UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 7, 2005
----- ----------------------------------
Common Stock, par value $0.01 1,591,174
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 4
Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis. 9
Item 3. Controls and Procedures. 17
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings. 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 18
Item 3. Defaults upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 19
Item 6. Exhibits 19
SIGNATURES 20
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
December 31, September 30,
2004 2004
------------ -------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 3,284 $ 4,528
Federal funds sold 2,170 3,584
Short-term investments 1,405 1,059
-------- --------
Total cash and cash equivalents 6,859 9,171
Securities available for sale 73,088 72,959
Federal Home Loan Bank stock, at cost 2,042 2,042
Loans, net of allowance for loan losses of $825 and $950, respectively 173,420 165,288
Banking premises and equipment, net 6,327 6,437
Accrued interest receivable 1,050 1,050
Deferred income taxes 816 765
Bank-owned life insurance 6,003 5,746
Other assets 374 552
-------- --------
Total assets $269,979 $264,010
======== ========
Liabilities and Stockholders' Equity
Deposits $209,353 $211,710
Short-term borrowings 4,500 3,500
Long-term borrowings 25,000 18,000
Mortgagors' escrow accounts 345 312
Accrued expenses and other liabilities 1,971 1,783
-------- --------
Total liabilities 241,169 235,305
-------- --------
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,
1,591,174 and 1,589,574 issued and outstanding respectively 16 16
Additional paid-in capital 4,886 4,843
Retained earnings 24,442 24,198
Accumulated other comprehensive income (50) 159
Unearned compensation-RRP (10,859 and 10,859 shares) (189) (209)
Unearned compensation-ESOP (29,465 and 30,202 shares, respectively) (295) (302)
-------- --------
Total stockholders' equity 28,810 28,705
-------- --------
Total liabilities and stockholders' equity $269,979 $264,010
======== ========
See accompanying notes to unaudited consolidated financial statements
1
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended
December 31,
----------------------
2004 2003
(unaudited)
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,235 $ 2,016
Interest and dividends on investment securities 736 943
Interest on federal funds sold 11 6
Interest on short-term investments 5 4
--------- ---------
Total interest and dividend income 2,987 2,969
--------- ---------
Interest expense:
Interest on deposits 616 626
Interest on Federal Home Loan Bank advances 198 133
--------- ---------
Total interest expense 814 759
--------- ---------
Net interest income 2,173 2,210
(Credit) provision for loan losses (125) 30
--------- ---------
Net interest income, after (credit) provision for loan losses 2,298 2,180
--------- ---------
Other income:
Customer service fees 154 175
Gain (loss) on sales and calls of securities, net 2 (1)
Gain on sales of mortgages,net 0 4
Miscellaneous 67 72
--------- ---------
Total other income 223 250
--------- ---------
Operating expenses:
Salaries and employee benefits 1,032 1,020
Occupancy and equipment 292 290
Data processing 179 174
Marketing and advertising 58 28
Professional fees 66 52
Other general and administrative 398 350
--------- ---------
Total operating expenses 2,025 1,914
--------- ---------
Income before provision for income taxes 496 516
Provision for income taxes 157 167
--------- ---------
Net income $ 339 $ 349
========= =========
Number of weighted average shares outstanding-Basic 1,549,148 1,538,835
Earnings per share - Basic $ 0.22 $ 0.23
Number of weighted average shares outstanding-Dilutive 1,569,337 1,563,473
Earnings per share-Dilutive $ 0.22 $ 0.22
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 Total
Common Paid-in Retained Comprehensive RRP Compensation Stockholders'
Stock Capital Earnings Income (Loss) Stock ESOP Equity
------ ---------- -------- ------------- -------- ------------ -------------
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2003 $16 $4,706 $23,325 $1,290 $(288) $(331) $28,718
-------
Comprehensive loss:
Net income - - 349 - - - 349
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment and
tax effects - - - (367) - - (367)
-------
Total comprehensive loss (18)
-------
Cash dividends declared ($0.05 per share) - - (79) - - - (79)
ESOP shares released and committed to
to be released (737 shares) - 17 - - - 7 24
Amortization of RRP stock (950 shares) - - - - 20 - 20
Issuance of common stock under stock
option plan, net of
income tax benefits ($2) - 3 - - - - 3
--- ------ ------- ----- ----- ----- -------
Balance at December 31, 2003 (unaudited) $16 $4,726 $23,595 $ 923 $(268) $(324) $28,668
=== ====== ======= ===== ===== ===== =======
Balance at September 30, 2004 $16 $4,843 $24,198 $ 159 $(209) $(302) $28,705
-------
Comprehensive income:
Net income - - 339 - - - 339
Change in net unrealized gain
on securities available for sale, net
of reclassification adjustment and
tax effects - - - (209) - - (209)
-------
Total comprehensive income 130
-------
Cash dividends declared ($0.06 per share) - - (95) - - - (95)
ESOP shares released and committed
to be released (737 shares) - 16 - - - 7 23
Amortization of RRP stock (838 shares) - - - - 20 - 20
Issuance of common stock under
stock option plan, net of
income tax benefits ($11) - 27 - - - - 27
--- ------ ------- ----- ----- ----- -------
Balance at December 31, 2004 (unaudited) $16 $4,886 $24,442 $ (50) $(189) $(295) $28,810
=== ====== ======= ===== ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended
December 31,
--------------------
2004 2003
(unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 339 $ 349
Adjustments to reconcile net income to net
cash provided by operating activities:
(Credit) provision for loan losses (125) 30
Net amortization of securities 101 132
Amortization of net deferred loan costs and
Premiums (discounts) 5 (1)
Depreciation and amortization expense 128 138
Gain on the sales of mortgages, net - (4)
(Gain) loss on sales and calls of securities, net (2) 1
Increase in accrued interest receivable - (115)
Deferred income tax provision (benefit) 38 (72)
ESOP shares released and committed to be released 23 24
Amortization of RRP stock 20 20
Increase in bank-owned life insurance (55) (58)
Other, net 366 221
------- -------
Net cash provided by operating activities 838 665
------- -------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls 2 4,750
Maturities 400 500
Purchases (2,279) (9,361)
Principal payments 1,351 2,395
Loan originations, net (8,012) (1,737)
Purchase of banking premises and equipment, net (18) (16)
Premiums paid on bank-owned life insurance (202) (54)
------- -------
Net cash used by investing activities (8,758) (3,523)
------- -------
Cash flows from financing activities:
Net decrease in deposits (2,357) (2,017)
Net increase in short-term borrowings 1,000 -
Proceeds from Federal Home Loan Bank advances 8,000 2,500
Repayment of Federal Home Loan Bank advances (1,000) (2,500)
Net increase in mortgagors' escrow accounts 33 29
Issuance of common stock under stock option plan,
net of tax benefits 27 3
Dividends paid (95) (79)
------- -------
Net cash provided (used) by financing activities 5,608 (2,064)
------- -------
Net change in cash and cash equivalents (2,312) (4,922)
Cash and cash equivalents at beginning of year 9,171 11,901
------- -------
Cash and cash equivalents at end of year $ 6,859 $ 6,979
======= =======
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, 2004, 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
2004 Annual Report to Stockholders.
2) Commitments and Contingencies.
At December 31, 2004, the Bank had residential and commercial loan
commitments to borrowers of $4.9 million, commitments for home equity lines
of $450 thousand, available home equity lines of credit of $13.4 million,
unadvanced funds on commercial lines of credit, overdrafts and
participation loans of $1.4 million, unadvanced funds on construction
mortgages of $1.6 million and personal overdraft lines of credit of
approximately $492 thousand. The Company had no commitments to purchase or
sell securities at December 31, 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
5
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 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
December 31,
------------------
2004 2003
---- ----
<s> <c> <c> <c>
Net income As reported $ 339 $ 349
Pro forma $ 332 $ 342
Basic earnings per share As reported $0.22 $0.23
Pro forma $0.21 $0.22
Diluted earnings per share As reported $0.22 $0.22
Pro forma $0.21 $0.22
On December 16, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123R (SFAS 123R), "Share-
Based Payment," which changes the manner in which share-based compensation,
such as stock options, will be accounted for effective as of the beginning
of the first interim or annual reporting period that begins after June 15,
2005. The cost of employee services received in exchange for equity
instruments, including options, will be measured by the fair value of the
options at the grant date and will be recognized over the vesting period.
The changes in accounting will replace existing requirements under SFAS
No. 123, "Accounting for Stock-Based Compensation," and will eliminate the
Bank's ability to account for share-based compensation transactions using
APB Opinion No. 25, "Accounting for Stock Issued to Employees," which does
not require companies to expense options if the exercise price is equal to
the trading price at the date of grant. The Bank expects to adopt SFAS 123R
effective January 1, 2006 on a prospective basis. The pro forma amounts
disclosed above generally reflect the accounting requirements of SFAS 123R.
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 December 31, 2004 and
September 30, 2004, and the results of operations for three-months ended
December 31, 2004, compared to the same period 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 changes
in 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-deposit 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 December 31, 2004 and September 30, 2004
The Company's total assets increased by $6.0 million, or 2.3%, to
$270.0 million at December 31, 2004 from $264.0 million at September 30,
2004. While deposits declined by $2.4 million, or 1.1%, to $209.4 million
from $211.7 million, short and long-term borrowing from the Federal Home
Loan Bank (the "FHLB") increased by $8.0 million, or 37.2%, to $29.5
million at December 31, 2004 from $21.5 million at September 30, 2004. The
increase in borrowing was used primarily to fund loan growth and deposit
outflows. Loans, net of allowance for loan losses, increased by $8.1 million,
or 4.9%, to $173.4 million at December 31, 2004 as compared to $165.3 million
at September 30, 2004 primarily as a result of new loan growth in
adjustable-rate residential and commercial loans and increases in home
equity lines-of-credit. Much of this loan growth was the result of a
successful wholesale mortgage broker program and attractive retail and
business loan products. With regard to deposit outflow, while time deposit
certificate balances grew, the Bank experienced deposit outflows in tiered-
rate savings and money market deposit accounts. Cash and cash equivalent
balances declined by $2.3 million, or 25.2%, to $6.9 million at December
31, 2004 from $9.2 million at September 30, 2004 and such funds were also
utilized to fund increased loan volume and deposit outflows.
Regarding asset quality, non-performing loans increased to $275
thousand, or 0.16% of net loans at December 31, 2004 as compared to $121
thousand, or 0.07% of net loans at September 30, 2004. Total stockholders'
equity increased by $105 thousand, to $28.8 million at December 31, 2004.
Stockholders' equity increased by net income of $339 thousand, however, it
was offset by a $209 thousand decline in the after-tax market value of
securities available for sale and the payment of $95 thousand dividends to
stockholders. The Company's securities available for sale consist primarily
of interest-rate sensitive securities, whose market values change inversely
with changes in market interest rates. Interest rates at December 31, 2004
were generally higher than rates at September 30, 2004 and, accordingly,
the after-tax market value of securities available for sale declined. For
three-months ended December 31, 2004, the Company paid a dividend of $0.06
per share, as compared to a dividend of $0.05 per share for three-months
ended December 31, 2003. The dividend payout ratio, which represents
dividends declared per share divided by dilutive earnings per share, was
27.78% and 22.40% for three-months ended December 31, 2004 and 2003,
respectively.
Comparison of Operating Results for Three-Months Ended December 31, 2004
and 2003
Net Income: The Company reported earnings per share (dilutive) for three-
months ended December 31, 2004 of $0.22 on net income of $339 thousand, as
compared to $0.22 per share (dilutive) on net income of $349 thousand for
three-months ended December 31, 2003. For three-months ended December 31,
2004, net income declined by $10 thousand, or 2.9%, as compared to three-
months ended December 31, 2003. The Company's return on average assets was
0.51% for three-months ended December 31, 2004 as compared to 0.54% for
three-months ended December 31, 2003 and the Company's return on average
stockholders' equity was 4.70% for three-months ended December 31, 2004 as
compared to 4.82% for three-months ended December 31, 2003.
The decline in net income was primarily due to an increase in
operating expenses and declines in net interest income and other income,
offset, to a lesser extent, by a credit provision for loan losses and a
decrease in income taxes. Operating expenses increased by $111 thousand, or
5.8%, to $2.0 million for three-months ended December 31, 2004 as compared
to $1.9 million for three-months ended December 31, 2003 primarily due to
higher general and administrative costs associated with director retainer
fees, costs associated with internal/external vulnerability testing of our
computer networks and expenses related to the audit of internal control
over financial reporting as required by Section 404 of the Sarbanes-
8
Oxley Act of 2002. As it relates to the Sarbanes-Oxley Act of 2002,
management believes increased costs associated with compliance will have a
material effect upon the level of operating expenses and, accordingly, the
level of future net income. Operating expenses were also affected by higher
marketing costs associated with cable TV and newspaper advertising and
costs associated with the hiring of a new controller. Operating expenses as
a percent of average assets were 3.03% for three-months ended December 31,
2004 as compared to 2.98% for three-months ended December 31, 2003. Other
income declined by $27 thousand, or 10.8%, to $223 thousand for three-
months ended December 31, 2004 as compared to $250 thousand for three-
months ended December 31, 2003 primarily due to a decline in the level of
commercial loan prepayment fees, offset, to a lesser extent by an increase
in fees associated with the sale of non-deposit investment products. Net
interest income declined by $37 thousand, or 1.7%, to $2.2 million for
three-months ended December 31, 2004, as compared to three-months ended
December 31, 2003. The average rate earned on interest-earning assets
declined by 0.14%, to 4.81% for three-months ended December 31, 2004 from
4.95% for three-months ended December 31, 2003, and the average cost of
interest-bearing liabilities increased by 0.07%, to 1.54% for three-months
ended December 31, 2004 from 1.47% for three-months ended December 31,
2003. As a result, the net interest rate spread, which represents the
difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest bearing-liabilities, declined to
3.27% for three-months ended December 31, 2004, as compared to 3.48% for
three-months ended December 31, 2003. The decline in the rates of interest
earned on interest-earning assets primarily reflects a decline in market
interest rates on loans and securities, offset, to a lesser extent by in
increase in the rate of interest earned on short-term securities. The
increase in average rates of interest paid on interest-bearing liabilities
was primarily the result of higher interest rates paid on tiered-rate
savings accounts, offset, to a lesser extent by a decline in the average
rate of interest paid on borrowing from the Federal Home Loan Bank of
Boston. There was a $125 thousand credit provision for loan loss for three-
months ended December 31, 2004 as compared to a $30 thousand provision for
three-months ended December 31, 2003 and primarily reflects an improvement
in the credit quality of specific commercial loans for which a portion of
the allowance for loan losses had been allocated. The provision for income
taxes declined by $10 thousand, to $157 thousand for three-months ended
December 31, 2004, resulting in an effective income tax rate of 31.7%, as
compared to an effective income tax rate of 32.4% for three-months ended
December 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
December 31,
------------------ Increase
2004 2003 (decrease)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 1.39% 0.81% 0.58%
Investment Securities (2) 3.92% 4.15% -0.23%
Loans (3) 5.31% 5.60% -0.29%
Total interest-earning assets 4.81% 4.95% -0.14%
Interest-bearing liabilities:
NOW accounts 0.11% 0.10% 0.01%
Savings accounts (4) 1.17% 1.08% 0.09%
Money market deposit accounts 0.99% 1.03% -0.04%
Certificate of deposit accounts 2.18% 2.19% -0.01%
Total interest-bearing deposits 1.31% 1.28% 0.03%
Borrowed funds 3.46% 4.89% -1.43%
Total interest-bearing liabilities 1.54% 1.47% 0.07%
Net interest rate spread (5) 3.27% 3.48% -0.21%
Net interest margin (6) 3.50% 3.69% -0.19%
<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 $18 thousand, or 0.6%, to $3.0 million for three-months ended
December 31, 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 0.14%, to 4.81% for three-months ended December 31, 2004 from
4.95% for three-months ended December 31, 2003. However, the average volume
of interest-earning assets for three-months ended December 31, 2004
increased to $248.1 million as compared to an average volume of $239.8
million for three-months ended December 31, 2003. The funding 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 December 31, 2004 decreased
to $75.1 million, earning 3.92% as compared to an average balance of $90.8
million, earning 4.15% for three-months ending December 31, 2003. The
average balance of short-term investments for three-months ended December
31, 2004 declined to $4.6 million earning 1.39% as compared to an average
balance of $4.9 million earning 0.81% for three-months ending December 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 loans 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 December 31,
2004, increased to $168.4 million earning 5.31%, as compared to an average
balance of $144.0 million earning 5.60% for three-months ending December
31, 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 increased by $55 thousand,
or 7.2%, to $814 thousand for three-months ended December 31, 2004, from
$759 thousand for three-months ended December 31, 2003. The increase in
interest expense was mainly due to higher interest rates paid on tiered-
rate savings accounts, offset, to a lesser extent by a decline in the
average rate of interest paid on borrowing from the FHLB. The average
volume of all interest-bearing liabilities (which includes interest-bearing
deposits and borrowings) increased to $211.0 million, with a cost of 1.54%,
for three-months ended December 31, 2004 as compared to $206.0 million,
with a cost of 1.47%, for three-months ending December 31, 2003. The
average volume of interest-bearing deposits declined to $188.1 million,
with a cost of 1.31%, for three-months ended December 31, 2004 as compared
to $195.1 million, with a cost of 1.28%, for three-months ended December
31, 2003. Within the category of interest-bearing deposits, the average
balance of certificate of deposit accounts declined by $3.7 million, while
the average balance of NOW, savings and money market accounts also declined
by $3.3 million. The decrease in certificates and other deposits was due to
competitive pricing from other institutions and the relative attractiveness
of alternative investments. The Company utilized alternative sources of
funds by increasing borrowing from the FHLB. The average balance of
borrowings increased to $22.9 million, with an average cost of 3.46%, for
three-months ended December 31, 2004, as compared to an average balance of
$10.9 million, with an average cost of 4.89%, for three-months ended
December 31, 2003. The increase in average borrowing from the FHLB funded
the increased demand for loans as well as deposit outflow.
Net Interest Income: The Bank's net interest income decreased by $37
thousand, or 1.7%, for three-months ended December 31, 2004, to $2.2
million compared to three-months ended December
11
31, 2003. The decrease was primarily attributed to the combination of a
increase in interest and dividend income of $18 thousand and an increase in
interest expense of $55 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, decreased to 3.27% for three-months ended December 31, 2004 as
compared to 3.48% for three-months ended December 31, 2003.
(Credit) provision for Loan Losses: The Bank had a $125 thousand
credit provision for loan losses for three-months ended December 31, 2004
compared to a $30 thousand provision for three-months ended December 31,
2003. The (credit) 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. The
credit to the allowance for loan losses, during the quarter end December
31, 2004, primarily reflects an improvement in the credit quality of
specific commercial loans for which a portion of the allowance for loan
losses had been allocated. 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 $275 thousand of non-accrual loans and
non-performing assets and an allowance for loan losses of $825 thousand at
December 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 declined by $27 thousand, or 10.8%, to $223
thousand for three-months ended December 31, 2004, from $250 thousand for
three-months ended December 31, 2003, primarily due to a decline in the
level of commercial loan prepayment fees, offset to a lesser extent by an
increase in fees associated with the sale of non-deposit investment
products. Income from customer service fees declined by $21 thousand, or
12.0%, to $154 thousand for three-months ended December 31, 2004 as
compared to $175 thousand for three-months ended December 31, 2003 relating
to a decline in the level of commercial loan prepayment fees. Gains on
sales of mortgages declined by $4 thousand to $0 as compared to $4 thousand
for three-months ended December 31, 2003, as a result of a decline in sales
of fixed-rate mortgages.
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
12
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 December 31, 2004 and December 31, 2003,
no investment in common stock met the criteria noted above.
Operating Expenses: For three-months ended December 31, 2004
operating expenses increased by $111 thousand, or 5.8%, to $2.0 million as
compared to $1.9 million for three-months ended December 31, 2003.
Operating expenses as a percent of average assets were 3.03% for three-
months ended December 31, 2004 as compared to 2.98% for three-months ended
December 31, 2003. Other general and administrative expenses increased by
$48 thousand, to $398 thousand for three-months ended December 31, 2004 as
compared to $350 thousand for three-months ended December 31, 2003
primarily as a result of increases in consulting expense and expenses
relating to annual retainer fees for directors. Marketing and advertising
expense increased by $30 thousand, to $58 thousand, for three-months ended
December 31, 2004 as compared to $28 thousand, for three-months ended
December 31, 2003, primarily as a result of an increase in expenses
relating to print, radio and cable TV advertising. Professional fees
increased by $14 thousand, to $66 thousand, for three-months ended December
31, 2004 as compared to $52 thousand for three-months ended December 31,
2003 resulting from increased costs related to compliance with Section 404
of the Sarbanes-Oxley Act of 2002. As it relates to the Sarbanes-Oxley Act
of 2002, management believes increased costs associated with compliance
will have a material effect upon the level of operating expenses and,
accordingly, the level of future net income. Salary and employee benefit
expenses increased by $12 thousand, or 1.2%, to $1.0 million for three-
months ended December 31, 2004 as compared to three-months ended December
31, 2003 due to benefit expense on bank owned life insurance policies for
directors, merit increases for Company personnel and expenses related to
the hiring of a new controller. Data processing expenses increased $5
thousand, or 2.9%, to $179 thousand for three-months ended December 31,
2004, as compared to $174 thousand for three-months ended December 31, 2003
primarily due to a higher level of services provided by the data processing
vendor.
Income Taxes: Income before provision for income taxes declined by
$20 thousand, to $496 for three-months ended December 31, 2004 as compared
to $516 thousand for three-months ended December 31, 2003. Primarily as a
result of this decline, the provision for income taxes declined by $10
thousand, to $157 thousand, for three-months ended December 31, 2004 as
compared to $167 thousand for three-months ended December 31, 2003. The
effective income tax rate was 31.7% and 32.4% for three-months ended
December 31, 2004 and three-months ended December 31, 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.
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 to fund loan growth, deposit outflow and 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.
13
The Bank's primary investing activities are the origination of one-to
four-family real estate and other loans and the purchase of securities.
During three-months ended December 31, 2004, the Bank originated loans of
$20.0 million and experienced principal repayments on loans of $12.0
million. The Bank purchased securities of $2.3 million, while sales and
calls on securities provided $2 thousand and principal payments on
mortgage-backed securities provided an additional $1.4 million. There were
$400 thousand of securities that matured during three-months ended December
31, 2004. During three-months ended December 31, 2004, the Bank experienced
a net decrease in deposits of $2.4 million. These investing activities were
financed primarily by a net increase in FHLB borrowing of $8.0 million and
by a net decrease in cash and cash equivalents of $2.3 million during
three-months ended December 31, 2004.
Certificate of deposit accounts scheduled to mature within one year
were $35.5 million at December 31, 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.
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 December 31,
2004, the Bank had $29.5 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 $58.7 million at
December 31, 2004.
At December 31, 2004, the Company's capital to assets ratio was
10.67% and it exceeded applicable regulatory capital requirements. Further,
it does not have any balloon or other payments due on any long-term
obligations or any off-balance sheet items other than the commitments and
unused lines of credit.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on the
Company's financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that 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.
14
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) None
(c) 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 December 31, 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) Price Paid per Announced Plans the Plans or
Period Purchased Share (or Unit) or Programs Programs
- ------ ---------- --------------- --------------- ---------------
<s> <c> <c> <c> <c>
October 1, 2004 through 0 0 0 79,069(1)
October 31, 2004
November 1, 2004 0 0 0 79,069
through November 30, 2004
December 1, 2004 through 0 0 0 79,069
December 31, 2004
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>
15
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit 31.1: Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1: Section 1350 Certifications
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: February 14, 2005 By: /s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: February 14, 2005 By: /s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Treasurer and
Clerk
17