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 March 31, 2006
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 May 4, 2006
----- -----------------------------
Common Stock, par value $0.01 1,595,774
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 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 Operations 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. 18
PART II. OTHER INFORMATION 19
Item 1. Legal Proceedings. 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
March 31, September 30,
2006 2005
--------- -------------
(unaudited)
<s> <c> <c>
Assets
Cash and due from banks $ 4,147 $ 3,590
Federal funds sold 2,600 1,785
Short-term investments 1,061 3,599
-------- --------
Total cash and cash equivalents 7,808 8,974
Securities available for sale, at fair value 65,006 63,940
Federal Home Loan Bank stock, at cost 3,163 2,966
Loans, net of allowance for loan losses of $784 and $785, respectively 209,059 200,477
Banking premises and equipment, net 6,421 6,094
Accrued interest receivable 1,338 1,181
Deferred income taxes 1,375 1,135
Bank-owned life insurance 6,429 6,118
Other assets 1,936 605
-------- --------
Total assets $302,535 $291,490
======== ========
Liabilities and Stockholders' Equity
Deposits $221,359 $210,281
Short-term borrowings 0 4,000
Long-term borrowings 49,500 46,000
Mortgagors' escrow accounts 380 409
Accrued expenses and other liabilities 3,206 2,197
-------- --------
Total liabilities 274,445 262,887
-------- --------
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,
1,595,774 and 1,594,774 issued and outstanding, respectively 16 16
Additional paid-in capital 5,030 4,990
Retained earnings 24,413 24,714
Accumulated other comprehensive loss (1,021) (714)
Unearned compensation-RRP (5,923 and 7,509 shares, respectively) (91) (130)
Unearned compensation-ESOP (25,781 and 27,255 shares, respectively) (257) (273)
-------- --------
Total stockholders' equity 28,090 28,603
-------- --------
Total liabilities and stockholders' equity $302,535 $291,490
======== ========
See accompanying notes to unaudited consolidated financial statements
1
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Operations
(Dollars in thousands, except share data)
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
2006 2005 2006 2005
---- ---- ---- ----
(unaudited) (unaudited)
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 2,859 $ 2,323 $ 5,662 $ 4,557
Interest and dividends on investment securities 693 732 1,331 1,469
Interest on federal funds sold 15 19 30 30
Interest on short-term investments 17 6 50 11
--------- --------- --------- ---------
Total interest and dividend income 3,584 3,080 7,073 6,067
--------- --------- --------- ---------
Interest expense:
Interest on deposits 1,123 711 2,099 1,327
Interest on Federal Home Loan Bank advances 553 272 1,097 470
--------- --------- --------- ---------
Total interest expense 1,676 983 3,196 1,797
--------- --------- --------- ---------
Net interest income 1,908 2,097 3,877 4,270
(Credit) provision for loan losses 0 (48) 0 (173)
--------- --------- --------- ---------
Net interest income, after (credit) provision for loan losses 1,908 2,145 3,877 4,443
--------- --------- --------- ---------
Other income:
Customer service fees 186 158 381 312
Gain on sales of securities available for sale, net 0 47 0 49
(Loss) gain on sales of mortgages, net (25) 6 (25) 6
Miscellaneous 70 90 131 157
--------- --------- --------- ---------
Total other income 231 301 487 524
--------- --------- --------- ---------
Operating expenses:
Salaries and employee benefits 1,234 1,078 2,399 2,109
Occupancy and equipment 331 352 601 617
Data processing 187 189 377 368
Marketing and advertising 36 54 79 112
Professional fees 156 89 272 155
Other general and administrative 492 283 819 709
--------- --------- --------- ---------
Total operating expenses 2,436 2,045 4,547 4,070
--------- --------- --------- ---------
(Loss) income before (benefit) provision for income taxes (297) 401 (183) 897
(Benefit) provision for income taxes (99) 114 (73) 271
--------- --------- --------- ---------
Net (loss) income ($198) $ 287 ($110) $ 626
========= ========= ========= =========
Number of weighted average shares outstanding-Basic 1,561,515 1,552,618 1,560,746 1,550,883
(Loss) earnings per share-Basic ($0.13) $0.18 ($0.07) $0.40
Number of weighted average shares outstanding-Dilutive 1,561,515 1,570,467 1,560,746 1,569,902
(Loss) earnings per share-Dilutive ($0.13) $0.18 ($0.07) $0.40
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)
(unaudited)
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, 2004 $16 $4,843 $24,198 $ 159 ($209) ($302) $28,705
-------
Comprehensive loss:
Net income 0 0 626 0 0 0 626
Change in net unrealized loss on
securities available for sale, net
of Reclassification adjustment and
tax effects 0 0 0 (813) 0 0 (813)
-------
Total comprehensive loss (187)
-------
Cash dividends declared and paid
($.12 per share) 0 0 (191) 0 0 0 (191)
ESOP shares released and committed
to be released (1,474 shares) 0 30 0 0 0 15 45
Amortization of RRP stock (1,675
shares) 0 0 0 0 40 0 40
Issuance of common stock under stock
option plan, net of income tax
benefits ($26) 0 80 0 0 0 0 80
--- ------ ------- ------- ----- ----- -------
Balance at March 31, 2005 $16 $4,953 $24,633 ($654) ($169) ($287) $28,492
=== ====== ======= ======= ===== ===== =======
Balance at September 30, 2005 $16 $4,990 $24,714 ($714) ($130) ($273) $28,603
-------
Comprehensive loss:
Net income 0 0 (110) 0 0 0 (110)
Change in net unrealized loss on
securities available for sale,
net of tax effects 0 0 0 (307) 0 0 (307)
-------
Total comprehensive loss (417)
-------
Cash dividends declared and paid
($.12 per share) 0 0 (191) 0 0 0 (191)
ESOP shares released and committed
to be released (1,474 shares) 0 25 0 0 0 16 41
Amortization of RRP stock (1,586
shares) 0 0 0 0 39 0 39
Issuance of common stock under stock
option plan, net of income tax
benefits ($5) 0 15 0 0 0 0 15
--- ------ ------- ------- ----- ----- -------
Balance at March 31, 2006 $16 $5,030 $24,413 ($1,021) ($91) ($257) $28,090
=== ====== ======= ======= ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six Months Ended
March 31,
----------------------
2006 2005
---- ----
(unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net (loss) income ($110) $ 626
Adjustments to reconcile net (loss) income to net cash
Provided (used) by operating activities:
(Credit) provision for loan losses - (173)
Net amortization of securities 145 189
Amortization of net deferred loan costs and premiums
on purchased loans and indirect lending 35 9
Depreciation expense 237 250
Loss (gain) on the sales of mortgages 25 (6)
Gain on sales and calls of securities, net - (49)
Increase in accrued interest receivable (157) (71)
Deferred income tax (benefit) provision (87) 17
ESOP shares released and committed to be released 41 45
Amortization of RRP stock 39 40
Increase in bank-owned life insurance (107) (36)
Other, net (322) 273
----------------------
Net cash provided (used) by operating activities (261) 1,114
----------------------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls - 2,024
Maturities 6,350 1,450
Purchases (10,580) (4,476)
Principal payments 2,559 2,903
Purchase of Federal Home Loan Bank stock (197) (33)
Proceeds from the sale of loans 1,707 292
Loan originations, net (10,349) (17,280)
Purchase of banking premises and equipment, net (564) (52)
Premiums paid on bank-owned life insurance (204) (207)
----------------------
Net cash used by investing activities (11,278) (15,379)
----------------------
Cash flows from financing activities:
Net increase in deposits 11,078 1,423
Net decrease in short-term borrowings (4,000) (1,100)
Proceeds from Federal Home Loan Bank advances 3,500 12,000
Repayment of Federal Home Loan Bank advances - (1,000)
Net increase in mortgagors' escrow accounts (29) 31
Issuance of common stock under stock option plan,
net of tax benefits 15 80
Dividends paid (191) (191)
----------------------
Net cash provided by financing activities 10,373 11,243
----------------------
Net change in cash and cash equivalents (1,166) (3,022)
Cash and cash equivalents at beginning of year 8,974 9,171
----------------------
Cash and cash equivalents at end of period $ 7,808 $ 6,149
======================
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 March 31, 2006, the Bank had residential and commercial loan
commitments to borrowers of $6.4 million, commitments for home equity lines
of $370 thousand, available home equity lines of credit of $17.1 million,
unadvanced funds on commercial lines of credit, overdrafts and
participation loans of $3.5 million, unadvanced funds on construction
mortgages of $1.4 million and personal overdraft lines of credit of
approximately $485 thousand. The Company had no commitments to purchase or
sell securities at March 31, 2006.
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 three and six months eneded March 31, 2006, the
Company has no potential common shares outstanding that are considered
anti-dilutive. If applicable, the Company would exclude from the diluted
earnings per share calculation any potential common shares that would
increase earnings per share. Potential common shares that may be issued by
the Company relate solely to outstanding stock options and grants and are
determined using the treasury stock method.
On January 25, 2001, the Company's stockholders approved the
Westborough Financial Services, Inc. 2001 Stock Option Plan (the "Stock
Option Plan"). Under the Stock Option Plan, the Company may grant options
to its directors, officers and employees for up to 55,348 shares of common
stock. Both incentive stock options and non-qualified stock options may be
granted under the Stock Option Plan. The exercise price of each option
equals the market price of the Company's stock on the date of grant and an
option's maximum term is ten years. Options generally vest over a five-year
period.
The Company applies APB Opinion 25 and related Interpretations in
accounting for the Stock Option Plan. Accordingly, no compensation cost has
been recognized. Had compensation cost for the
5
Company's Stock Option Plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method prescribed
by SFAS No. 123, the Company's net income (loss) and earnings per share
would have been adjusted to the pro forma amounts indicated below:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands, except share data)
<s> <c> <c> <c> <c> <c>
Net (loss) income As reported ($198) $287 ($110) $626
Pro forma ($199) $280 ($112) $613
Basic (loss) earnings per share As reported ($0.13) $0.18 ($0.07) $0.40
Pro forma ($0.13) $0.18 ($0.07) $0.40
Diluted (loss) earnings per share As reported ($0.13) $0.18 ($0.07) $0.40
Pro forma ($0.13) $0.18 ($0.07) $0.39
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 components of net periodic pension cost are as follows:
(Dollars in thousands) Three months ended March 31, Six months ended March 31,
---------------------------- --------------------------
2006 2005 2006 2005
---------------------------- --------------------------
<s> <c> <c> <c> <c>
Service cost $ 54 $ 50 $ 107 $ 101
Interest cost 43 47 88 94
Expected return on assets (54) (54) (108) (108)
Transition obligation 1 1 1 1
Past service cost 0 0 0 0
Actuarial gain (2) 0 (4) 0
---------------- ------------------
$ 42 $ 44 $ 84 $ 88
================ ==================
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 March 31, 2006 and
September 30, 2005, and the results of operations for three and six-months
ended March 31, 2006, compared to the same periods in 2005. This discussion
and analysis should be read in conjunction with the unaudited consolidated
financial statements and related notes that are included within this
report.
The Company's principal business is its investment in the Bank, which
is a community-oriented financial institution providing a variety of
financial services to the communities which it serves. The business of the
Bank consists of attracting deposits from the general public or borrowing
funds 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 litigation expenses and general and local economic and competitive
conditions, particularly those with respect to changes in market interest
rates, government policies and actions of regulatory authorities. Future
changes in applicable law, regulations or government policies may
materially impact the Bank. Additionally, the Bank's lending activity is
concentrated in loans secured by real estate located in Westborough,
Northborough and Shrewsbury, Massachusetts. Accordingly, the Bank's results
of operations are affected by regional market and economic conditions.
8
Comparison of Financial Condition at March 31, 2006 and September 30, 2005
The Company's total assets increased by $11.0 million, or 3.8%, to
$302.5 million at March 31, 2006 from $291.5 million at September 30, 2005.
Additionally, deposits increased by $11.1 million, or 5.3%, to $221.4
million from $210.3 million, primarily in money market deposit accounts and
longer-term certificates of deposit. The increase in deposits was used
primarily to fund loan portfolio growth which increased by $8.6 million, or
4.3%, to $209.1 million at March 31, 2006 as compared to $200.5 million at
September 30, 2005. Within the loan portfolio, commercial loans increased
by $2.0 million from September 30, 2005 to March 31, 2006 and residential
real estate and home equity lines-of-credit increased by $6.5 million for
the same period. Total stockholders' equity declined by $513 thousand, to
$28.1 million at March 31, 2006 from $28.6 million at September 30, 2005
primarily as a result of changes in accumulated other comprehensive loss
relating to the change in after-tax value in securities available for sale,
coupled with a current period net loss of $110 thousand and the payment of
$191 thousand in dividends to stockholders.
Accumulated other comprehensive after-tax loss at March 31, 2006 was
$1.0 million, as compared to $714 thousand at September 30, 2005. The
Company's securities consist primarily of interest-rate sensitive
securities whose market value changes inversely with changes in market
interest rates. Interest rates at March 31, 2006 were generally higher than
rates at September 30, 2005 and, accordingly, the market value of
securities available for sale declined. At March 31, 2006, deferred income
tax benefits associated with this market value decline were approximately
$527 thousand.
Comparison of Operating Results for Three-Months Ended March 31, 2006 and
2005
Net (Loss) Income: The Company reported a loss per share (dilutive)
for three-months ended March 31, 2006 of $0.13 on a net loss of $198
thousand, as compared to earnings of $0.18 per share (dilutive) on net
income of $287 thousand for three-months ended March 31, 2005. The
Company's return on average assets was (0.26%) for three-months ended March
31, 2006 as compared to 0.42% for three-months ended March 31, 2005.
The loss for three-months ended March 31, 2006 was primarily due to
an increase in operating expenses, a decrease in net interest income and a
decline in other income. Operating expenses increased by $391 thousand, or
19.1%, to $2.4 million for three-months ended March 31, 2006 as compared to
$2.0 million for three-months ended March 31, 2005. Net interest income
declined by $189 thousand, or 9.0%, to $1.9 million for three-months ended
March 31, 2006 as compared to $2.1 million for three-months ended March 31,
2005, as the Bank continues to experience 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 ("FOMC") increased short-term rates, competitive
interest rates paid to interest-bearing deposit customers increased.
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. Other income decreased
by $70 thousand, or 23.3%, to $231 thousand for three-months ended March
31, 2006 as compared to three-months ended March 31, 2005, resulting from
substantially reduced volume of loans and investments sold, as compared to
three-months ended March 31, 2005. Income from customer service fees,
however, increased by $28 thousand for three-months ended March 31, 2006 as
compared to March 31, 2005 primarily due to fees associated with the sale
of non-deposit investment products and fees on commercial loans.
9
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
March 31,
------------------ Increase
2006 2005 (decrease)(7)
---- ---- -------------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 4.92% 2.66% 2.26%
Investment securities (2) 4.02% 3.95% 0.07%
Loans (3) 5.45% 5.25% 0.21%
Total interest-earning assets 5.09% 4.83% 0.26%
Interest-bearing liabilities:
NOW accounts 0.14% 0.13% 0.01%
Savings accounts (4) 1.32% 1.34% (0.02%)
Money market deposit accounts 3.32% 0.94% 2.38%
Certificate of deposit accounts 3.64% 2.42% 1.22%
Total interest-bearing deposits 2.31% 1.51% 0.80%
Borrowed funds 4.13% 3.53% 0.60%
Total interest-bearing liabilities 2.71% 1.80% 0.91%
Net interest rate spread (5)(7) 2.39% 3.04% (0.65%)
Net interest margin (6) 2.71% 3.29% (0.58%)
<FN>
<F1> Short-term investments include federal funds sold.
<F2> All investment securities are considered available for sale.
<F3> Loans are net of deferred loan origination costs (fees), allowance
for loan losses, discount/premium on purchased loans and unadvanced
funds.
<F4> Savings accounts include the balance in mortgagors' escrow accounts.
<F5> Net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
<F6> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
<F7> Columns and rows may not add due to small rounding variances.
</FN>
10
Interest and Dividend Income: Interest and dividend income increased
by $504 thousand, or 16.4%, to $3.6 million for three-months ended March
31, 2006 from $3.1 million for March 31, 2005. The increase was primarily
due to the combination of an increase in the average volume of interest-
earning assets and slightly higher rates earned on average interest-earning
assets. The average volume of interest-earning assets for three-months
ended March 31, 2006 increased to $281.3 million as compared to an average
volume of $254.9 million for three-months ended March 31, 2005.
Additionally, the Bank's average interest rate earned on all interest-
earning assets increased by 0.27%, to 5.09% for three-months ended March
31, 2006 from 4.83% for three-months ended March 31, 2005. The funding
source for the increase in the average volume of interest-earning assets
was primarily from an increase in deposit accounts. The average balance of
investment securities for three-months ended March 31, 2006 decreased to
$68.9 million, earning 4.02% as compared to an average balance of $74.1
million, earning 3.95% for three-months ending March 31, 2005. The average
balance of short-term investments for three-months ended March 31, 2006
declined to $2.6 million earning 4.92% as compared to an average balance of
$3.7 million earning 2.66% for three-months ending March 31, 2005. The
higher yield reflects increases in short-term rates by the FOMC. The
average balance of loans for three-months ended March 31, 2006, increased
to $209.9 million earning 5.45%, as compared to an average balance of
$177.1 million earning 5.25% for three-months ending March 31, 2005.
Interest Expense: Total interest expense increased by $693 thousand,
or 70.5%, to $1.7 million for three-months ended March 31, 2006 from $983
thousand for three-months ended March 31, 2005. The increase in interest
expense was mainly due to higher interest rates paid on money market
deposits accounts and certificates of deposit resulting from management's
response to rate increases by the FOMC, and an increase in the average rate
of interest paid on borrowings from the Federal Home Loan Bank ("FHLB").
The average volume of all interest-bearing liabilities (which includes
interest-bearing deposits and borrowings) increased to $247.8 million, with
a cost of 2.71%, for three-months ended March 31, 2006 as compared to
$219.1 million, with a cost of 1.80%, for three-months ending March 31,
2005. The average volume of interest-bearing deposits increased to $194.2
million, with a cost of 2.31%, for three-months ended March 31, 2006 as
compared to an average balance of $188.2 million, with a cost of 1.51%, for
three-months ended March 31, 2005. Within the category of interest-bearing
deposits, the average balance of money market deposit accounts and
certificate of deposit accounts increased by $20.7 million and $16.6
million, respectively, while the average balance of savings and NOW
accounts declined by $29.6 million and $1.7 million, respectively. The
decrease in savings and NOW 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 has utilized
alternative sources of funds by increasing its borrowing from the FHLB. The
average balance of borrowings increased to $53.7 million, with an average
cost of 4.13%, for three-months ended March 31, 2006, as compared to an
average balance of $30.9 million, with an average cost of 3.53%, for three-
months ended March 31, 2005. 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 $189
thousand, or 9.0%, for three-months ended March 31, 2006, to $1.9 million
compared to $2.1 million for three-months ended March 31, 2005. The
decrease was attributed to the combination of an increase in interest
expense of $693 thousand, offset, to a lesser extent, by an increase in
interest and dividend income of $504 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 0.65% to 2.39% for three-months ended
March 31, 2006 as compared to 3.04% for three-months ended March 31, 2005.
(Credit) Provision for Loan Losses: The Bank had no provision for
loan losses for three-months ended March 31, 2006 compared to a $48
thousand (credit) provision for loan losses for three-
11
months ended March 31, 2005. 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 was a result of management's periodic analysis of risks
inherent in the 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 to be in the
high technology and financial services belt and, most likely, the Bank's
allowance for loan loss will reflect the relative health of these economic
sectors. While management believes it's current level of allowance for loan
losses is adequate, there can be no assurance that the allowance will be
sufficient to cover loan losses or that future adjustments to the allowance
will not be necessary if economic and/or other conditions differ
substantially from the economic and other conditions considered by
management in evaluating the adequacy of the current level of the allowance
for loan losses.
Other Income: Other income consists primarily of fee income for
customer services, gains and losses from the sale of mortgages and the sale
of securities available for sale, and income from bank-owned life insurance
("BOLI"). Total other income declined by $70 thousand, or 23.3%, to $231
thousand for three-months ended March 31, 2006, from $301 thousand for
three-months ended March 31, 2005. During three-months ended March 31,
2006, the Company sold fixed-rate mortgage loans, with servicing retained
by the Bank, and recognized a pre-tax loss on the sale of $25 thousand, as
compared to a pre-tax gain of $6 thousand, for three-months ended March 31,
2005. Additionally, gains on sales of securities available for sale
declined by $47 thousand for three-months ended March 31, 2006, as compared
to three-months ended March 31, 2005. Miscellaneous income decreased by $20
thousand, or 22.2%, to $70 thousand for three-months ended March 31, 2006,
from $90 thousand for three-months ended March 31, 2005, primarily from a
death benefit received on a BOLI policy in 2005 for a former director of
the Company, offset, to a lesser extent by an increase in mortgage
servicing income recognized upon the sale of mortgages in the secondary
market. Income from customer service fees increased by $28 thousand, or
17.7%, to $186 thousand for three-months ended March 31, 2006 as compared
to $158 thousand for three-months ended March 31, 2005, primarily due to
fees associated with the sale of non-deposit investment products and
prepayment fees on commercial loans.
Operating Expenses: Three-months ended March 31, 2006 operating
expenses increased by $391 thousand, or 19.1%, to $2.4 million, compared to
$2.0 million for three-months ended March 31, 2005. Operating expenses as a
percent of average assets were 3.23% for three-months ended March 31, 2006
as compared to 2.99% for three-months ended March 31, 2005. The primary
reasons for the increase in operating expenses were legal fees and
settlement expenses relating to a civil action filed against the Bank and
an increase in salaries and employee benefits. Salaries and employee
benefits increased by $156 thousand, or 14.5%, to $1.2 million for three-
months ended March 31, 2006 as compared to three-months ended March 31,
2005, due to general increases in employee salaries, an increase in
retirement benefit costs and an increase in sales incentive compensation.
Professional fees increased by $67 thousand, or 75.3%, to $156 thousand for
three-months ended March 31, 2006, as compared to three-months ended March
31, 2005, primarily due to legal and other expenses related to the civil
action filed against the Bank and also expenses relating to strategic
planning projects and initiatives. Occupancy and equipment expenses
declined by $21 thousand, or 6.0%, to $331 thousand for three-months ended
March 31, 2006, primarily due to an expense related to records archival
initiative incurred during the three-months ended March 31, 2005.
12
Income Taxes: Income (loss) before (benefit) provision for income
taxes declined by $698 thousand, to ($297) thousand for three-months ended
March 31, 2006 as compared to $401 thousand for three-months ended March
31, 2005. Primarily a result of this decline, the provision (benefit) for
income taxes declined by $213 thousand, to ($99) thousand, for three-months
ended March 31, 2006 as compared to $114 thousand for three-months ended
March 31, 2005. The effective income tax rate was (33.3%) and 28.4% for
three-months ended March 31, 2006 and three-months ended March 31, 2005,
respectively. In addition, the Bank utilizes a wholly-owned security
investment subsidiary and receives favorable tax treatment from the
increase in the cash surrender value of BOLI.
Comparison of Operating Results for Six-Months Ended March 31, 2006 and
2005
Net (Loss) Income: The Company reported a loss per share (dilutive)
for six-months ended March 31, 2006 of $0.07 on a net loss of $110
thousand, as compared to earnings of $0.40 per share (dilutive) on net
income of $626 thousand for six-months ended March 31, 2005. The Company's
return on average assets was (0.07%) for six-months ended March 31, 2006 as
compared to 0.46% for six-months ended March 31, 2005.
The decrease in net income for six-months ended March 31, 2006 was
due primarily to an increase in operating expenses, a decrease in net
interest income, a decrease in the credit provision for loan losses and a
decline in other income. For six-months ended March 31, 2006, operating
expenses increased by $477 thousand, or 11.7%, to $4.5 million, from $4.1
million for six-months ended March 31, 2005. Net interest income decreased
by $393 thousand, or 9.2%, to $3.9 million, for six-months ended March 31,
2006, as compared to $4.3 million for six-months ended March 31, 2005, as
the Bank continued to experience the effects of a relatively flat yield
curve, where the difference between short-term interest rates and longer-
term interest rates was relatively small. The net interest rate spread
declined by 0.70%, to 2.45% for six-months ended March 31, 2006 as compared
to 3.15% for six-months ended March 31, 2005. 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 0.23%, to 5.06% for
six-months ended March 31, 2006 from 4.83% for six-months ended March 31,
2005. However, the cost of average interest-bearing liabilities increased
by 0.94%, to 2.61% for six-months ended March 31, 2006 from 1.67% for six-
months ended March 31, 2005 and primarily reflects higher interest rates
paid on deposit accounts and FHLB advances. 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 six-
months ended March 31, 2006 as compared to a $173 thousand credit provision
for loan losses for six-months ended March 31, 2005. 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.
Other income decreased by $37 thousand, or 7.1%, to $487 thousand for six-
months ended March 31, 2006, resulting from substantially reduced volume of
loans and investments sold, as compared to six-months ended March 31, 2005.
Income from customer service fees, however, increased by $69 thousand for
six-months ended March 31, 2006 as compared to March 31, 2005 primarily due
to fees associated with the sale of non-deposit investment products and
prepayment fees on commercial loans.
13
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:
Six Months Ended
March 31,
---------------- Increase
2006 2005 (decrease)(7)
---- ---- -------------
<s> <c> <c> <c>
Interest-earning assets:
Short-term investments (1) 4.44% 1.95% 2.49%
Investment securities (2) 3.90% 3.94% (0.04%)
Loans (3) 5.45% 5.28% 0.17%
Total interest-earning assets 5.06% 4.83% 0.23%
Interest-bearing liabilities:
NOW accounts 0.14% 0.12% 0.02%
Savings accounts (4) 1.38% 1.26% 0.12%
Money market deposit accounts 3.30% 0.97% 2.33%
Certificate of deposit accounts 3.48% 2.31% 1.17%
Total interest-bearing deposits 2.19% 1.41% 0.78%
Borrowed funds 4.14% 3.51% 0.63%
Total interest-bearing liabilities 2.61% 1.67% 0.94%
Net interest rate spread (5)(7) 2.45% 3.15% (0.70%)
Net interest margin (6) 2.77% 3.40% (0.63%)
<FN>
<F1> Short-term investments include federal funds sold.
<F2> All investment securities are considered available for sale.
<F3> Loans are net of deferred loan origination costs (fees), allowance
for loan losses, discount/premium on purchased loans and unadvanced
funds.
<F4> Savings accounts include the balance in mortgagors' escrow accounts.
<F5> Net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
<F6> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
<F7> Columns and rows may not add due to small rounding variances.
</FN>
14
Interest and Dividend Income: The Bank's interest and dividend income
increased by $1.0 million, or 16.6%, to $7.1 million for six-months ended
March 31, 2006 as compared to $6.1 million for six-months ended March 31,
2005. Primarily due to an increase in the rate of interest earned on short-
term investments and loans, the yield on interest-earning assets increased
by 0.23% to 5.06% for six-months ended March 31, 2006 from 4.83% for six-
months ended March 31, 2005. The average volume of interest-earning assets
for six-months ended March 31, 2006 increased to $279.5 million as compared
to an average volume of $251.5 million for six-months ended March 31, 2005.
The funding source for the increase in the average volume of interest-
earning assets was primarily from an increase in Federal Home Loan Bank
advances and an increase in deposit accounts. The average balance of loans
for six-months ended March 31, 2006, increased to $207.7 million earning
5.45%, as compared to an average balance of $172.7 million earning 5.28%
for six-months ending March 31, 2005. The average balance of short-term
investments for six-months ended March 31, 2006 declined to $3.6 million
earning 4.44% as compared to an average balance of $4.2 million earning
1.95% for six-months ending March 31, 2005. The higher yield reflects
increases in short-term rates by the FOMC. The average balance of
investment securities for six-months ended March 31, 2006 decreased to
$68.3 million, earning 3.90% as compared to an average balance of $74.6
million, earning 3.94% for six-months ending March 31, 2005.
Interest Expense: Total interest expense increased by $1.4 million,
or 77.9%, to $3.2 million for six-months ended March 31, 2006, from $1.8
million for six-months ended March 31, 2005. The increase in interest
expense was primarily due to higher interest rates paid on deposit accounts
and increased usage of FHLB advances. The average volume of all interest-
bearing liabilities increased to $244.6 million, with a cost of 2.61%, for
six-months ended March 31, 2006 as compared to $215.0 million, with a cost
of 1.67%, for six-months ending March 31, 2005. Within this category of
interest-bearing liabilities, the average volume of interest-bearing
deposits increased to $191.6 million, with a cost of 2.19%, for six-months
ended March 31, 2006 as compared to $188.2 million, with a cost of 1.41%,
for six-months ended March 31, 2005. The average balance of borrowings
increased to $53.0 million, with an average cost of 4.14%, for six-months
ended March 31, 2006, as compared to an average balance of $26.8 million,
with an average cost of 3.51%, for six-months ended March 31, 2005. The
increase in average borrowing from the FHLB has funded the continued demand
for residential and commercial loans.
Net Interest Income: The Bank's net interest income decreased by $393
thousand, or 9.2%, for six-months ended March 31, 2006, to $3.9 million, as
compared to $4.3 million for six-months ended March 31, 2005. As noted
above, the decrease was primarily attributed to the combination of an
increase in interest expense of $1.4 million, offset, to a lesser extent by
a increase in interest and dividend income of $1.0 million. 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 0.70%, to 2.45% for six-months
ended March 31, 2006 as compared to 3.15% for six-months ending March 31,
2005.
(Credit) Provision for Loan Losses: The Bank had no provision for
loan losses for six-months ended March 31, 2006 compared to a $173 thousand
(credit) provision for six-months ended March 31, 2005. 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 the 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.
15
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 to be 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 $37 thousand, or 7.1%, to $487 thousand for six-months ended
March 31, 2006, from $524 thousand for six-months ended March 31, 2005.
Gains on sales of securities available for sale declined by $49 thousand
for six-months ended March 31, 2006, as compared to six-months ended March
31, 2005, on substantially reduced volume of investments sold. During six-
months ended March 31, 2006, the Company sold fixed-rate mortgage loans,
with servicing retained by the Bank, and recognized a pre-tax loss on the
sale of $25 thousand, as compared to a pre-tax gain of $6 thousand, for
six-months ended March 31, 2005. Miscellaneous income decreased by $26
thousand, or 16.6% to $131 thousand for six-months ended March 31, 2006 as
compared to $157 thousand for six-months ended March 31, 2005 primarily as
a result of a death benefit received on a BOLI policy in 2005 for a former
director of the Company, offset, to a lesser extent by an increase in
mortgage servicing income recognized upon the sale of mortgages in the
secondary market. Customer service fees increased by $69 thousand, or
22.1%, to $381 thousand for the six-months ended March 31, 2006 as compared
to $312 thousand for six-months ended March 31, 2005, primarily due to fees
associated with the sale of non-deposit investment products and prepayment
fees on commercial loans.
Operating Expenses: For six-months ended March 31, 2006, operating
expenses increased by $477 thousand, or 11.7%, to $4.5 million, from $4.1
million for six-months ended March 31, 2005. The primary reasons for the
increase in operating expenses were due to legal fees and settlement
expenses relating to a civil action filed against the Bank and increases in
salaries and employee benefits. Salaries and employee benefits increased by
$290 thousand, or 13.8%, to $2.4 million for six-months ended March 31,
2006 as compared to six-months ended March 31, 2005 primarily as a result
of increased retirement benefit costs, general salary increases for
employees and higher levels of sales incentive compensation. Professional
fees increased by $117 thousand, or 75.5%, to $272 thousand for six-months
ended March 31, 2006, as compared to $155 thousand for six-months ended
March 31, 2005, primarily due to legal and other expenses related to the
civil action filed against the Bank and also expenses relating to strategic
planning projects and initiatives. As a result of a higher volume of
services provided, data processing expenses increased by $9 thousand, or
2.4%, to $377 thousand for six-months ended March 31, 2006 as compared to
$368 thousand for six-month ended March 31, 2005. Occupancy and equipment
expenses declined by $16 thousand, or 2.6%, to $601 thousand for three-
months ended March 31, 2006, primarily due to an expense related to a
records archival initiative incurred during the six-months ended March 31,
2005
Income Taxes: Income (loss) before (benefit) provision for income
taxes decreased by $1.1 million, to ($183) thousand for six-months ended
March 31, 2006 as compared to $897 thousand for six-months ended March 31,
2005. Primarily a result of this decrease, the provision (benefit) for
income taxes decreased by $344 thousand, to ($73) thousand for six-months
ended March 31, 2006 as compared to $271 thousand for six-months ended
March 31, 2005. The effective income tax rate was (39.9%) and 30.2% for
six-months ended March 31, 2006 and six-months ended March 31, 2005,
respectively. In addition, the Bank utilizes a wholly-owned security
investment subsidiary and receives favorable tax treatment from the
increase in the cash surrender value of BOLI.
16
Liquidity and Capital Resources
The term "liquidity" refers to the Bank's ability to generate
adequate amounts of cash to fund loan originations, deposit withdrawals and
operating expenses. The Bank's primary sources of funds are deposits,
scheduled amortization and prepayments of loan principal and mortgage-
backed securities, maturities and calls of investment securities and funds
provided by the Bank's operations. The Bank also borrows money from time to
time from the FHLB as part of its management of interest rate risk and to
even out cyclical patterns of loan demand.
Loan repayments and maturing securities are a relatively predictable
source of funds. However, deposit flows, calls of securities and
prepayments of loans and mortgage-backed securities are strongly influenced
by interest rates, general and local economic conditions and competition in
the marketplace. These factors reduce the predictability of the timing of
these sources of funds.
The Bank's primary investing activities are the origination of one-to
four-family real estate and other loans and the purchase of securities.
During six-months ended March 31, 2006, the Bank originated loans of $36.0
million, experienced principal repayments on loans of $25.7 million and
sold $1.7 million of 30 and 40 year fixed-rate loans. The Bank purchased
securities of $10.6 million during six-months ended March 31, 2006.
Principal payments on mortgage-backed securities provided an additional
$2.6 million and there were $6.4 million of securities that matured during
six-months ended March 31, 2006. During six-months ended March 31, 2006,
investing activities were financed by a net increase in deposits of $11.1
million. While savings account balances declined over the recent six months
ended March 31, 2006 the Bank experienced an increase in money market
accounts and certificates of deposit, as customers moved their funds into
relatively higher earning deposit accounts.
Certificate of deposit accounts scheduled to mature within one year
were $52.2 million at March 31, 2006. 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 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 March 31,
2006, the Bank had $49.5 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 $57.9 million at
March 31, 2006.
At March 31, 2006, the Company's capital to assets ratio was 9.28%
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.
17
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 (i) is
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.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On March 15, 2006, the Bank settled the litigation matter previously
disclosed in the Company's Current Report on Form 8-K dated July 11, 2005.
The settlement was entered into without admission of fault or liability by
the Bank or any other party. The financial aspects of the settlement remain
confidential pursuant to the terms of the settlement agreement. See the
Company's Current Report on Form 8-K dated July 11, 2005 for more
information.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the six-months ended March 31, 2006, 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
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.
Westborough Financial Services, Inc. (the "Company") held its annual
meeting of stockholders on January 26, 2006 (the "Meeting"). All of the
proposals submitted to the stockholders at the Meeting were approved. The
proposals submitted to stockholders and the tabulation of votes for each
proposal is as follows:
1. Election of four directors of the Company. The number of votes cast
with respect to this matter was as follows:
Nominee For Withheld Broker Non-Votes
James N. Ball 1,454,171 23,479 0
David E. Carlstrom 1,456,246 21,404 0
John L. Casagrande 1,455,246 22,404 0
Robert A. Klugman 1,456,246 21,404 0
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 31.1: Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1: Section 1350 Certifications
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: May 15, 2006 By: /s/ Joseph F. MacDonough
-------------------------------
President and Chief Executive
Officer
Date: May 15, 2006 By: /s/ John L. Casagrande
-------------------------------
Senior Vice-President,
Treasurer and Clerk
20