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, 2007
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 3, 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; and
* 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 (unaudited)................................ 1
Consolidated Balance Sheets................................... 1
Consolidated Statements of Operations......................... 2
Consolidated Statements of Changes in Stockholders' Equity.... 3
Consolidated Statements of Cash Flows......................... 4
Notes to Unaudited Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis or Plan of Operation....... 8
Item 3. Controls and Procedures......................................... 17
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............................................... 20
Item 6. Exhibits ....................................................... 20
SIGNATURES.............................................................. 21
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
June 30, September 30,
2007 2006
-------- -------------
(unaudited)
Assets
Cash and due from banks $ 2,913 $ 2,431
Federal funds sold 5,971 3,444
Short-term investments 8,486 2,442
-------- --------
Total cash and cash equivalents 17,370 8,317
Securities available for sale 53,605 62,442
Federal Home Loan Bank stock, at cost 3,421 3,376
Loans, net of allowance for loan losses of
$866 and $780, respectively 205,383 209,744
Premises and equipment, net 6,454 6,560
Accrued interest receivable 1,149 1,368
Deferred income taxes 1,579 1,268
Bank-owned life insurance 6,968 6,555
Other assets 2,184 1,337
-------- --------
Total assets $298,113 $300,967
======== ========
Liabilities and Stockholders' Equity
Deposits $212,756 $211,277
Long-term borrowings 53,500 57,500
Mortgagors' escrow accounts 375 380
Accrued expenses and other liabilities 4,752 3,427
-------- --------
Total liabilities 271,383 272,584
-------- --------
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, 1,608,974 and 1,595,774 issued and
outstanding, respectively 16 16
Additional paid-in capital 5,359 5,063
Retained earnings 22,324 24,289
Accumulated other comprehensive loss (667) (659)
Unearned compensation-RRP (3,742 and 4,729 shares,
respectively) (81) (83)
Unearned compensation-ESOP (22,097 and 24,308
shares, respectively) (221) (243)
-------- --------
Total stockholders' equity 26,730 28,383
-------- --------
Total liabilities and stockholders' equity $298,113 $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 Nine-Months Ended
June 30, June 30,
----------------------- -----------------------
2007 2006 2007 2006
---- ---- ---- ----
(unaudited) (unaudited)
Interest and dividend income:
Interest and fees on loans $ 3,039 $ 2,907 $ 9,098 $ 8,569
Interest and dividends on investment securities 597 655 1,904 1,986
Interest on federal funds sold 48 25 80 55
Interest on short-term investments 133 24 288 74
--------- --------- --------- ---------
Total interest and dividend income 3,817 3,611 11,370 10,684
--------- --------- --------- ---------
Interest expense:
Interest on deposits 1,484 1,240 4,252 3,339
Interest on Federal Home Loan Bank advances 602 521 1,915 1,618
--------- --------- --------- ---------
Total interest expense 2,086 1,761 6,167 4,957
--------- --------- --------- ---------
Net interest income 1,731 1,850 5,203 5,727
Provision for loan losses 30 0 90 0
--------- --------- --------- ---------
Net interest income, after provision for loan losses 1,701 1,850 5,113 5,727
--------- --------- --------- ---------
Other income:
Customer service fees 172 163 510 544
Gain on sales of securities available for sale, net 0 0 4 0
Loss on sales of mortgages 0 0 0 (25)
Miscellaneous 27 37 180 168
--------- --------- --------- ---------
Total other income 199 200 694 687
--------- --------- --------- ---------
Operating expenses:
Salaries and employee benefits 1,084 1,226 4,046 3,625
Occupancy and equipment 248 282 801 882
Data processing 278 203 664 580
Marketing and advertising 42 54 114 133
Professional fees 1,058 120 1,626 392
Other general and administrative 309 77 908 897
--------- --------- --------- ---------
Total operating expenses 3,019 1,962 8,159 6,509
--------- --------- --------- ---------
(Loss) income before (benefit) provision for income taxes (1,119) 88 (2,352) (95)
(Benefit) provision for income taxes (417) 0 (676) (73)
--------- --------- --------- ---------
Net (loss) income $ (702) $ 88 $ (1,676) $ (22)
========= ========= ========= =========
Number of weighted average shares outstanding-Basic 1,582,349 1,565,632 1,575,880 1,561,565
(Loss) earnings per share-Basic $ (0.44) $ 0.06 $ (1.06) $ (0.01)
Number of weighted average shares outstanding-Dilutive 1,582,349 1,579,781 1,575,880 1,561,565
(Loss) earnings per share-Dilutive $ (0.44) $ 0.06 $ (1.06) $ (0.01)
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 Loss RRP ESOP Total
------ ---------- -------- ------------- ------------- ------------- -------
Balance at September 30, 2005 $16 $4,990 $24,714 $ (714) $(130) $(273) $28,603
-------
Comprehensive loss:
Net loss 0 0 (22) 0 0 0 (22)
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (419) 0 0 (419)
-------
Total comprehensive loss (441)
-------
Cash dividends declared and paid ($.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 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
=== ====== ======= ======= ===== ===== =======
Balance at September 30, 2006 $16 $5,063 $24,289 $ (659) $ (83) $(243) $28,383
-------
Comprehensive loss:
Net loss 0 0 (1,676) 0 0 0 (1,676)
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (8) 0 0 (8)
-------
Total comprehensive loss (1,684)
-------
Cash dividends declared and paid ($.18 per share) 0 0 (289) 0 0 0 (289)
ESOP shares released and committed
to be released (2,210 shares) 0 53 0 0 0 22 75
Amortization of RRP stock 0 1 0 0 2 0 3
Issuance of common stock under stock option
plan, net of income tax benefits ($106) 0 242 0 0 0 0 242
--- ------ ------- ------- ----- ----- -------
Balance at June 30, 2007 (unaudited) $16 $5,359 $22,324 $ (667) $ (81) $(221) $26,730
=== ====== ======= ======= ===== ===== =======
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,
--------------------
2007 2006
-------- --------
Cash flows from operating activities:
Net loss $ (1,676) $ (22)
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Provision for loan losses 90 -
Net amortization of securities 37 208
Amortization of net deferred loan costs and premiums
(discounts) on purchased loans and indirect lending 38 52
Depreciation expense 334 361
Loss on the sales of mortgages - 25
Gain on sales and calls of securities, net (4) -
Decrease (increase) in accrued interest receivable 219 (9)
Deferred income tax benefit (309) (127)
ESOP shares released and committed to be released 75 60
Amortization of RRP stock 3 46
Increase in bank-owned life insurance (184) (180)
Other, net 478 344
--------------------
Net cash (used) provided by operating activities (899) 758
--------------------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls - -
Maturities 19,061 9,350
Purchases (13,118) (12,560)
Principal payments 2,851 4,560
Purchase of Federal Home Loan Bank stock (45) (197)
Proceeds from the sale of loans 55 1,765
Loan originations, net 4,178 (10,900)
Purchase of premises and equipment, net (228) (686)
Premiums paid on bank-owned life insurance (229) (207)
--------------------
Net cash provided (used) by investing activities 12,525 (8,875)
--------------------
Cash flows from financing activities:
Net increase in deposits 1,479 3,557
Net increase in short-term borrowings - 500
Proceeds from Federal Home Loan Bank advances 2,000 5,500
Repayment of Federal Home Loan Bank advances (6,000) (2,000)
Net decrease in mortgagors' escrow accounts (5) (43)
Issuance of common stock under stock option plan,
net of tax benefits 242 15
Dividends paid (289) (287)
--------------------
Net cash (used) provided by financing activities (2,573) 7,242
--------------------
Net change in cash and cash equivalents 9,053 (875)
Cash and cash equivalents at beginning of year 8,317 8,974
--------------------
Cash and cash equivalents at end of period $ 17,370 $ 8,099
====================
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 on Form 10-KSB/A.
2) Commitments and Contingencies.
At June 30, 2007, the Bank had residential and commercial loan
commitments to borrowers of $12.0 million, available home equity lines of
credit of $15.3 million, unadvanced funds on commercial lines of credit,
overdrafts and participation loans of $3.6 million, unadvanced funds on
construction mortgages of $3.6 million and personal overdraft lines of credit
of approximately $474 thousand. The Company had no commitments to purchase or
sell securities at June 30, 2007.
3) Earnings (loss) per Share and Stock Based Compensation.
Basic earnings (loss) per share represent income available (loss
attributable) to common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) 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, 2007
and 2006, the Company has 17,090 and 27,500 outstanding stock option shares
that are considered anti-dilutive as the Company had recorded a net loss for
the respective periods. The Company has excluded from the diluted earnings
(loss) per share calculation any potential common shares that would increase
loss 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 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
5
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 (loss) and earnings (loss) per share would have
been adjusted to the pro forma amounts indicated below:
Three-Months Ended Nine-Months Ended
June 30, 2006 June 30, 2006
------------------ -----------------
(in thousands, except per share data)
Net income (loss) As reported $88 $(22)
Pro forma $87 $(25)
Basic earnings (loss) per share As reported $0.06 $(0.01)
Pro forma $0.06 $(0.01)
Diluted earnings (loss) per share As reported $0.06 $(0.01)
Pro forma $0.06 $(0.01)
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 June 30, Nine-months ended June 30,
--------------------------- --------------------------
2007 2006 2007 2006
--------------------------- --------------------------
Service cost $ 60 $ 54 $ 179 $ 161
Interest cost 44 43 130 131
Expected return on assets (58) (54) (173) (161)
Transition obligation 1 1 2 2
Actuarial gain (4) (2) (12) (6)
--------------------------- --------------------------
$ 43 $ 42 $ 126 $ 127
=========================== ==========================
5) Recent accounting pronouncements
On February 15, 2007, the Financial Accounting Standards Board issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, which provides companies with an option to report selected
financial assets and liabilities at fair value. Statement No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. Statement No. 159 is effective for the
Company's 2009 fiscal year, with early adoption permitted for the Company's
2008 fiscal year, provided that the Company also adopts Statement No. 157 for
fiscal 2008. Management is currently evaluating the potential impacts of
adopting Statement No. 159 on its 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 June 30, 2007 and September 30,
2006, and the results of operations for three and nine-months ended June 30,
2007, compared to the same periods in 2006. 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-deposit
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, 2007 and September 30, 2006
The Company's total assets decreased by $2.9 million, or 0.9%, to $298.1
million at June 30, 2007 from $301.0 million at September 30, 2006, primarily
as a result of a decrease in securities available for sale and net loans,
offset to a lesser extent by an increase in short-term investments and federal
funds sold. Securities available for sale decreased by $8.8 million, or 14.2%,
to $53.6 millions from $62.4 million, primarily due to calls and maturities of
government-sponsored enterprise obligations and regularly scheduled payments on
mortgage-backed securities. As a result, short-term investments and federal
funds sold increased by $8.6 million at June 30, 2007 as the Company works to
reinvest the cash inflows. Additionally, net loans decreased by $4.4 million to
$205.4 million at June 30, 2007 from $209.7 million at September 30, 2006.
Within the loan portfolio, commercial loans increased by $3.5 million from
September 30, 2006 to June 30, 2007 and residential real estate and home equity
lines-of-credit decreased by $7.9 million for the same period. Deposits
increased by $1.5 million to $212.8 million at June 30, 2007 from $211.3
million at September 30, 2006, primarily in short-term certificates of deposit
and checking accounts. Additionally, Federal Home Loan Bank ("FHLB") advances
decreased by $4.0 million, or 7.0%,to $53.5 million at June 30, 2007 from $57.5
million at September 30, 2006. Total stockholders' equity declined by $1.7
million, to $26.7 million at June 30, 2007 from $28.4 million at September 30,
2006 primarily as a result of the net period loss of $1.7 million, the payment
of $289 thousand in dividends to shareholders and the change in accumulated
other comprehensive loss relating to the change in after-tax value in
securities available for sale, partially offset by $296 thousand from the
exercise of stock options. The Company's securities consist primarily of
interest-rate sensitive securities whose market value changes inversely with
changes in market interest rates. At June 30, 2007, deferred income tax
benefits associated with this market value decline were approximately $347
thousand.
Comparison of Operating Results for Three-Months Ended June 30, 2007 and 2006
Net Loss: The Company reported a loss per share (dilutive) for
three-months ended June 30, 2007 of $0.44 on a net loss of $702 thousand, as
compared to earnings per share (dilutive) of $0.06 on a income of $88 thousand
for three-months ended June 30, 2006. The Company's return on average assets
was a negative 0.95% for three-months ended June 30, 2007 as compared to a
positive 0.12% for three-months ended June 30, 2006.
The net loss for three-months ended June 30, 2007 was primarily due to an
increase in operating expenses and a decrease in net interest income. Operating
expenses increased by $1.1 million, or 53.9%, to $3.0 million for three-months
ended June 30, 2007 as compared to $2.0 million for three-months ended June 30,
2006. The increase was primarily due to increases in professional fees and
other operating expenses related to the proposed merger with Assabet Valley
Bancorp ("Assabet"). These increases were partially offset by a decrease in
salary and employee benefits and occupancy and equipment expenses. Net interest
income declined by $119 thousand, or 6.4%, to $1.7 million for three-months
ended June 30, 2007 as compared to $1.9 million for three-months ended June 30,
2006, as the Bank continues to experience the effects of a relatively flat
yield curve. As a result, 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 0.20%, to 2.10% for
three-months ended June 30, 2007 as compared to 2.30% for three-months ended
June 30, 2006. Primarily due to an increase in the rate of interest earned on
investment securities and commercial loans, the yield on average
interest-earning assets increased by 0.36%, to 5.53% for three-months ended
June 30, 2007 from 5.17% for three-months ended June 30, 2006. However, the
cost of average interest-bearing liabilities increased by 0.57%, to 3.43% for
three-months ended June 30, 2007 from 2.86% for three-months ended June 30,
2006 and primarily reflects higher interest rates paid on certificate of
deposit accounts and Federal Home Loan Bank advances. 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 continued operating losses, until such time as the
yield curve returns to a more normal, upward slope.
9
The Bank recorded a $30 thousand provision for loan losses for three-months
ended June 30, 2007 as compared to no provision for loan losses for
three-months ended June 30, 2006.
The following schedule of 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
2007 2006 (decrease)(7)
---------------------------------------
Interest-earning assets:
Short-term investments (1) 5.32% 5.50% -0.18%
Investment securities (2) 4.27% 3.92% 0.35%
Loans (3) 5.88% 5.56% 0.32%
Total interest-earning assets 5.53% 5.17% 0.36%
Interest-bearing liabilities:
NOW accounts 0.73% 0.15% 0.58%
Savings accounts (4) 1.15% 1.34% -0.19%
Money market deposit accounts 2.85% 3.34% -0.49%
Certificate of deposit accounts 4.78% 3.96% 0.82%
Total interest-bearing deposits 3.12% 2.53% 0.59%
Borrowed funds 4.50% 4.15% 0.35%
Total interest-bearing liabilities 3.43% 2.86% 0.57%
Net interest rate spread (5)(7) 2.10% 2.30% -0.20%
Net interest margin (6) 2.51% 2.65% -0.14%
(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.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(7) Columns and rows may not add do to small rounding variances.
10
Interest and Dividend Income: Interest and dividend income increased by
$206 thousand, or 5.7%, to $3.8 million for three-months ended June 30, 2007
from $3.6 million for June 30, 2006. The increase was due to higher rates
earned on average interest-earning assets. The average volume of
interest-earning assets for three-months ended June 30, 2007 decreased to
$276.1 million as compared to an average volume of $279.6 million for
three-months ended June 30, 2006. The Bank's average interest rate earned on
all interest-earning assets increased by 0.36%, to 5.53% for three-months ended
June 30, 2007 from 5.17% for three-months ended June 30, 2006. The decrease in
the average volume of interest-earning assets was the result of the Company
paying down borrowings from the FHLB. The average balance of investment
securities for three-months ended June 30, 2007 decreased to $55.9 million,
earning 4.27% as compared to an average balance of $66.9 million, earning 3.92%
for three-months ending June 30, 2006. The average balance of short-term
investments for three-months ended June 30, 2007 increased to $13.6 million
earning 5.32% as compared to an average balance of $3.6 million earning 5.50%
for three-months ending June 30, 2006. The average balance of loans for
three-months ended June 30, 2007, decreased slightly to $206.6 million earning
5.88%, as compared to an average balance of $209.1 million earning 5.56% for
three-months ending June 30, 2006.
Interest Expense: Total interest expense increased by $325 thousand, or
18.5%, to $2.1 million for three-months ended June 30, 2007 from $1.8 million
for three-months ended June 30, 2006. The increase in interest expense was due
to a combination of higher volumes certificate of deposit accounts and
borrowings from the FHLB and an increase in the average rate of interest paid
on certificates of deposit, NOW accounts and borrowings from the FHLB. The
average volume of all interest-bearing liabilities (which includes
interest-bearing deposits and borrowings) increased to $243.5 million, with a
cost of 3.43%, for three-months ended June 30, 2007 as compared to $240.3
million, with a cost of 2.86%, for three-months ending June 30, 2006. The
average volume of interest-bearing deposits increased to $190.0 million, with a
cost of 3.12%, for three-months ended June 30, 2007 as compared to an average
balance of $188.2 million, with a cost of 2.53%, for three-months ended June
30, 2006. Within the category of interest-bearing deposits, the average balance
of certificate of deposit and NOW accounts increased by $6.0 million and $231
thousand respectively, while the average balance of savings and money market
deposit accounts declined by $3.2 million and $1.2 million, respectively. The
decrease in savings and money market deposit accounts was due to the relative
attractiveness of and transfers to certificate of deposit accounts and
alternative investments in the marketplace. During this period, the Bank
utilized alternative sources of funds by increasing its borrowing from the
FHLB. The average balance of borrowings increased to $53.5 million, with an
average cost of 4.50%, for three-months ended June 30, 2007, as compared to an
average balance of $52.1 million, with an average cost of 4.15%, for
three-months ended June 30, 2006.
Net Interest Income: Net interest income decreased by $119 thousand, or
6.4%, for three-months ended June 30, 2007, to $1.7 million compared to $1.9
million for three-months ended June 30, 2006. The decrease was attributed to
the combination of an increase in interest expense of $325 thousand, offset, to
a lesser extent, by an increase in interest and dividend income of $206
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 0.20% to 2.10% for
three-months ended June 30, 2007 as compared to 2.30% for three-months ended
June 30, 2006.
Provision for Loan Losses: The Bank recorded a $30 thousand provision for
loan losses for three-months ended June 30, 2007 compared to $0 for
three-months ended June 30, 2006. The increase in the provision for loan losses
is primarily due to the allowance for specific problem loans. Total loans at
June 30, 2007 were $205.4 million, $209.7 million at September 30, 2006 and
$209.5 million at June 30, 2006. It is the Bank's policy to provide valuation
allowances for probable 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
11
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 $1 thousand, or 0.5%, to $199 thousand
for three-months ended June 30, 2007, from $200 thousand for three-months ended
June 30, 2006. Income from customer service fees increased by $9 thousand, or
5.5%, to $172 thousand for three-months ended June 30, 2007 as compared to $163
thousand for three-months ended June 30, 2006, primarily due to an increase in
fees associated with the sale of non-deposit investment products, offset to a
lesser extent by a slight decrease in ATM usage fees. Miscellaneous income
decreased by $10 thousand, or 27.0%, to $27 thousand for three-months ended
June 30, 2007, from $37 thousand for three-months ended June 30, 2006,
primarily from a decrease in mortgage servicing income recognized upon the
servicing of mortgages sold in the secondary market and a decrease in income on
BOLI.
Operating Expenses: Three-months ended June 30, 2007 operating expenses
increased by $1.1 million, or 53.9%, to $3.0 million, compared to $2.0 million
for three-months ended June 30, 2006. Operating expenses as a percent of
average assets were 4.07% for three-months ended June 30, 2007 as compared to
2.62% for three-months ended June 30, 2006. The primary reasons for the
increase in operating expenses were due to professional and other operating
expenses associated with the pending merger with Assabet, offset to a lesser
extent by a decrease in salaries and employee benefits and occupancy and
equipment expenses. Professional fees increased by $938 thousand to $1.1
million for three-months ended June 30, 2007 from $120 thousand for
three-months ended June 30, 2006, primarily due to litigation, legal and other
expenses related to the proposed merger with Assabet. Such litigation expenses
do not reflect anticipated reimbursement from the Company's liability insurance
carrier. Other general and administrative expenses increased by $232 thousand
to $309 thousand for three-months ended June 30, 2007 as compared to $77
thousand for three-months ended June 30, 2006, due primarily to expenses
related to the Company's annual meeting of shareholders. Salaries and employee
benefit expenses declined by $142 thousand, or 11.6%, to $1.1 million for
three-months ended June 30, 2007 as compared to $1.2 million for three-months
ended June 30, 2006, due primarily to a reduction in director benefit expense
and a decline in employee compensation. Occupancy and equipment expenses
declined by $34 thousand, or 12.1%, to $248 thousand for three-months ended
June 30, 2007 as compared to $282 thousand for three-months ended June 30,
2006, due to a reduction in maintenance expenses coupled with a decline in
depreciation expense on equipment, still in operation, reaching their estimated
useful life.
Income Taxes: Loss before benefit for income taxes increased by $1.2
million, to a loss of $1.1 million for three-months ended June 30, 2007 as
compared to net income of $88 thousand for three-months ended June 30, 2006.
Primarily a result of this increased loss, the benefit for income taxes
increased by $417 thousand, to a benefit of $417 thousand, for three-months
ended June 30, 2007 as compared to $0 for three-months ended June 30, 2006.
The effective income tax rate was (37.3%) and 0.00% for three-months ended June
30, 2007 and three-months ended June 30, 2006, respectively. The lower
effective tax rate was attributable to the loss before income taxes for
three-months ended June 30, 2007, as compared to June 30, 2006, a reduced
impact of tax benefit items such
12
as tax-exempt income, life insurance income and dividends received deduction as
a percentage of pre-tax income.
Comparison of Operating Results for Nine-Months Ended June 30, 2007 and 2006
Net Loss: The Company reported a loss per share (dilutive) for
nine-months ended June 30, 2007 of $1.06 on a net loss of $1.7 million, as
compared to a loss per share (dilutive) of $0.01 on a net loss of $22 thousand
for nine-months ended June 30, 2006. The Company's return on average assets was
negative 0.75% for nine-months ended June 30, 2007 as compared to negative
0.01% for nine-months ended June 30, 2006.
The increased net loss for nine-months ended June 30, 2007 was due
primarily to an increase in operating expenses and a decrease in net interest
income. For nine-months ended June 30, 2007, operating expenses increased by
$1.7 million, or 25.3%, to $8.2 million, from $6.5 million for nine-months
ended June 30, 2006. The primary reasons for the increase in operating expenses
were due to increased professional fees and other operating expenses related to
the pending merger with Assabet, offset to a lesser extent by a decline in
occupancy and equipment and marketing expenses. Net interest income decreased
by $524 thousand, or 9.1%, to $5.2 million, for nine-months ended June 30,
2007, as compared to $5.7 million for nine-months ended June 30, 2006, as the
Bank continues to experience the effects of a relatively flat yield curve. The
net interest rate spread declined by 0.29%, to 2.11% for nine-months ended June
30, 2007 as compared to 2.40% for nine-months ended June 30, 2006. Primarily
due to an increase in the rate of interest earned on short-term investments,
investment securities and commercial loans, the yield on average
interest-earning assets increased by 0.37%, to 5.47% for nine-months ended June
30, 2007 from 5.10% for nine-months ended June 30, 2006. However, the cost of
average interest-bearing liabilities increased by 0.66%, to 3.36% for
nine-months ended June 30, 2007 from 2.70% for nine-months ended June 30, 2006
and primarily reflects higher interest rates paid on certificate of deposit
accounts and FHLB advances. The Bank recorded a $90 thousand provision for loan
losses for nine-months ended June 30, 2007 as compared to no provision for loan
losses for nine-months ended June 30, 2006.
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
2007 2006 (decrease)(7)
---------------------------------------
Interest-earning assets:
Short-term investments (1) 5.09% 4.79% 0.30%
Investment securities (2) 4.33% 3.90% 0.43%
Loans (3) 5.81% 5.49% 0.32%
Total interest-earning assets 5.47% 5.10% 0.37%
Interest-bearing liabilities:
NOW accounts 0.53% 0.17% 0.36%
Savings accounts (4) 1.20% 1.37% -0.17%
Money market deposit accounts 3.06% 3.32% -0.26%
Certificate of deposit accounts 4.64% 3.65% 0.99%
Total interest-bearing deposits 3.01% 2.31% 0.70%
Borrowed funds 4.54% 4.14% 0.40%
Total interest-bearing liabilities 3.36% 2.70% 0.66%
Net interest rate spread (5)(7) 2.11% 2.40% -0.29%
Net interest margin (6) 2.50% 2.73% -0.23%
(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.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(7) Columns and rows may not add do to small rounding variances.
14
Interest and Dividend Income: Interest and dividend income increased by
$686 thousand, or 6.4%, to $11.4 million for nine-months ended June 30, 2007 as
compared to $10.7 million for nine-months ended June 30, 2006. Primarily due to
an increase in the rate of interest earned on loans and investment securities,
the yield on interest-earning assets increased by 0.37% to 5.47% for
nine-months ended June 30, 2007 from 5.10% for nine-months ended June 30, 2006.
The average volume of interest-earning assets for nine-months ended June 30,
2007 decreased to $277.2 million as compared to an average volume of $279.6
million for nine-months ended June 30, 2006. These funds were primarily used to
fund deposit reductions. The average balance of loans for nine-months ended
June 30, 2007, increased to $208.8 million earning 5.81%, as compared to an
average balance of $208.1 million earning 5.49% for nine-months ending June 30,
2006. The average balance of short-term investments for nine-months ended June
30, 2007 increased to $9.7 million earning 5.09% as compared to an average
balance of $3.6 million earning 4.79% for nine-months ending June 30, 2006. The
higher yield reflects increases in short-term rates by the Federal Open Market
Committee. The average balance of investment securities for nine-months ended
June 30, 2007 decreased to $58.7 million, earning 4.33% as compared to an
average balance of $67.8 million, earning 3.90% for nine-months ending June 30,
2006.
Interest Expense: Total interest expense increased by $1.2 million, or
24.4%, to $6.2 million for nine-months ended June 30, 2007, from $5.0 million
for nine-months ended June 30, 2006. The increase in interest expense was
primarily 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 decreased to $244.5 million, with a cost of 3.36%, for nine-months
ended June 30, 2007 as compared to $245.1 million, with a cost of 2.70%, for
nine-months ending June 30, 2006. Within this category of interest-bearing
liabilities, the average volume of interest-bearing deposits decreased to
$188.2 million, with a cost of 3.01%, for nine-months ended June 30, 2007 as
compared to $193.0 million, with a cost of 2.31%, for nine-months ended June
30, 2006. Within the category of interest-bearing deposits, the average balance
of money market deposit accounts and certificate of deposit accounts increased
by $9.3 million and $15.9 million, respectively, while the average balance of
savings and NOW accounts declined by $27.5 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. The average balance of borrowings
increased by $4.2 million to $56.3 million, with an average cost of 4.54%, for
nine-months ended June 30, 2007, as compared to an average balance of $52.1
million, with an average cost of 4.14%, for nine-months ended June 30, 2006.
The increase in average borrowing from the FHLB helped fund the decline in
average balances of interest-bearing deposits.
Net Interest Income: Net interest income decreased by $524 thousand, or
9.1%, for nine-months ended June 30, 2007, to $5.2 million, as compared to $5.7
million for nine-months ended June 30, 2006. The decrease was primarily
attributed to the combination of an increase in interest expense of $1.2
million, offset, to a lesser extent by an increase in interest and dividend
income of $686 thousand. The Bank's net interest rate spread, which represents
the difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities, decreased by
0.29%, to 2.11% for nine-months ended June 30, 2007 as compared to 2.40% for
nine-months ending June 30, 2006.
Provision for Loan Losses: The Bank recorded a $90 thousand provision for
loan losses for nine-months ended June 30, 2007 compared to $0 for nine-months
ended June 30, 2006. The increase in the provision for loan losses is due to an
increase in the general reserves on commercial loans, as the balance increased
by $3.5 million to $39.0 million for nine-months ended June 30, 2007, as well
as a slight increase in the allowance related to specific problem loans. Total
loans at June 30, 2007 were $205.4 million, $209.7 million at September 30,
2006 and $209.5 million at June 30, 2006. The Bank's policy regarding the
provision for loan losses is discussed in the comparison of operating
15
results for three-months ended June 30, 2007 and 2006 above.
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
increased by $7 thousand, or 1.0%, to $694 thousand for nine-months ended June
30, 2007, from $687 thousand for nine-months ended June 30, 2006. 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. Miscellaneous income increased by $12 thousand, or 7.1%, to
$180 thousand for nine-months ended June 30, 2007 as compared to $168 thousand
for nine-months ended June 30, 2006 primarily as a result of increases in the
cash surrender value on BOLI policies, income from the origination of
Massachusetts Housing Loans, and the dividend on the Bank Insurance Fund
Investment. Customer service fees decreased by $34 thousand, or 6.3%, to $510
thousand for the nine-months ended June 30, 2007 as compared to $544 thousand
for nine-months ended June 30, 2006, primarily due to a decline in the
prepayment fees on commercial loans and a slight decline in ATM usage fees.
Operating Expenses: For nine-months ended June 30, 2007, operating
expenses increased $1.7 million, or 25.3%, to $8.2 million, from $6.5 million
for nine-months ended June 30, 2006. The primary reasons for the increase in
operating expenses were due to increases in professional fees, salaries and
employee benefits and data processing, offset, to a lesser extent, by declines
in expenses relating to occupancy and equipment and marketing. Professional
fees increased by $1.2 million, or 312%, to $1.6 million for nine-months ended
June 30, 2007 as compared to $392 thousand for nine-months ended June 30, 2006,
due primarily to litigation, legal and other expenses related to the pending
merger with Assabet. Such litigation expenses do not reflect anticipated
reimbursement from the Company's liability insurance carrier. Salaries and
employee benefits increased by $421 thousand, or 11.6%, to $4.0 million for
nine-months ended June 30, 2007 as compared to $3.6 million for nine-months
ended June 30, 2006 primarily as a result of a bonus payment made to a senior
executive and an accelerated recognition of certain director benefit expenses.
As a result of a higher volume of services provided and anticipated conversion
costs associated with the pending merger with Assabet, data processing expenses
increased by $84 thousand, or 14.5%, to $664 thousand for nine-months ended
June 30, 2007 as compared to $580 thousand for nine-months ended June 30, 2006.
Occupancy and equipment expenses declined by $81 thousand, or 9.2%, to $801
thousand for nine-months ended June 30, 2007 as compared to $882 thousand for
nine-months ended June 30, 2006, due to a reduction in maintenance expenses
coupled with a decline in depreciation expense on equipment, still in
operation, reaching their estimated useful life.
Income Taxes: Loss before benefit for income taxes increased by $2.3
million, to a loss of $2.4 million for nine-months ended June 30, 2007 as
compared to a loss of $95 thousand for nine-months ended June 30, 2006.
Primarily a result of this increased loss, the benefit for income taxes
increased by $603 thousand, to a benefit of $676 thousand, for nine-months
ended June 30, 2007 as compared to a benefit of $73 thousand for nine-months
ended June 30, 2006. The effective income tax rate was (28.7%) and (76.8%) for
nine-months ended June 30, 2007 and nine-months ended June 30, 2006,
respectively. The lower effective tax rate was attributable to the loss before
income taxes for nine-months ended June 30, 2007, as compared to June 30, 2006,
a reduced impact of tax benefit items such as tax-exempt income, life insurance
income and dividends received deduction as a percentage 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
16
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 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, 2007, the Bank originated loans of $24.7 million and
experienced principal repayments on loans of $20.5 million. The Bank purchased
securities of $13.1 million during nine-months ended June 30, 2007. Principal
payments on mortgage-backed securities provided an additional $2.9 million and
$19.1 million of securities matured or were called during nine-months ended
June 30, 2007. During nine-months ended June 30, 2007 the Company experienced a
net increase in deposits of $1.5 million. While savings account balances
declined over the recent nine-months ended June 30, 2007, the Bank experienced
an increase in money market accounts and certificates of deposit, as customers
moved their funds into relatively higher earning deposit accounts.
Certificate of deposit accounts scheduled to mature within one year were
$80.5 million at June 30, 2007. 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.
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, 2007, the Bank had $53.5 million in
outstanding borrowing from the FHLB and, based upon estimated eligible
collateral that could be pledged with the FHLB, the Bank had additional
borrowing capacity of $46.2 million at June 30, 2007.
At June 30, 2007, the Company's capital to assets ratio was 8.97% and it
exceeded applicable regulatory capital requirements. Further, it does not have
any balloon or other payments due on any long-term obligations or any
off-balance sheet items other than the commitments and unused lines of credit.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Item 3. Controls and Procedures.
Management, including the Company's President and Chief Executive Officer
and Senior Vice President, Chief Financial Officer, 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, Chief
Financial Officer, Treasurer and Clerk concluded that
17
the disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act (i) is recorded, processed, summarized and
reported as and when required, and (ii) accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosures.
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation that occurred
during the Company's last fiscal quarter that have materially affected, or that
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On June 4, 2007, a purported class action (Philippe E. Gut and Gwen Pratt Gut
v. Joseph F. MacDonough, et al.) relating to the Company's proposed merger with
Assabet was filed against the Company, its directors, Westborough MHC, The
Westborough Bank, Assabet Valley Bancorp and Hudson Savings Bank in Worcester
County, Massachusetts, Superior Court.
Among other things, the complaint: (1) alleges breach of fiduciary duty and
self dealing by the Company's directors in connection with approval of the
Merger Agreement; (2) alleges aiding and abetting breach of fiduciary duty by
Assabet Valley Bancorp and Hudson Savings Bank; (3) asks for declaratory
judgment that the Merger Agreement is null, void and of no effect; (4) asks for
declaratory judgment that the Company's directors violated their fiduciary
duties in connection with approval of the Merger Agreement; (5) asks that the
defendants be enjoined from taking steps to accomplish or implement the merger
under the terms set forth in the Merger Agreement; and (6) asks for judgment
that the action is a proper class action and that the plaintiffs are proper
class representatives.
On August 9, 2007 a hearing on Plaintiffs' motion for preliminary injunction of
the merger was held, and on August 14, 2007 the Massachusetts Superior Court
issued an order denying Plaintiffs' motion in its entirety.
The Company continues to believe that the suit is without merit and intends to
vigorously defend the suit.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the nine-months ended June 30, 2007, 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. 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.
The Annual Meeting of the Company's Shareholders was held on July 24, 2007 with
the following matters being voted upon and with the indicated results:
1. Approval of the Agreement and Plan of Merger dated as of November 13,
2006 among Assabet Valley Bancorp, HudWest Financial Services, Inc.,
Hudson Savings Bank and Westborough Bancorp, MHC, Westborough Financial
Services, Inc. and The Westborough Bank.
19
--------------------------------------------------------------
VOTES VOTES BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
--- ------- ----------- ---------
--------------------------------------------------------------
1,263,572 181,171 1,275 101,176
--------------------------------------------------------------
2. Election of Directors for terms expiring in 2010
--------------------------------------------------------------
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
--------------------------------------------------------------
Nancy M. Carlson 1,372,414 174,780
--------------------------------------------------------------
Benjamin H. Colonero, Jr. 1,375,014 172,180
--------------------------------------------------------------
Jeffrey B. Leland 1,372,601 174,593
--------------------------------------------------------------
Joseph F. MacDonough 1,374,659 172,535
--------------------------------------------------------------
The following directors of the Company were not up for election at the annual
meeting:
Terms expiring in 2008: Edward S. Bilzerian, Paul F. McGrath, Charlotte C.
Spinney, Phyllis A. Stone and James E. Tashjian
Terms expiring in 2009: James N. Ball, David E. Carlstrom, John L. Casagrande
and Robert A. Klugman
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
20
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, 2007 By: /s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: August 14, 2007 By: /s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Chief
Financial Officer, Treasurer
and Clerk
21