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 June 30, 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 August 8, 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 and the Bank
do 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 of 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)
June 30, September 30,
2006 2005
-------- -------------
(unaudited)
Assets
Cash and due from banks $ 3,175 $ 3,590
Federal funds sold 2,388 1,785
Short-term investments 2,536 3,599
-------- --------
Total cash and cash equivalents 8,099 8,974
Securities available for sale 61,743 63,940
Federal Home Loan Bank stock, at cost 3,163 2,966
Loans, net of allowance for loan losses of
$780 and $785, respectively 209,535 200,477
Banking premises and equipment, net 6,419 6,094
Accrued interest receivable 1,190 1,181
Deferred income taxes 1,482 1,135
Bank-owned life insurance 6,505 6,118
Other assets 1,536 605
-------- --------
Total assets $299,672 $291,490
======== ========
Liabilities and Stockholders' Equity
Deposits $213,838 $210,281
Short-term borrowings $ 4,500 $ 4,000
Long -term borrowings 49,500 46,000
Mortgagors' escrow accounts 366 409
Accrued expenses and other liabilities 3,472 2,197
-------- --------
Total liabilities 271,676 262,887
-------- -------
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 5,042 4,990
Retained earnings 24,405 24,714
Accumulated other comprehensive loss (1,133) (714)
Unearned compensation-RRP (5,299 and 7,509
shares, respectively) (84) (130)
Unearned compensation-ESOP (25,170 and 27,255
shares, respectively) (250) (273)
-------- --------
Total stockholders' equity 27,996 28,603
-------- --------
Total liabilities and stockholders' equity $299,672 $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 Nine Months Ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(unaudited) (unaudited)
Interest and dividend income:
Interest and fees on loans $2,907 $2,412 $8,569 $6,969
Interest and dividends on investment securities 655 727 1,986 2,196
Interest on federal funds sold 25 26 55 55
Interest on short-term investments 24 8 74 19
------ ------ ------ ------
Total interest and dividend income 3,611 3,173 10,684 9,239
------ ------ ------ ------
Interest expense:
Interest on deposits 1,240 787 3,339 2,113
Interest on Federal Home Loan Bank advances 521 326 1,618 796
------ ------ ------ ------
Total interest expense 1,761 1,113 4,957 2,909
------ ------ ------ ------
Net interest income 1,850 2,060 5,727 6,330
(Credit) provision for loan losses 0 0 0 (173)
------ ------ ------ ------
Net interest income, after (credit) provision for loan losses 1,850 2,060 5,727 6,503
------ ------ ------ ------
Other income:
Customer service fees 163 139 544 452
Gain on sales of securities available for sale, net 0 0 0 49
Gain (loss) on sales of mortgages 0 159 (25) 165
Miscellaneous 37 40 168 196
------ ------ ------ ------
Total other income 200 338 687 862
------ ------ ------ ------
Operating expenses:
Salaries and employee benefits 1,226 1,132 3,625 3,241
Occupancy and equipment 282 261 882 879
Data processing 203 190 580 558
Marketing and advertising 54 72 133 184
Professional fees 120 168 392 323
Other general and administrative 77 313 897 1,018
------ ------ ------ ------
Total operating expenses 1,962 2,136 6,509 6,203
------ ------ ------ ------
Income (loss) before provision (benefit) for income taxes 88 262 (95) 1,162
Provision (benefit) for income taxes 0 91 (73) 362
------ ------ ------ ------
Net income (loss) $ 88 $ 171 $ (22) $ 800
====== ====== ====== ======
Number of weighted average shares outstanding-Basic 1,565,632 1,558,305 1,561,565 1,551,800
Earnings (loss) per share-Basic $0.06 $0.11 $(0.01) $0.52
Number of weighted average shares outstanding-Dilutive 1,579,781 1,572,796 1,561,565 1,570,867
Earnings (loss) per share-Dilutive $0.06 $0.11 $(0.01) $0.51
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
------ ---------- -------- ------------- ------------- ------------- -------
Balance at September 30, 2004 $16 $4,843 $24,198 $ 159 $(209) $(302) $28,705
-------
Comprehensive income:
Net income 0 0 800 0 0 0 800
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (487) 0 0 (487)
-------
Total comprehensive loss 313
------
Cash dividends declared and paid
($.18 per share) 0 0 (287) 0 0 0 (287)
ESOP shares released and committed
to be released (2,210 shares) 0 41 0 0 0 22 63
Amortization of RRP stock (2,850 shares) 0 0 0 0 59 0 59
Issuance of common stock under stock option
plan, net of income tax benefits ($22) 0 83 0 0 0 0 83
--- ------ ------- ------- ----- ----- -------
Balance at June 30, 2005 (unaudited) $16 $4,967 $24,711 $ (328) $(150) $(280) $28,936
=== ====== ======= ======= ===== ===== =======
Balance at September 30, 2005 $16 $4,990 $24,714 $ (714) $(130) $(273) $28,603
-------
Comprehensive loss:
Net loss 0 0 (22) 0 0 0 (22)
Change in net unrealized loss on
securities available for sale, net of
tax effects 0 0 0 (419) 0 0 (419)
-------
Total comprehensive loss (441)
-------
Cash dividends declared and paid
($.18 per share) 0 0 (287) 0 0 0 (287)
ESOP shares released and committed
to be released (2,210 shares) 0 37 0 0 0 23 60
Amortization of RRP stock ( 2,085 shares) 0 0 0 0 46 0 46
Issuance of common stock under stock option
plan, net of income tax benefits ($5) 0 15 0 0 0 0 15
--- ------ ------- ------- ----- ----- -------
Balance at June 30, 2006 (unaudited) $16 $5,042 $24,405 $(1,133) $ (84) $(250) $27,996
=== ====== ======= ======= ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended
June 30,
---------------------
2006 2005
-------- --------
(unaudited)
Cash flows from operating activities:
Net (loss) income $ (22) $ 800
Adjustments to reconcile net income to net cash
provided by operating activities:
(Credit) provision for loan losses - (173)
Net amortization of securities 208 304
Amortization of net deferred loan costs and premiums
on purchased loans and indirect lending 52 19
Depreciation expense 361 363
Loss (gain) on the sales of mortgages 25 (165)
Gain on sales and calls of securities, net - (49)
Increase in accrued interest receivable (9) (102)
Deferred income tax (benefit) provision (127) 60
ESOP shares released and committed to be released 60 63
Amortization of RRP stock 46 59
Increase in bank-owned life insurance (180) (88)
Other, net 344 520
-------- --------
Net cash provided by operating activities 758 1,611
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls - 2,024
Maturities 9,350 1,700
Purchases (12,560) (5,575)
Principal payments 4,560 3,369
Purchase of Federal Home Loan Bank stock (197) (425)
Proceeds from the sale of loans 1,815 8,214
Loan originations, net (10,950) (27,421)
Purchase of banking premises and equipment, net (686) (74)
Premiums paid on bank-owned life insurance (207) (229)
-------- --------
Net cash used by investing activities (8,875) (18,417)
-------- --------
Cash flows from financing activities:
Net increase in deposits 3,557 3,136
Net increase (decrease) in short-term borrowings 500 (3,500)
Proceeds from Federal Home Loan Bank advances 5,500 17,000
Repayment of Federal Home Loan Bank advances (2,000) (1,000)
Net (decrease) increase in mortgagors' escrow accounts (43) 42
Issuance of common stock under stock option plan,
net of tax benefits 15 83
Dividends paid (287) (287)
--------- --------
Net cash provided by financing activities 7,242 15,474
-------- --------
Net change in cash and cash equivalents (875) (1,332)
Cash and cash equivalents at beginning of year 8,974 9,171
-------- --------
Cash and cash equivalents at end of period $ 8,099 $ 7,839
======== ========
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 June 30, 2006, the Bank had residential and commercial loan commitments
to borrowers of $2.7 million, commitments for home equity lines of $1.4 million,
available home equity lines of credit of $17.4 million, unadvanced funds on
commercial lines of credit, overdrafts and participation loans of $3.9 million,
unadvanced funds on construction mortgages of $1.1 million and personal
overdraft lines of credit of approximately $492 thousand. The Company had no
commitments to purchase or sell securities at June 30, 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 nine
months ended June 30, 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 Nine Months Ended
June 30, June 30,
------------------ -----------------
2006 2005 2006 2005
---- ---- ---- ----
Net income (loss) As reported $ 88 $ 171 $ (22) $ 800
Pro forma $ 87 $ 164 $ (25) $ 780
Basic earnings (loss) per share As reported $0.06 $0.11 $(0.01) $0.52
Pro forma $0.06 $0.11 $(0.01) $0.50
Diluted earnings (loss) per share As reported $0.06 $0.11 $(0.01) $0.51
Pro forma $0.06 $0.10 $(0.01) $0.50
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
pension 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:
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
(Dollars in thousands) 2006 2005 2006 2005
---- ---- ---- ----
Service cost $ 54 $ 50 $ 161 $ 150
Interest cost 43 47 131 141
Expected return on assets (54) (54) (161) (162)
Transition obligation 1 1 2 2
Actuarial gain (2) 0 (6) 0
---- ---- ----- -----
$ 42 $ 44 $ 127 $ 131
==== ==== ===== =====
7
Item 2. Management's Discussion and Analysis of Plan of Operation.
General
The following discussion compares the financial condition of the Company
and its wholly-owned subsidiary, the Bank, at June 30, 2006 and September 30,
2005, and the results of operations for three and nine-months ended June 30,
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 June 30, 2006 and September 30, 2005
The Company's total assets increased by $8.2 million, or 2.8%, to $299.7
million at June 30, 2006 from $291.5 million at September 30, 2005.
Additionally, deposits increased by $3.6 million, or 1.7%, to $213.8 million
from $210.3 million, primarily in money market deposit accounts and longer-term
certificates of deposit. The increase in deposits and FHLB advances were used
primarily to fund loan portfolio growth which increased by $9.1 million, or
4.5%, to $209.5 million at June 30, 2006 as compared to $200.5 million at
September 30, 2005. Within the loan portfolio, commercial loans increased by
$4.9 million from September 30, 2005 to June 30, 2006 and residential real
estate and home equity lines-of-credit increased by $4.4 million for the same
period. Total stockholders' equity declined by $607 thousand, to $28.0 million
at June 30, 2006 from $28.6 million at September 30, 2005. The decrease was
primarily the result of changes in accumulated other comprehensive loss relating
to the change in after-tax value in securities available for sale, coupled with
a net loss of $22 thousand and the payment of $287 thousand in dividends to
stockholders during the nine-months ended June 30, 2006..
Accumulated other comprehensive after-tax loss at June 30, 2006 was $1.1
million, as compared to $714 thousand at September 30, 2005. The Company's
securities portfolio consists primarily of interest-rate sensitive securities
whose market value changes inversely with changes in market interest rates.
Interest rates at June 30, 2006 were generally higher than rates at September
30, 2005 and, accordingly, the market value of securities available for sale
declined. At June 30, 2006, deferred income tax benefits associated with this
market value decline were approximately $594 thousand.
Comparison of Operating Results for Three-Months Ended June 30, 2006 and 2005
Net Income: The Company reported earnings per share (dilutive) for
three-months ended June 30, 2006 of $0.06 on net income of $88 thousand, as
compared to $0.11 per share (dilutive) on net income of $171 thousand for
three-months ended June 30, 2005. The Company's return on average assets was
0.12% for three-months ended June 30, 2006 as compared to 0.24% for three-months
ended June 30, 2005.
The decrease in net income for three-months ended June 30, 2006 was
primarily due to a decrease in net interest income and a decline in other
income, offset to a lesser extent by a decrease in operating expenses. Net
interest income declined by $210 thousand, or 10.2%, to $1.9 million for
three-months ended June 30, 2006 as compared to $2.1 million for three-months
ended June 30, 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. As the Federal
Reserve Open Market Committee ("FOMC") increased short-term rates, the
competitive interest rates paid to interest-bearing deposit customers increased.
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 possible
operating losses, until such time as the yield curve returns to a more normal,
upward slope. Other income decreased by $138 thousand, or 40.8%, to $200
thousand for three-months ended June 30, 2006 as compared to three-months ended
June 30, 2005, resulting from substantially reduced volume of gains from loan
sales. Income from customer service fees, however, increased by $24 thousand for
three-months ended June 30, 2006 as compared to June 30, 2005 primarily due to
fees associated with the sale of non-deposit investment products. Operating
expenses decreased by $174 thousand, or 8.1%, to $2.0 million for three-months
ended June 30, 2006 as compared to $2.1 million for three-months ended June 30,
2005. Other general and administrative expenses decreased by $236 thousand, or
75.4%, to $77 thousand for three-months ended June 30, 2006 as compared to $313
thousand for three-months ended June 30, 2005, due to the recovery of settlement
costs relating to a civil action filed against the Bank. Salaries and employee
benefits increased by $94 thousand, or 8.3%, to $1.2 million for three-months
ended June 30, 2006 as compared to three-months ended June 30, 2005, due to
general increases in employee salaries, an increase in benefit costs and an
increase in sales incentive compensation. Professional fees decreased by $48
thousand, or 28.6%, to $120
9
thousand for three-months ended June 30, 2006, as compared to three-months ended
June 30, 2005, primarily due to a decline in legal and other expenses related to
the civil action filed against the Bank.
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
June 30,
------------------ Increase
2006 2005 (decrease)(7)
---- ---- -------------
Interest-earning assets:
Short-term investments (1) 5.50% 2.65% 2.85%
Investment securities (2) 3.92% 4.03% -0.11%
Loans (3) 5.56% 5.24% 0.33%
Total interest-earning assets 5.17% 4.85% 0.32%
Interest-bearing liabilities:
NOW accounts 0.15% 0.14% 0.01%
Savings accounts (4) 1.34% 1.40% -0.06%
Money market deposit accounts 3.34% 0.99% 2.35%
Certificate of deposit accounts 3.96% 2.66% 1.30%
Total interest-bearing deposits 2.53% 1.65% 0.89%
Borrowed funds 4.15% 3.77% 0.38%
Total interest-bearing liabilities 2.86% 1.97% 0.89%
Net interest rate spread (5)(7) 2.30% 2.88% -0.58%
Net interest margin (6) 2.65% 3.15% -0.50%
<FN>
<F1> Short-term investments include federal funds sold.
<F2> All investment securities are considered available for sale.
<F3> Loans are net of deferred loan origination costs (fees), allowance for
loan losses, discount/premium on purchased loans and unadvanced funds.
<F4> Savings accounts include the balance in mortgagors' escrow accounts.
<F5> Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
<F6> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
<F7> Columns and rows may not add do to small rounding variances.
</FN>
10
Interest and Dividend Income: Interest and dividend income increased by
$438 thousand, or 13.8%, to $3.6 million for three-months ended June 30, 2006
from $3.2 million for three-months ended June 30, 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 June 30, 2006 increased to $279.6 million as compared to an
average volume of $261.6 million for three-months ended June 30, 2005.
Additionally, the Bank's average interest rate earned on all interest-earning
assets increased by 0.32%, to 5.17% for three-months ended June 30, 2006 from
4.85% for three-months ended June 30, 2005. The funding source for the increase
in the average volume of interest-earning assets was primarily from increases in
borrowings from the Federal Home Loan Bank ("FHLB") and deposit accounts. The
average balance of investment securities for three-months ended June 30, 2006
decreased to $66.9 million, earning 3.92% as compared to an average balance of
$72.2 million, earning 4.03% for three-months ending June 30, 2005. The FHLB
deferred the declaration and payment of its quarterly stock dividend due to a
one-time change in its dividend schedule. Had the dividend been paid during
three-months ended June 30, 2006, on its former schedule, and at the former rate
per share, the percent earnings on investment securities would have been
approximately 4.16%, or an increase of 24 basis points from 3.92%. The average
balance of short-term investments for three-months ended June 30, 2006 declined
to $3.6 million earning 5.50% as compared to an average balance of $5.1 million
earning 2.65% for three-months ending June 30, 2005. The higher yield reflects
increases in short-term rates by the FOMC. The average balance of loans for
three-months ended June 30, 2006, increased to $209.1 million earning 5.56%, as
compared to an average balance of $184.2 million earning 5.24% for three-months
ending June 30, 2005.
Interest Expense: Total interest expense increased by $648 thousand, or
58.2%, to $1.8 million for three-months ended June 30, 2006 from $1.1 million
for three-months ended June 30, 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 FHLB. The average volume of all interest-bearing liabilities (which
includes interest-bearing deposits and borrowings) increased to $246.0 million,
with a cost of 2.86%, for three-months ended June 30, 2006 as compared to $225.5
million, with a cost of 1.97%, for three-months ending June 30, 2005. The
average volume of interest-bearing deposits increased to $195.7 million, with a
cost of 2.53%, for three-months ended June 30, 2006 as compared to an average
balance of $190.9 million, with a cost of 1.65%, for three-months ended June 30,
2005. Within the category of interest-bearing deposits, the average balance of
money market deposit accounts and certificate of deposit accounts increased by
$25.9 million and $15.1 million, respectively, while the average balance of
savings and NOW accounts declined by $33.8 million and $2.5 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 $50.3 million, with an average
cost of 4.15%, for three-months ended June 30, 2006, as compared to an average
balance of $34.5 million, with an average cost of 3.77%, for three-months ended
June 30, 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 $210
thousand, or 10.2%, for three-months ended June 30, 2006, to $1.9 million
compared to $2.1 million for three-months ended June 30, 2005. The decrease was
attributed to the combination of an increase in interest expense of $648
thousand, offset, to a lesser extent, by an increase in interest and dividend
income of $438 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 0.58% to
2.30% for three-months ended June 30, 2006 as compared to 2.88% for three-months
ended June 30, 2005.
11
(Credit) Provision for Loan Losses: The Bank had no provision for loan
losses for three-months ended June 30, 2006 and 2005, respectively. 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.
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 $138 thousand, or 40.8%, to $200 thousand for
three-months ended June 30, 2006, from $338 thousand for three-months ended June
30, 2005. During three-months ended June 30, 2006, there were no sales of
fixed-rate mortgage loans as compared to a pre-tax gain of $159 thousand, for
three-months ended June 30, 2005. Miscellaneous income decreased by $3 thousand,
or 7.5%, to $37 thousand for three-months ended June 30, 2006, from $40 thousand
for three-months ended June 30, 2005, primarily from an increase in amortization
of mortgage servicing rights recognized upon the sale of mortgages in the
secondary market, offset to a lesser degree by an increase in income on BOLI
policies on certain directors. Income from customer service fees increased by
$24 thousand, or 17.3%, to $163 thousand for three-months ended June 30, 2006 as
compared to $139 thousand for three-months ended June 30, 2005, primarily due to
fees associated with the sale of non-deposit investment products.
Operating Expenses: Three-months ended June 30, 2006 operating expenses
decreased by $174 thousand, or 8.1%, to $2.0 million, compared to $2.1 million
for three-months ended June 30, 2005. Operating expenses as a percent of average
assets were 2.62% for three-months ended June 30, 2006 as compared to 3.05% for
three-months ended June 30, 2005. The primary reasons for the decrease in
operating expenses was a recovery of settlement costs relating to a civil action
filed against the Bank, offset to a lesser extent by an increase in salaries and
employee benefits. Other general and administrative expenses decreased by $236
thousand, or 75.4%, to $77 thousand for three-months ended June 30, 2006 as
compared to $313 thousand for three-months ended June 30, 2005, due to the
recovery of settlement costs relating to a civil action filed against the Bank.
Professional fees decreased by $48 thousand, or 28.6%, to $120 thousand for
three-months ended June 30, 2006, as compared to three-months ended June 30,
2005, primarily due to a decline in legal and other expenses related to the
civil action filed against the Bank. Salaries and employee benefits increased by
$94 thousand, or 8.3%, to $1.2 million for three-months ended June 30, 2006 as
compared to three-months ended June 30, 2005, due to general increases in
employee salaries, an increase in benefit costs and an increase in sales
incentive compensation. Occupancy and equipment expenses increased by $21
thousand, or 8.0%, to $282 thousand for three-months ended June 30, 2006,
primarily due to the completion of facilities upgrades within the branch network
during three-months ended June 30, 2006.
12
Income Taxes: Income before provision for income taxes declined by $174
thousand, to $88 thousand for three-months ended June 30, 2006 as compared to
$262 thousand for three-months ended June 30, 2005. Primarily a result of this
decline, the provision for income taxes declined by $91 thousand, to $0
thousand, for three-months ended June 30, 2006 as compared to $91 thousand for
three-months ended June 30, 2005. The effective income tax rate was 0.00% and
34.7% for three-months ended June 30, 2006 and three-months ended June 30, 2005,
respectively. The lower effective tax rate was attributable to relatively low
level of income before income taxes for three-months ended June 30 2006, as
compared to June 30, 2005, in addition to the Bank's utilization of a
wholly-owned security investment subsidiary, and an increase in income from the
cash surrender value of BOLI as a percent of pre-tax income.
Comparison of Operating Results for Nine-Months Ended June 30, 2006 and 2005
Net (Loss) Income: The Company reported a loss per share (dilutive) for
nine-months ended June 30, 2006 of $0.01 on a net loss of $22 thousand, as
compared to earnings of $0.51 per share (dilutive) on net income of $800
thousand for nine-months ended June 30, 2005. The Company's return on average
assets was negative 0.01% for nine-months ended June 30, 2006 as compared to
0.39% for nine-months ended June 30, 2005.
The decrease in net income for nine-months ended June 30, 2006 was due to
a decrease in net interest income, an increase in operating expenses, a decrease
in the credit for loan losses and a decline in other income. Net interest income
decreased by $603 thousand, or 9.5%, to $5.7 million, for nine-months ended June
30, 2006, as compared to $6.3 million for nine-months ended June 30, 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 0.66%, to
2.40% for nine-months ended June 30, 2006 as compared to 3.06% for nine-months
ended June 30, 2005. For nine-months ended June 30, 2006, operating expenses
increased by $306 thousand, or 4.9%, to $6.5 million, from $6.2 million for
nine-months ended June 30, 2005. The primary reasons for the increase in
operating expenses were due to increases in salaries and employee benefits and
professional fees, offset to a lesser extent, by a decline in general and
administrative and marketing and advertising expenses. Salaries and employee
benefits expense increased by $384 thousand, or 11.8%, to $3.6 million for
nine-months ended June 30, 2006 as compared to nine-months ended June 30, 2005
primarily as a result of increased benefit costs, general salary increases for
employees and higher levels of sales incentive compensation. The Bank had no
provision for loan losses for nine-months ended June 30, 2006 as compared to a
$173 thousand credit provision for loan losses for nine-months ended June 30,
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 $175 thousand, or 20.3%, to $687 thousand
for nine-months ended June 30, 2006, resulting from substantially reduced volume
of gains from loans and investments sold, as compared to nine-months ended June
30, 2005. Income from customer service fees, however, increased by $92 thousand
for nine-months ended June 30, 2006 as compared to June 30, 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:
Nine Months Ended
June 30,
----------------- Increase
2006 2005 (decrease)(7)
---- ---- -------------
INTEREST-EARNING ASSETS:
Short-term investments (1) 4.79% 2.21% 2.58%
Investment securities (2) 3.90% 3.97% -0.07%
Loans (3) 5.49% 5.26% 0.23%
Total interest-earning assets 5.10% 4.83% 0.27%
INTEREST-BEARING LIABILITIES:
NOW accounts 0.15% 0.12% 0.03%
Savings accounts (4) 1.37% 1.30% 0.07%
Money market deposit accounts 3.32% 0.97% 2.35%
Certificate of deposit accounts 3.65% 2.43% 1.22%
Total interest-bearing deposits 2.31% 1.49% 0.82%
Borrowed funds 4.42% 3.61% 0.81%
Total interest-bearing liabilities 2.70% 1.78% 0.93%
Net interest rate spread (5)(7) 2.40% 3.06% -0.66%
Net interest margin (6) 2.73% 3.31% -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 do to small rounding variances.
</FN>
14
Interest and Dividend Income: The Bank's interest and dividend income
increased by $1.4 million, or 15.6%, to $10.7 million for nine-months ended June
30, 2006 as compared to $9.2 million for nine-months ended June 30, 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 0.27%
to 5.10% for nine-months ended June 30, 2006 from 4.83% for nine-months ended
June 30, 2005. The average volume of interest-earning assets for nine-months
ended June 30, 2006 increased to $279.6 million as compared to an average volume
of $254.8 million for nine-months ended June 30, 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 nine-months ended June 30, 2006,
increased to $208.1 million earning 5.49%, as compared to an average balance of
$176.5 million earning 5.26% for nine-months ending June 30, 2005. The average
balance of short-term investments for nine-months ended June 30, 2006 declined
to $3.6 million earning 4.79% as compared to an average balance of $4.5 million
earning 2.21% for nine-months ending June 30, 2005. The higher yield reflects
increases in short-term rates by the FOMC. The average balance of investment
securities for nine-months ended June 30, 2006 decreased to $67.8 million,
earning 3.90% as compared to an average balance of $73.8 million, earning 3.97%
for six-months ending June 30, 2005. The FHLB deferred the declaration of its
quarterly stock dividend due to a one-time change in its dividend schedule. Had
the dividend been paid in June 2006 on its former schedule, and at the former
rate per share, the percent earnings on investment securities would have been
approximately 3.98%, or an increase of 8 basis points from 3.90%.
Interest Expense: Total interest expense increased by $2.0 million, or
70.4%, to $5.0 million for nine-months ended June 30, 2006, from $2.9 million
for nine-months ended June 30, 2005. The increase in interest expense was
primarily due to higher interest rates paid on deposit accounts and FHLB
advances. The average volume of all interest-bearing liabilities increased to
$245.1 million, with a cost of 2.70%, for nine-months ended June 30, 2006 as
compared to $218.5 million, with a cost of 1.78%, for nine-months ending June
30, 2005. Within this category of interest-bearing liabilities, the average
volume of interest-bearing deposits increased to $193.0 million, with a cost of
2.31%, for nine-months ended June 30, 2006 as compared to $189.1 million, with a
cost of 1.49%, for nine-months ended June 30, 2005. The average balance of
certificates of deposit and money market accounts increased to $68.6 million and
$23.3 million with an average cost of 3.65% and 3.32%, respectively, for
nine-months ended June 30, 2006, as compared to an average balance of $53.2
million and $5.3 million with an average cost of 2.43% and 0.97% for nine-months
ended June 30, 2005. The average balance of borrowings increased to $52.1
million, with an average cost of 4.42%, for nine-months ended June 30, 2006, as
compared to an average balance of $29.4 million, with an average cost of 3.61%,
for nine-months ended June 30, 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 $603
thousand, or 9.5%, for nine-months ended June 30, 2006, to $5.7 million, as
compared to $6.3 million for nine-months ended June 30, 2005. As noted above,
the decrease was primarily attributed to the combination of an increase in
interest expense of $2.0 million, offset, to a lesser extent by an increase in
interest and dividend income of $1.4 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 0.66%, to 2.40% for nine-months ended June 30, 2006 as
compared to 3.06% for nine-months ending June 30, 2005.
(Credit) Provision for Loan Losses: The Bank had no provision for loan
losses for nine-months ended June 30, 2006 compared to a $173 thousand (credit)
provision for nine-months ended June 30, 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
15
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 BOLI. Total other income decreased by $175
thousand, or 20.3%, to $687 thousand for nine-months ended June 30, 2006, from
$862 thousand for nine-months ended June 30, 2005. During nine-months ended June
30, 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 $165 thousand for nine-months ended June 30, 2005. Gains on
sales of securities available for sale declined by $49 thousand for nine-months
ended June 30, 2006, as compared to nine-months ended June 30, 2005, on
substantially reduced volume of investments sold. Miscellaneous income decreased
by $28 thousand, or 14.3% to $168 thousand for nine-months ended June 30, 2006
as compared to $196 thousand for nine-months ended June 30, 2005 primarily as a
result of a death benefit received on a BOLI policy in 2005 for a former
director of the Company. Customer service fees increased by $92 thousand, or
20.4%, to $544 thousand for the nine-months ended June 30, 2006 as compared to
$452 thousand for nine-months ended June 30, 2005, primarily due to fees
associated with the sale of non-deposit investment products and prepayment fees
on commercial loans.
Operating Expenses: For nine-months ended June 30, 2006, operating
expenses increased by $306 thousand, or 4.9%, to $6.5 million, from $6.2 million
for nine-months ended June 30, 2005. The primary reasons for the increase in
operating expenses were due to increases in salaries and employee benefits and
professional fees, offset to a lesser extent, by a decline in general and
administrative and marketing expenses. Salaries and employee benefits increased
by $384 thousand, or 11.8%, to $3.6 million for nine-months ended June 30, 2006
as compared to nine-months ended June 30, 2005 primarily as a result of
increased benefit costs, general salary increases for employees and higher
levels of sales incentive compensation. Professional fees increased by $69
thousand, or 21.4%, to $392 thousand for nine-months ended June 30, 2006, as
compared to $323 thousand for nine-months ended June 30, 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 $22 thousand, or 3.9%, to $580 thousand for nine-months ended June
30, 2006 as compared to $558 thousand for nine-month ended June 30, 2005. Other
general and administrative expenses declined by $121 thousand, or 11.9%, to $897
thousand for nine-months ended June 30, 2006, primarily due to expenses related
to a civil action filed against the Bank and expenses related to a customer
satisfaction survey conducted during the nine-months ended June 30, 2005.
Income Taxes: Income (loss) before provision (benefit) for income taxes
decreased by $1.3 million, to $95 thousand loss for nine-months ended June 30,
2006 as compared to $1.2 million in income for nine-months ended June 30, 2005.
Primarily a result of this decrease, the provision
16
(benefit) for income taxes decreased by $435 thousand, to $73 thousand benefit
for nine-months ended June 30, 2006 as compared to $362 thousand provision for
nine-months ended June 30, 2005. The effective income tax rate was (76.8%) and
31.2% for nine-months ended June 30, 2006 and nine-months ended June 30, 2005,
respectively. The lower effective tax rate was attributable to relatively low
level of income (loss) before income taxes for nine months ended June 30 2006,
as compared to June 30, 2005, in addition to the Bank's utilization of a
wholly-owned security investment subsidiary, and an increase in income from the
cash surrender value of BOLI as a percent of pre-tax income.
Liquidity and Capital Resources
The term "liquidity" refers to the Bank's ability to generate adequate
amounts of cash to fund loan originations, deposit withdrawals and operating
expenses. The Bank's primary sources of funds are deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by the Bank's
operations. The Bank also borrows money from time to time from the FHLB as part
of its management of interest rate risk and to even out cyclical patterns of
loan demand.
Loan repayments and maturing securities are a relatively predictable
source of funds. However, deposit flows, calls of securities and prepayments of
loans and mortgage-backed securities are strongly influenced by interest rates,
general and local economic conditions and competition in the marketplace. These
factors reduce the predictability of the timing of these sources of funds.
The Bank's primary investing activities are the origination of one-to
four-family real estate and other loans and the purchase of securities. During
nine-months ended June 30, 2006, the Bank originated loans of $47.5 million,
experienced principal repayments on loans of $36.6 million and sold $1.8 million
of 30 and 40 year fixed-rate loans. The Bank purchased securities of $12.6
million during nine-months ended June 30, 2006. Principal payments on
mortgage-backed securities provided an additional $4.6 million and there were
$9.4 million of securities that matured during nine-months ended June 30, 2006.
During nine-months ended June 30, 2006, investing activities were financed by a
net increase in deposits of $3.6 million. While savings account balances
declined over the recent nine months ended June 30, 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. Investing
activities were further financed by a net increase in FHLB borrowing of $4
million.
Certificate of deposit accounts scheduled to mature within one year were
$54.2 million at June 30, 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 June 30, 2006, the Bank had $54.0 million in
outstanding borrowing from the FHLB and, based upon estimated eligible
collateral that could be pledged with the FHLB, the Bank had additional
borrowing capacity of $54.0 million at June 30, 2006.
At June 30, 2006, the Company's capital to assets ratio was 9.34% 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.
17
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 (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.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the nine-months ended June 30, 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 of up to
79,069 shares of the Company's outstanding common stock. 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 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: August 14, 2006 By: /s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: August 14, 2006 By: /s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Treasurer and
Clerk
20