decline were approximately $1.0 million.
Comparison of Operating Results for Three-Months Ended June 30, 2004 and
2003
Net Income: The Company reported earnings per share (dilutive) for
three-months ended June 30, 2004 of $0.13 on net income of $210 thousand,
as compared to $0.15 per share (dilutive) on net income of $227 thousand
for three-months ended June 30, 2003. For three-months ended June 30, 2004,
net income decreased by $17 thousand, or 7.5%, to $210 thousand, as
compared to $227 thousand, for three-months ended June 30, 2003. The
Company's return on average assets was 0.32% for three-months ended June
30, 2004 as compared to 0.36% for three-months ended June 30, 2003.
The decline in net income was primarily due to a decrease in gains on
sales of securities available for sale, a decrease in gains on sales of
mortgages and an increase in the provision for loan losses, offset, to a
lesser extent, by an increase in net interest income. Gains on sales of
securities available for sale declined by $101 thousand, or 76.5%, to $31
thousand for three-months ended June 30, 2004 as compared to $132 thousand
for three-months ended June 30, 2003 primarily as a result of a decline in
the volume of securities sold. Gains on sales of mortgages declined by $24
thousand for three-months ended June 30,
8
2004 as a result of a decline in sales of fixed-rate mortgages. The
provision for loan losses increased by $30 thousand for three-months ended
June 30, 2004 and reflects the result of a $2.6 million net increase in
residential loans and a $2.0 million net increase in commercial loans for
three-months ended June 30, 2004. Net interest income increased by $140
thousand, or 7.1%, to $2.1 million for three-months ended June 30, 2004 as
compared to $2.0 million for three-months ended June 30, 2003. Interest and
dividend income declined by $39 thousand, or 1.4%, to $2.8 million for
three-months ended June 30, 2004 as compared to $2.9 million for three-
months ended June 30, 2003. Alternatively, interest expenses declined by
$179 thousand, or 19.6%, to $734 thousand for three-months ended June 30,
2004 as compared to $913 thousand for three-months ended June 30, 2003. The
net interest rate spread, which reflects the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities, increased by 0.13%, to 3.24% for
three-months ended June 30, 2004 as compared to 3.11% for three-months
ended June 30, 2003. While the average rate earned on interest-earning
assets declined by 0.26%, to 4.65% for three-months ended June 30, 2004
from 4.91% for three-months ended June 30, 2003, the average cost of
interest-bearing liabilities declined, to a greater extent, by 0.40%, to
1.41% for three-months ended June 30, 2004 from 1.81% for three-months
ended June 30, 2003. The decline in the rates of interest earned on
interest-earning assets primarily reflects a decline in market interest
rates and the desire for loan customers to refinance their loans at lower
interest rates. 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 FHLB.
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
June 30,
------------------ Increase
2004 2003 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 0.81% 0.94% -0.13%
Investment securities (2) 3.85% 4.30% -0.45%
Loans (3) 5.33% 5.60% -0.27%
Total interest-earning assets 4.65% 4.91% -0.26%
Interest-bearing liabilities:
NOW accounts 0.10% 0.12% -0.02%
Savings accounts (4) 1.04% 1.34% -0.30%
Money market deposit accounts 0.97% 1.12% -0.15%
Certificate of deposit accounts 1.99% 2.53% -0.54%
Total interest-bearing deposits 1.18% 1.57% -0.39%
Borrowed funds 3.71% 6.57% -2.86%
Total interest-bearing liabilities 1.41% 1.81% -0.40%
Net interest rate spread (5) 3.24% 3.11% 0.13%
Net interest margin (6) 3.45% 3.35% 0.10%
<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 $39 thousand, or 1.4%, to $2.8 million for three-months ended
June 30, 2004. 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
0.26%, to 4.65% for three-months ended June 30, 2004 from 4.91% for three-
months ended June 30, 2003. However, the average volume of interest-earning
assets for three-months ended June 30, 2004 increased to $244.1 million as
compared to an average volume of $234.2 million for three-months ended June
30, 2003. The source of the increase in the average volume of interest-
earning assets was primarily from increases in the average volume of
interest-bearing liabilities 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 June 30, 2004 increased to $97.5 million, earning 3.85%
as compared to an average balance of $90.1 million, earning 4.30% for
three-months ending June 30, 2003 primarily due to a $10 million purchase
of 15-yr, fixed-rate federal agency mortgage-backed securities funded by
borrowing from the FHLB. The average balance of short-term investments for
three-months ended June 30, 2004 declined to $4.9 million earning 0.81% as
compared to an average balance of $9.4 million earning 0.94% for three-
months ending June 30, 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 FHLB for cash management purposes. The average balance of loans
for three-months ended June 30, 2004, increased to $141.8 million earning
5.33%, as compared to an average balance of $134.7 million earning 5.60%
for three-months ending June 30, 2003. While the average volume of
residential 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 $179 thousand,
or 19.6%, to $734 thousand for three-months ended June 30, 2004, from $913
thousand for three-months ended June 30, 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 $207.9 million, with a cost of 1.41%,
for three-months ended June 30, 2004 as compared to $202.2 million, with a
cost of 1.81%, for three-months ending June 30, 2003. The average volume of
interest-bearing deposits declined to $188.8 million, with a cost of 1.18%,
for three-months ended June 30, 2004 as compared to $192.7 million, with a
cost of 1.57%, for three-months ended June 30, 2003. Within the category of
interest-bearing deposits, the average balance of certificate of deposit
accounts declined by $10.5 million, while the average balance of NOW,
savings and money market accounts increased by $6.6 million. During the
recent quarter, some financial institutions paid above-market rates of
interest which, management believes, enticed some maturing certificate of
deposit customers to move their deposits to other financial institutions. To
a lesser extent, some customers chose to keep their maturing certificate of
deposit funds with the Bank and placed such funds in non-time deposit savings
and NOW accounts. During this period of interest-bearing deposit decline, the
Bank chose to increase its borrowing from the FHLB. The average balance of
borrowings increased to $19.1 million, with an average cost of 3.71%, for
three-months ended June 30, 2004, as compared to an average balance of $9.5
million, with an average cost of 6.57%, for three-months ended June 30,
2003. The increase in average borrowing from the FHLB was the result of
borrowing $10 million to fund the purchase of 15-yr, fixed-rate federal
agency mortgage-backed securities. The
11
average life of the borrowing was selected to somewhat match the estimated
life and other characteristics of the underlying securities.
Net Interest Income: The Bank's net interest income increased by $140
thousand, or 7.1%, for three-months ended June 30, 2004, to $2.1 million
compared to $2.0 million for three-months ended June 30, 2003. The increase
was primarily attributed to the combination of a decrease in interest and
dividend income of $39 thousand and a decline in interest expense of $179
thousand. The Bank's net interest rate spread, which represents the
difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities, increased to
3.24% for three-months ended June 30, 2004 as compared to 3.11% for three-
months ended June 30, 2003.
Provision for Loan Losses: The Bank had a $30 thousand provision for
loan losses for three-months ended June 30, 2004 compared to $0 for three-
months ended June 30, 2003. Total loans were $145.9 million at June 30,
2004 and $141.3 million at March 31, 2004, resulting in a $4.6 million
increase in loans during the current quarter. The increase in loans during
the current quarter was primarily as a result of $2.6 million growth in
residential real estate loans and $2.0 million growth in commercial loans.
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 $312
thousand of non-accrual loans and non-performing assets and an allowance
for loan losses of $950 thousand at June 30, 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 declined by $138 thousand, or 37.2%, to $233
thousand for three-months ended June 30, 2004, from $371 thousand for
three-months ended June 30, 2003. Gains on sales of securities available
for sale declined by $101 thousand, or 76.5%, to $31 thousand for three-
months ended June 30, 2004 as compared to $132 thousand for three-months
ended June 30, 2003 primarily as a result of a decline in the volume of
securities sold. Gains on sales of mortgages declined by $24 thousand for
three-months ended June 30, 2004 as a result of a decline in sales of
fixed-rate mortgages. Income from customer service fees declined by $7
thousand, or 4.2%, to $159 thousand for three-months ended June 30, 2004 as
compared to $166 thousand for three-months ended June 30, 2003, primarily
from a decrease in ATM fee income.
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.
12
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 June 30, 2004 and June 30, 2003, no investment in common stock met
the criteria noted above.
Operating Expenses: Compared to three-months ended June 30, 2003,
three-months ended June 30, 2004 operating expenses increased by $6
thousand, or 0.3%, to $2.0 million. Salary and employee benefit expenses
declined by $41 thousand, or 3.7%, to $1.1 million for three-months ended
June 30, 2004 as compared to three-months ended June 30, 2003 due, in large
part, to the payment of $75 thousand to a retiring officer in May 2003.
While expenses relating to the Bank's supplemental employee retirement plan
increased, the Bank experienced a reduction in the level of incentive
compensation payments and a reduction in retirement expenses relating to
its employee defined-benefit pension plan and its director retirement 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 $29 thousand for
three-months ended June 30, 2004 as compared to $41 thousand for three-
months ended June 30, 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 $31 thousand, or 23.0%, to
$166 thousand for three-months ended June 30, 2004, as compared to $135
thousand for three-months ended June 30, 2003 primarily due to a higher
level of services provided by the data processing vendor. Marketing and
advertising expense increased by $19 thousand, to $80 thousand, for three-
months ended June 30, 2004 as compared to $61 thousand, for three-months
ended June 30, 2003, primarily as a result of an increase in expenses
relating to print, radio and cable TV advertising. Professional fees
decreased by $17 thousand, to $53 thousand, for three-months ended June 30,
2004 as compared to $70 thousand for three-months ended June 30, 2003
primarily as a result of decreased legal fees. Occupancy and equipment
expenses decreased by $18 thousand, to $300 thousand for three-months ended
June 30, 2004 as compared to $318 thousand for three-months ended June 30,
2003 primarily as a result of a reduction in depreciation, rent and other
occupancy costs associated with the April 2004 closing of a Shrewsbury
branch office located in the Shaw's Supermarket and also due to a decline
in the level of depreciation expenses relating to in-use software and
computer equipment which was fully depreciated in the current period.
During July, management began a program of replacing certain older
generation personal computers and software. Other general and
administrative expenses increased by $32 thousand, to $348 thousand for
three-months ended June 30, 2004 as compared to $316 thousand for three-
months ended June 30, 2003 primarily as a result of increases in consulting
expense relating to the use of an outside facilitator in preparing a
strategic plan and other consultant expenses associated with loan
compliance reviews.
Income Taxes: Income before provision for income taxes declined by
$34 thousand, to $293 for three-months ended June 30, 2004 as compared to
$327 thousand for three-months ended June 30, 2003. Primarily a result of
this decline, the provision for income taxes declined by $17 thousand, to
$83 thousand, for three-months ended June 30, 2004 as compared to $100
thousand for three-months ended June 30, 2003. The effective income tax
rate was 28.3% and 30.6% for three-months ended June 30, 2004 and three-
months ended June 30, 2003, respectively. In addition, the Bank utilizes a
wholly-owned security investment subsidiary, 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.
13
Comparison of Operating Results for Nine-months Ended June 30, 2004 and
2003
Net Income: The Company reported earnings per share (dilutive) for
nine-months ended June 30, 2004 of $0.55 on net income of $858 thousand, as
compared to $0.44 per share (dilutive) on net income of $684 thousand for
nine-months ended June 30, 2003. For nine-months ended June 30, 2004, net
income increased by $174 thousand, or 25.4%, to $858 thousand, as compared
to $684 thousand, for nine-months ended June 30, 2003. The Company's return
on average assets was 0.45% for nine-months ended June 30, 2004 as compared
to 0.37% for nine-months ended June 30, 2003.
The increase in net income was primarily due to an increase in net
interest income, customer service fees and gain on the sales of mortgages,
offset, to a lesser extent, by an increase in operating expenses, provision
for loan losses, provision for income taxes and a decline in gains on the
sales of securities available for sale. Net interest income increased by
$259 thousand, or 4.2%, to $6.4 million for nine-months ended June 30,
2004, as compared to $6.1 million for nine-months ended June 30, 2003.
While the average rate earned on interest-earning assets declined by 0.52%,
to 4.76% for nine-months ended June 30, 2004 from 5.28% for nine-months
ended June 30, 2003, the average cost of interest-bearing liabilities
declined, to a greater extent, by 0.62%, to 1.43% for nine-months ended
June 30, 2004 from 2.05% for nine-months ended June 30, 2003. The decline
in the rates of interest earned on interest-earning assets primarily
reflects a decline in market interest rates and the desire for loan
customers to refinance their loans at lower interest rates. The decline in
rates of interest paid on interest-bearing liabilities was primarily the
result of maturing certificates of deposits reinvested at lower rates, a
decline in the rate paid on savings deposits and also due to an increase in
the amount of relatively low-cost borrowings from the FHLB. Income from
customer service fees increased by $91 thousand, or 20.4%, to $536 thousand
for nine-months ended June 30, 2004 as compared to $445 thousand for nine-
months ended June 30, 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 nine-months ended June 30, 2004, the
Company sold fixed-rate mortgage loans, with servicing retained by the
Bank, and recognized a pre-tax gain on the sale of $88 thousand, as
compared to a pre-tax gain of $29 thousand, on a substantially reduced
volume of loans sold, for nine-months ended June 30, 2003. For nine-months
ended June 30, 2004, operating expenses increased by $86 thousand, or 1.5%,
to $5.9 million, from $5.8 million for nine-months ended June 30, 2003. The
primary reasons for the increase were due to general increases in staff
salaries, an increase in supplemental employee retirement plan expenses and
also due to a decline in deferred costs related to the decrease in the
volume of new mortgage loans. As a result of a higher level of services
provided, data processing expenses increased by $69 thousand, or 15.5%, to
$514 thousand for nine-months ended June 30, 2004 as compared to $445
thousand for nine-months ended June 30, 2003. Occupancy and equipment
expenses declined due primarily to a savings associated with the closing of
the Shaw's Supermarket branch in April 2004 and a general decline in
depreciation due to more in-use equipment being fully depreciated. Also,
professional fees declined as a result of a decline in legal expenses. The
provision for loan losses increased by $70 thousand for nine-months ended
June 30, 2004 and reflects the result of a $5.5 million net increase in
commercial loans for nine-months ended June 30, 2004. Provision for income
taxes increased as a result of increased income before provision for income
taxes.
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
Nine-Months Ended
June 30,
----------------- Increase
2004 2003 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 0.82% 1.17% -0.35%
Investment securities (2) 3.94% 4.70% -0.76%
Loans (3) 5.44% 6.06% -0.62%
Total interest-earning assets 4.76% 5.28% -0.52%
Interest-bearing liabilities:
NOW accounts 0.10% 0.18% -0.08%
Savings accounts (4) 1.06% 1.50% -0.44%
Money market deposit accounts 0.99% 1.32% -0.33%
Certificate of deposit accounts 2.08% 2.90% -0.82%
Total interest-bearing deposits 1.22% 1.82% -0.60%
Borrowed funds 4.38% 6.55% -2.17%
Total interest-bearing liabilities 1.43% 2.05% -0.62%
Net interest rate spread (5) 3.33% 3.23% 0.10%
Net interest margin (6) 3.54% 3.52% 0.02%
<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 $607 thousand, or 6.6%, to $8.6 million for nine-months ended
June 30, 2004 as compared to $9.2 million for nine-months ended June 30,
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 0.52%, to
4.76% for nine-months ended June 30, 2004 from 5.28% for nine-months ended
June 30, 2003. However, the average volume of interest-earning assets for
nine-months ended June 30, 2004 increased to $239.6 as compared to an
average volume of $231.4 million for nine-months ended June 30, 2003. This
$8.2 million increase in average volume of interest-earning assets was
primarily the result of positive cash flows from interest-bearing deposits,
FHLB advances and non interest-bearing liabilities such as checking
accounts. 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 nine-months ended
June 30, 2004 increased to $92.7 million, earning 3.94% as compared to an
average balance of $87.1 million, earning 4.70% for nine-months ending June
30, 2003. The average balance of short-term investments for nine-months
ended June 30, 2004 declined to $5.1 million earning 0.82% as compared to
an average balance of $12.8 million earning 1.17% for nine-months ending
June 30, 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 FHLB
for cash management purposes. The average balance of loans for nine-months
ended June 30, 2004, increased to $141.8 million earning 5.44%, as compared
to an average balance of $131.5 million earning 6.06% for nine-months
ending June 30, 2003. While the average volume of real estate and
commercial loans increased, the Bank experienced 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 during the period, loan sales and
unscheduled customer refinancing and renegotiations of existing loan
interest rates.
Interest Expense: Total interest expense declined by $866 thousand,
or 28.3%, to $2.2 million for nine-months ended June 30, 2004, from $3.1
million for nine-months ended June 30, 2003. The decline in interest
expense was primarily 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 also due to a decline in the cost of borrowing from the
FHLB. The average volume of all interest-bearing liabilities (which
includes interest-bearing deposits and borrowings) increased to $204.5
million, with a cost of 1.43%, for nine-months ended June 30, 2004 as
compared to $199.0 million, with a cost of 2.05%, for nine-months ending
June 30, 2003. Within this category of interest-bearing liabilities, the
average volume of interest-bearing deposits increased to $191.2 million,
with a cost of 1.22%, for nine-months ended June 30, 2004 as compared to
$189.5 million, with a cost of 1.82%, for nine-months ended June 30, 2003.
The average balance of borrowings increased to $13.3 million, with an
average cost of 4.38%, for nine-months ended June 30, 2004, as compared to
an average balance of $9.5 million, with an average cost of 6.55%, for
nine-months ended June 30, 2003. The increase in average borrowing from the
FHLB was the result of borrowing $10 million to fund the purchase of 15-yr,
fixed-rate federal agency mortgage-backed securities. The average life of
the borrowing was selected to somewhat match the estimated life and other
characteristics of the underlying securities.
Net Interest Income: The Bank's net interest income increased by $259
thousand, or 4.2%, for nine-months ended June 30, 2004, to $6.4 million,
from $6.1 million for nine-months ended June 30, 2003. As noted above, the
increase was primarily attributed to the combination of a decrease in
16
interest and dividend income of $607 thousand and a decline in interest
expense of $866 thousand. The Bank's reduction in rates paid on interest-
bearing deposit accounts and borrowing 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 interest-earning assets
and the weighted average cost of interest-bearing liabilities, increased by
0.10%, to 3.33% for nine-months ended June 30, 2004 as compared to 3.23%
for nine-months ending June 30, 2003.
Provision for Loan Losses: The Bank had a $70 thousand provision for
loan losses for nine-months ended June 30, 2004 compared to $0 for nine-
months ended June 30, 2003. Total loans at June 30, 2004 and September 30,
2003 were $145.9 million and $141.6 million, respectively, reflecting
growth of $4.3 million, or 3.0%. The increase in loans during the current
nine-months was primarily as a result of $5.5 million growth in commercial
loans and a decline of $930 thousand in residential real estate loans. The
residential real estate loan decline reflects the results of the sale of
$4.9 million of loans during the year. 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 $312 thousand of non-accrual loans and
non-performing assets and an allowance for loan losses of $950 thousand at
June 30, 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 $117 thousand, or 15.9%, to $854
thousand for nine-months ended June 30, 2004, from $737 thousand for the
comparative nine-months ended June 30, 2003. Income from customer service
fees increased by $91 thousand, or 20.4%, to $536 thousand for nine-months
ended June 30, 2004 as compared to $445 thousand for nine-months ended June
30, 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. For nine-months ended June 30, 2004, the Company sold
fixed-rate mortgage loans, with servicing retained by the Bank, and
recognized a pre-tax gain on the sale of $88 thousand, as compared to a
pre-tax gain of $29 thousand, on a substantially reduced volume of loans
sold, for nine-months ended June 30, 2003. Additionally, for nine-months
ended June 30, 2004, the Company sold securities available for sale,
primarily common stocks, corporate bonds and federal agency securities, and
realized net pre-tax gains of $89 thousand, as compared to net pre-tax
gains of $129 thousand for nine-months ended June 30, 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
17
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 nine-months ended June 30, 2004 and June 30, 2003, no
investment in common stock met the criteria noted above.
Operating Expenses: For nine-months ended June 30, 2004, operating
expenses increased by $86 thousand, or 1.5%, to $5.9 million, from $5.8
million for nine-months ended June 30, 2003. While salary and benefits,
data processing, marketing and other general and administrative expenses
increased, expenses relating to professional fees and occupancy and
equipment declined for nine-months ended June 30, 2004 as compared to nine-
months ended June 30, 2003. Salary and employee benefit expenses increased
$52 thousand, or 1.7%, to $3.1 million for nine-months ended June 30, 2004
compared to the same nine-months ended in 2003. Salary and benefit expenses
increased as a result of general salary adjustments and increased expenses
relating to the Company's Employee Stock Ownership Plan and supplemental
employee retirement plans. Decreases in some salary and benefit expenses
occurred due to declines in retirement expenses relating to the
defined-benefit pension plan and director supplemental compensation
benefit, and also due to declines in overtime pay and the use of temporary
help. Data processing expenses increased 15.5%, or $69 thousand, to $514
thousand for nine-months ended June 30, 2004 as compared to $445 thousand
for nine-months ended June 30, 2003 primarily as a result of an increase in
the level of services provided. Marketing and advertising expenses increased
by 4.8%, or $7 thousand, to $154 thousand for nine-months ended June 30, 2004
primarily due an increase in expenses relating to radio, direct print and
special event sponsorships. Other general and administrative expenses
increased by $10 thousand, or 1.0%, to $1 million for nine-months ended
June 30, 2004 as compared to nine-months ended June 30, 2003 primarily as a
result of increases in consulting expense associated with the utilization of an
outside facilitator in preparing a strategic plan and other consultant
expenses associated with loan compliance reviews. Some operating expense
areas decreased. Professional fees declined by $27 thousand, or 12.3%, to
$192 thousand for nine-months ended June 30, 2004 as compared to $219
thousand for nine-months ended June 30, 2003 due primarily to a decline in
legal expenses. Also, occupancy and equipment expenses decreased by $25
thousand, to $920 thousand for nine-months ended June 30, 2004 as compared
to $945 thousand for nine-months ended June 30, 2003 primarily as a result
of a reduction in depreciation, rent and other occupancy costs associated
with the April 2004 closing of a Shrewsbury branch office located in the
Shaw's Supermarket and also due to a decline in the level of depreciation
expenses relating to in-use software and computer equipment which was fully
depreciated in the current period. During July, management began a program
of replacing certain older generation personal computers and software.
Income Taxes: Income before provision for income taxes increased by
$220 thousand, to $1.2 million for nine-months ended June 30, 2004 as
compared to $1.0 million for nine-months ended June 30, 2003. Primarily a
result of this increase, the provision for income taxes increased by $46
thousand, to $382 thousand, for nine-months ended June 30, 2004 as compared
to $336 thousand for nine-months ended June 30, 2003. The effective income
tax rate was 30.8% and 32.9% for nine-months ended June 30, 2004 and nine-
months ended June 30, 2003, respectively. In addition, the Bank utilizes a
wholly-owned security investment subsidiary, 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.
18
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 FHLB 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 nine-months ended June 30, 2004, the Bank originated loans of $40.7
million, experienced principal repayments on loans of $31.5 million and
sold $4.9 million of 30-yr fixed-rate loans. The Bank purchased securities
of $30.3 million, while sales and calls on securities provided $11.4
million and principal payments on mortgage-backed securities provided an
additional $6.7 million. There were $5.0 million of securities that matured
during nine-months ended June 30, 2004. During nine-months ended June 30,
2004, the Bank experienced a net decrease in deposits of $1.2 million.
During the recent quarter, some competitor financial institutions offered
above-market rates of interest which, management believes, enticed some
maturing certificate of deposit customers to move their deposits to other
financial institutions. These investing activities were financed primarily by
a net increase in FHLB borrowing of $9.0 million and by a net decrease in cash
and cash equivalents of $3.6 million during nine-months ended June 30, 2004.
Certificate of deposit accounts scheduled to mature within one year
were $35.5 million at June 30, 2004. Based on the Bank's historical deposit
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. The Bank has recently begun
promoting this new certificate of deposit and believes it will
significantly enhance 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 the
state and in its peer group. The Bank anticipates that it will have
sufficient funds to meet its current funding commitments. At June 30, 2004,
the Bank had $18.5 million in outstanding borrowing from the FHLB and,
based upon estimated eligible collateral that could be pledged with the
FHLB, the Bank had additional borrowing capacity of $58.9 million at June
30, 2004.
At June 30, 2004, the Company's capital to assets ratio was 10.60%
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 are 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 June 30, 2004.
(d) Maximum
(c) Total Number (or
Number of Approximate
Shares (or Dollar Value)
Units) of Shares (or
(a) Total Purchased as Units) that may
Number of Part of yet be
Shares (or (b) Average Publicly Purchased under
Units) per Price Paid per Announced Plans the Plans or
Period Purchased Share (or Unit) or Programs Programs
- ------ ---------- --------------- --------------- ---------------
<s> <c> <c> <c> <c>
April 1, 2004 through
April 30, 2004 0 0 0 79,069(1)
May 1, 2004 through
May 31, 2004 0 0 0 79,069
June 1, 2004 through
June 30, 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>
Item 3. Defaults upon Senior Securities.
None
21
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: Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1: Section 1350 Certifications
(b) Reports on 8-K.
On July 27, 2004, the registrant filed with the SEC a Current
Report on Form 8-K dated July 27, 2004 furnishing its press
release announcing earnings for the third 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: August 16, 2004 By: /s/ Joseph F. MacDonough
--------------------------------
President and Chief Executive
Officer
Date: August 16, 2004 By: /s/ John L. Casagrande
--------------------------------
Senior Vice-President,
Treasurer and Clerk
23