UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
OR
[ ] TRANSITION REPORT UNDER 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 [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)
YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding as of February 8, 2006
----- ----------------------------------
Common Stock, par value $0.01 1,594,774
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 and the
Bank do not undertake any obligation 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 or Plan of Operation 8
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
December 31, September 30,
2005 2005
------------ -------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 3,305 $ 3,590
Federal funds sold 1,465 1,785
Short-term investments, at fair value 1,120 3,599
-------- --------
Total cash and cash equivalents 5,890 8,974
Securities available for sale, at fair value 66,247 63,940
Federal Home Loan Bank stock, at cost 3,107 2,966
Loans, net of allowance for loan losses of
$785 and $785, respectively 209,041 200,477
Premises and equipment, net 6,021 6,094
Accrued interest receivable 1,170 1,181
Deferred income taxes 1,225 1,135
Bank-owned life insurance 6,370 6,118
Other assets 1,521 605
-------- --------
Total assets $300,592 $291,490
======== ========
Liabilities and Stockholders' Equity
Deposits $215,024 $210,281
Short-term borrowings 4,000 4,000
Long-term borrowings 49,500 46,000
Mortgagors' escrow accounts 430 409
Accrued expenses and other liabilities 3,112 2,197
-------- --------
Total liabilities 272,066 262,887
-------- --------
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, 1,594,774 and 1,594,774 issued and
outstanding, respectively 16 16
Additional paid-in capital 5,002 4,990
Retained earnings 24,708 24,714
Accumulated other comprehensive (loss) income (825) (714)
Unearned compensation-RRP (6,716 and 7,509 shares) (110) (130)
Unearned compensation-ESOP (26,518 and 27,255
shares, respectively) (265) (273)
-------- --------
Total stockholders' equity 28,526 28,603
-------- --------
Total liabilities and stockholders' equity $300,592 $291,490
======== ========
See accompanying notes to unaudited consolidated financial statements
1
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended
December 31,
-------------------------
2005 2004
---- ----
(unaudited)
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $2,803 $2,235
Interest and dividends on investment securities 638 736
Interest on federal funds sold 15 11
Interest on short-term investments 33 5
------ ------
Total interest and dividend income 3,489 2,987
------ ------
Interest expense:
Interest on deposits 976 616
Interest on Federal Home Loan Bank advances 544 198
------ ------
Total interest expense 1,520 814
------ ------
Net interest income 1,969 2,173
(Credit) provision for loan losses 0 (125)
------ ------
Net interest income, after (credit) provision for loan losses 1,969 2,298
------ ------
Other income:
Customer service fees 195 154
Gain on sales and calls of securities available for sale, net 0 2
Miscellaneous 61 67
------ ------
Total other income 256 223
------ ------
Operating expenses:
Salaries and employee benefits 1,165 1,032
Occupancy and equipment 270 292
Data processing 190 179
Marketing and advertising 42 58
Professional fees 116 66
Other general and administrative 326 398
------ ------
Total operating expenses 2,109 2,025
------ ------
Income before provision for income taxes 116 496
Provision for income taxes 26 157
------ ------
Net income $ 90 $ 339
====== ======
Number of weighted average shares outstanding-Basic 1,560,379 1,549,148
Earnings per share - Basic $0.06 $0.22
Number of weighted average shares outstanding-Dilutive 1,575,665 1,569,337
Earnings per share-Dilutive $0.06 $0.22
See accompanying notes to unaudited consolidated financial statements.
2
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive RRP Compensation
Stock Capital Earnings Income (Loss) Stock ESOP Total
------ ---------- -------- ------------- -------- ------------ -----
(unaudited)
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at September 30, 2004 $16 $4,843 $24,198 $ 159 $(209) $(302) $28,705
Comprehensive income
Net income - - 339 - - - 339
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects - - - (209) - - (209)
Total comprehensive income 130
-------
Cash dividends declared ($0.06 per share) - - (95) - - - (95)
ESOP shares released and committed to
to be released (737 shares) - 16 - - - 7 23
Amortization of RRP stock (838 shares) - - - - 20 - 20
Issuance of common stock under stock option
plan, net of income tax benefits ($11) - 27 - - - - 27
--- ------ ------- ----- ----- ----- -------
Balance at December 31, 2004 (unaudited) $16 $4,886 $24,442 $ (50) $(189) $(295) $28,810
=== ====== ======= ===== ===== ===== =======
Balance at September 30, 2005 $16 $4,990 $24,714 $(714) $(130) $(273) $28,603
Comprehensive income:
Net income - - 90 - - - 90
Change in net unrealized gainloss on
securities available for sale, net of
reclassification adjustment and tax effects - - - (111) - - (111)
-------
Total comprehensive incomeloss (21)
-------
Cash dividends declared ($0.06 per share) - - (96) - - - (96)
ESOP shares released and committed
to be released ( 737 shares) - 12 - - - 8 20
Amortization of RRP stock ( 793 shares) - - - - 20 - 20
--- ------ ------- ----- ----- ----- -------
Balance at December 31, 2005 (unaudited) $16 $5,002 $24,708 $(825) $(110) $(265) $28,526
=== ====== ======= ===== ===== ===== ========
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended
December 31,
----------------------
2005 2004
---- ----
(unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 90 $ 339
Adjustments to reconcile net income to net cash
provided by operating activities:
(Credit) provision for loan losses - (125)
Net amortization of securities 81 101
Amortization of net deferred loan costs and premiums
(discounts) on purchased loans and indirect lending 9 5
Depreciation expense 116 128
Gain on sales and calls of securities, net - (2)
Decrease in accrued interest receivable 11 -
Deferred income tax (benefit) provision (32) 38
ESOP shares released and committed to be released 20 23
Amortization of RRP stock 20 20
Increase in bank-owned life insurance (53) (55)
Other, net (1) 366
-------- --------
Net cash provided by operating activities 261 838
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls - 2
Maturities 4,000 400
Purchases (7,941) (2,279)
Principal payments 1,384 1,351
Purchase of Federal Home Loan Bank stock (141) -
Loan originations, net (8,573) (8,012)
Purchase of banking premises and equipment, net (43) (18)
Premiums paid on bank-owned life insurance (199) (202)
-------- --------
Net cash used by investing activities (11,513) (8,758)
-------- --------
Cash flows from financing activities:
Net decrease in deposits 4,743 (2,357)
Net increase in short-term borrowings - 1,000
Proceeds from Federal Home Loan Bank advances 3,500 8,000
Repayment of Federal Home Loan Bank advances - (1,000)
Net increase in mortgagors'' escrow accounts 21 33
Issuance of common stock under stock option plan,
net of tax benefits - 27
Dividends paid (96) (95)
-------- --------
Net cash provided by financing activities 8,168 5,608
-------- --------
Net change in cash and cash equivalents (3,084) (2,312)
Cash and cash equivalents at beginning of year 8,974 9,171
-------- --------
Cash and cash equivalents at end of period $ 5,890 $ 6,859
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
Westborough Financial Services, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
1) Basis of Presentation and Consolidation.
The unaudited consolidated interim financial statements of
Westborough Financial Services, Inc. and Subsidiary (the "Company")
presented herein should be read in conjunction with the consolidated
financial statements for the year ended September 30, 2005, 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
2005 Annual Report to Stockholders.
2) Commitments and Contingencies.
At December 31, 2005, the Bank had residential and commercial loan
commitments to borrowers of $3.0 million, commitments for home equity lines
of $2.2 million, available home equity lines of credit of $16.8 million,
unadvanced funds on commercial lines of credit, overdrafts and
participation loans of $4.3 million, unadvanced funds on construction
mortgages of $2.0 million and personal overdraft lines of credit of
approximately $482 thousand. The Company had no commitments to purchase or
sell securities at December 31, 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 earnings per share would have been adjusted to the
pro forma amounts indicated below:
5
Three Months Ended December 31,
-------------------------------
2005 2004
---- ----
<s> <c> <c> <c>
Net income As reported $ 90 $ 339
Pro forma $ 89 $ 332
Basic earnings per share As reported $0.06 $0.22
Pro forma $0.06 $0.21
Diluted earnings per share As reported $0.06 $0.22
Pro forma $0.06 $0.21
In December 2004, the FASB issued 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).
6
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.
The following summarizes the components of net periodic pension cost
for three-months ended December 31:
Three months ended
December 31,
------------------
(Dollars in thousands) 2005 2004
---- ----
<s> <c> <c>
Service cost $ 53 $ 50
Interest cost 44 47
Expected return on assets (54) (55)
Transition obligation 1 1
Actuarial gain (1) (1)
---- ----
$ 43 $ 42
==== ====
7
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
The following discussion compares the financial condition of the
Company and its wholly owned subsidiary, the Bank, at December 31, 2005 and
September 30, 2005, and the results of operations for three-months ended
December 31, 2005, compared to the same period 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 December 31, 2005 and
September 30, 2005
The Company's total assets increased by $9.1 million, or 3.1%, to
$300.6 million at December 31, 2005 from $291.5 million at September 30,
2005. Deposits increased by $4.7 million, or 2.3%, to $215.0 million from
$210.3 million, primarily in personal checking accounts and one-year or
longer term certificates of deposit. Long-term Federal Home Loan Bank
advances increased by $3.5 million, or 7.6%, to $49.5 million at December
31, 2005 from $46.0 million at September 30, 2005. The increase in deposits
and borrowings was used primarily to fund loan growth. Loans, net of
allowance for loan losses, increased by $8.6, or 4.3%, to $209.0 million at
December 31, 2005 as compared to $200.5 million at September 30, 2005
primarily as a result of net new loan growth in adjustable-rate residential
and commercial loans and increases in home equity lines-of-credit. Cash and
cash equivalent balances declined by $3.1 million, or 34.4%, to $5.9
million at December 31, 2005 from $9.0 million at September 30, 2005 and
such funds were invested in the securities portfolio and used to fund
increased loan volume.
Total stockholders' equity decreased by $77 thousand, to $28.5
million at December 31, 2005. Stockholders' equity increased by net income
of $90 thousand, however, it was offset by a $111 thousand decline in the
after-tax market value of securities available for sale and the payment of
$96 thousand in dividends to stockholders. The Company's securities
available for sale consist primarily of interest-rate sensitive securities,
whose market values change inversely with changes in market interest rates.
Interest rates applicable to the securities portfolio at December 31, 2005
were generally higher than the interest rates that were applicable at
September 30, 2005 and, accordingly, the after-tax market value of
securities available for sale declined. For each three-months ended
December 31, 2005 and December 31, 2004, the Company paid a dividend of
$0.06 per share. The dividend payout ratio, which represents dividends
declared per share divided by dilutive earnings per share, was 105.04% and
27.78% for three-months ended December 31, 2005 and 2004, respectively.
Comparison of Operating Results for Three-Months Ended
December 31, 2005 and 2004
Net Income: The Company reported earnings per share (dilutive) for
three-months ended December 31, 2005 of $0.06 on net income of $90
thousand, as compared to $0.22 per share (dilutive) on net income of $339
thousand for three-months ended December 31, 2004. For three-months ended
December 31, 2005, net income declined by $249 thousand, or 73.5%, as
compared to three-months ended December 31, 2004. The Company's return on
average assets was 0.12% for three-months ended December 31, 2005 as
compared to 0.51% for three-months ended December 31, 2004 and the
Company's return on average stockholders' equity was 1.26% for three-months
ended December 31, 2005 as compared to 4.70% for three-months ended
December 31, 2004.
The decrease in net income for three-months ended December 31, 2005
was primarily due to a decrease in the Bank's net interest income, which is
primarily attributed to a decrease in the Company's net interest margin,
resulting from the effects of a relatively flat yield curve, a reduction in
the (credit) provision for loan losses, and an increase in operating
expenses, offset to a lesser extent, by an increase in customer service
fees. For three-months ended December 31, 2005, net interest income
declined by $204 thousand, or 9.4%, to $2.0 million as compared to $2.2
million for three-months ended December 31, 2004. During 2005, the Bank
experienced the effects of a relatively flat yield curve, where the
difference between short-term interest rates and longer-term interest rates
was relatively small. As the Federal Reserve Open Market Committee
increased short-term rates, the interest rates paid to interest-bearing
deposit customers increased. As a result of these changes, the net interest
rate spread, which represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities, declined by 0.76%, to 2.51% for three-months ended December
31, 2005 as compared to 3.27% for three-months ended December 31, 2004.
Primarily due to an increase in the rate of interest earned on short-term
investments and loans, the yield on average interest-earning assets
increased by 0.20%, to 5.02% for three-months ended December 31, 2005 from
4.82% for three-months ended December 31, 2004. However, the cost of
average interest-bearing liabilities increased by 0.98%, to 2.52% for
three-months ended December 31, 2005 from 1.54% for three-months ended
December 31, 2004 and primarily reflects higher interest rates paid on
savings accounts, certificates of deposits, money market deposit accounts
and Federal Home Loan Bank advances. Continued flattening of the yield
curve challenged the Bank by limiting investment opportunities and returns.
Compression of the net interest rate spread can be expected to result in
lower net interest income, and possibly losses, until such time as the
yield curve returns to a more normal, upward slope. The Bank had no
provision for loan losses for three-months ended December 31, 2005 as
compared to a $125 thousand (credit) provision for loan losses for three-
months ended December 31, 2004. This primarily reflects paydowns and the
high credit
9
quality of specific commercial loans for which a portion of the allowance
for loan losses had been allocated. Operating expenses increased by $84
thousand, or 4.1%, to $2.1 million for three-months ended December 31,
2005. The primary reasons for the increase in operating expenses were due
to general increases in employee salaries and commissions, coupled with
increases in professional fees, retirement benefits and data processing
fees. Professional fees increased by $50 thousand, or 75.8%, to $116
thousand for three months ended December 31, 2005 primarily due to legal
and other expenses related to a civil action filed against the Bank and
also due to various strategic planning projects and initiatives. Primarily
as a result of a higher volume of services provided, data processing
expenses increased by $11 thousand, or 6.1%, to $190 thousand for three-
months ended December 31, 2005. Occupancy and equipment expenses declined
by $22 thousand, or 7.5%, primarily due to the completion of a records
archival initiative in December 2004. Marketing and advertising expenses
declined by $16 thousand, or 27.6%, to $42 thousand, for three-months ended
December 31, 2005 as compared to $58 thousand for three-months ended
December 31, 2004 as a result of a decline in cable TV advertising. Other
general and administrative expenses declined by 18.1%, or $72 thousand for
three-months ended December 31, 2005, resulting from a timing change on
payment of retainer fees to the directors of the Company. Customer service
fees increased by $41 thousand, or 26.6%, to $195 thousand for three-months
ended December 31, 2005 from $154 thousand for three-months ended December
31, 2004 due primarily to an increase in prepayment fees on commercial
loans plus an increase in fees associated with the sale of non-deposit
investment products.
10
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:
Three Months Ended
December 31,
------------------ Increase
2005 2004 (decrease)(7)
---- ---- -------------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 4.16% 1.39% 2.77%
Investment Securities (2) 3.77% 3.92% -0.15%
Loans (3) 5.46% 5.31% 0.15%
Total interest-earning assets 5.02% 4.82% 0.20%
Interest-bearing liabilities:
NOW accounts 0.14% 0.11% 0.03%
Savings accounts (4) 1.43% 1.17% 0.26%
Money market deposit accounts 3.22% 0.99% 2.23%
Certificate of deposit accounts 3.30% 2.18% 1.12%
Total interest-bearing deposits 2.07% 1.31% 0.76%
Borrowed funds 4.15% 3.46% 0.69%
Total interest-bearing liabilities 2.52% 1.54% 0.98%
Net interest rate spread (5)(7) 2.51% 3.27% -0.76%
Net interest margin (6) 2.84% 3.50% -0.66%
<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 $502 thousand, or 16.8%, to $3.5 million for three-months
ended December 31, 2005 from $3.0 million for three-months ended December
31, 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 December 31, 2005
increased to $277.8 million as compared to an average volume of $248.1
million for three-months ended December 31, 2004. Additionally, the Bank's
average interest rate earned on all interest-earning assets increased by
0.20%, to 5.02% for three-months ended December 31, 2005 from 4.82% for
three-months ended December 31, 2004. The funding sources for the increase
in the average volume of interest-earning assets were primarily from
increases in borrowed funds. The average balance of loans for three-months
ended December 31, 2005, increased to $205.5 million earning 5.46%, as
compared to an average balance of $168.4 million earning 5.31% for three-
months ending December 31, 2004. The Bank experienced continued growth in
residential and commercial loans. The average balance of investment
securities for three-months ended December 31, 2005 decreased to $67.7
million, earning 3.77% as compared to an average balance of $75.1 million,
earning 3.92% for three-months ending December 31, 2004. The proceeds from
the decrease in investment securities were used to fund loan growth. The
average yield on short-term investments for three-months ended December 31,
2005 increased to 4.16% as compared to 1.39% for three-months ended
December 31, 2004 on an average balance of $4.6 million for December 31,
2005 and September 30, 2005, respectively. The higher average yield on
short-term investments reflects general increases in short-term rates.
Interest Expense: Mainly due to an increase in the average rate paid
on interest-bearing liabilities plus an increase in the average volume of
interest-bearing liabilities, total interest expense increased by $706
thousand, or 86.7%, to $1.5 million for three-months ended December 31,
2005, from $814 thousand for three-months ended December 31, 2004. The
average volume of interest-bearing liabilities, which includes interest-
bearing deposits and FHLB advances, increased to $241.5 million with a cost
of 2.52% for three-months ended December 31, 2005 as compared to $211.0
million with a cost of 1.54% for three-months ended December 31, 2004. The
primary reason for the increase in costs reflects higher interest rates
paid on savings accounts, certificates of deposits, money market deposit
accounts and Federal Home Loan Bank advances. The average volume of
interest-bearing deposits increased to $189.1 million, with a cost of
2.07%, for three-months ended December 31, 2005 as compared to an average
balance of $188.2 million, with a cost of 1.31%, for three-months ended
December 31, 2004. Within the category of interest-bearing deposits, the
average balance of certificate of deposit and money market accounts
increased by $14.4 million and $7.6 million, respectively, while the
average balance of NOW and savings accounts declined by $3.7 and $17.5
million, respectively. The decrease in NOW and savings accounts was due to
the relative attractiveness of certificate of deposit accounts, money
market 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
$52.4 million, with an average cost of 4.15% for three-months ended
December 31, 2005, as compared to an average balance of $22.9 million, with
an average cost of 3.46%, for three-months ended December 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 decreased by $204
thousand, or 9.4%, for three-months ended December 31, 2005, to $2.0
million compared to three-months ended December 31, 2004. The decrease was
primarily attributed to the combination of an increase in interest expense
of $706 thousand, offset, to a lesser extent, by an increase in interest
and dividend income of $502 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 0.76% to 2.51% for three-months ended December 31,
2005 as compared to 3.27% for three-months ended December 31, 2004.
(Credit) provision for Loan Losses: The Bank had no provision for
loan losses for three-months ended December 31, 2005 as compared to a $125
thousand (credit) provision for loan losses for three-months ended December
31, 2004. This primarily reflects paydowns and the high credit quality of
specific commercial loans for which a portion of the allowance for loan
losses had been allocated. The (credit) provision for loan losses is a
result of management's periodic analysis of risks inherent in its loan
portfolio as well as the adequacy of the allowance for loan losses. It is
the Bank's policy to provide valuation allowances for estimated losses on
loans based upon past loss experience, current trends in the level of
delinquent and specific problem loans, loan concentrations to single
borrowers, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current
economic conditions in our market area. Accordingly, the evaluation of the
adequacy of the allowance for loan losses is not based directly on the
level of non-performing loans. As
12
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 $33 thousand, or 14.8%, to $256
thousand for three-months ended December 31, 2005, from $223 thousand for
three-months ended December 31, 2004. Customer service fees increased by
$41 thousand, or 26.6%, to $195 thousand for three-months ended December
31, 2005 from $154 thousand for three-months ended December 31, 2004
primarily due to an increase in prepayment fees on commercial loans plus an
increase in fees associated with the sale of non-deposit investment
products. Miscellaneous income decreased by 9.0%, or $6 thousand to $61
thousand, for three-months ended December 31, 2005 from $67 thousand for
three-months ended December 31, 2004, primarily due to an increase in
amortization of mortgage servicing income recognized upon sale of mortgages
in the secondary market.
Operating Expenses: Three-months ended December 31, 2005 operating
expenses increased by $84 thousand, or 4.1%, to $2.1 million, compared to
$2.0 million for three-months ended December 31, 2004. Operating expenses
as a percent of average assets were 2.84% for three-months ended December
31, 2005 as compared to 3.03% for three-months ended December 31, 2004. The
primary reasons for the increase in operating expenses were due to general
increases in employee salaries and commissions, coupled with increases in
professional fees, retirement benefits and data processing fees. Salary and
employee benefit expenses increased by $133 thousand, or 12.9% to $1.2
million for three-months ended December 31, 2005 as compared to $1.0
million for three-months ended December 31, 2004 primarily as a result of
general increases in employee salaries, expenses for a supplemental
employee retirement plan and increases in sales incentives. Professional
fees increased by $50 thousand, or 75.8%, to $116 thousand for three-months
ended December 31, 2005 primarily due to legal and other expenses related
to a civil action filed against the Bank and also due to various strategic
planning projects and initiatives. As a result of a higher volume of
services provided, data processing expenses increased by $11 thousand, or
6.1%, to $190 thousand for three-months ended December 31, 2005. Other
general and administrative expenses declined by 18.1%, or $72 thousand for
three-months ended December 31, 2005, resulting from a timing change on
retainer payments to the directors of the Company. Occupancy and equipment
expenses declined by $22 thousand, or 7.5%, primarily due to an expense
related to records archival initiative for three-months ended December 31,
2004. Marketing and advertising expenses declined by $16 thousand, or
27.6%, to $42 thousand, for three-months ended December 31, 2005 as
compared to $58 thousand for three-months ended December 31, 2004 as a
result of a decline in cable TV advertising.
Income Taxes: Income before provision for income taxes declined by
$380 thousand, to $116 thousand for three-months ended December 31, 2005 as
compared to $496 thousand for three-months ended December 31, 2004. The
provision for income taxes decreased by $131 thousand, to $26 thousand, for
three-months ended December 31, 2005 as compared to $157 thousand for
three-months ended December 31, 2004. The effective income tax rate was
22.4% and 31.7% for three-months ended December 31, 2005 and three-months
ended December 31, 2004, respectively. The decrease in the Company's
effective tax rate was a result of a decline in pre-tax earnings, coupled
with, tax advantages from a wholly-owned security investment subsidiary,
benefit of a dividends received deduction on common stock held and
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.
13
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 three-months ended December 31, 2005, the Bank originated loans of
$24.5 million and experienced principal repayments on loans of $15.9
million. The Bank purchased securities of $7.9 million and principal
payments on mortgage-backed securities provided an additional $659
thousand. There were $4.0 million of securities that matured during three-
months ended December 31, 2005. During three-months ended December 31,
2005, the Bank experienced a net increase in deposits of $4.7 million.
While savings account balances declined over the three-months ended
December 31, 2005 the Bank experienced an increase in checking, money
market accounts and time deposits, such as certificates of deposit, as
customers moved their funds into higher earning deposit accounts. Investing
activities were also financed by a net increase in FHLB borrowing of $3.5
million and by a net decrease in cash and cash equivalents of $3.1 million
during three-months ended December 31, 2005.
Certificate of deposit accounts scheduled to mature within one year
were $47.3 million at December 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 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 December 31,
2005, the Bank had $53.5 million in outstanding borrowing from the FHLB
and, based upon estimated eligible collateral that could be pledged with
the FHLB, the Bank had additional borrowing capacity of $63.8 million at
December 31, 2005.
At December 31, 2005, the Company's capital to assets ratio was 9.49%
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 have materially
affected, or that are reasonably likely to materially affect, the Company's
internal control over financial reporting.
14
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
During the three months ended December 31, 2005, the Company did not
repurchase any of its common stock. 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. To date, no shares have been
repurchased under this program.
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 of Form 8-K
Exhibit 31.1: Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1: Section 1350 Certifications
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: February 14, 2006 By:/s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: February 14, 2006 By:/s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Treasurer and
Clerk
16