UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 8, 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.
Forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, which are subject to significant risks and
uncertainties. The following factors, many of which are subject to change
based on various other factors beyond the Company's control, and other
factors identified in the Company's filings with the Securities and
Exchange Commission and those presented elsewhere by management from time
to time, could cause its financial performance to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements. Examples of forward-looking statements
include, but are not limited to, estimates with respect to our financial
condition, results of operations and business that are subject to various
factors which would cause actual results to differ materially from these
estimates. These factors include, but are not limited to:
* conditions which effect general and local economies;
* changes in interest rates, deposit flows, demand for mortgages
and other loans, real estate values and competition;
* changes in accounting principles, policies, or guidelines;
* changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing,
products and services.
This list of important factors is not exclusive. The Company or the
Bank does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company or the Bank.
WESTBOROUGH FINANCIAL SERVICES, INC.
AND SUBSIDIARY
INDEX
PART I: FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Changes in Stockholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 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. 21
Item 5. Other Information. 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
June 30, September 30,
2005 2004
-------- -------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 3,256 $ 4,528
Federal funds sold 3,584 3,584
Short-term investments 999 1,059
-------- --------
Total cash and cash equivalents 7,839 9,171
Securities available for sale 70,463 72,959
Federal Home Loan Bank stock, at cost 2,467 2,042
Loans, net of allowance for loan losses of
$785 and $950, respectively 184,814 165,288
Banking premises and equipment, net 6,148 6,437
Accrued interest receivable 1,152 1,050
Deferred income taxes 941 765
Bank owned life insurance 6,063 5,746
Other assets 554 552
-------- --------
Total assets $280,441 $264,010
======== ========
Liabilities and Stockholders' Equity
Deposits $214,846 $211,710
Short-term borrowings 0 3,500
Long-term borrowings 34,000 18,000
Mortgagors' escrow accounts 354 312
Accrued expenses and other liabilities 2,305 1,783
-------- --------
Total liabilities 251,505 235,305
-------- --------
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,
1,594,174 and 1,589,574 issued and outstanding, respectively 16 16
Additional paid-in capital 4,967 4,843
Retained earnings 24,711 24,198
Accumulated other comprehensive (loss) income (328) 159
Unearned compensation-RRP (7,509 and 10,859 shares, respectively) (150) (209)
Unearned compensation-ESOP (27,992 and 30,202 shares, respectively) (280) (302)
-------- --------
Total stockholders' equity 28,936 28,705
-------- --------
Total liabilities and stockholders' equity $280,441 $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 Nine Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---- ---- ---- ----
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,412 $ 1,890 $ 6,969 $ 5,786
Interest and dividends on investment securities 727 938 2,196 2,739
Interest on federal funds sold 26 7 55 22
Interest on short term investments 8 3 19 9
--------- --------- --------- ---------
Total interest and dividend income 3,173 2,838 9,239 8,556
--------- --------- --------- ---------
Interest expense:
Interest on deposits 787 557 2,113 1,756
Interest on borrowings 326 177 796 437
--------- --------- --------- ---------
Total interest expense 1,113 734 2,909 2,193
--------- --------- --------- ---------
Net interest income 2,060 2,104 6,330 6,363
Provision (credit) for loan losses 0 30 (173) 70
--------- --------- --------- ---------
Net interest income, after provision (credit) for loan losses 2,060 2,074 6,503 6,293
--------- --------- --------- ---------
Other income:
Customer service fees 139 159 452 523
Gain on sales and calls of securities available for sale, net 0 31 49 89
Gain on sales of mortgages 159 0 165 87
Miscellaneous 40 59 196 194
--------- --------- --------- ---------
Total other income 338 249 862 893
--------- --------- --------- ---------
Operating expenses:
Salaries and employee benefits 1,132 1,083 3,241 3,160
Occupancy and equipment 261 300 879 920
Data processing expenses 190 166 558 514
Marketing and advertising 72 80 184 154
Professional fees 168 53 323 192
Other general and administrative 313 348 1,018 1,006
--------- --------- --------- ---------
Total operating expenses 2,136 2,030 6,203 5,946
--------- --------- --------- ---------
Income before provision for income taxes 262 293 1,162 1,240
Provision for income taxes 91 83 362 382
--------- --------- --------- ---------
Net income $ 171 $ 210 $ 800 $ 858
========= ========= ========= =========
Number of weighted average shares outstanding-Basic 1,558,305 1,546,958 1,551,800 1,540,744
Earnings per share-Basic $ 0.11 $ 0.14 $ 0.52 $ 0.56
Number of weighted average shares outstanding-Dilutive 1,572,796 1,568,791 1,570,867 1,566,070
Earnings per share-Dilutive $ 0.11 $ 0.13 $ 0.51 $ 0.55
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 loss:
Net income 0 0 858 0 0 0 858
Change in net unrealized gain on
securities available for sale, net of
Reclassification adjustment and tax effects 0 0 0 (1,638) 0 0 (1,638)
-------
Total comprehensive loss (780)
-------
Cash dividends declared and paid ($0.15 per share) 0 0 (238) 0 0 0 (238)
ESOP shares released and committed
to be released (2,210 shares) 0 53 0 0 0 22 75
Amortization of RRP stock (2,850 shares) 0 0 0 0 59 0 59
Issuance of common stock under stock option plan,
including tax benefits of $22 0 70 0 0 0 0 70
--- ------ ------- ------ ----- ----- -------
Balance at June 30, 2004 (unaudited) $16 $4,829 $23,945 $ (348) ($229) ($309) $27,904
=== ====== ======= ====== ===== ===== =======
Balance at September 30, 2004 $16 $4,843 $24,198 $ 159 ($209) ($302) $28,705
-------
Comprehensive income:
Net income 0 0 800 0 0 0 800
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (487) 0 0 (487)
-------
Total comprehensive income 313
-------
Cash dividends declared and paid ($0.18 per share) 0 0 (287) 0 0 0 (287)
ESOP shares released and committed
to be released (2,210 shares) 0 41 0 0 0 22 63
Amortization of RRP stock (2,512 shares) 0 0 0 0 59 0 59
Issuance of common stock under stock option plan,
including tax benefits of $27 0 83 0 0 0 0 83
--- ------ ------- ------ ----- ----- -------
Balance at June 30, 2005 (unaudited) $16 $4,967 $24,711 $ (328) ($150) ($280) $28,936
=== ====== ======= ====== ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended
June 30,
---------------------
2005 2004
---- ----
<s> <c> <c>
Cash flows from operating activities:
Net income $ 800 $ 858
Adjustments to reconcile net income to net cash
provided by operating activities:
(Credit) provision for loan losses (173) 70
Net amortization of securities 304 406
Amortization of net deferred loan costs and premiums 19 6
Depreciation and amortization expense 363 416
Gain on the sales of mortgages (165) (87)
Gain on sales and calls of securities available for sale, net (49) (89)
Increase in accrued interest receivable (102) (16)
Deferred income tax provision (benefit) 60 (122)
ESOP shares released and committed to be released 63 75
Amortization of RRP stock 59 59
Increase in bank-owned life insurance (88) (160)
Other, net 520 30
-------- --------
Net cash provided by operating activities 1,611 1,446
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls 2,024 11,350
Maturities 1,700 5,015
Purchases (5,575) (30,307)
Principal payments 3,369 6,731
Purchase of Federal Home Loan Bank stock, at cost (425) (364)
Proceeds from the sale of loans 8,214 4,884
Loan originations, net (27,421) (9,169)
Purchase of banking premises and equipment, net (74) (254)
Premiums paid on bank-owned life insurance (229) (244)
-------- --------
Net cash used by investing activities (18,417) (12,358)
-------- --------
Cash flows from financing activities:
Net decrease in deposits 3,136 (1,188)
Net (decrease) increase in short-term borrowings (3,500) 1,000
Proceeds from Federal Home Loan Bank advances 17,000 21,250
Repayment of Federal Home Loan Bank advances (1,000) (13,250)
Net increase in mortgagors' escrow accounts 42 6
Issuance of common stock under stock option plan, net 83 70
Dividends paid (287) (238)
-------- --------
Net cash provided by financing activities 15,474 7,650
-------- --------
Net change in cash and cash equivalents (1,332) (3,262)
Cash and cash equivalents at beginning of period 9,171 11,901
-------- --------
Cash and cash equivalents at end of period $ 7,839 $ 8,639
======== ========
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 June 30, 2005, the Bank had residential and commercial loan
commitments to borrowers of $3.5 million, commitments for home equity lines
of $1.9 million, available home equity lines of credit of $15.0 million,
unadvanced funds on commercial lines of credit, overdrafts and
participation loans of $1.9 million, unadvanced funds on construction
mortgages of $2.7 million and personal overdraft lines of credit of
approximately $492 thousand. The Company had no commitments to purchase or
sell securities at June 30, 2005. See also Part II, Item I. Legal
proceedings.
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 Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Net income As reported $ 171 $ 210 $ 800 $ 858
Pro forma $ 164 $ 203 $ 780 $ 838
Basic earnings per share As reported $0.11 $0.14 $0.52 $0.56
Pro forma $0.11 $0.13 $0.50 $0.54
Diluted earnings per share As reported $0.11 $0.13 $0.51 $0.55
Pro forma $0.10 $0.13 $0.50 $0.54
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 interim period of its first fiscal year that begins after
December 15, 2005, which will be October 1, 2006. 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 non-vested 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 re-measure 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
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.
6
The components of net periodic pension cost are as follows:
(Dollars in thousands) Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2005 2004 2005 2004
--------------- ----------------
<s> <c> <c> <c> <c>
Service cost $ 50 $ 49 $ 151 $ 146
Interest cost 47 48 141 144
Expected return on assets (54) (56) (162) (168)
Transition obligation 1 1 2 2
Past service cost 0 0 0 0
Actuarial Loss 0 (3) 1 (8)
--------------- -----------------
$ 44 $ 39 $ 133 $ 116
=============== =================
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 June 30, 2005 and
September 30, 2004, and the results of operations for three and nine-months
ended June 30, 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 primary
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 primarily 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 June 30, 2005 and September 30, 2004
The Company's total assets increased by $16.4 million, or 6.2%, to
$280.4 million at June 30, 2005 from $264.0 million at September 30, 2004.
Additionally, deposits increased by $3.1 million, or 1.5%, to $214.8
million from $211.7 million. Long and short-term borrowing from the
Federal Home Loan Bank (the "FHLB") increased by $12.5 million, or 58.1%,
to $34.0 million at June 30, 2005 from $21.5 million at September 30, 2004.
The increase in borrowing was used primarily to fund loan portfolio growth
which increased by $19.5 million, or 11.8%, to $184.8 million, at June 30,
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 $18.5 million from September 30, 2004 to June 30, 2005 and
commercial loans increased by $1.0 million for the same period. Total
stockholders' equity increased by $231 thousand, to $28.9 million at June
30, 2005 from $28.7 million at September 30, 2004 primarily as a result of
the Company retaining earnings, offset to a lesser extent by, changes in
accumulated other comprehensive loss relating to the change in after-tax
value in securities available for sale.
Accumulated other comprehensive loss at June 30, 2005 was $328
thousand, as compared to 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 June 30, 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 $171 thousand.
Comparison of Operating Results for Three-Months Ended June 30, 2005 and
2004
Net Income: The Company reported earnings per share (dilutive) for
three-months ended June 30, 2005 of $0.11 as compared to $0.13 per share
(dilutive) for three-months ended June 30, 2004. For three-months ended
June 30, 2005 net income decreased by $39 thousand, or 18.6%, to $171
thousand, as compared to $210 thousand, for three-months ended June 30,
2004. The Company's return on average assets was 0.24% for three-months
ended June 30, 2005 as compared to 0.32% for three-months ended June 30.
The decrease in net income for three-months ended June 30, 2005 was
primarily due to a decrease in the Bank's net interest income, a decline in
gains on sales of securities available for sale, a decrease in customer
service fees and miscellaneous income, coupled with an increase in
operating expenses. These amounts were offset, to a lesser extent, by an
increase in gains on sale of mortgages. The Bank's net interest income
decreased by $44 thousand, or 2.1%, to $2.1 million for three-months ended
June 30, 2005 as compared to three-months ended June 30, 2004. The
decrease in net interest income resulted from an increase in interest
expense of $379 thousand, to $1.1 million for the three-months ended June
30, 2005 as compared to $734 thousand for three-months ended June 30, 2004
offset, to a lesser extent, by an increase in interest and dividend income
of $335 thousand, to $3.2 million for the three-months ended June 30, 2005
as compared to $2.8 million for the three-months ended June 30, 2004. Net
interest income decreased primarily due to increases in interest expense on
deposit accounts resulting from a rising short-term interest rate
environment offset, to a lesser extent by an increase in interest and
dividend income resulting from increased loan volume. As a result, the
Company's net interest margin, expressed as a percentage of average
interest-earning assets, declined to 3.15% for three-months ended June 30,
2005, from 3.45% for three-months ended June 30, 2004. For three-months
ended June 30, 2005, the Company did not sell any securities available for
sale, as compared to net, pre-tax gains of $31 thousand for three-months
ended June 30, 2004. Income from customer service fees decreased by $20
thousand, or 12.6%, to $139 thousand for three-months ended June 30, 2005
as compared to $159 thousand for three-months ended June 30, 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 decline
in loan prepayment fees offset, to a lesser extent, by an increase in ATM
service income. During three-months ended June 30, 2005, the Company sold
fixed-rate mortgage loans, with servicing retained by the Bank, and
recognized a
9
pre-tax gain on the sale of $159 thousand, as compared to no pre-tax gain
for three-months ended June 30, 2004. Operating expenses increased by $106
thousand, or 5.2%, to $2.1 million for three-months ended June 30, 2005 as
compared to three-months ended June 30, 2004. The primary reasons of for
the increase in operating expenses were due to increases in professional
fees, general increases in employee benefits and staff salaries, and data
processing fees offset, to a lesser extent, by a decrease in occupancy and
equipment expenses and other general and administrative expenses.
Professional fees increased by $115 thousand, or 217.0% to $168 thousand
for the three-months ended June 30, 2005, as compared to $53 thousand for
the three-months ended June 30, 2004, primarily due to legal and other
expenses related to a complaint filed against the Bank and also
professional fees related to various strategic planning projects and
initiatives. There was no provision for loan loss for three-months ended
June 30, 2005 as compared to a $30 thousand provision for loan loss for
three-months ended June 30, 2004 and primarily reflects the overall credit
quality of the loan portfolio.
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
June 30,
------------------ Increase
2005 2004 (decrease)(7)
---- ---- -------------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 2.67% 0.81% 1.87%
Investment securities (2) 4.03% 3.85% 0.17%
Loans (3) 5.24% 5.33% -0.09%
Total interest-earning assets 4.85% 4.65% 0.20%
Interest-bearing liabilities:
NOW accounts 0.15% 0.10% 0.04%
Savings accounts (4) 1.40% 1.04% 0.36%
Money market deposit accounts 0.96% 0.97% 0.00%
Certificate of deposit accounts 2.67% 1.99% 0.67%
Total interest-bearing deposits 1.65% 1.18% 0.47%
Borrowed funds 3.78% 3.71% 0.07%
Total interest-bearing liabilities 1.97% 1.41% 0.57%
Net interest rate spread (5)(7) 2.88% 3.24% -0.36%
Net interest margin (6) 3.15% 3.45% -0.30%
<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 foot due to small variances in rounding.
</FN>
11
Interest and Dividend Income: The Bank's interest and dividend
income increased by $335 thousand, or 11.8%, to $3.2 million for three-
months ended June 30, 2005 from $2.8 million for three-months ended June
30, 2004. The increase was primarily due to the combination of an increase
in the average volume of interest-earning assets and slightly higher
interest rates earned on average interest-earning assets. The average
volume of interest-earning assets for three-months ended June 30, 2005
increased to $261.5 million as compared to an average volume of $244.1
million for three-months ended June 30, 2004. Additionally, the Bank's
average interest rate earned on all interest-earning assets increased by
0.20%, to 4.85% for three-months ended June 30, 2005 from 4.65% for three-
months ended June 30, 2004. The funding sources for the increase in the
average volume of interest-earning assets were 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 June 30, 2005
decreased to $72.2 million, earning 4.03% as compared to an average balance
of $97.5 million, earning 3.85% for three-months ending June 30, 2004. The
average balance of short-term investments for three-months ended June 30,
2005 increased to $5.1 million earning 2.67% as compared to an average
balance of $4.9 million earning 0.81% for three-months ending June 30,
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 June 30, 2005, increased to $184.2 million
earning 5.24%, as compared to an average balance of $141.8 million earning
5.33% for three-months ending June 30, 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. 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: Primarily reflecting recent increases in rates by
the FOMC, total interest expense increased by $379 thousand, or 51.6%, to
$1.1 million for three-months ended June 30, 2005, from $734 thousand for
three-months ended June 30, 2004. The increase in interest expense was
mainly due to higher interest rates paid on tiered-rate savings,
certificate of deposit accounts, and an increase in average interest rate
paid and volume of borrowings from the FHLB. The average volume of all
interest-bearing liabilities (which includes interest-bearing deposits and
borrowings) increased to $225.5 million, with a cost of 1.97%, for three-
months ended June 30, 2005 as compared to $207.9 million, with a cost of
1.41%, for three-months ending June 30, 2004. The average volume of
interest-bearing deposits increased to $190.9 million, with a cost of
1.65%, for three-months ended June 30, 2005 as compared to an average
balance of $188.8 million, with a cost of 1.18%, for three-months ended
June 30, 2004. Within the category of interest-bearing deposits, the
average balance of certificate of deposit accounts increased by $10.0
million, while the average balance of NOW, savings and money market
accounts declined by $7.9 million. The decrease in NOW, savings and money
market accounts was due to the relative attractiveness of certificate of
deposit accounts and alternative investments in the marketplace. During
this period, the Bank utilized alternative sources of funds by increasing
its borrowing from the FHLB. The average balance of borrowings increased
to $34.5 million, with an average cost of 3.78%, for three-months ended
June 30, 2005, as compared to an average balance of $19.1 million, with an
average cost of 3.71%, for three-months ended June 30, 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 decreased by $44
thousand, or 2.1%, for three-months ended June 30, 2005, three-months ended
June 30, 2004. The decrease was primarily attributed to the combination of
an increase in interest expense of $379 thousand, offset, to a lesser
12
extent, by an increase in interest and dividend income of $335 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 0.36% to
2.88% for three-months ended June 30, 2005 as compared to 3.24% for three-
months ended June 30, 2004.
Provision (credit) for Loan Losses: There was no provision for loan
loss for three-months ended June 30, 2005 as compared to a $30 thousand
provision for loan loss for three-months ended June 30, 2004 and primarily
reflects the overall credit quality of the loan portfolio. The provision
(credit) for loan losses is a result of management's periodic analysis of
risks inherent in its loan portfolio as well as the adequacy of the
allowance for loan losses. It is the Bank's policy to provide valuation
allowances for estimated losses on loans based upon past loss experience,
current trends in the level of delinquent and specific problem loans, loan
concentrations to single borrowers, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions in our market area.
Accordingly, the evaluation of the adequacy of the allowance for loan
losses is not based directly on the level of non-performing loans. As the
Bank expands its commercial lending activities, management believes that
growth in the 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 increased by $89 thousand, or 35.7%, to $338
thousand for three-months ended June 30, 2005, from $249 thousand for
three-months ended June 30, 2004. During three-months ended June 30, 2005,
the Company sold fixed-rate mortgage loans, with servicing retained by the
Bank, and recognized a pre-tax gain on the sale of $159 thousand, as
compared to no pre-tax gain for three-months ended June 30, 2004. For
three-months ended June 30, 2005, the Company did not sell any securities
available for sale, as compared to net, pre-tax gains of $31 thousand for
three-months ended June 30, 2004. Income from customer service fees
decreased by $20 thousand, or 12.6%, to $139 thousand for three-months
ended June 30, 2005 as compared to $159 thousand for three-months ended
June 30, 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 decline in loan prepayment fees offset, to a lesser extent, by an
increase in ATM service income. Miscellaneous income decreased by $19
thousand, or 32.2%, to $40 thousand for three-months ended June 30, 2005,
from $59 thousand for three-months ended June 30, 2004, primarily from a
decline in income from BOLI.
Operating Expenses: Three-months ended June 30, 2005 operating
expenses increased by $106 thousand, or 5.2%, to $2.1 million, compared to
three-months ended June 30, 2004. Operating expenses as a percent of
average assets were 3.05% for three-months ended June 30, 2005 as compared
to 3.10% for three-months ended June 30, 2004. The primary reasons for the
increase in operating expenses were due to increases in professional fees
along with general increases in staff salaries and data processing
expenses. Professional fees increased by $115 thousand, or 217.0% to $168
thousand for three-months ended June 30, 2005 as compared to $53 thousand
for three-months ended June 30, 2004. This increase is primarily due to
legal and other expenses related to a complaint filed against the Bank and
also professional fees related to various strategic planning projects and
initiatives. Salary and employee benefit expenses increased by $49
thousand, or 4.5%, to $1.1 million for three-months ended June 30, 2005 as
compared to three-months ended June 30, 2004. The Bank is allowed to defer
certain operating costs, primarily salaries, related to originating loans.
As a result of a general increase in lending volume,
13
the deferred operating costs associated with the closing of new
residential, commercial and construction loans has increased to $40
thousand for three-months ended June 30, 2005 as compared to $29 thousand
for three-months ended June 30, 2004. These deferred costs are considered
yield adjustments, and are subsequently charged to interest income over the
life of each loan. The Bank experienced an increase in expenses for
supplemental employee retirement plan and sales incentives for the three-
months ended June 30, 2005 as compared to three-months ended June 30, 2004.
Data processing expenses increased $24 thousand, or 14.5%, to $190 thousand
for three-months ended June 30, 2005, as compared to $166 thousand for
three-months ended June 30, 2004 primarily due to a higher level of
services provided by the data processing vendor. Occupancy expense declined
by $39 thousand, or 13.0%, to $261 thousand for three-months ended June 30,
2005 as compared to $300 thousand, for three-months ended June 30, 2004.
The decrease in occupancy expense is a result of a reduction in
depreciation, rent, and other occupancy costs associated with the April
2004 closing of a Shrewsbury branch office located in the Shaw's
Supermarket. Marketing and advertising expense decreased by $8 thousand,
to $72 thousand, for three-months ended June 30, 2005 as compared to $80
thousand, for three-months ended June 30, 2004. Other general and
administrative expenses decreased by $35 thousand, to $313 thousand for
three-months ended June 30, 2005 as compared to $348 thousand for three-
months ended June 30, 2004 primarily as a result of a reduction in deposit
insurance expenses, a decline in the write-down of discontinued assets,
offset, to a lesser degree, by an increase in consulting expenses.
Income Taxes: Income before provision for income taxes declined by
$31 thousand, to $262 for three-months ended June 30, 2005 as compared to
$293 thousand for three-months ended June 30, 2004. The provision for
income taxes increased by $8 thousand, to $91 thousand, for three-months
ended June 30, 2005 as compared to $83 thousand for three-months ended June
30, 2004. The effective income tax rate was 34.7% and 28.3% for three-
months ended June 30, 2005 and three-months ended June 30, 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 Nine-Months Ended June 30, 2005 and
2004
Net Income: The Company reported earnings per share (dilutive) for
nine-months ended June 30, 2005 of $0.51 as compared to $0.55 per share
(dilutive) for nine-months ended June 30, 2004. For nine-months ended June
30, 2005 net income decreased by $58 thousand, or 6.8%, to $800 thousand,
as compared to $858 thousand, for nine-months ended June 30, 2004. The
Company's return on average assets was 0.39% for nine-months ended June 30,
2005 as compared to 0.45% for nine-months ended June 30, 2004.
The decrease in net income for nine-months ended June 30, 2005 was
due primarily to an increase in operating expenses, a decline in the Bank's
net interest income, a decrease in customer service fees, and a decline in
gains on sales of securities available for sale. These amounts were
offset, to a lesser extent, by an increase in the (credit) provision for
loan losses and an increase in gains on sales of mortgages. For nine-
months ended June 30, 2005, operating expenses increased by $257 thousand,
or 4.3%, to $6.2 million, from $5.9 million for nine-months ended June 30,
2004. The primary reasons for the increase in operating expenses were due
to an increase in professional fees, general increases in employee benefits
and staff salaries, and an increase in data processing and marketing
expenses. Professional fees increased by $131 thousand, or 68.2%, to $323
thousand for nine-months ended June 30, 2005 as compared to $192 thousand
for nine-months ended June 30, 2004 primarily due to legal and other
expenses related to a complaint filed against the Bank and also
professional fees related to various strategic planning projects and
initiatives. As a result of a higher level of services provided, data
processing expenses increased by $44 thousand, or 8.6%, to $558 thousand
for nine-months ended June 30, 2005 as compared to $514 thousand for nine-
months ended June 30, 2004. Net interest income decreased by $33 thousand,
or 0.5%, to $6.3 million, for nine-months ended June 30, 2005 as compared
to nine-months ended June 30, 2004 primarily due to increases in interest
expenses on deposit accounts resulting from a rising short-term interest
rate environment offset, to a lesser
14
extent by an increase in interest and dividend income resulting from
increased loan volume. As a result, the Company's net interest margin,
expressed as a percentage of average interest-earning assets, declined to
3.31% for nine-months ended June 30, 2005, from 3.54%, for nine-months
ended June 30, 2004. Customer service fees declined by $71 thousand, or
13.6%, to $452 thousand for nine-months ended June 30, 2005 as compared to
$523 thousand for nine-months ended June 30, 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 nine-
months ended June 30, 2005, the Company sold securities available for sale
and recognized a pre-tax gain on the sales of $49 thousand, on a
substantially reduced volume of securities, as compared to a net pre-tax
gain of $89 thousand for nine-months ended June 30, 2004. Additionally,
for nine-months ended June 30, 2005, the Company sold fixed-rate mortgage
loans, with servicing retained by the Bank and recognized a net pre-tax
gain on the sale of $165 thousand, as compared to a pre-tax gain of $87
thousand for nine-months ended June 30, 2004. The Bank recorded a $173
thousand (credit) provision for loan loss for nine-months ended June 30,
2005 as compared to a $70 thousand provision for loan loss for nine-months
ended June 30, 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
Nine Months Ended
June 30,
----------------- Increase
2005 2004 (decrease)(7)
---- ---- -------------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 2.21% 0.82% 1.38%
Investment securities (2) 3.97% 3.94% 0.03%
Loans (3) 5.26% 5.44% -0.19%
Total interest-earning assets 4.83% 4.76% 0.07%
Interest-bearing liabilities:
NOW accounts 0.12% 0.10% 0.03%
Savings accounts (4) 1.30% 1.05% 0.25%
Money market deposit accounts 0.96% 0.99% -0.03%
Certificate of deposit accounts 2.44% 2.09% 0.36%
Total interest-bearing deposits 1.49% 1.22% 0.27%
Borrowed funds 3.61% 4.38% -0.77%
Total interest-bearing liabilities 1.78% 1.43% 0.35%
Net interest rate spread (5)(7) 3.06% 3.33% -0.27%
Net interest margin (6) 3.31% 3.54% -0.23%
<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 foot due to small variances in rounding
</FN>
16
Interest and Dividend Income: The Bank's interest and dividend
income increased by $683 thousand, or 8.0%, to $9.2 million for nine-months
ended June 30, 2005 as compared to $8.6 million for nine-months ended June
30, 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 to
4.83% for nine-months ended June 30, 2005 from 4.76% for nine-months ended
June 30, 2004. The average volume of interest-earning assets for nine-
months ended June 30, 2005 increased by $15.3 million, to $254.8 million,
as compared to an average volume of $239.5 million for nine-months ended
June 30, 2004. This increase in average volume of interest-earning assets
was primarily the result of residential real estate loan growth funded by
FHLB borrowing.
The average balance of investment securities for nine-months ended
June 30, 2005 decreased to $73.8 million, earning 3.97% as compared to an
average balance of $92.7 million, earning 3.94% for nine-months ending June
30, 2004. The average balance of short-term investments for nine-months
ended June 30, 2005 declined to $4.5 million earning 2.21% as compared to
an average balance of $5.1 million earning 0.82% for nine-months ending
June 30, 2004. The average balance of loans for nine-months ended June 30,
2005, increased to $176.5 million earning 5.26%, as compared to an average
balance of $141.8 million earning 5.44% for nine-months ending June 30,
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 $716 thousand,
or 32.6%, to $2.9 million for nine-months ended June 30, 2005, from $2.2
million for nine-months ended June 30, 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 $218.5
million, with a cost of 1.78%, for nine-months ended June 30, 2005 as
compared to $204.5 million, with a cost of 1.43%, for nine-months ending
June 30, 2004. Within this category of interest-bearing liabilities, the
average volume of interest-bearing deposits decreased to $189.1 million,
with a cost of 1.49%, for nine-months ended June 30, 2005 as compared to
$191.3 million, with a cost of 1.22%, for nine-months ended June 30, 2004.
The average balance of borrowings increased to $29.4 million, with an
average cost of 3.61%, for nine-months ended June 30, 2005, as compared to
an average balance of $13.3 million, with an average cost of 4.38%, for
nine-months ended June 30, 2004. The increase in average borrowing from
the FHLB has funded the continued demand for residential and commercial
loans, over the past nine months, and to a lesser extent the decline in
interest-bearing deposits. The decline in average cost of borrowing was
due to the scheduled maturity of relatively higher rate borrowings.
Net Interest Income: The Bank's net interest income decreased by $33
thousand, or 0.5%, for nine-months ended June 30, 2005, to $6.3 million, as
compared to nine-months ended June 30, 2004. As noted above, the increase
was primarily attributed to the combination of an increase in interest
expense of $716 thousand, offset, to a lesser extent by an increase in
interest and dividend income of $683 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 0.27%, to 3.06% for nine-months ended
June 30, 2005 as compared to 3.33% for nine-months ending June 30, 2004.
(Credit) Provision for Loan Losses: The Bank recorded a $173
thousand (credit) provision for loan losses for nine-months ended June 30,
2005 compared to $70 thousand provision for nine-months ended June 30,
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.
17
It is the Bank's policy to provide valuation allowances for estimated
losses on loans based upon past loss experience, current trends in the
level of delinquent and specific problem loans, loan concentrations to
single borrowers, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, and current
economic conditions in our market area. Accordingly, the evaluation of the
adequacy of the allowance for loan losses is not based directly on the
level of non-performing loans. As the Bank expands its commercial lending
activities, management believes that growth in the 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 BOLI. Total other income
decreased by $31 thousand, or 3.5%, to $862 thousand for nine-months ended
June 30, 2005, from $893 thousand for nine-months ended June 30, 2004.
Customer service fees declined by $71 thousand, or 13.6%, to $452 thousand
for the nine-months ended June 30, 2005 as compared to $523 thousand for
nine-months ended June 30, 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. The Company sold securities
available for sale, primarily common stocks, and realized net pre-tax gains
of $49 thousand for nine months ended June 30, 2005, as compared to net
pre-tax gains of $89 thousand for nine-months ended June 30, 2004. The
Company sold $8.2 million fixed-rate mortgage loans, with servicing
retained by the Bank, and recognized a pre-tax gain on the sale of $165
thousand for nine-months ended June 30, 2005, as compared to $4.9 million
and realized a pre-tax gain of $87 thousand for nine-months ended June 30,
2004.
Operating Expenses: For nine-months ended June 30, 2005, operating
expenses increased by $257 thousand, or 4.3%, to $6.2 million, from $5.9
million for nine-months ended June 30, 2004. The primary reasons for the
increase in operating expenses were due to an increase in professional
fees, general increases in employee benefits and staff salaries, and an
increase in data processing and marketing expenses. Professional fees
increased by $131 thousand, or 68.2%, to $323 thousand for nine-months
ended June 30, 2005 as compared to $192 thousand for nine-months ended June
30, 2004 primarily due to legal and other expenses related to a complaint
filed against the Bank and also professional fees related to various
strategic planning projects and initiatives. Salaries and employee benefits
increased by $81 thousand, or 2.6%, to $3.2 million for nine-months ended
June 30, 2005 as compared to nine-months ended June 30, 2004 primarily as a
result of higher levels of sales incentive compensation related to loan
production, higher levels of medical insurance expense, recruitment expense
and officer and director benefits expenses. As a result of a higher level
of services provided, data processing expenses increased by $44 thousand,
or 8.6%, to $558 thousand for nine-months ended June 30, 2005 as compared
to $514 thousand for nine-months ended June 30, 2004. Marketing and
advertising expenses increased by $30 thousand, or 19.5% to $184 thousand
for nine-months ended June 30, 2005 as compared to $154 thousand for nine-
months ended June 30, 2004 primarily as a result of an increase in cable
television and newspaper advertising expenses. Other general and
administrative expenses increased by $12 thousand, or 1.2%, to $1.0 million
for nine-months ended June 30, 2005 as compared to nine-months ended June
30, 2004 primarily as a result of an increase in regulatory disclosure
forms and director meeting and retainer fees. Occupancy and equipment
expenses declined by $41 thousand, or 4.5%, to $879 thousand for nine-
months ended June 30, 2005 as compared to $920 thousand, for nine-months
ended June 30, 2004. The decrease in occupancy expense is a result of a
reduction in depreciation, rent, and other occupancy costs associated with
the April 2004 closing of a Shrewsbury branch office located in the Shaw's
Supermarket.
18
Income Taxes: Income before provision for income taxes decreased by
$78 thousand, to $1.2 million for nine-months ended June 30, 2005 as
compared to nine-months ended June 30, 2004. Primarily a result of this
decrease, the provision for income taxes decreased by $20 thousand, to $362
thousand, for nine-months ended June 30, 2005 as compared to $382 thousand
for nine-months ended June 30, 2004. The effective income tax rate was
31.2% and 30.8% for nine-months ended June 30, 2005 and nine-months ended
June 30, 2004, respectively. 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 nine-months ended June 30, 2005, the Bank originated loans of $63.8
million, experienced principal repayments on loans of $36.3 million and
sold $8.2 million of 15 and 30 year fixed-rate loans. The Bank purchased
securities of $5.6 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 $1.7 million of securities that
matured during nine-months ended June 30, 2005. During nine-months ended
June 30, 2005, the Bank experienced a net increase in deposits of $3.1
million. While non-time deposits such as savings, money market deposit
accounts and checking account balances declined over the recent nine-months
ended June 30, 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 $12.5 million and by a net
decrease in cash and cash equivalents of $1.3 million during nine-months
ended June 30, 2005.
Certificate of deposit accounts scheduled to mature within one year
were $44.1 million at June 30, 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 has introduced
certificate of deposit programs with flexible and competitive terms which
it believes enhances deposit retention and attracts new depositors as well.
The Bank is committed to maintaining a strong liquidity position;
therefore, it monitors its liquidity position on a daily basis. The Bank
also periodically reviews liquidity information prepared by the Depositors
Insurance Fund, the Federal Deposit Insurance Corporation and other
available reports, which compare the Bank's liquidity with banks in the
state and in its peer group. The Bank anticipates that it will have
sufficient funds to meet its current funding commitments. At June 30,
2005, the Bank had $34.0 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 $66.7 million at
June 30, 2005.
19
At June 30, 2005, the Company's capital to assets ratio was 10.32%
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 to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is (i)
recorded, processed, summarized and reported as and when required and (ii)
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosures.
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.
On October 14, 2004, a suit was filed in the Worcester Superior Court
of the Commonwealth of Massachusetts by Evelyn G. Birnie against Christos
Kyriazis and Tierre Verde Specialty Market, Inc., defendants, and Bank of
America, N.A., trustee. An amended complaint filed on July 1, 2005 by
James L. Birnie, Executor of the Estate of Evelyn G. Birnie, named
Westborough Bank (the "Bank") as an additional defendant. The Bank is the
wholly-owned subsidiary of Westborough Financial Services, Inc. (the
"Registrant"). On July 11, 2005, the Bank received a summons related to
the suit.
The amended suit alleges a fraudulent scheme by a former Bank
employee and defendant Kyriazis against Evelyn G. Birnie, a former customer
of the Bank, and asserts claims for breach of contract, breach of fiduciary
duty, conversion, negligence and unfair and deceptive acts by persons
engaged in trade or commerce. The amended suit alleges losses
approximating $1,100,000 and seeks an unspecified amount in damages from
the Bank. The amended suit also seeks the imposition of a constructive
trust on the defendants, and an accounting by the defendants, as to all of
plaintiff's funds which have come into their possession.
The Bank intends to vigorously defend the suit.
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 June 30,2005.
(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>
April 1, 2005 through April 30, 2005 0 0 0 79,069(1)
- ------------------------------------------------------------------------------------------------------------
May 1, 2005 through May 31, 2005 0 0 0 79,069
- ------------------------------------------------------------------------------------------------------------
June 1, 2005 through June 30, 2005 0 0 0 79,069
- ------------------------------------------------------------------------------------------------------------
Total 0 0 0 79,069
- ------------------------------------------------------------------------------------------------------------
<FN>
<F1> In September 2000, the Massachusetts Division of Banks approved a
share repurchase program which authorized the repurchase of up to
79,069 shares. The program will continue until the repurchase of the
79,069 shares is complete.
</FN>
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
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: August 15, 2005 By:/s/ Joseph F. MacDonough
---------------------------
President and
Chief Executive Officer
Date: August 15, 2005 By:/s/ John L. Casagrande
-------------------------
Senior Vice-President,
Treasurer and Clerk
23