UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 5, 2007
----- ----------------------------------
Common Stock, par value $0.01 1,608,974
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;
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and
services;
* the impact of the proposed merger of the Company and the Bank with
Assabet Valley Bancorp and Hudson Savings Bank.
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 or Plan of Operation....... 7
Item 3. Controls and Procedures......................................... 15
PART II. OTHER INFORMATION.............................................. 16
Item 1. Legal Proceedings............................................... 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 16
Item 3. Defaults upon Senior Securities................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............. 16
Item 5. Other Information............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 16
SIGNATURES.............................................................. 17
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
December 31, September 30,
2006 2006
------------ -------------
(unaudited)
Assets
Cash and due from banks $ 3,358 $ 2,431
Federal funds sold 3,322 3,444
Short-term investments, at fair value 8,620 2,442
-------- --------
Total cash and cash equivalents 15,300 8,317
Securities available for sale, at fair value 53,485 62,442
Federal Home Loan Bank stock, at cost 3,391 3,376
Loans, net of allowance for loan losses of
$810 and $780, respectively 211,018 209,744
Premises and equipment, net 6,460 6,560
Accrued interest receivable 1,117 1,368
Deferred income taxes 1,340 1,268
Bank-owned life insurance 6,841 6,555
Other assets 1,573 1,337
-------- --------
Total assets $300,525 $300,967
======== ========
Liabilities and Stockholders' Equity
Deposits $208,479 $211,277
Short-term borrowings 6,500 0
Long-term borrowings 53,500 57,500
Mortgagors' escrow accounts 408 380
Accrued expenses and other liabilities 3,471 3,427
-------- --------
Total liabilities 272,358 272,584
-------- --------
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, 1,608,774 and 1,595,774 issued and
outstanding, respectively 16 16
Additional paid-in capital 5,318 5,063
Retained earnings 23,734 24,289
Accumulated other comprehensive loss (582) (659)
Unearned compensation-RRP (4,034 and 4,729 shares) (83) (83)
Unearned compensation-ESOP (23,571 and 24,308
shares, respectively) (236) (243)
-------- --------
Total stockholders' equity 28,167 28,383
-------- --------
Total liabilities and stockholders' equity $300,525 $300,967
======== ========
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
December 31,
----------------------
2006 2005
----------------------
(unaudited)
Interest and dividend income:
Interest and fees on loans $ 2,984 $ 2,803
Interest and dividends on investment securities 663 638
Interest on federal funds sold 15 15
Interest on short-term investments 47 33
--------- ---------
Total interest and dividend income 3,709 3,489
--------- ---------
Interest expense:
Interest on deposits 1,355 976
Interest on Federal Home Loan Bank advances 653 544
--------- ---------
Total interest expense 2,008 1,520
--------- ---------
Net interest income 1,701 1,969
Provision for loan losses 30 0
--------- ---------
Net interest income, after provision for loan losses 1,671 1,969
--------- ---------
Other income:
Customer service fees 165 195
Gain on sales of securities available for sale, net 1 0
Miscellaneous 112 61
--------- ---------
Total other income 278 256
--------- ---------
Operating expenses:
Salaries and employee benefits 1,412 1,165
Occupancy and equipment 283 270
Data processing 191 190
Marketing and advertising 37 42
Professional fees 302 116
Other general and administrative 269 326
--------- ---------
Total operating expenses 2,494 2,109
--------- ---------
Income (loss) before provision (benefit)
for income taxes (545) 116
Provision (benefit) for income taxes (86) 26
--------- ---------
Net (loss) income $ (459) $ 90
========= =========
Number of weighted average shares outstanding-Basic 1,569,272 1,560,379
Earnings (loss) per share - Basic $(0.29) $0.06
Number of weighted average shares outstanding-Dilutive 1,569,272 1,575,665
Earnings (loss) per share-Dilutive $(0.29) $0.06
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 RRP Compensation-
Stock Capital Earnings Income (Loss) Compensation- ESOP Total
------ ---------- -------- ------------- ------------- ------------- -------
Balance at September 30, 2005 $16 $4,990 $24,714 $ (714) $(130) $(273) $28,603
Comprehensive income:
Net income - - 90 - - - 90
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects - - - (111) - - (111)
-------
Total comprehensive loss (21)
Cash dividends declared ($0.06 per share) - - (96) - - - (96)
ESOP shares released and committed
to be released (737 shares) - 12 - - - 8 20
Amortization of RRP stock (793 shares) - - - - 20 - 20
Issuance of common stock under stock option
plan, net of income tax benefits - - - - - - -
--- ------ ------- ------- ----- ----- -------
Balance at December 31, 2005 $16 $5,002 $24,708 $ (825) $(110) $(265) $28,526
=== ====== ======= ======= ===== ===== =======
Balance at September 30, 2006 $16 $5,063 $24,289 $ (659) $ (83) $(243) $28,383
Comprehensive income:
Net (loss) income - - $ (459) - - - (459)
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and
tax effects - - - 77 - - 77
-------
Total comprehensive loss (382)
-------
Cash dividends declared ($0.06 per share) - - (96) - - - (96)
ESOP shares released and committed
to be released (737 shares) - 16 - - - 7 23
Amortization of RRP stock (695 shares) - - - - - - -
Issuance of common stock under stock option
plan, net of income tax benefits ($105) - 239 - - - - 239
--- ------ ------- ------- ----- ----- -------
Balance at December 31, 2006 $16 $5,318 $23,734 $ (582) $ (83) $(236) $28,167
=== ====== ======= ======= ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three-Months Ended
December 31,
--------------------
2006 2005
------- ---------
Cash flows from operating activities:
Net (loss) income $ (459) $ 90
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 30 -
Net amortization of securities 25 81
Amortization of net deferred loan costs and premiums
on purchased loans 28 9
Depreciation expense 106 116
Gain on sales and calls of securities, net (1) -
Decrease in accrued interest receivable 251 11
Deferred income tax benefit (114) (32)
ESOP shares released and committed to be released 23 20
Amortization of RRP stock - 20
Increase in bank-owned life insurance (282) (53)
Other, net (192) (1)
------- --------
Net cash (used) provided by operating activities (585) 261
------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls 2,500 -
Maturities 5,610 4,000
Purchases - (7,941)
Principal payments 942 1,384
Purchase of Federal Home Loan Bank stock (15) (141)
Loan originations, net (1,332) (8,573)
Purchase of banking premises and equipment, net (6) (43)
Premiums paid on bank-owned life insurance (4) (199)
------- --------
Net cash provided (used) by investing activities 7,695 (11,513)
------- --------
Cash flows from financing activities:
Net (decrease) increase in deposits (2,798) 4,743
Net increase in short-term borrowings 6,500 -
Proceeds from Federal Home Loan Bank advances - 3,500
Repayment of Federal Home Loan Bank advances (4,000) -
Net increase in mortgagors' escrow accounts 28 21
Issuance of common stock under stock option plan,
net of tax benefits 239 -
Dividends paid (96) (96)
------- --------
Net cash (used) provided by financing activities (127) 8,168
------- --------
Net change in cash and cash equivalents 6,983 (3,084)
Cash and cash equivalents at beginning of year 8,317 8,974
------- --------
Cash and cash equivalents at end of year $15,300 $ 5,890
======= ========
Supplemental cash flow information:
Interest paid on deposits $ 1,343 $ 972
Interest paid on FHLB Advances 631 503
Income taxes paid 10 23
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, 2006, included in the Annual Report on Form 10-KSB/A 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 2006 Annual Report to Stockholders.
2) Commitments and Contingencies.
At December 31, 2006, the Bank had residential and commercial loan
commitments to borrowers of $5.6 million, commitments for home equity lines of
$119 thousand, available home equity lines of credit of $15.1 million,
unadvanced funds on commercial lines of credit, overdrafts and participation
loans of $3.4 million, unadvanced funds on construction mortgages of $1.9
million and personal overdraft lines of credit of approximately $478 thousand.
The Company had no commitments to purchase or sell securities at December 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-months ended December 31, 2006, 13,100 outstanding
stock options shares were anti-dilutive as the Company had recorded a net loss
for the period. For the three months ended December 31, 2005, 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.
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
5
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 adopted SFAS 123(R) on October 1, 2006 using the modified
prospective transition method. Under the modified prospective transition
method, the Company uses the fair value based accounting method for all
employee awards granted, modified, or settled after September 30, 2006. As of
October 1, 2006, compensation cost related to the non-vested portion of awards
outstanding as of September 30, 2006 are based on the grant-date fair value of
those awards as calculated under the original provisions of Statement No. 123;
that is, the Company did 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). The implementation of SFAS 123(R) was not material.
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.
Prior to October 1, 2006, the Company applied APB Opinion 25 and related
Interpretations in accounting for the Stock Option Plan. Accordingly, no
compensation cost had been recognized. Had compensation cost for the Company's
Stock Option Plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the method prescribed by SFAS No.
123, the Company's net income and earnings per share would have been adjusted
to the pro forma amounts indicated below:
Three Months Ended
December 31,
------------------
2005
------------------
Net income As reported $90
Pro forma $89
Basic earnings per share As reported $0.06
Pro forma $0.06
Diluted earnings per share As reported $0.06
Pro forma $0.06
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 December 30,
-------------------------------
2006 2005
---- ----
Service cost $ 58 $ 53
Interest cost 43 44
Expected return on assets (57) (54)
Transition obligation 1 1
Actuarial gain (4) (1)
---- ----
$ 41 $ 43
==== ====
5) Recent Accounting Pronouncements
Defined Benefit Pension and Other Postretirement Plans
In September 2006, the Financial Accounting Standards Board issued
Statement No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans". This Statement will require employers, such
as the Company, to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. Specifically, the new
standard requires an employer to (a) recognize on its balance sheet an
asset for a plan's over-funded status or a liability for a plan's
under-funded status, (b) measure a plan's assets and its obligations that
determine its funded status as of the end of the employer's fiscal year,
and (c) recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur.
The requirement to recognize the funded status of a benefit plan and the
disclosure requirements are effective for the Company at the end of its
fiscal year ending September 30, 2007. The requirement to measure plan
assets and benefit obligations as of the date of the employer's fiscal
year-end balance sheet is effective for the Company's fiscal year ending
September 30, 2009. Management is in the process of evaluating the impact
of this Statement on the Company's consolidated financial statements.
7
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
The following discussion compares the financial condition of the Company
and its wholly-owned subsidiary, the Bank, at December 31, 2006 and September
30, 2006, and the results of operations for three-months ended December 31,
2006, compared to the same period 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, merger-related 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 December 31, 2006 and September 30, 2006
The Company's total assets decreased by $442 thousand, or 0.1%, to $300.5
million at December 31, 2006 from $301.0 million at September 30, 2006,
primarily as a result of a decrease in securities available for sale, offset to
a lesser extent by increases in short-term investments and net loans.
Securities available for sale decreased by $9.0 million, or 14.3%, to $53.5
million from $62.4 million, primarily due to calls and maturities of
government-sponsored obligations and regularly scheduled payments on
mortgage-backed securities. As a result, short-term investments increased by
$6.2 million for December 31, 2006 as the Company works to reinvest the cash
flows in the investment portfolio over the next quarter. Additionally, loans
increased by $1.3 million to $211.0 million at December 31, 2006 from $209.7
million at September 30, 2006. The increase within the loan portfolio was
primarily due to an increase in commercial loans of $3.1 million from September
30, 2006 to December 31, 2006 offset, to a lesser extent by a $1.8 million
decline in residential real estate and home equity lines-of-credit. Deposits
decreased by $2.8 million, or 1.3%, to $208.5 million from $211.3 million,
primarily in regular savings, longer-term certificates of deposit, and business
checking accounts. Federal Home Loan Bank ("FHLB") advances increased by $2.5
million, or 4.3% to $60.0 million at December 31, 2006 from $57.5 million at
September 30, 2006. Total stockholders' equity declined by $216 thousand, to
$28.2 million at December 31, 2006 from $28.4 million at September 30, 2006
primarily as a result of the net period loss of $459 thousand and the payment
of $96 thousand in dividends to shareholders. However, it was offset by $239
thousand from the exercise of stock options and a $77 thousand decrease in the
accumulated other comprehensive loss relating to the change in after-tax market
value in securities available for sale.
Accumulated other comprehensive after-tax loss at December 31, 2006 was
$582 thousand, as compared to $659 thousand at September 30, 2006. The
Company's securities consist primarily of interest-rate sensitive securities
whose market value changes inversely with changes in market interest rates. At
December 31, 2006, deferred income tax benefits associated with this market
value decline were approximately $303 thousand.
Comparison of Operating Results for Three-Months Ended December 31, 2006
and 2005
Net (Loss) Income: The Company reported a loss per share (dilutive) for
three-months ended December 31, 2006 of $0.29 on a net loss of $459 thousand,
as compared to earnings of $0.06 per share (dilutive) on net income of $90
thousand for three-months ended December 31, 2005. The Company's return on
average assets was a negative 0.62% for three-months ended December 31, 2006 as
compared to 0.12% for three-months ended December 31, 2005.
The decrease in net income for three-months ended December 31, 2006 was
primarily due to a decrease in the net interest margin, resulting from the
effects of an inverted yield curve, and an increase in legal and other expenses
due to the proposed merger with Assabet Valley Bancorp and Hudson Savings Bank.
Net interest income declined by $268 thousand, or 13.6%, to $1.7 million for
three-months ended December 31, 2006 as compared to $2.0 million for
three-months ended December 31, 2005, as the Bank continues to experience the
effects of an inverted yield curve, where short-term interest rates were higher
than longer-term interest rates. As the Federal Reserve Open Market Committee
increased short-term rates during the year, the interest rates paid to
interest-bearing deposit customers increased. As a result of these changes, the
net interest rate spread, which represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities, declined by 0.46%, to 2.05% for three-months ended December 31,
2006 as compared to 2.51% for three-months ended December 31, 2005. The
inversion 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 operating losses, until
such time as the yield curve returns to a more normal, upward slope. Other
income increased by $22 thousand, or 8.6%, to $278 thousand for three-months
ended December 31, 2006 as compared to three-months ended December 31, 2005,
resulting from an increase in miscellaneous income, offset to a lesser extent
by a decrease in customer service fees. Miscellaneous income increased by
83.6%, or $51 thousand to $112 thousand, for three-months ended December 31,
2006 from $61 thousand for three-months ended December 31, 2005, primarily due
to an increase in cash
9
surrender value on Bank Owned Life Insurance policies ("BOLI"). Customer
service fees decreased by $30 thousand, or 15.4%, to $165 thousand for
three-months ended December 31, 2006 from $195 thousand for three-months ended
December 31, 2005 due primarily to the receipt of prepayment fees on commercial
loans during 2005. Operating expenses increased by $385 thousand, or 18.3%, to
$2.5 million for three-months ended December 31, 2006 as compared to $2.1
million for three-months ended December 31, 2005. Salaries and employee benefit
expenses increased by $247 thousand, or 21.2%, to $1.4 million for three-months
ended December 31, 2006 as compared to $1.2 million for three-months ended
December 31, 2005, due to a bonus payment made to a senior executive and
increases in director benefit expenses, offset to a lesser extent by an
increase in cash surrender value on supplemental executive retirement
agreements for three senior executives. Professional fees increased by $186
thousand to $302 thousand for three-months ended December 31, 2006, as compared
to three-months ended December 31, 2005, primarily due to legal and other
expenses related to the proposed merger.
The following schedule of the Bank's net interest rate spread and net
interest margin for the periods indicated is based upon average balances and
will aid in the subsequent discussion of interest and dividend income, interest
expense and net interest income:
Three Months Ended
December 31,
------------------ Increase
2006 2005 (decrease)(7)
----- ----- -------------
Interest-earning assets:
Short-term investments (1) 4.11% 4.17% -0.06%
Investment securities (2) 4.22% 3.77% 0.45%
Loans (3) 5.70% 5.46% 0.24%
Total interest-earning assets 5.33% 5.02% 0.31%
Interest-bearing liabilities:
NOW accounts 0.27% 0.14% 0.13%
Savings accounts (4) 1.29% 1.43% -0.15%
Money market deposit accounts 3.34% 3.22% 0.12%
Certificate of deposit accounts 4.47% 3.30% 1.17%
Total interest-bearing deposits 2.89% 2.06% 0.83%
Borrowed funds 4.56% 4.15% 0.40%
Total interest-bearing liabilities 3.28% 2.52% 0.77%
Net interest rate spread (5) 2.05% 2.51% -0.46%
Net interest margin (6) 2.44% 2.84% -0.40%
(1) Short-term investments include federal funds sold.
(2) All investment securities are considered available for sale.
(3) Loans are net of deferred loan origination costs (fees), allowance for
loan losses, discount/premium on purchased loans and unadvanced funds.
(4) Savings accounts include the balance in mortgagors' escrow accounts.
(5) 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.
10
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(7) Columns and rows may not foot due to small variances in rounding
11
Interest and Dividend Income: Interest and dividend income increased by
$220 thousand, or 6.3%, to $3.7 million for three-months ended December 31,
2006 from $3.5 million for December 31, 2005. The increase was primarily due to
the combination of an increase in the higher rates earned on average
interest-earning assets and slightly higher volume of interest-earning assets.
The average volume of interest-earning assets for three-months ended December
31, 2006 increased to $278.4 million as compared to an average volume of $277.8
million for three-months ended December 31, 2005. Additionally, the Bank's
average interest rate earned on all interest-earning assets increased by 0.31%,
to 5.33% for three-months ended December 31, 2006 from 5.02% for three-months
ended December 31, 2005. The average balance of investment securities for
three-months ended December 31, 2006 decreased to $62.8 million, earning 4.22%
as compared to an average balance of $67.7 million, earning 3.77% for
three-months ending December 31, 2005. The average balance of short-term
investments for three-months ended December 31, 2006 increased to $6.0 million
earning 4.11% as compared to an average balance of $4.6 million earning 4.17%
for three-months ending December 31, 2005. The average balance of loans for
three-months ended December 31, 2006, increased to $209.6 million earning
5.70%, as compared to an average balance of $205.5 million earning 5.46% for
three-months ending December 31, 2005.
Interest Expense: Total interest expense increased by $488 thousand, or
32.1%, to $2.0 million for three-months ended December 31, 2006 from $1.5
million for three-months ended December 31, 2005. The increase in interest
expense was due to a combination of higher volumes of money market deposit
accounts, certificates of deposits, and borrowings from the FHLB and an
increase in the average rate of interest paid on certificates of deposit and
borrowings from the FHLB. The average volume of all interest-bearing
liabilities (which includes interest-bearing deposits and borrowings) increased
to $244.6 million, with a cost of 3.28%, for three-months ended December 31,
2006 as compared to $241.5 million, with a cost of 2.52%, for three-months
ending December 31, 2005. The average volume of interest-bearing deposits
decreased to $187.3 million, with a cost of 2.89%, for three-months ended
December 31, 2006 as compared to an average balance of $189.1 million, with a
cost of 2.06%, for three-months ended December 31, 2005. Within the category of
interest-bearing deposits, the average balance of money market deposit accounts
and certificate of deposit accounts increased by $20.0 million and $14.4
million, respectively, while the average balance of savings and NOW accounts
declined by $33.6 million and $2.6 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 $57.3 million, with an average cost of 4.56%, for
three-months ended December 31, 2006, as compared to an average balance of
$52.4 million, with an average cost of 4.15%, for three-months ended December
31, 2005. The increase in average borrowing from the FHLB primarily funded the
growth in commercial loans.
Net Interest Income: The Bank's net interest income decreased by $268
thousand, or 13.6%, for three-months ended December 31, 2006, to $1.7 million
compared to $2.0 million for three-months ended December 31, 2005. The decrease
was attributed to the combination of an increase in interest expense of $488
thousand, offset, to a lesser extent, by an increase in interest and dividend
income of $220 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
0.46% to 2.05% for three-months ended December 31, 2006 as compared to 2.51%
for three-months ended December 31, 2005.
Provision for Loan Losses: The Bank had a $30 thousand provision for loan
losses for three-months ended December 31, 2006 compared to $0 for three-months
ended December 31, 2005. Total loans at December 31, 2006 were $211.0 million,
$209.7 million at September 30, 2006 and $209.0 million at December 31, 2005.
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
12
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 increased by $22 thousand, or 8.6%, to $278
thousand for three-months ended December 31, 2006, from $256 thousand for
three-months ended December 31, 2005. Miscellaneous income increased by 83.6%,
or $51 thousand to $112 thousand, for three-months ended December 31, 2006 from
$61 thousand for three-months ended December 31, 2005, primarily due to an
increase in cash surrender value on Bank Owned Life Insurance policies
("BOLI"). Customer service fees decreased by $30 thousand, or 15.4%, to $165
thousand for three-months ended December 31, 2006 from $195 thousand for
three-months ended December 31, 2005 due primarily to the receipt of prepayment
fees on commercial loans during 2005.
Operating Expenses: Three-months ended December 31, 2006 operating
expenses increased by $385 thousand, or 18.3%, to $2.5 million, compared to
$2.1 million for three-months ended December 31, 2006. Operating expenses as a
percent of average assets were 3.34% for three-months ended December 31, 2006
as compared to 2.84% for three-months ended December 31, 2005. The primary
reasons for the increase in operating expenses were due to expenses associated
with the proposed merger with Assabet Valley Bancorp and Hudson Savings Bank,
offset to a lesser extent by a decrease in other general and administrative
expenses. Salaries and employee benefits increased by $247 thousand, or 21.2%
to $1.4 million for three-months ended December 31, 2006 due to a bonus payment
made to a senior executive and increases in director benefit expenses, offset
to a lesser extent by an increase in the cash surrender value on supplemental
executive retirement agreements for three senior executives. Professional fees
increased by $186 thousand to $302 thousand for three-months ended December 31,
2006 from $116 thousand for three-months ended December 31, 2005, primarily due
to legal and other expenses related to the proposed merger. Occupancy and
equipment expenses increased by $13 thousand, or 4.8%, primarily due to
depreciation related to the completion of building improvements to our Main
Office and Northborough branch locations during 2006. Other general and
administrative expenses declined by 17.5%, or $57 thousand for three-months
ended December 31, 2006, resulting from a decline in expenses related to an
employee opinion survey and a decline in expenses related to reduced in
mortgage lending volume.
Income Taxes: Income (loss) before provision (benefit) for income taxes
declined by $661 thousand, to a loss of $545 thousand for three-months ended
December 31, 2006 as compared to income of $116 thousand for three-months ended
December 31, 2005. Primarily a result of this decline, the provision for income
taxes declined by $112 thousand, to a benefit of $86 thousand, for three-months
ended December 31, 2006 as compared to a provision of $26 thousand for
three-months ended December 31, 2005. The effective income tax rate was (15.8%)
and 22.4% for three-months ended December 31, 2006 and three-months ended
December 31, 2005, respectively. The lower effective tax rate was attributable
to relatively low level of income (loss) before income taxes for three-months
ended December 31, 2006, as compared to December 31, 2005, in addition to the
Bank's
13
utilization of a wholly-owned security investment subsidiary, and favorable tax
treatment from the increase in the cash surrender value of BOLI.
Liquidity and Capital Resources
The term "liquidity" refers to the Bank's ability to generate adequate
amounts of cash to fund loan originations, deposit withdrawals and operating
expenses. The Bank's primary sources of funds are deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by the Bank's
operations. The Bank also borrows money from time to time from the FHLB as part
of its management of interest rate risk and to even out cyclical patterns of
loan demand.
Loan repayments and maturing securities are a relatively predictable
source of funds. However, deposit flows, calls of securities and prepayments of
loans and mortgage-backed securities are strongly influenced by interest rates,
general and local economic conditions and competition in the marketplace. These
factors reduce the predictability of the timing of these sources of funds.
The Bank's primary investing activities are the origination of one-to
four-family real estate and other loans and the purchase of securities. During
three-months ended December 31, 2006, the Bank originated loans of $5.5
million, experienced principal repayments on loans of $6.8 million of loans.
The Bank did not purchase any securities during three-months ended December 31,
2006. Principal payments on mortgage-backed securities provided an additional
$942 thousand and there were $8.1 million of securities that were matured, sold
or called during three-months ended December 31, 2006. During three-months
ended December 31, 2006, the bank experienced a net decrease in deposits of
$2.8 million. While savings account balances declined over the recent three
months ended December 31, 2006 the Bank experienced an increase in money market
accounts and certificates of deposit, as customers transferred their funds into
relatively higher earning deposit accounts.
Certificate of deposit accounts scheduled to mature within one year were
$65.2 million at December 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 December 31, 2006, the Bank had $60.0 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 $39.3 million at December 31, 2006.
At December 31, 2006, the Company's capital to assets ratio was 9.49% and
it exceeded applicable regulatory capital requirements. Further, it does not
have any balloon or other payments due on any long-term obligations or any
off-balance sheet items other than the commitments and unused lines of credit.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
14
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.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three-months ended December 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.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit 31.1: Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1: Section 1350 Certifications
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: February 14, 2007 By: /s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: February 14, 2007 By: /s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Treasurer
and Clerk
17