UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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
(508) 616-9206
(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 May 3, 2005
----- -----------------------------
Common Stock, par value $0.01 1,594,174
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.
Foward-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 on Financial Condition and
Results of Operation. 8
Item 3. Controls and Procedures. 20
PART II. OTHER INFORMATION 21
Item 1. Legal Proceedings. 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders. 22
Item 5. Other Information. 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
March 31, September 30,
2005 2004
--------- -------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 2,486 $ 4,528
Federal funds sold 2,069 3,584
Short-term investments 1,594 1,059
-------- --------
Total cash and cash equivalents 6,149 9,171
Securities available for sale 69,699 72,959
Federal Home Loan Bank stock, at cost 2,075 2,042
Loans, net of allowance for loan losses of
$785 and $950, respectively 182,446 165,288
Banking premises and equipment, net 6,239 6,437
Accrued interest receivable 1,121 1,050
Deferred income taxes 1,154 765
Cash surrender value of life insurance 5,989 5,746
Other assets 457 552
-------- --------
Total assets $275,329 $264,010
======== ========
Liabilities and Stockholders' Equity
Deposits $213,133 $211,710
Short-term borrowings 2,400 3,500
Long-term borrowings 29,000 18,000
Mortgagors' escrow accounts 343 312
Accrued expenses and other liabilities 1,961 1,783
-------- --------
Total liabilities 246,837 235,305
-------- --------
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, 1,593,974 and 1,589,574
issued and outstanding, respectively 16 16
Additional paid-in capital 4,953 4,843
Retained earnings 24,633 24,198
Accumulated other comprehensive income (654) 159
Unearned compensation-RRP (10,859 and 10,859
shares, respectively) (169) (209)
Unearned compensation-ESOP (28,728 and 30,202
shares, respectively) (287) (302)
-------- --------
Total stockholders' equity 28,492 28,705
-------- --------
Total liabilities and stockholders' equity $275,329 $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 Six Months Ended
March 31, March 31,
------------------------ ------------------------
2005 2004 2005 2004
---- ---- ---- ----
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,323 $ 1,881 $ 4,557 $ 3,897
Interest and dividends on investment securities 732 857 1,469 1,801
Interest on federal funds sold 19 9 30 15
Interest on short term investments 6 2 11 6
---------- ---------- ---------- ----------
Total interest and dividend income 3,080 2,749 6,067 5,719
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 711 572 1,327 1,198
Interest on borrowings 272 128 470 261
---------- ---------- ---------- ----------
Total interest expense 983 700 1,797 1,459
---------- ---------- ---------- ----------
Net interest income 2,097 2,049 4,270 4,260
(Credit) provision for loan losses (48) 10 (173) 40
---------- ---------- ---------- ----------
Net interest income, after provision for
loan losses 2,145 2,039 4,443 4,220
---------- ---------- ---------- ----------
Other income:
Customer service fees 158 189 312 365
Gain on sales of securities available
for sale, net 47 60 49 58
Gain on sales of mortgages 6 84 6 87
Miscellaneous 90 62 157 134
---------- ---------- ---------- ----------
Total other income 301 395 524 644
---------- ---------- ---------- ----------
Operating expenses:
Salaries and employee benefits 1,078 1,057 2,109 2,077
Occupancy and equipment 352 330 617 620
Data processing expenses 189 174 368 348
Marketing and advertising 54 46 112 74
Professional fees 89 87 155 139
Other general and administrative 283 309 709 659
---------- ---------- ---------- ----------
Total operating expenses 2,045 2,003 4,070 3,917
---------- ---------- ---------- ----------
Income before provision for income taxes 401 431 897 947
Provision for income taxes 114 132 271 299
---------- ---------- ---------- ----------
Net income $ 287 $ 299 $ 626 $ 648
========== ========== ========== ==========
Number of weighted average shares
outstanding-Basic 1,552,618 1,540,821 1,550,883 1,539,828
Earnings per share-Basic $0.18 $0.19 $0.40 $0.42
Number of weighted average shares
outstanding-Dilutive 1,570,467 1,562,570 1,569,902 1,564,710
Earnings per share-Dilutive $0.18 $0.19 $0.40 $0.41
See accompanying notes to unaudited consolidated financial statements.
2
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Compensation- Compensation-
Stock Capital Earnings Income (Loss) RRP ESOP Total
------ ---------- -------- ------------- ------------- ------------- -----
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2003 $16 $4,706 $23,325 $1,290 $(288) $(331) $28,718
Comprehensive income:
Net income 0 0 648 0 0 0 648
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects 0 0 0 (127) 0 0 (127)
Total comprehensive income 521
Cash dividends declared and paid
($0.10 per share) 0 0 (158) 0 0 0 (158)
ESOP shares released and committed
to be released (1,474 shares) 0 36 0 0 0 14 50
Amortization of RRP stock (1,900 shares) 0 0 0 0 40 0 40
Issuance of common stock under stock
option plan, net of income tax
benefits ($22) 0 48 0 0 0 0 48
--- ------ ------- ----- ----- ----- -------
Balance at March 31, 2004 (unaudited) $16 $4,790 $23,815 $1,163 $(248) $(317) $29,219
=== ====== ======= ===== ===== ===== =======
Balance at September 30, 2004 $16 $4,843 $24,198 $ 159 $(209) $(302) $28,705
Comprehensive income:
Net income 0 0 626 0 0 0 626
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effects 0 0 0 (813) 0 0 (813)
Total comprehensive income (187)
Cash dividends declared and paid
($0.12 per share) 0 0 (191) 0 0 0 (191)
ESOP shares released and committed
to be released (1,474 shares) 0 30 0 0 0 15 45
Amortization of RRP stock (1,675 shares) 0 0 0 0 40 0 40
Issuance of common stock under stock
option plan, net of income tax
benefits ($26) 0 80 0 0 0 0 80
--- ------ ------- ----- ----- ----- -------
Balance at March 31, 2005 (unaudited) $16 $4,953 $24,633 $(654) $(169) $(287) $28,492
=== ====== ======= ===== ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six Months Ended
March 31,
---------------------
2005 2004
---- ----
<s> <c> <c>
Cash flows from operating activities:
Net income $ 626 $ 648
Adjustments to reconcile net income to net
cash provided by operating activities:
(Credit) provision for loan losses (173) 40
Net amortization of securities 189 265
Amortization of net deferred loan costs
and premiums (discounts) 9 (7)
Depreciation and amortization expense 250 278
Gain on the sales of mortgages (6) (87)
(Gain) on sales and calls of securities, net (49) (58)
(Increase) decrease in accrued interest receivable (71) 31
Deferred income tax provision (benefit) 17 (105)
ESOP shares released and committed to be released 45 50
Amortization of RRP stock 40 40
Increase in bank-owned life insurance (36) (102)
Other, net 273 (224)
-------- --------
Net cash provided by operating activities 1,114 769
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls 2,024 9,322
Maturities 1,450 3,000
Purchases (4,476) (22,453)
Principal payments 2,903 3,757
Purchase of Federal Home Loan Bank stock, at cost (33) -
Proceeds from the sale of loans 292 4,884
Loan originations, net (17,280) (4,514)
Purchase of banking premises and equipment, net (52) (130)
Premiums paid on bank-owned life insurance (207) (214)
-------- --------
Net cash used by investing activities (15,379) (6,348)
-------- --------
Cash flows from financing activities:
Net decrease in deposits 1,423 (3,929)
Net increase in short-term borrowings (1,100) 3,000
Proceeds from Federal Home Loan Bank advances 12,000 14,250
Repayment of Federal Home Loan Bank advances (1,000) (11,250)
Net increase in mortgagors' escrow accounts 31 16
Issuance of common stock under stock option plan,
net of tax benefits 80 48
Dividends paid (191) (158)
-------- --------
Net cash provided by financing activities 11,243 1,977
-------- --------
Net change in cash and cash equivalents (3,022) (3,602)
Cash and cash equivalents at beginning of year 9,171 11,901
-------- --------
Cash and cash equivalents at end of period $ 6,149 $ 8,299
======== ========
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 March 31, 2005, the Bank had residential and commercial loan
commitments to borrowers of $13.8 million, commitments for home equity
lines of $390 thousand, available home equity lines of credit of $13.9
million, unadvanced funds on commercial lines of credit, overdrafts and
participation loans of $1.6 million, unadvanced funds on construction
mortgages of $1.3 million and personal overdraft lines of credit of
approximately $504 thousand. The Company had no commitments to purchase or
sell securities at March 31, 2005.
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 ("SFAS") 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 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
5
earnings per share would have been adjusted to the pro forma amounts
indicated below:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Net income As reported $ 287 $ 299 $ 626 $ 648
Pro forma $ 280 $ 292 $ 613 $ 635
Basic earnings per share As reported $0.18 $0.19 $0.40 $0.42
Pro forma $0.18 $0.19 $0.40 $0.41
Diluted earnings per share As reported $0.18 $0.19 $0.40 $0.41
Pro forma $0.18 $0.19 $0.39 $0.41
In December 2004, the FASB published FASB Statement No. 123 (revised
2004), Share-Based Payment ("SFAS 123(R)" or the "Statement"). SFAS 123(R)
requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in
financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. SFAS 123(R) covers a wide range
of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS 123(R) is a replacement of
FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and its related interpretive guidance. The effect of the Statement will be
to require entities to measure the cost of employee services received in
exchange for stock options based on the grant-date fair value of the award,
and to recognize the cost over the period the employee is required to
provide services for the award. SFAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement.
The Company will be required to apply SFAS 123(R) as of the beginning
of its first fiscal year that begins after June 15, 2005, which will be
October 1, 2005. SFAS 123(R) allows two methods for determining the effects
of the transition: the modified prospective transition method and the
modified retrospective method of transition. Under the modified prospective
transition method, an entity would use the fair value based accounting
method for all employee awards granted, modified, or settled after the
effective date. As of the effective date, compensation cost related to the
nonvested portion of awards outstanding as of that date would be based on
the grant-date fair value of those awards as calculated under the original
provisions of Statement No. 123; that is, an entity would not remeasure the
grant-date fair value estimate of the unvested portion of awards granted
prior to the effective date of SFAS 123(R). Under the modified
retrospective method of transition, an entity would revise its previously
issued financial statements to recognize employee compensation cost for
prior periods presented in accordance with the original provisions of
Statement No. 123. The Company has not yet completed its study of the
transition methods or made any decisions about how it will adopt SFAS
123(R).
4) Pension Plan
6
The Bank provides pension benefits for eligible employees through a
defined benefit pension plan. Substantially all employees participate in
the retirement plan on a non-contributing basis, and are fully vested after
three years of service.
The components of net periodic pension cost are as follows:
(Dollars in thousands) Three months ended March 31, Six months ended March 31,
---------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c>
Service cost $ 50 $ 49 $ 101 $ 97
Interest cost 47 48 94 96
Expected return on assets (54) (56) (108) (112)
Transition obligation 1 1 1 1
Past service cost 0 0 0 0
Actuarial Loss 0 (3) 0 (5)
------------- ---------------
$ 44 $ 39 $ 88 $ 77
============= ===============
7
Item 2. Management's Discussion and Analysis on Financial Condition and
Results of Operation.
General
The following discussion compares the financial condition of the
Company and its wholly owned subsidiary, the Bank, at March 31, 2005 and
September 30, 2004, and the results of operations for three and six-months
ended March 31, 2005, compared to the same periods in 2004. 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.
8
Comparison of Financial Condition at March 31, 2005 and September 30, 2004
The Company's total assets increased by $11.3 million, or 4.3%, to
$275.3 million at March 31, 2005 from $264.0 million at September 30, 2004.
Additionally, deposits increased by $1.4 million, or 0.7%, to $213.1
million from $211.7 million. Long and short-term borrowing from the Federal
Home Loan Bank (the "FHLB") increased by $9.9 million, or 46.0%, to $31.4
million at March 31, 2005 from $21.5 million at September 30, 2004. The
increase in borrowing was used primarily to fund loan portfolio growth
which increased by $17.2 million, or 10.4%, to $182.4 million, at March 31,
2005 as compared to $165.3 million at September 30, 2004. Within the loan
portfolio, residential real estate and home equity lines-of-credit
increased by $16.0 million from September 30, 2004 to March 31, 2005 and
commercial loans increased by $1.1 million for the same period. Total
stockholders' equity declined by $213 thousand, to $28.5 million at March
31, 2005 from $28.7 million at September 30, 2004 primarily as a result of
changes in accumulated comprehensive income relating to the change in
after-tax value in securities available for sale.
Accumulated other comprehensive after-tax loss at March 31, 2005 was
$654 thousand, as compared to after tax income of $159 thousand at
September 30, 2004. 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 March 31, 2005 were generally
higher than rates at September 30, 2004 and, accordingly, the market value
of securities available for sale declined. Deferred income tax benefits
associated with this market value decline were approximately $341 thousand.
Comparison of Operating Results for Three-Months Ended March 31, 2005 and 2004
Net Income: The Company reported earnings per share (dilutive) for
three-months ended March 31, 2005 of $0.18 on net income of $287 thousand,
as compared to $0.19 per share (dilutive) on net income of $299 thousand
for three-months ended March 31, 2004. For three-months ended March 31,
2005, net income decreased by $12 thousand, or 4.0%, to $287 thousand, as
compared to $299 thousand, for three-months ended March 31, 2004. The
Company's return on average assets was 0.42% for three-months ended March
31, 2005 as compared to 0.48% for three-months ended March 31, 2004.
The decrease in net income for three-months ended March 31, 2005 was
primarily due to a decrease in customer service fees, a decline in gains on
sales of securities available for sale, a decline in gains on the sales of
mortgages, and an increase in operating expenses offset by increases in
miscellaneous income, net interest income and the credit provision for loan
losses. Income from customer service fees decreased by $31 thousand, or
16.4%, to $158 thousand for three-months ended March 31, 2005 as compared
to $189 thousand for three-months ended March 31, 2004, primarily from a
decrease in fee income from the sale of non-deposit investment products,
such as mutual funds and annuities and from a decrease in fee income from
service charges on deposit accounts. Additionally, for three-months ended
March 31, 2005, the Company sold securities available for sale, primarily
common stocks, and realized net pre-tax gains of $47 thousand, as compared
to net pre-tax gains of $60 thousand for three-months ended March 31, 2004.
Also, during three-months ended March 31, 2005, the Company sold fixed-rate
mortgage loans, with servicing retained by the Bank, and recognized a pre-
tax gain on the sale of $6 thousand, on a substantially reduced volume of
loans sold, as compared to a pre-tax gain of $84 thousand, for three-months
ended March 31, 2004. Operating expenses increased by $42 thousand, or
2.1%, to $2.0 million for three-months ended March 31, 2005 as compared to
three-months ended March 31, 2004. The primary reasons of for the increase
in operating expenses were due to increases in occupancy and equipment
expenses relating to utilities, snow removal and software maintenance,
along with general increases in staff salaries and data processing
expenses. For three-months ended March 31, 2005, miscellaneous income
increased by $28 thousand, or 45.2%, to $90 thousand, from $62 thousand for
three-months ended March 31, 2004. The primary reason for the increase was
due to insurance proceeds received from a Bank-owned life insurance policy
for a former director of the Company. With regard to the Bank's net
interest income, it increased by $48 thousand, or 2.3% for three-months
ended
9
March 31, 2005, as compared to three-months ended March 31, 2004 primarily
because of changes in volume. The Company's net interest margin, expressed
as a percentage of average interest-earning assets, declined by 0.20%, to
3.29% for three-months ended March 31, 2005, from 3.49%, for three-months
ended March 31, 2004. There was a $48 thousand credit provision for loan
loss for three-months ended March 31, 2005 as compared to a $10 thousand
provision for loan loss for three-months ended March 31, 2004 that
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 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:
10
Three Months Ended
March 31, Increase
------------------ (decrease)
2005 2004 (7)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 2.69% 0.82% 1.87%
Investment securities (2) 3.95% 3.82% 0.13%
Loans (3) 5.25% 5.39% -0.13%
Total interest-earning assets 4.83% 4.68% 0.15%
Interest-bearing liabilities:
NOW accounts 0.13% 0.11% 0.01%
Savings accounts (4) 1.34% 1.03% 0.31%
Money market deposit accounts 0.95% 0.98% -0.02%
Certificate of deposit accounts 2.42% 2.05% 0.37%
Total interest-bearing deposits 1.51% 1.21% 0.31%
Borrowed funds 3.53% 5.16% -1.64%
Total interest-bearing liabilities 1.80% 1.40% 0.40%
Net interest rate spread (5)(7) 3.04% 3.28% -0.24%
Net interest margin (6) 3.29% 3.49% -0.20%
<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 or
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.
<F7> Columns and rows may not add do to small rounding variances.
</FN>
11
Interest and Dividend Income: The Bank's interest and dividend income
increased by $331 thousand, or 12.0%, to $3.1 million for three-months
ended March 31, 2005 from $2.7 million for March 31, 2004. The increase was
primarily due to the combination of an increase in the average volume of
interest-earning assets offset, to a lesser extent, by lower rates earned
on average interest-earning assets. The average volume of interest-earning
assets for three-months ended March 31, 2005 increased to $254.8 million as
compared to an average volume of $234.8 million for three-months ended
March 31, 2004. Additionally, the Bank's average interest rate earned on
all interest-earning assets increased by 0.15%, to 4.83% for three-months
ended March 31, 2005 from 4.68% for three-months ended March 31, 2004. The
funding source for the increase in the average volume of interest-earning
assets was primarily from increases in borrowed funds, offset to a lesser
extent by a decrease in the average volume of short-term investments and
investment securities. The average balance of investment securities for
three-months ended March 31, 2005 decreased to $74.1 million, earning 3.95%
as compared to an average balance of $89.9 million, earning 3.82% for
three-months ending March 31, 2004. The average balance of short-term
investments for three-months ended March 31, 2005 declined to $3.7 million
earning 2.69% as compared to an average balance of $5.3 million earning
0.82% for three-months ending March 31, 2004. The higher interest rate
reflects increases in short-term rates by the Federal Open Market Committee
(the "FOMC"). The average balance of loans for three-months ended March 31,
2005, increased to $177.0 million earning 5.25%, as compared to an average
balance of $139.6 million earning 5.39% for three-months ending March 31,
2004. 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 due to new loan volume being granted at
rates below the average rates earned on the portfolio as a whole.
Interest Expense: Primarily reflecting recent increases in rates by
the FOMC, total interest expense increased by $283 thousand, or 40.4%, to
$983 thousand for three-months ended March 31, 2005, from $700 thousand for
three-months ended March 31, 2004. The increase in interest expense was
mainly due to higher interest rates paid on tiered-rate savings and
certificate of deposit accounts, offset, to a lesser extent by a decline in
average rate of interest paid on borrowings from the FHLB. The average
volume of all interest-bearing liabilities (which includes interest-bearing
deposits and borrowings) increased to $219.0 million, with a cost of 1.80%,
for three-months ended March 31, 2005 as compared to $199.7 million, with a
cost of 1.40%, for three-months ending March 31, 2004. The average volume
of interest-bearing deposits declined to $188.2 million, with a cost of
1.51%, for three-months ended March 31, 2005 as compared to an average
balance of $189.8 million, with a cost of 1.21%, for three-months ended
March 31, 2004. Within the category of interest-bearing deposits, the
average balance of certificate of deposit accounts increased by $3.0
million, while the average balance of NOW, savings and money market
accounts declined by $4.6 million. The decrease in NOW, savings and money
market accounts was due to the relative attractiveness of time deposits and
alternative investments in the marketplace. During this period of interest-
bearing deposit decline, the Bank has utilized alternative sources of funds
by increasing its borrowing from the FHLB. The average balance of
borrowings increased to $30.8 million, with an average cost of 3.53%, for
three-months ended March 31, 2005, as compared to an average balance of
$9.9 million, with an average cost of 5.16%, for three-months ended March
31, 2004. The increase in average borrowing from the FHLB primarily funded
the growth in residential and commercial loans.
Net Interest Income: The Bank's net interest income increased by $48
thousand, or 2.3%, for three-months ended March 31, 2005, to $2.1 million
compared to $2.0 million for three-months ended March 31, 2004. The
increase was primarily attributed to the combination of an increase in
interest and dividend income of $331 thousand and an increase in interest
expense of $283 thousand. The Bank's net interest rate spread, which
represents the difference between the weighted average yield on interest-
earning assets and the weighted average cost of interest-bearing
liabilities, declined by 0.24% to 3.04% for three-months ended March 31,
2005 as compared to 3.28% for three-months ended March 31, 2004.
12
(Credit) Provision for Loan Losses: The Bank recorded a $48 thousand
(credit) provision for loan losses for three-months ended March 31, 2005
compared to a $10 thousand provision for loan losses for three-months ended
March 31, 2004. The (credit) provision for loan losses was 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) provision for loan losses during the quarter end March 31,
2005, 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 allowance for loan losses may be
likely. Additionally, while management believes it continues to have
excellent loan quality, the Bank recognizes that it is located in a market
and geographic area that is considered in the high technology and financial
services belt 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 for loan losses.
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 $94 thousand, or 23.8%, to $301
thousand for three-months ended March 31, 2005, from $395 thousand for
three-months ended March 31, 2004. During three-months ended March 31,
2005, the Company sold fixed-rate mortgage loans, with servicing retained
by the Bank, and recognized a pre-tax gain on the sale of $6 thousand, on a
substantially reduced volume of loans sold, as compared to a pre-tax gain
of $84 thousand, for three-months ended March 31, 2004. Income from
customer service fees decreased by $31 thousand, or 16.4%, to $158 thousand
for three-months ended March 31, 2005 as compared to $189 thousand for
three-months ended March 31, 2004, primarily from a decrease in fee income
from the sale of non-deposit investment products, such as mutual funds and
annuities and from a decrease in fee income from service charges on deposit
accounts. Additionally, for three-months ended March 31, 2005, the Company
sold securities available for sale, primarily common stocks, and realized
net pre-tax gains of $47 thousand, as compared to net pre-tax gains of $60
thousand for three-months ended March 31, 2004. Miscellaneous income
increased by $28 thousand, or 45.2%, to $90 thousand for three-months ended
March 31, 2005, from $62 thousand for three-months ended March 31, 2004,
primarily from an increase in insurance proceeds from a Bank Owned Life
Insurance policy for a former director of the Company.
Operating Expenses: Compared to three-months ended March 31, 2004,
three-months ended March 31, 2005 operating expenses increased by $42
thousand, or 2.1%, to $2.0 million. Operating expenses as a percent of
average assets were 2.99% for three-months ended March 31, 2005 as compared
to 3.18% for three-months ended March 31, 2004. The primary reasons for the
increase in operating expenses were due to increases in occupancy and
equipment expenses along with general increases in staff salaries and data
processing expenses. Occupancy expenses increased by $22 thousand, or 6.7%
to $189 thousand for three-months ended March 31, 2005 as compared to $174
for three-months ended March 31, 2004. This increase is a result of an
additional expenses related to utilities, snow removal and software
maintenance, offset to a lesser extent by 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. Salary and
employee benefit expenses increased by $21 thousand, or 2.0%, to $1.1
million for three-months ended March 31, 2005 as compared to three-months
ended March 31, 2004. The Bank
13
is allowed to defer certain operating costs, primarily salaries, related to
originating loans. As a result of a general increase in lending volume, the
reduction in salary costs associated with the closing of new residential,
commercial and construction loans has increased to $31 thousand for three-
months ended March 31, 2005 as compared to $19 thousand for three-months
ended March 31, 2004. These deferred costs are considered yield
adjustments, and are subsequently charged to interest income over the life
of each loan. While expenses relating to the Bank's supplemental employee
retirement plan and recruitment expenses increased, the Bank experienced a
reduction in officers' salaries for the three-months ended March 31, 2005
as compared to three-months ended March 31, 2004. Data processing expenses
increased $15 thousand, or 8.6%, to $189 thousand for three-months ended
March 31, 2005, as compared to $174 thousand for three-months ended March
31, 2004 primarily due to a higher level of services provided by the data
processing vendor. Marketing and advertising expense increased by $8
thousand, to $54 thousand, for three-months ended March 31, 2005 as
compared to $46 thousand, for three-months ended March 31, 2004, primarily
as a result of an increase in expenses relating to print, radio and cable
television advertising, as well as expenses relating to a service quality
survey. Professional fees increased by $2 thousand, to $89 thousand, for
three-months ended March 31, 2005 as compared to $87 thousand for three-
months ended March 31, 2004. Other general and administrative expenses
decreased by $26 thousand, to $283 thousand for three-months ended March
31, 2005 as compared to $309 thousand for three-months ended March 31, 2004
primarily as a result of a decrease in consulting expenses, offset, to a
lesser degree by an increase in supplies and printing related to regulatory
disclosure forms.
Income Taxes: Income before provision for income taxes declined by
$30 thousand, to $401 for three-months ended March 31, 2005 as compared to
$431 thousand for three-months ended March 31, 2004. Primarily a result of
this decline, the provision for income taxes declined by $18 thousand, to
$114 thousand, for three-months ended March 31, 2005 as compared to $132
thousand for three-months ended March 31, 2004. The effective income tax
rate was 28.4% and 30.6% for three-months ended March 31, 2005 and three-
months ended March 31, 2004, 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.
Comparison of Operating Results for Six-Months Ended March 31, 2005 and 2004
Net Income: The Company reported earnings per share (dilutive) for
six-months ended March 31, 2005 of $0.40 on net income of $626 thousand, as
compared to $0.41 per share (dilutive) on net income of $648 thousand for
six-months ended March 31, 2004. For six-months ended March 31, 2005, net
income decreased by $22 thousand, or 3.4%, to $626 thousand, as compared to
$648 thousand, for six-months ended March 31, 2004. The Company's return on
average assets was 0.46% for six-months ended March 31, 2005 as compared to
0.51% for six-months ended March 31, 2004.
The decrease in net income for six-months ended March 31, 2005 was
due primarily to an increase in operating expenses, a decline in customer
service fees, a decline in gains on sales of securities available for sale
and a decline in gains on the sale of mortgages, offset, by an increase in
net interest income, a credit provision for loan losses and an increase in
miscellaneous income. For six-months ended March 31, 2005, operating
expenses increased by $153 thousand, or 3.9%, to $4.1 million, from $3.9
million for six-months ended March 31, 2004. The primary reasons for the
increase in operating expenses were due to higher marketing costs
associated with cable television and newspaper advertising expenses and an
increase in printing expenses. Salaries and employee benefits increased by
$32 thousand, or 1.5%, to $2.1 million for six-months ended March 31, 2005
as compared to six-months ended March 31, 2004 primarily as a result of
fees paid for the recruitment of a controller and commercial loan officer,
higher levels of sales incentive compensation related to loan production
and officer and director benefits expenses. As a result of a higher level
of services provided, data processing expenses increased by $20 thousand,
or 5.7%, to $368 thousand for six-months ended March 31, 2005 as compared
to $348 thousand. Other general and administrative expenses increased by
$50 thousand, or 7.6%, to $709 thousand for six-months ended March 31, 2005
as compared to six-months ended March 31, 2004 primarily as a result of an
increase in regulatory forms and director meeting and retainer fees.
Professional fees increased by $16 thousand, or 11.5%, to
14
$155 thousand for six-months ended March 31, 2005 as compared to six-months
ended March 31, 2004. The primary reasons for the increase were increases
in legal expenses and, to a lesser extent, audit expenses. Customer service
fees declined by $53 thousand, or 14.5%, to $312 thousand for the six-
months ended March 31, 2005 as compared to $365 thousand for six-months
ended March 31, 2004, 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 in 2004. Also for six-months ended March 31, 2005, the
Company sold fixed-rate mortgage loans, with servicing retained by the
Bank, and recognized a pre-tax gain on the sale of $6 thousand, on a
substantially reduced volume of loans sold, as compared to a pre-tax gain
of $87 thousand for six-months ended March 31, 2004. Additionally, the
Company sold securities available for sale, primarily common stocks, and
realized net pre-tax gains of $49 thousand, as compared to net pre-tax
gains of $58 thousand for six-months ended March 31, 2004. Miscellaneous
income increased by $23 thousand, or 17.2% to $157 thousand for six-months
ended March 31, 2005 as compared to $134 thousand for six-months ended
March 31, 2004 primarily as a result of insurance proceeds received from a
Bank Owned Life Insurance policy for a former director of the Company. Net
interest income increased by $10 thousand, or 0.2%, to $4.3 million, for
six-months ended March 31, 2005, as compared to $4.3 million for six-months
ended March 31, 2004 primarily due to changes in volume. The Company's net
interest margin, expressed as a percentage of average interest-earning
assets, declined by 0.19%, to 3.40% for six-months ended March 31, 2005,
from 3.59%, for six-months ended March 31, 2004. There was a $173 thousand
credit provision for loan loss for six-months ended March 31, 2005 as
compared to a $40 thousand provision for loan loss for six-months ended
March 31, 2004 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 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:
15
Six Months Ended
March 31, Increase
---------------- (decrease)
2005 2004 (7)
---- ---- ----------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 1.97% 0.82% 1.14%
Investment securities (2) 3.94% 3.99% -0.05%
Loans (3) 5.28% 5.50% -0.23%
Total interest-earning assets 4.83% 4.82% 0.00%
Interest-bearing liabilities:
NOW accounts 0.12% 0.10% 0.03%
Savings accounts (4) 1.26% 1.06% 0.20%
Money market deposit accounts 0.97% 1.00% -0.04%
Certificate of deposit accounts 2.31% 2.12% 0.19%
Total interest-bearing deposits 1.41% 1.24% 0.17%
Borrowed funds 3.50% 5.02% -1.52%
Total interest-bearing liabilities 1.68% 1.44% 0.23%
Net interest rate spread (5)(7) 3.15% 3.38% -0.23%
Net interest margin (6) 3.40% 3.59% -0.20%
<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.
<F7> Columns and rows may not add do to small rounding variances.
</FN>
16
Interest and Dividend Income: The Bank's interest and dividend income
increased by $348 thousand, or 6.1%, to $6.1 million for six-months ended
March 31, 2005 as compared to $5.7 million for six-months ended March 31,
2004. The increase was due to the combination of an increase in the average
volume of interest-earning assets and to a lesser extent, by slightly
higher rates earned on average interest-earning assets. The Bank's average
interest rate earned on all interest-earning assets increased by 0.01% to
4.83% for six-months ended March 31, 2005 from 4.82% for six-months ended
March 31, 2004. However, the average volume of interest-earning assets for
six-months ended March 31, 2005 increased to $251.5 as compared to an
average volume of $237.3 million for six-months ended March 31, 2004. This
$14.2 million increase in average volume of interest-earning assets was
primarily the result of real estate loan growth funded by FHLB advances.
The average balance of investment securities for six-months ended
March 31, 2005 decreased to $74.6 million, earning 3.94% as compared to an
average balance of $90.3 million, earning 3.99% for six-months ending March
31, 2004. The average balance of short-term investments for six-months
ended March 31, 2005 declined to $4.2 million earning 1.97% as compared to
an average balance of $5.1 million earning 0.82% for six-months ending
March 31, 2004. The average balance of loans for six-months ended March 31,
2005, increased to $172.7 million earning 5.28%, as compared to an average
balance of $141.8 million earning 5.50% for six-months ending March 31,
2004. While the average volume of 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 increased by $338 thousand,
or 23.2%, to $1.8 million for six-months ended March 31, 2005, from $1.5
million for six-months ended March 31, 2004. The increase in interest
expense was primarily due to higher interest rates paid on interest-bearing
liabilities and an increase in the average volume of FHLB borrowings. The
average volume of all interest-bearing liabilities increased to $215.0
million, with a cost of 1.67%, for six-months ended March 31, 2005 as
compared to $202.9 million, with a cost of 1.44%, for six-months ending
March 31, 2004. Within this category of interest-bearing liabilities, the
average volume of interest-bearing deposits decreased to $188.2 million,
with a cost of 1.41%, for six-months ended March 31, 2005 as compared to
$192.5 million, with a cost of 1.24%, for six-months ended March 31, 2004.
The average balance of borrowings increased to $26.9 million, with an
average cost of 3.50%, for six-months ended March 31, 2005, as compared to
an average balance of $10..4 million, with an average cost of 5.02%, for
six-months ended March 31, 2004. The increase in average borrowing from the
FHLB has funded the continued demand for residential and commercial loans,
over the past six months, and to a lesser extent the decline in interest-
bearing deposits.
Net Interest Income: The Bank's net interest income increased by $10
thousand, or 0.2%, for six-months ended March 31, 2005, to $4.3 million, as
compared to six-months ended March 31, 2004. As noted above, the increase
was primarily attributed to the combination of an increase in interest and
dividend income of $348 thousand, offset, to a lesser extent by a increase
in interest expense of $338 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 by 0.23%, to 3.15% for six-months ended March 31,
2005 as compared to 3.38% for six-months ending March 31, 2004.
(Credit) Provision for Loan Losses: The Bank recorded a $173 thousand
(credit) provision for loan losses for six-months ended March 31, 2005
compared to $40 thousand provision for six-months ended March 31, 2004. 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
17
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 allowance for loan losses may be likely. Additionally, while
management believes it continues to have excellent loan quality, the Bank
recognizes that it is located in a market and geographic area that is
considered in the high technology and financial services belt 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 for loan losses.
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 decreased by $120 thousand, or 18.6%, to $524
thousand for six-months ended March 31, 2005, from $644 thousand for six-
months ended March 31, 2004. Customer service fees declined by $53
thousand, or 14.5%, to $312 thousand for the six-months ended March 31,
2005 as compared to $365 thousand for six-months ended March 31, 2004,
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
in December 2003. Also for six-months ended March 31, 2005, the Company
sold fixed-rate mortgage loans, with servicing retained by the Bank, and
recognized a pre-tax gain on the sale of $6 thousand, on a substantially
reduced volume of loans sold, as compared to a pre-tax gain of $87 thousand
for six-months ended March 31, 2004. The Company sold securities available
for sale, primarily common stocks, and realized net pre-tax gains of $49
thousand, as compared to net pre-tax gains of $58 thousand for six-months
ended March 31, 2004. Miscellaneous income increased by $23 thousand, or
17.2% to $157 thousand for six-months ended March 31, 2005 as compared to
$134 thousand for six-months ended March 31, 2004 primarily as a result of
insurance proceeds received from a Bank Owned Life Insurance policy for a
former director of the Company.
Operating Expenses: For six-months ended March 31, 2005, operating
expenses increased by $153 thousand, or 3.9%, to $4.1 million, from $3.9
million for six-months ended March 31, 2004. Salaries and employee benefits
increased by $32 thousand, or 1.5%, to $2.1 million for six-months ended
March 31, 2005 as compared to six-months ended March 31, 2004 primarily as
a result of higher levels of sales incentive compensation related to loan
production, higher levels of medical insurance expense and officer and
director benefits expenses. As a result of a higher level of services
provided, data processing expenses increased by $20 thousand, or 5.7%, to
$368 thousand for six-months ended March 31, 2005 as compared to $348
thousand for six-month ended March 31, 2004. Other general and
administrative expenses increased by $50 thousand, or 7.6%, to $709
thousand for six-months ended March 31, 2005 as compared to $659 thousand
for six-months ended March 31, 2004 primarily as a result of an increase in
regulatory disclosure forms and director meeting and retainer fees.
Marketing and advertising expenses increased by $38 thousand, or 51.4% to
$112 thousand for six-months ended March 31, 2005 as compared to $74
thousand for six-months ended March 31, 2004 primarily as a result of an
increase in cable television and newspaper advertising expenses.
Professional fees increased by $16 thousand, or 11.5%, to $155 thousand for
six-months ended March 31, 2005 as compared to $139 thousand for six-months
ended March 31, 2004. The primary reasons for the increase were increases
in legal expenses and, to a lesser extent, audit expense.
Income Taxes: Income before provision for income taxes decreased by
$50 thousand, to $897 thousand for six-months ended March 31, 2005 as
compared to $947 thousand for six-months ended
18
March 31, 2004. Primarily a result of this decrease, the provision for
income taxes increased by $28 thousand, to $271 thousand, for six-months
ended March 31, 2005 as compared to $299 thousand for six-months ended
March 31, 2004. The effective income tax rate was 30.2% and 31.6% for six-
months ended March 31, 2005 and six-months ended March 31, 2004,
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 as part of its management of interest rate risk and to
even out cyclical patterns of loan demand.
Loan repayments and maturing securities are a relatively predictable
source of funds. However, deposit flows, calls of securities and
prepayments of loans and mortgage-backed securities are strongly influenced
by interest rates, general and local economic conditions and competition in
the marketplace. These factors reduce the predictability of the timing of
these sources of funds.
The Bank's primary investing activities are the origination of one-to
four-family real estate and other loans and the purchase of securities.
During six-months ended March 31, 2005, the Bank originated loans of $39.2
million, experienced principal repayments on loans of $21.9 million and
sold $292 thousand of 30 year fixed-rate loans. The Bank purchased
securities of $4.5 million, while sales and calls on securities provided
$2.0 million and principal payments on mortgage-backed securities provided
an additional $2.8 million. There were $1.5 million of securities that
matured during six-months ended March 31, 2005. During six-months ended
March 31, 2005, the Bank experienced a net increase in deposits of $1.4
million. While non-time deposits such as savings, money market deposit
accounts and checking account balances declined over the recent six months
ended March 31, 2005 the Bank experienced an increase in time deposits such
as certificates of deposit, as customers moved their funds into relatively
higher earning deposit accounts. These investing activities were financed
primarily by a net increase in FHLB borrowing of $9.9 million and by a net
decrease in cash and cash equivalents of $3.0 million during six-months
ended March 31, 2005.
Certificate of deposit accounts scheduled to mature within one year
were $33.5 million at March 31, 2005. 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 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 promotes this certificate of
deposit and has introduced other certificates of deposit programs which it
believes will enhance deposit 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 March 31,
2005, the Bank had $31.4 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 $60.3 million at
19
March 31, 2005.
At March 31, 2005, the Company's capital to assets ratio was 10.35%
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.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to purchases made by
or on behalf of the Company or any "affiliated purchaser" (as defined in
Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the
Company's common stock during the three months ended March 31, 2005.
- -----------------------------------------------------------------------------------------------
(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>
January 1, 2005 through 0 0 0 79,069(1)
January 31, 2005
- -----------------------------------------------------------------------------------------------
February 1, 2005 through 0 0 0 79,069
February 28, 2005
- -----------------------------------------------------------------------------------------------
March 1, 2005 through 0 0 0 79,069
March 31, 2005
- -----------------------------------------------------------------------------------------------
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
Item 4. Submission of Matters to a Vote of Security Holders.
21
Westborough Financial Services, Inc. (the "Company") held its annual
meeting of stockholders on January 27, 2005 (the "Meeting"). All of the
proposals submitted to the stockholders at the Meeting were approved. The
proposals submitted to stockholders and the tabulation of votes for each
proposal is as follows:
1. Election of six directors of the Company. The number of votes cast
with respect to this matter was as follows:
Nominee For Withheld Broker Non-Votes
Edward S. Bilzerian 1,430,823 40,750 0
Jeffrey B. Leland 1,463,273 8,300 0
Paul F. McGrath 1,469,323 2,250 0
Charlotte C. Spinney 1,466,823 4,750 0
Phyllis A. Stone 1,466,823 4,750 0
James E. Tashjian 1,469,323 2,250 0
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 31.1: Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1: Section 1350 Certifications
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: May 16, 2005 By: /s/ Joseph F. MacDonough
------------------------
President and Chief Executive
Officer
Date: May 16, 2005 By: /s/ John L. Casagrande
----------------------
Senior Vice-President, Treasurer
and Clerk
23