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PROSPECTUS
[LOGO]
WESTBOROUGH FINANCIAL SERVICES, INC.
PROPOSED HOLDING COMPANY FOR THE WESTBOROUGH BANK
UP TO 859,625 SHARES OF COMMON STOCK
Westborough Financial Services, Inc. is a new corporation that is offering
shares of its common stock. The shares we are offering represent less than half
of the outstanding common stock of Westborough Financial Services. Westborough
Savings Bank, to be renamed The Westborough Bank, formed Westborough Financial
Services to own the Westborough Bank as part of a reorganization of our
structure. More than half of the outstanding common stock of Westborough
Financial Services will be owned by Westborough Bancorp, MHC, a mutual holding
company. The common stock of Westborough Financial Services will be quoted for
trading on the OTC Bulletin Board under the symbol "WFSM."
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TERMS OF THE OFFERING
PRICE: $10.00 PER SHARE
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
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<S> <C> <C>
Number of shares............................................ 552,500 747,500
Underwriting commissions and expenses....................... $ 90,410 $ 126,290
Net proceeds to Westborough Financial Services.............. $5,028,810 $6,942,930
Net proceeds per share to Westborough Financial Services.... $ 9.10 $ 9.29
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WE MAY SELL UP TO 859,625 SHARES BECAUSE OF REGULATORY CONSIDERATIONS
OR CHANGES IN MARKET OR ECONOMIC CONDITIONS WITHOUT THE RESOLICITATION OF
SUBSCRIBERS.
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THIS INVESTMENT INVOLVES A DEGREE OF RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
PLEASE READ THE RISK FACTORS BEGINNING ON PAGE 12.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE DEPOSITORS INSURANCE FUND OR
ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE COMMISSIONER OF BANKS OF THE COMMONWEALTH OF MASSACHUSETTS NOR
ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
We are offering the common stock on a best efforts basis, and subject to
certain other conditions, including our right to reject any order in whole or
in part. The minimum number of shares that you may purchase is 25 shares.
Funds received prior to termination of the offering will be held in an
account at Westborough Savings which will bear interest at our passbook rate.
This offering will close on or about December 15, 1999.
TRIDENT SECURITIES
a Division of McDonald Investments, Inc.
November 12, 1999
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[MAP OF THE WESTBOROUGH BANK BRANCH OFFICES]
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SUMMARY
To understand the offering more fully, you should read this entire
document carefully, including the consolidated financial statements and the
notes to the consolidated financial statements.
Our Reorganization and Stock Offering
Westborough Savings is currently a Massachusetts-chartered mutual savings
bank. It is reorganizing into the mutual holding company structure. As part of
the reorganization, Westborough Financial Services is offering shares of its
common stock to the public. After the reorganization, Westborough Financial
Services will own Westborough Savings, which will be renamed "The Westborough
Bank."
This chart shows our new structure, which is commonly referred to as a
mutual holding company structure, after the reorganization:
- ----------------------------- -----------------------------
Westborough Bancorp, MHC Public Stockholders
- ----------------------------- -----------------------------
65% of Westborough | | 35% of Westborough
Financial Services, | --------------------------- | Financial Services,
Inc's common stock ------ Westborough Financial ----- Inc's common stock
Services, Inc.
---------------------------
|
|100% Ownership
---------------------------
The Westborough Bank
---------------------------
Westborough Bancorp, MHC will own a majority of Westborough Financial
Services' common stock after the reorganization. The same trustees and officers
who manage Westborough Savings will manage Westborough Bancorp, MHC. The Board
of Trustees of Westborough Bancorp, MHC will control the outcome of most matters
put to a vote of stockholders of Westborough Financial Services. We cannot
assure you that the votes cast by Westborough Bancorp, MHC will be in your
personal best interests as a stockholder. For more information concerning your
lack of voting control over Westborough Financial Services, see "Westborough
Bancorp, MHC" and "Restrictions on Acquisition of Westborough Financial
Services, Inc. and The Westborough Bank."
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The Companies
Westborough Savings Bank
Westborough Savings is a Massachusetts-chartered mutual savings bank. Our
mission is to serve as a community-oriented provider of traditional banking and
other financial services to individuals and small business organizations,
including residential and commercial real estate mortgages, consumer and
commercial loans and deposit instruments.
Westborough Savings has five full service branches located in the towns of
Westborough, Northborough and Shrewsbury, Massachusetts. We also operate a
non-public, self-contained office at the "Willows," a retirement community
located in Westborough. At June 30, 1999, we had assets of $172.1 million,
deposits of $147.1 million and equity of $19.4 million.
Westborough Financial Services, Inc.
Westborough Financial Services will be the holding company for The
Westborough Bank after the reorganization. Westborough Financial Services has
not engaged in any business to date.
Westborough Bancorp, MHC
Westborough Bancorp, MHC is initially expected to own approximately
65% of the outstanding common stock of Westborough Financial Services after
the reorganization. We currently do not expect that Westborough Bancorp, MHC
will engage in any business activity other than owning a majority of the
common stock of Westborough Financial Services. Westborough Bancorp, MHC has
not engaged in any business to date.
The following are highlights of Westborough Savings' operating strategy:
o Community Banking.
Westborough Savings strives to remain a leader in meeting the
financial service needs of the local community and to provide
quality service to the individuals and small businesses in its
market area.
o Residential Lending.
Westborough Savings originates residential first mortgages, and at
June 30, 1999, we had $81.4 million of residential first mortgage
loans, representing 88.7% of our total loan portfolio. We originate
substantially all of these loans for our own portfolio, rather than
for sale, and we service the loans we originate.
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o Capital Strength and Profitability.
Our policy has always been to maintain the financial strength of
Westborough Savings through conservative risk management, a sound
financial condition and consistent earnings. At June 30, 1999, our
ratio of equity to assets was 11.30%, and for the nine months ended
June 30, 1999, our return on average assets was 0.98% and our return
on average equity was 8.23%.
o Asset Quality.
Through our commitment to residential lending, we have had low
levels of losses on loans and late payments. At June 30, 1999, we
had no non-performing assets, and our ratio of allowance for loan
losses to total loans before the allowance for loan losses was
0.96%.
o Investment in Facilities and Technology.
We intend to significantly expand our facilities and technological
capabilities to better serve our customer and communities by
utilizing alternative delivery channels. We will continue to employ
and expand the use of automatic teller machines ("ATMs"), 24 hour
telephone banking and electronic fund transfer services, and intend
to introduce Internet online banking and online bill payment
services. We also plan to renovate and expand our main office to
allow our executive and administrative functions to be performed in
a single facility.
o Branch Expansion.
We believe that a well-positioned branch network is critical to
maintaining market share in the traditional community banking and
small business arenas. Our three year Business Plan contemplates the
establishment or acquisition of one or more branch locations in our
market area.
o Expansion of Product Lines.
We are making a commitment to small business lending as a natural
outgrowth of our more traditional community banking services. We are
also planning to expand our offering of non-traditional financial
products, such as insurance and annuities, either directly or
through affiliates and to introduce other financial services, such
as fiduciary services, to better position us as a full service
financial institution.
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Reasons for the Reorganization
The conversion of Westborough Savings to a stock savings bank and its
acquisition by Westborough Financial Services will permit Westborough
Financial Services to issue common stock, which is a source of capital not
available to mutual savings banks. The proceeds from the sale of common stock
of Westborough Financial Services will provide Westborough Bank with new
capital, which will support future deposit growth and expanded operations.
The ability of Westborough Financial Services to sell additional common stock
also will enable Westborough Financial Services and Westborough Bank to
increase their capital in response to any future regulatory capital
requirement levels. While Westborough Savings currently exceeds all
regulatory capital requirements, the sale of common stock in connection with
the reorganization will assist Westborough Bank with the orderly preservation
and expansion of its capital base and will provide flexibility to respond to
sudden and unanticipated capital needs.
Westborough Savings' mutual form of ownership will be preserved in
Westborough Bancorp, MHC, which, as a mutual holding company, will own at least
51% of the common stock of Westborough Financial Services as long as Westborough
Bancorp, MHC remains in existence. The reorganization will allow Westborough
Bank to achieve certain benefits of a stock company without a loss of control
that is possible in a full savings institution conversion from mutual to stock
form.
In addition, since Westborough Savings competes with local and regional
banks not only for customers, but also for employees, we believe that the
ability of Westborough Financial Services to issue common stock will also afford
us the opportunity to attract and retain management and employees through
various stock benefit plans, including incentive stock option plans, stock award
plans and employee stock ownership plans.
After considering the advantages and risks of the reorganization, as
well as applicable fiduciary duties, the Board of Trustees of Westborough
Savings unanimously approved the reorganization as being in the best
interests of Westborough Savings, its depositors and the communities that it
serves.
Terms of the Offering
We are offering between 552,500 and 747,500 shares of common stock of
Westborough Financial Services to the public. The number of shares we sell in
the offering may increase by 15% to 859,625 shares as a result of regulatory
considerations or changes in financial markets. If we increase the number of
shares we issue, you will not have the opportunity to change or cancel your
stock order unless the number of shares to be issued is increased to in excess
of 859,625 shares. The offering price is $10.00 per share. Trident Securities
will use its best efforts to assist us in selling our stock.
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Persons Who Can Order Stock in the Offering
We are offering the shares of common stock of Westborough Financial
Services in what we call a "subscription offering" in the order of priority
listed below:
o Depositors with accounts at Westborough Savings with total balances
of at least $50 on December 31, 1997;
o Depositors with accounts at Westborough Savings with total balances
of at least $50 on December 31, 1998; and
o Our employee stock ownership plan, which will provide retirement
benefits to our employees.
The shares of common stock not purchased in the subscription offering will
be offered in what we call a "community offering" to the residents of the towns
of Grafton, Hopkinton, Northborough, Shrewsbury, Southborough and Westborough,
Massachusetts. We also may offer shares of common stock not purchased in either
the subscription offering or community offering to the public through a selling
group of brokers on a best efforts basis.
How We Determined the Offering Range and the $10.00 Price Per Share
The offering range is based on an independent appraisal of Westborough
Savings by RP Financial, LC., an appraisal firm experienced in appraisals of
savings institutions. RP Financial has estimated that our market value at
September 17, 1999, is between $15.8 million and $21.4 million. This results in
an offering of between 552,500 and 747,500 shares of stock at an offering price
of $10.00 per share because we are only offering 35% of our stock to the public.
RP Financial's estimate of our market value was based in part upon our financial
condition and results of operations and the effect of the additional capital
raised in this offering. RP Financial's independent appraisal will be updated
before we complete our reorganization.
Two of the factors that RP Financial considered in determining our market
value were the price-to-book ratio and the price-to-earnings ratio or P/E ratio.
The price-to-book ratio represents the price per share of stock divided by its
book value per share. After completion of the reorganization, each share of
Westborough Financial Services common stock, including the shares we issue to
Westborough Bancorp, MHC, will have a book value of $13.22, assuming we sell
650,000 shares in the minority offering. This means that the price you pay for
each share in this offering will be 75.64% of the book value.
The P/E ratio represents the price per share of stock divided by earnings
or net income per share. In our case, for 1998, our P/E ratio would have been
13.70x, assuming that we sold 650,000 shares in the minority offering. Each of
the price-to-book ratio and the
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P/E ratio were calculated using information contained in Westborough Bank's pro
forma financial data.
The $10.00 price per share was determined by our Board of Trustees based
upon a number of factors, including the fact that $10.00 is the price per share
most commonly used in stock offerings involving reorganizations of savings
institutions.
Limits on Your Purchase of the Common Stock
Your orders for common stock will be limited in the following ways:
o the minimum order is 25 shares;
o in the subscription offering, the maximum amount that an individual
with his or her associates may purchase is $100,000;
o in the community offering, the maximum amount that an individual
with his or her associates may purchase is $100,000; and
o if we receive orders for a greater number of shares than we are
offering, then we will allocate the shares that we issue as
described in "The Reorganization and The Offering -- Limitations on
Common Stock Purchases;" this may result in your receiving a smaller
number of shares than you ordered.
We may increase the $100,000 purchase limitation if we do not receive orders for
at least 552,500 shares. For additional information on these purchase
limitations see "The Reorganization and The Offering -- Limitations on Common
Stock Purchases."
How You May Pay for Your Shares
In the subscription offering and the community offering you may pay for
your shares only by:
o personal check, official bank check, money order or cash, if
delivered in person; or
o authorizing us to withdraw money from your deposit accounts
maintained with Westborough Savings.
You May Not Sell or Transfer Your Subscription Rights
If you order stock in the subscription offering, you will be required
to state that you are purchasing the stock for yourself and that you have no
agreement or understanding to sell or transfer your rights. We intend to take
legal action, including notice to applicable regulators, against anyone who
sells or gives away their subscription rights. We will not, including notice
to applicable regulators, accept your order if we have reason to believe that
you sold or transferred your subscription rights.
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Deadline for Orders of Common Stock
If you wish to purchase shares, you must submit a properly completed
stock order form, together with payment for the shares, to the Stock
Information Center by 12:00 noon, Massachusetts Time, on December 15, 1999,
unless we extend this deadline. You must submit your order form by mail,
overnight courier or by dropping off your order form at any of our branch
offices.
Termination of the Offering
The subscription offering will terminate at 12:00 noon, Massachusetts
Time, on December 15, 1999. We expect that the community offering, if any,
will terminate at the same time. We may extend this expiration date without
notice to you, until January 29, 2000, unless regulators approve, if any,a
later date. All further extensions, in the aggregate, may not last beyond the
second anniversary of the date of approval of the plan of reorganization by
the corporators of Westborough Savings, which took place on October 20, 1999.
Steps We Can Take If We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 552,500 shares of common
stock, we may take several steps in order to sell the minimum number of
shares in the offering range without resoliciting subscriptions from our
depositors. Specifically, we may increase the $100,000 purchase limitation to
a maximum of 5% of the shares offered for sale in the offering, exclusive of
an increase in the total number of shares issued due to an increase in the
offering range of up to 15% (or up to 859,625 shares). In addition, we may
seek regulatory approval to extend the offering beyond the January 29, 2000
expiration date. See "The Reorganization and The Offering -- Limitations on
Common Stock Purchases."
Market for the Common Stock
We expect the common stock to be listed for trading on the OTC Bulletin
Board under the symbol "WFSM." Trident Securities intends to make a market in
the common stock but it is under no obligation to do so.
How We Intend to Use the Proceeds We Raise from the Offering
Assuming we sell 747,500 shares in the subscription offering, we intend to
distribute the net proceeds from the offering as follows:
o $3.5 million will be contributed to Westborough Bank;
o $598 thousand will be loaned to the employee stock ownership plan of
Westborough Bank to fund its purchase of common stock; and
o $2.9 million will be retained by Westborough Financial Services;
Westborough Financial Services may use the net proceeds retained from the
offering as a possible source of funds to invest in securities, to finance the
possible acquisition of other
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financial institutions or other businesses that are related to banking, to
repurchase common stock or to pay dividends and for other general corporate
purposes. Westborough Bank may use the proceeds it receives to support the
expansion of its lending activities and to expand its operations through the
establishment or acquisition of one or more additional branch offices in its
market area and the expansion and renovation of its main office.
Our Policy Regarding Dividends
Payment of dividends on the common stock will be subject to determination
and declaration by our Board of Directors and the availability of funds for such
dividends. Our Board of Directors currently anticipates declaring and paying
cash dividends on the common stock following consummation of the reorganization.
However, when the payment of dividends will begin is currently unknown. Any
dividend policy of Westborough Financial Services, however, will also depend
upon our debt and equity structure, earnings and financial condition, need for
capital in connection with possible future acquisitions and other factors,
including economic conditions, regulatory restrictions and tax considerations.
We can give no assurance that dividends will be declared or as to the amount and
frequency of dividends, if declared.
The only funds available to us for the payment of dividends will be cash
and cash equivalents held at the holding company level, dividends paid by
Westborough Bank to us, and borrowings. Westborough Bank will be prohibited from
paying cash dividends to us to the extent that any such payment would reduce
Westborough Bank's capital below required capital levels or would impair the
liquidation account to be established for the benefit of Westborough Bank's
eligible account holders and supplemental eligible account holders at the time
of the reorganization. See "Regulation of Westborough Savings Bank and
Westborough Financial Services, Inc. -- Massachusetts Banking Regulation --
Dividends."
Our Directors, Officers and Employees Will Have Additional Compensation and
Benefit Programs After the Reorganization
We are adding a new benefit plan for our officers and employees at no cost
to them:
o Employee Stock Ownership Plan. This retirement plan will cover most
of our employees. We will lend the plan money to buy up to 8% of the
shares we sell in the offering. The plan will buy shares either in
the offering or in the open market. The plan will allocate the
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stock to employees over a period of at least ten years as additional
compensation for their services.
We are also adding the following termination pay arrangements:
o Employment Agreements. We are entering into employment agreements
with Mr. Joseph F. MacDonough, our President and Chief Executive
Officer, and Mr. John L. Casagrande, our Senior Vice President and
Treasurer. If we discharge one of them without cause, if one of them
resigns because we do not meet our obligations under these
agreements or following a change in control of Westborough Financial
Services, we must make a termination payment.
We also plan to add the following stock-based benefit plans for our
directors, officers and employees:
o Stock Option Plan. Under this plan, we may grant our officers,
directors and employees options to purchase our stock at a price
that is set on the date we grant the option. The price that we set
cannot be less than our stock's trading price when we grant the
options, so the options will have value only if our stock price
increases. Recipients of options will have up to ten years to
exercise their options.
o Management Recognition Plan. This plan will allow selected officers,
directors and employees to receive shares of our stock, without
making any payment at all, if they work for us until the end of a
specified service period.
We will not implement a stock option plan or management recognition plan unless
our stockholders approve them. We do not expect to ask our stockholders to
approve these plans until at least six months after we complete the offering. We
expect to obtain the shares we would need for these plans through open market
stock purchases or from authorized but unissued shares.
The following table presents the dollar value of the shares that we expect
to grant under the employee stock ownership plan and the contemplated management
recognition plan and of those to be granted under the stock option plan, and the
percentage of Westborough Financial Services' outstanding common stock that will
be represented by these shares. We based the value of the shares for the
employee stock ownership plan and management recognition plan on a price of
$10.00 per share and the issuance of 747,500 shares of common stock.
Percentage of
Value of common stock sold
Benefit plan shares granted in the offering
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Employee stock ownership plan...... $ 598,000 8%
Stock option plan.................. -- 10%
Management recognition plan........ $ 299,000 4%
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Possible Conversion of Westborough Bancorp, MHC to Stock Form
In the future, Westborough Bancorp, MHC will have authority to convert
from the mutual to capital stock form, in a transaction commonly known as a
"second-step conversion." If Westborough Bancorp, MHC were to undertake a
second-step conversion, Westborough Financial Services' public stockholders
would own approximately the same percentage of the resulting entity as they
owned prior to the second-step conversion. This percentage would be adjusted
to reflect the assets owned by Westborough Bancorp, MHC and any dividends
waived by Westborough Bancorp, MHC. The Board of Trustees has no current plan
to undertake a "second-step conversion" transaction and, under current
regulatory restrictions, may not do so for a period of three years following
the reorganization absent compelling and valid business reasons established
to the satisfaction of the Commissioner of Banks of the Commonwealth of
Massachusetts. For a description of this possible second-step conversion, see
"The Reorganization and The Offering -- Possible Conversion of Westborough
Bancorp, MHC to Stock Form."
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How You May Obtain Additional Information Regarding the Offering
If you have any questions regarding the offering or the reorganization,
please call the Stock Information Center at (508) 366-5333, which will be
open from 9:00 a.m. to 5:00 p.m., Monday through Friday.
RISK FACTORS
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You should consider carefully the following risk factors before
deciding whether to invest in our common stock.
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After the reorganization our return on average equity will be low compared to
other companies. This could hurt the price of our common stock.
We will not be able to deploy the increased capital from this offering
into earning assets immediately. Our ability to leverage our new capital
profitably will be significantly affected by industry competition for loans
and deposits. Also, we intend to make significant investments in non-earning
assets such as facilities and technology. Initially, we plan to invest the
net proceeds in short-term investments which generally have lower yields than
loans. This will reduce our return on average equity to a level that will be
lower than our historical ratios. For the nine months ended June 30, 1999,
our return on average equity was 8.23%. Until we can leverage our increased
capital and grow interest-earning assets, we expect our return on equity to
be below the industry average, which may negatively impact the value of our
stock.
Our loans are concentrated in a small geographic area.
Our loan portfolio is primarily secured by real estate located in the
towns of Westborough, Northborough, Shrewsbury and Grafton, Massachusetts.
Accordingly, the asset quality of our loan portfolio is largely dependent upon
the economy and unemployment rate in this area. A downturn in the economy in our
primary lending area would likely adversely affect our operations and
profitability.
We may not successfully expand and grow.
Our future will depend on the success of increasing our loan portfolio,
developing a commercial loan expertise, developing new product lines and opening
new branches. Our ability to originate small business loans and expand product
lines will depend on market conditions in our primary market area. Small
business loans, however, are new to us and involve a higher degree of risk than
one-to four-family residential mortgage loans. As the volume of small business
loans in our loan portfolio increases, the corresponding risks and potential for
losses from these activities will also increase. The success of the branching
opportunities will, in turn, depend on our ability to integrate new branches
into our current operations and our success in attracting customers and a
sufficient amount of deposits to make the new branches profitable.
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Rising interest rates may hurt our profits.
To be profitable, we have to earn more money in interest and fees than we
pay as interest and other expenses. Of our total loan portfolio, 62.3% are
residential mortgage loans that have interest rates fixed for the term of the
loan. We originate loans with terms of up to 30 years, while 28.6% of our
deposit accounts consist of certificate of deposit accounts with remaining terms
to maturity of one year or less. If interest rates rise, the amount of interest
we pay on deposits is likely to increase more quickly than the amount of
interest we receive on our loans, mortgage-backed securities and investment
securities. This would cause our profits to decrease. Rising interest rates may
also reduce the value of our mortgage-backed securities and investment
securities. For additional information on our exposure to interest rates, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Interest Rate Risk."
The market for common stock will be limited.
Due to the small size of the offering, it is highly unlikely that an
active trading market for our stock will develop and be maintained. If an active
market does not develop, you may not be able to sell your shares promptly or
perhaps at all, or sell your shares at a price equal to or above the price you
paid for them. The common stock may not be appropriate as a short-term
investment.
Westborough Bancorp, MHC's voting control over Westborough Financial Services
may prevent transactions you would like.
Westborough Bancorp, MHC is initially expected to own approximately
65% of Westborough Financial Services' common stock after the reorganization.
Westborough Bancorp, MHC will be managed by the same trustees/directors and
officers who currently manage Westborough Savings. The Board of Trustees of
Westborough Bancorp, MHC will control the outcome of most matters put to a
vote of stockholders of Westborough Financial Services. We cannot assure you
that the votes cast by Westborough Bancorp, MHC will be in your personal best
interests as a stockholder. For more information regarding your lack of
voting control over Westborough Financial Services, see "Westborough Bancorp,
MHC" and "Restrictions on Acquisition of Westborough Financial Services, Inc.,
and The Westborough Bank."
Our intent to remain independent may not suit your investment objectives.
Westborough Savings has operated as an independent community-oriented
savings institution since 1869. We intend to continue to operate as an
independent community-oriented savings institution following the reorganization.
Westborough Bank and Westborough Financial Services will be controlled by
Westborough Bancorp, MHC, and we have no current plans to alter this mutual
holding company structure in the future. Accordingly, you are urged not to
subscribe for shares of common stock if you are anticipating a sale of
Westborough Bank or Westborough Financial Services.
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The implementation of stock-based benefits will increase our future compensation
expense and reduce our earnings.
We intend to adopt a stock option plan that will provide for the granting
of options to purchase common stock, to adopt a management recognition plan that
will provide for awards of common stock to our eligible officers, employees and
directors and to have an employee stock ownership plan which will purchase
shares in the reorganization. These plans will increase our future costs of
compensating our directors and employees and reduce our earnings. The cost of
these plans will vary based on our stock price.
Strong competition within our market area may reduce our customer base.
Competition in the banking and financial services industry is intense. We
have competed for customers by offering excellent service and competitive rates
on our loans and deposit products. We compete with commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms. Some of
these competitors have greater resources than we do and may offer services that
we do not provide. Our profitability depends upon our continued ability to
successfully compete in our market area.
The Year 2000 problem could hurt our operations and our profits and could lower
the value of your stock.
We rely upon computers to conduct our daily business. Failure of any of
our computer systems, those of the parties we do business with or the public
infrastructure, including the electric and telephone companies, to process in
the new year may disrupt our ability to do routine business and to service our
customers. For example, we may not be able to process withdrawals or deposits,
prepare account statements or engage in any of the transactions that constitute
our normal operations. This could hurt our profits. For additional information
regarding the Year 2000 problem, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure."
We have broad discretion in allocating the proceeds of the offering. Our failure
to effectively apply such proceeds could hurt our profits.
We intend to contribute approximately $3.5 million of the $6.9 million in
net proceeds (assuming the sale of 747,500 shares in the offering) to
Westborough Bank, which will use the proceeds to support the expansion of its
lending activities and to expand its operations through the establishment or
acquisition of one or more additional branch offices. The expansion and
renovation of its main office currently is estimated to cost approximately $2.5
million. In addition, we will retain approximately $2.9 million of the net
proceeds to invest in securities, to finance the possible acquisition of other
financial institutions or other businesses related to banking, to repurchase
common stock or to pay dividends and for other general corporate purposes. Other
than with respect to the estimated costs of the main office renovation, we have
not allocated specific amounts of proceeds for these purposes, and we will have
significant flexibility in determining the
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amounts of net proceeds we apply to different uses and the timing of such
applications. Our failure to apply these funds effectively could hurt our
profits.
Recent stock market volatility may negatively affect the trading
price of our common stock.
Publicly traded stock, including stocks of financial institutions, have
recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded. In several cases, common stock issued by
recently converted financial institutions has traded at a price that is below
the price at which such shares were sold in the initial offerings of those
companies. The purchase price of our common stock in the offering is based on
the independent appraisal by RP Financial. After our shares begin trading,
the trading price of our common stock will be determined by the marketplace
and may be influenced by many factors, including prevailing interest rates,
investor perceptions of Westborough Financial Services and general industry
and economic conditions. Due to possible continued market volatility and to
other factors, including certain risk factors discussed in this document,
there can be no assurance that, following the reorganization, the trading
price of our common stock will be at or above the $10.00 per share initial
offering price.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The summary information presented below at or for each of the years
presented is derived in part from the consolidated financial statements of
Westborough Savings. The following information is only a summary, and you should
read it in conjunction with our consolidated financial statements and notes
beginning on page F-1.
At June 30, At September 30,
----------- ------------------------------
1999 1998 1997 1996
----------- -------- -------- --------
(In thousands)
Selected Financial Data:
Total assets ....................... $172,113 $158,523 $143,896 $140,218
Loans, net(1) ...................... 89,428 82,348 70,580 65,243
Investment securities(2) ........... 63,259 60,107 61,654 62,743
Total deposits ..................... 147,135 135,962 125,170 120,282
Federal Home Loan Bank advances .... 4,000 2,000 -- 3,000
Total surplus ...................... 19,448 19,367 17,447 15,789
Allowance for loan losses .......... 869 827 786 690
Non-accrual loans .................. -- -- -- --
Non-performing assets .............. -- 74 19 144
For the Nine
Months
Ended At of For the Year Ended
June 30, September 30,
--------------- ------------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
(In thousands)
Selected Operating Data:
Interest and dividend income ...... $7,876 $7,443 $9,933 $9,461 $8,711
Total interest expense ............ 3,688 3,392 4,557 4,426 4,037
------ ------ ------ ------ ------
Net interest income ............... 4,188 4,051 5,376 5,035 4,674
Provision for loan losses ......... 35 30 39 96 105
------ ------ ------ ------ ------
Net interest income,
after provision for loan losses 4,153 4,021 5,337 4,939 4,569
Total other income ................ 983 301 383 608 454
Total operating expense ........... 3,337 2,688 3,657 3,563 3,145
------ ------ ------ ------ ------
Income before income taxes ........ 1,799 1,634 2,063 1,984 1,878
Provision for income taxes ........ 595 574 750 676 695
------ ------ ------ ------ ------
Net income ........................ $1,204 $1,060 $1,313 $1,308 $1,183
====== ====== ====== ====== ======
(footnotes on next page)
17
<PAGE>
<TABLE>
<CAPTION>
At or for the
Nine Months Ended At or For the Year
June 30, Ended September 30,
----------------- ---------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data(3)
Performance Ratios:
Return on average assets ................... 0.98% 0.96% 0.88% 0.93% 0.91%
Return on average equity ................... 8.23% 7.90% 7.25% 8.06% 7.81%
Average equity to average assets ........... 11.90% 12.12% 12.16% 11.58% 11.62%
Equity to total assets at end of period .... 11.30% 12.49% 12.22% 12.12% 11.26%
Average interest rate spread ............... 2.99% 3.25% 3.20% 3.24% 3.25%
Net interest margin(4) ..................... 3.55% 3.81% 3.76% 3.74% 3.74%
Average interest-earning assets to average
interest-bearing liabilities .......... 117.72% 117.66% 117.84% 115.60% 115.12%
Total operating expense to average
assets ................................ 2.71% 2.43% 2.46% 2.54% 2.41%
Efficiency ratio(5) ........................ 64.53% 61.76% 63.50% 63.14% 61.33%
Regulatory Capital Ratios:
Regulatory tier 1 leverage capital ......... 11.41% 12.09% 12.00% 11.90% 11.60%
Tier 1 risk-based capital .................. 20.60% 22.59% 21.80% 22.90% 26.10%
Total risk-based capital ................... 21.52% 23.62% 22.70% 24.00% 27.20%
Asset Quality Ratios:
Non-performing loans as a percent
of loans ............................... -- -- -- -- --
Non-performing assets as a percent
of total assets ....................... -- -- 0.05% 0.01% 0.10%
Allowance for loan losses as a percent
of total loans before the allowance for
loan losses ........................... 0.96% 0.99% 0.99% 1.10% 1.05%
Number of:
Full-service offices(6) .................... 5 4 4 4 3
Full-time equivalent employees ............. 60 51 53 51 50
</TABLE>
- ----------
(1) Loans are shown net of deferred loan costs (fees), allowance for loan loss
and unadvanced loan funds.
(2) Includes Federal Home Loan Bank of Boston stock.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. Ratios for the period at or for the nine months ended June 30 are
annualized.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(5) The efficiency ratio represents the ratio of operating expenses divided by
the sum of net interest income and other income.
(6) The number of full-service offices shown does not include our branch at
the Willows.
18
<PAGE>
RECENT DEVELOPMENTS
The summary information presented below at or for each of the periods
presented is derived, in part, from the consolidated financial statements of
Westborough Savings and its subsidiaries. In our opinion, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the financial condition and results of operations for the unaudited
periods presented have been included.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999 AT JUNE 30, 1999 AT SEPTEMBER 30, 1998
--------------------- ---------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets .................. $174,594 $172,113 $158,523
Loans, net(1) ................. 92,092 89,428 82,348
Investment securities(2) ...... 64,457 63,259 60,107
Total deposits ................ 150,111 147,135 135,962
Federal Home Loan Bank advances 4,000 4,000 2,000
Total surplus ................. 19,281 19,448 19,367
Allowance for loan losses ..... 879 869 827
Non-accrual loans ............. -- -- --
Non-performing assets ......... -- -- 74
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest and dividend income ..... $ 2,730 $ 2,490 $10,606 $ 9,933
Total interest expense ........... 1,288 1,165 4,976 4,557
------- ------- ------- -------
Net interest income .............. 1,442 1,325 5,630 5,376
Provision for loan losses ........ 10 9 45 39
------- ------- ------- -------
Net interest income,
after provision for loan losses 1,432 1,316 5,585 5,337
Total other income ............... 264 82 1,247 383
Total operating expense .......... 1,326 969 4,663 3,657
------- ------- ------- -------
Income before income taxes ....... 370 429 2,169 2,063
Provision for income taxes ....... 101 176 696 750
------- ------- ------- -------
Net income ....................... $ 269 $ 253 $ 1,473 $ 1,313
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(footnotes on next page)
19
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR for THE YEAR ENDED
THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------
1999 1998 1999 1998
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(3)
PERFORMANCE RATIOS:
Return on average assets ..................... 0.62% 0.66% 0.89% 0.88%
Return on average equity ..................... 5.54% 5.40% 7.56% 7.25%
Average equity to average assets ............. 11.25% 12.29% 11.73% 12.16%
Equity to total assets at end of period ...... 11.04% 12.22% 11.04% 12.22%
Average interest rate spread ................. 3.05% 3.03% 3.01% 3.20%
Net interest margin(4) ....................... 3.53% 3.61% 3.54% 3.76%
Average interest-earning assets to average
interest-bearing liabilities ............... 115.42% 118.38% 117.12% 117.84%
Total operating expense to average
assets ..................................... 3.07% 2.54% 2.81% 2.46%
Efficiency ratio(5) .......................... 77.73% 68.87% 67.81% 63.50%
REGULATORY CAPITAL RATIOS:
Regulatory tier 1 leverage capital ........... 11.40% 12.00% 11.40% 12.00%
Tier 1 risk-based capital .................... 20.25% 21.80% 20.25% 21.80%
Total risk-based capital ..................... 21.15% 22.70% 21.15% 22.70%
ASSET QUALITY RATIOS:
Non-performing loans as a percent
of loans ................................. -- -- -- --
Non-performing assets as a percent
of total assets ............................ -- 0.05% -- 0.05%
Allowance for loan losses as a percent
of total loans before the allowance for
loan losses ................................ 0.95% 0.99% 0.95% 0.99%
NUMBER OF:
Full-service offices(6) ...................... 5 4 5 4
Full-time equivalent employees ............... 60 53 60 53
</TABLE>
- ----------
(1) Loans are shown net of deferred loan costs (fees), allowance for loan loss
and unadvanced loan funds.
(2) Includes Federal Home Loan Bank of Boston stock.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. Ratios for the period at or for the three months ended September
30 are annualized.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(5) The efficiency ratio represents the ratio of operating expenses divided by
the sum of net interest income and other income.
(6) The number of full-service offices shown does not include our branch at
the Willows.
20
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND JUNE 30, 1999:
Westborough Savings' total assets increased by $2.5 million, or 1.4%,
to $174.6 million at September 30, 1999 from $172.1 million at June 30, 1999.
The increase in total assets during this period was primarily attributable to
net loans, mainly real estate, which increased by $2.7 million, to $92.1
million at September 30, 1999 from $89.4 million at June 30, 1999.
Investments, excluding short-term cash equivalents such as federal funds,
increased by $1.2 million to $64.5 million at September 30, 1999 due mainly
to an increase in common stock investments. Short-term cash equivalents,
however, decreased by $4.0 million during this period.
Total deposits increased by $3.0 million, or 2.0%, to $150.1 million at
September 30, 1999 from $147.1 million at June 30, 1999. Most of this increase
was attributable to increases in short-term, interest-bearing tiered-rate and
certificate of deposit accounts. Total surplus declined by $167 thousand to
$19.3 million at September 30, 1999 from $19.4 million at June 30, 1999
as a result of net income of $269 thousand for the three month period ending
September 30, 1999, which was more than countered by a decline of $436
thousand in the value of investments considered available for sale. Rising
market interest rates during this period contributed to the decline in the
value of Westborough Savings' interest-sensitive investments.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND SEPTEMBER 30,
1998:
Westborough Savings' total assets increased by $16.1 million, or
10.1%, to $174.6 million September 30, 1999 from $158.5 million at September
30, 1998. Net loans during this period increased by $9.7 million, or 11.8%,
to $92.1 million at September 30, 1999, from $82.3 million at September 30,
1998. The loan increase was primarily due to increased loan originations for
loans secured by real estate. Investments increased by $4.4 million to $64.5
million at September 30, 1999 from $60.1 million at September 30, 1998. This
increase was mainly attributable to an increase in equity investments in
preferred and common stocks. At September 30, 1999, an investment in life
insurance utilized to finance a deferred compensation plan for bank trustees
increased by $2.2 million.
Total deposits increased by $14.1 million, or 10.4%, to $150.1
million at September 30, 1999 from $136.0 million at September 30, 1998. Most
of this increase was attributable to increases in short-term,
interest-bearing tiered-rate and certificate of deposit accounts. Total
surplus declined by $86 thousand to $19.3 million at September 30, 1999 from
$19.4 million at September 30, 1998 as a result of net income of $1.5 million
for the year ending September 30, 1999, which was more than countered by a
decline of $1.6 million in the value of investments considered available for
sale. Rising market interest rates during this period contributed to the
decline in the value of Westborough Savings' interest-sensitive investments.
21
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998:
NET INCOME
Westborough Savings' net income for the three months ended September
30, 1999 increased $16 thousand, or 6.3%, to $269 thousand as compared to
$253 thousand for the three months ended September 30, 1998. This increase
during the period was a result of increases in interest income of $240
thousand, other income of $182 thousand and a decline in the provision for
income taxes of $75 thousand. These amounts were offset by increases in
operating expenses of $357 thousand and interest expenses of $123 thousand.
Westborough Savings' return on average assets for the quarter ended September
30, 1999 was 0.62% compared to 0.66% for the quarter ended September 30, 1998.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $240 thousand, or 9.6%, to
$2.7 million for the quarter ended September 30, 1999 from $2.5 million for
the quarter ended September 30, 1998. The increase in interest and dividend
income was mainly the result of a higher average volume of interest-earning
assets, reduced to a lesser extent, by a decline in the average rate earned
on earning assets. The average volume of interest-earning assets for the
quarter ended September 30, 1999 was $163.3 million earning a rate of 6.69%
as compared to $146.8 million earning a rate of 6.79% for the quarter ended
September 30, 1998. Westborough Savings experienced continued growth in real
estate lending and invested additional cash flows into stocks and short-term
investments. The average balance of loans for the quarter ended September 30,
1999 was $91.0 million, earning 7.38% for the quarter. This compares to an
average balance of loans for the quarter ended September 30, 1998 of $82.1
million, earning 7.57% for the quarter. The average balance of investment
securities for the quarter ended September 30, 1999 was $63.9 million,
earning 5.94% for the quarter. This compares to an average balance of
investments for the quarter ended September 30, 1998 of $58.8 million,
earning 5.83% for the quarter. Lastly, the average balance of short-term
investments for the quarter ended September 30, 1999 was $8.3 million,
earning 4.90% for the quarter. This compares to an average balance of
short-term investments for the quarter ended September 30, 1998 of $5.9
million, earning 5.39% for the quarter.
INTEREST EXPENSE
Interest expense increased by $123 thousand, or 10.6%, to $1.3 million for the
quarter ended September 30, 1999 from $1.2 million for the quarter ended
September 30, 1998. Interest expense increased due to a higher volume of
interest-bearing liabilities, offset, to a lesser extent, by a declining average
rate of interest paid on such interest-bearing liabilities. The average volume
of interest-bearing liabilities was $141.5 million with a cost of 3.64% for the
quarter ended September 30, 1999 as compared to $124.0 million with a cost of
3.76% for the quarter ended September 30, 1998. The average volume of borrowed
funds from the Federal Home Loan Bank of Boston increased during the quarter
ended September 30, 1999 to $4.0 million, up from an average balance of $133
thousand for the quarter ended September 30, 1998. The average volume of
interest-bearing deposits increased to $137.5 million with
22
<PAGE>
a cost of 3.60% for the quarter ended September 30, 1999 as compared to $123.9
million with a cost of 3.76% for the quarter ended September 30, 1998.
NET INTEREST INCOME
Westborough Savings' net interest and dividend income increased by $117
thousand for the quarter ended September 30, 1999, or 8.8%, to $1.4 million from
$1.3 million for the quarter ended September 30, 1998. The increase is
attributed to the combination of an increase in interest and dividend income of
$240 thousand and an increase in interest expense of $123 thousand. Westborough
Savings' net interest rate spread increased to 3.05% for the quarter ended
September 30, 1999, from 3.03% for the comparative quarter ended September 30,
1998.
While the average yield on interest-earning assets declined to 6.69%
for the quarter ended September 30, 1999 as compared to 6.79% for the quarter
ended September 30, 1998, the average volume of interest-earning assets
increased to $163.3 million for the quarter ended September 30, 1999 as
compared to $146.8 million for the quarter ended September 30, 1998.
Regarding interest-bearing liabilities, while the average cost of these
liabilities declined to 3.64% for the quarter ended September 30, 1999, from
3.76% for the quarter ended September 30, 1998, the average volume of
interest-bearing liabilities increased to $141.5 million for the quarter
ended September 30, 1999 as compared to $124.0 million for the quarter ended
September 30, 1998.
PROVISION FOR LOAN LOSSES
Westborough Savings' provision for loan losses increased by $1 thousand
to $10 thousand for the quarter ended September 30, 1999 as compared to $9
thousand for the quarter ended September 30, 1998. This moderate increase
reflects our continued loan portfolio growth, including commercial real estate
loans. Westborough Savings' continues to have a low level of non-performing
loans. However, as we expand our commercial lending activities, increases in the
provision are likely.
OTHER INCOME
Other income consists primarily of fee income for bank services,
gains and losses from the sale of securities and income from the writing of
options to buy common stock held in our stock portfolio. Total other income
increased 222%, to $264 thousand for the quarter ended September 30, 1999,
from $82 thousand for the comparative quarter ended September 30, 1998. The
primary reason for the increase in other income was income from the writing
of options to buy common stock held in our portfolio. For the quarter ended
September 30, 1999, income from options increased by $132 thousand, from -$0-
for the quarter ended September 30, 1998. Gains from the sale of securities
increased to $23 thousand for the quarter ended September 30, 1999, as
compared to $1 thousand for the quarter ended September 30, 1998. Income from
customer deposit and loan fees, plus income from the sale of non-insured
investment products through FISCO Equity, Inc., increased to $109 thousand
for the quarter ended September 30, 1999, as compared to $81 thousand for the
quarter ended September 30, 1998.
23
<PAGE>
OPERATING EXPENSE
For the three months ended September 30, 1999, operating expenses
increased $357 thousand, or 36.8%, to $1,326 thousand from $969 thousand for the
three months ended September 30, 1998. The increase was primarily due to $195
thousand increase in salary and benefits, reflecting the recent opening of a new
supermarket branch, additional staff in marketing and commercial services,
retail staff incentive payments and general increases in salary based upon
merit. Also, occupancy and equipment, data processing, marketing, promotion,
supplies and other expenses increased as a result of our recent opening of our
supermarket branch in Shrewsbury. Additional board and committee meetings,
mostly associated with strategic planning issues and meetings concerning the
formation of a mutual holding company, plus the payment of a quarterly retainer
fee during the most recent quarter, increased the level of trustee fees expense.
INCOME TAXES
The provision for income taxes declined by $75 thousand to $101
thousand for the quarter ended September 30, 1999 as compared to $176
thousand for the quarter ended September 30, 1998, resulting in an effective
tax rate of 27.3% and 41.0% for the quarter ended September 30, 1999 and
1998, respectively. Westborough Savings utilizes security investment
subsidiaries to substantially reduce state income taxes and each entity files
separate, unconsolidated state income tax returns. For the quarter ended
September 30, 1999, for state income tax purposes only, Westborough Savings
incurred a loss for which it was able to apply an effective state tax benefit
of 10.91% and, as a result, Westborough Savings' effective federal and state
tax rate was reduced to 27.3% for the quarter.
COMPARISON OF OPERATING RESULTS FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998:
NET INCOME
Westborough Savings net income for the twelve months ended September
30, 1999 increased $160 thousand, or 12.2%, to $1.5 million as compared to
$1.3 million for the twelve months ended September 30, 1998. This increase
was a result of increases in interest income of $673 thousand, other income
of $864 thousand and a decline in the provision for income taxes of $54
thousand. These amounts were offset by increases in operating expenses of
$1.0 million and interest expenses of $419 thousand. Westborough Savings'
return on average assets for the year ended September 30, 1999 was 0.89%
compared to 0.88% for the year ended September 30, 1998.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $673 thousand, or 6.8%, to
$10.6 million for the year ended September 30, 1999 from $9.9 million for the
year ended September 30, 1998. The increase in interest and dividend income
was mainly the result of a higher average volume of interest-earning assets
reduced,
24
<PAGE>
to a lesser extent, by a decline in the average rate earned on earning
assets. The average volume of interest-earning assets for the year ended
September 30, 1999 was $158.9 million earning a rate of 6.67% as compared to
$143.0 million earning a rate of 6.95% for the year ended September 30, 1998.
Westborough Savings experienced continued growth in real estate lending and
invested additional cash flows into stocks and short-term investments. The
average balance of loans for the year ended September 30, 1999 was $86.9
million, earning 7.39% for the year. This compares to an average balance of
loans for the year ended September 30, 1998 of $76.4 million, earning 7.71%
for the year. The average balance of investment securities for the year ended
September 30, 1999 was $62.9 million, earning 5.98% for the year. This
compares to an average balance of investments for the year ended September
30, 1998 of $61.3 million, earning 6.11% for the year. Finally, the average
balance of short-term investments for the year ended September 30, 1999 was
$9.1 million, earning 4.65% for the year. This compares to an average balance
of short-term investments for the year ended September 30, 1998 of $5.4
million, earning 5.71% for the year.
INTEREST EXPENSE
Interest expense increased by $419 thousand, or 9.2%, to $5.0 million
for the year ended September 30, 1999 from $4.6 million for the year ended
September 30, 1998. Interest expense increased due to a higher volume of
interest-bearing liabilities, offset, to a lesser extent, by a declining average
rate of interest paid on such interest-bearing liabilities. The average volume
of interest-bearing liabilities was $135.7 million with a cost of 3.67% for the
year ended September 30, 1999 as compared to $121.4 million with a cost of 3.75%
for the year ended September 30, 1998. The average volume of borrowed funds from
the Federal Home Loan Bank of Boston increased during the year ended September
30, 1999 to $3.2 million, up from an average balance of $33 thousand for the
year ended September 30, 1998. The average volume of interest-bearing deposits
increased to $132.5 million with a cost of 3.63% for the year ended September
30, 1999 as compared to $121.3 million with a cost of 3.75% for the year ended
September 30, 1998.
NET INTEREST INCOME
Westborough Savings' net interest and dividend income increased by $254
thousand for the year ended September 30, 1999, or 4.7%, to $5.6 million from
$5.4 million for the year ended September 30, 1998. The increase is attributed
to the combination of an increase in interest and dividend income of $673
thousand and an increase in interest expense of $419 thousand. Westborough
Savings' net interest rate spread declined to 3.01% for the year ended September
30, 1999 from 3.20% for the comparative year ended September 30, 1998.
While the average yield on interest-earning assets declined to 6.67%
for the year ended September 30, 1999 as compared to 6.95% for the year ended
September 30, 1998, the average volume of interest-earning assets increased
to $158.9 million for the year ended September 30, 1999 as compared to $143.0
million for the year ended September 30, 1998. The average cost of interest
bearing liabilities declined to 3.67% for the year ended September 30, 1999,
from 3.75% for the year ended September 30, 1998, while the average volume of
interest-bearing liabilities increased to $135.7 million for the year ended
September 30, 1999 as compared to $121.4 million for the year ended September
30, 1998.
25
<PAGE>
PROVISION FOR LOAN LOSSES
Westborough Savings' provision for loan losses increased by $6 thousand
to $45 thousand for the year ended September 30, 1999 as compared to $39
thousand for the year ended September 30, 1998. This moderate increase reflects
our continued loan portfolio growth, including commercial real estate loans.
Westborough Savings continues to have a low level of non-performing loans.
However, as we expand our commercial lending activities, increases in the
provision are likely.
OTHER INCOME
Other income consists primarily of fee income for bank services,
gains and losses from the sale of securities and income from the writing of
options to buy common stock held in our stock portfolio. Total other income
increased 226% to $1.2 million for the year ended September 30, 1999 from
$383 thousand for the comparative year ended September 30, 1998. The primary
reason for the increase in other income was security gains and income from
the writing of options to buy common stock held in our portfolio. Gains from
the sale of securities increased to $558 thousand for the year ended
September 30, 1999 as compared to $90 thousand for the year ended September
30, 1998. For the year ended September 30, 1999, income from options
increased by $352 thousand, from -$0- for the year ended September 30, 1998.
Income from customer deposit and loan fees, plus income from the sale of
non-insured investment products through FISCO Equity, Inc., increased to $337
thousand for the year ended September 30, 1999, as compared to $293 thousand
for the year ended September 30, 1998.
OPERATING EXPENSE
For the twelve months ended September 30, 1999, operating expenses
increased $1.0 million, or 27.5%, to $4.7 million from $3.7 million for the
twelve months ended September 30, 1998. The increase was primarily due to $554
thousand increase in salary and benefits, reflecting the recent opening of a new
supermarket branch, senior management bonuses, additional staff in marketing and
commercial services, retail staff incentive payments and general increases in
salary based upon merit. Also, occupancy and equipment, data processing,
marketing, promotion, supplies and other expenses increased as a result of our
recent opening of our supermarket branch. Additional board and committee
meetings, mostly associated with strategic planning issues and meetings
concerning the formation of a mutual holding company, plus the payment of a
yearly retainer fee during the most recent year, increased the level of trustee
fees expense.
INCOME TAXES
The provision for income taxes declined by $54 thousand, to $696
thousand for the year ended September 30, 1999 as compared to $750 thousand for
the year ended September 30, 1998, resulting in an effective tax rate of 32.1%
and 36.4% for the years ended September 30, 1999 and 1998, respectively.
Westborough Savings utilizes security investment subsidiaries to substantially
reduce state income taxes.
26
<PAGE>
WESTBOROUGH SAVINGS BANK
Westborough Savings is a Massachusetts-chartered mutual savings bank,
chartered in 1869. Westborough Savings is headquartered in Westborough,
Massachusetts, which is located 12 miles east of Worcester and 29 miles west
of Boston, Massachusetts. Our deposits are insured by the FDIC up to
applicable legal limits and the Depositors Insurance Fund in excess of such
amounts. We are examined and regulated by the Division of Banks of the
Commonwealth of Massachusetts and the FDIC. Westborough Savings Bank's
executive offices are located at 100 E. Main Street, Westborough,
Massachusetts 01581 and its telephone number is (508) 366-4111. Westborough
Savings also maintains an Internet web site located at
www.westborosavings.com.
Westborough Savings is a community and customer-oriented retail bank
offering traditional deposit products, residential and commercial real estate
mortgage loans and, to a lesser extent, consumer and commercial loans. We
operate five full service banking offices located in the towns of Westborough,
Northborough and Shrewsbury, Massachusetts. We also operate a non-public
self-contained office at the "Willows," a retirement community located in
Westborough. Together, our offices serve our "primary market area" consisting of
Westborough, Northborough, Shrewsbury, Grafton, Southborough and Hopkinton,
Massachusetts.
At June 30, 1999, we had total loans of $91.8 million, of which $81.4
million, or 88.7%, were residential first mortgage loans. Of the residential
first mortgage loans outstanding at that date, 29.8% were adjustable-rate
mortgage loans and 70.2% were fixed-rate loans. We retain substantially all of
the loans that we originate. We also invest in mortgage-backed and investment
securities, consisting primarily of U.S. government, government agency and
corporate securities. Our investment portfolio equaled $63.3 million, or 36.8%
of our total assets at June 30, 1999. For further information on our operations
and financial condition, see "Business of Westborough Savings Bank."
WESTBOROUGH FINANCIAL SERVICES, INC.
Westborough Financial Services has not engaged in any business to date
and will serve as a holding company of The Westborough Bank (formerly known
as Westborough Savings Bank) following the reorganization. A majority of the
outstanding shares of Westborough Financial Services' common stock will be
owned by Westborough Bancorp, MHC. Westborough Financial Services' executive
offices are located at 100 E. Main Street, Westborough, Massachusetts 01581
and its telephone number is (508) 366-4111.
WESTBOROUGH BANCORP, MHC
As part of our reorganization, Westborough Savings will organize
Westborough Bancorp, MHC as a Massachusetts-chartered mutual holding company
which will be registered as a bank holding company with the Federal Reserve
Board. Persons who had liquidation rights with respect to Westborough Savings as
of the date of the reorganization will continue to have liquidation rights
solely with respect to Westborough Bancorp, MHC. Their liquidation rights in
Westborough Bancorp, MHC will exist as long as they maintain a deposit account
at
27
<PAGE>
Westborough Bank. Westborough Bancorp, MHC's executive offices are located at
100 E. Main Street, Westborough, Massachusetts 01581 and its telephone number
is (508) 366-4111.
Westborough Bancorp, MHC's principal assets will be the shares of common
stock of Westborough Financial Services that it receives in the reorganization
and approximately $100,000 that it receives as its initial capitalization. At
the present time, we expect that Westborough Bancorp, MHC will not engage in any
business activity other than its investment in a majority of the common stock of
Westborough Financial Services and the management of any cash dividends received
from Westborough Financial Services. Federal and state law and regulations
require that as long as Westborough Bancorp, MHC is in existence it must own a
majority of Westborough Financial Services' common stock.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The net proceeds will depend on the total number of shares of common stock
sold in the offering, which in turn will depend on RP Financial's appraisal,
regulatory and market considerations, and the expenses incurred in connection
with the offering. Although we will not be able to determine the actual net
proceeds from the sale of the common stock until we complete the offering, we
estimate the net proceeds to be between $5.0 million and $6.9 million.
Westborough Financial Services intends to distribute the net proceeds from
the offering as follows:
Number of Shares Sold
-----------------------
552,500 747,500
---------- ----------
Offering proceeds ................................... $5,525,000 $7,475,000
Less: offering expenses ............................. 496,190 532,070
---------- ----------
Net offering proceeds ............................... 5,028,810 6,942,930
---------- ----------
Less:
Proceeds contributed to Westborough Bank ........ 2,514,405 3,471,465
Proceeds used for loan to employee
stock ownership plan ......................... 442,000 598,000
---------- ----------
Proceeds remaining for Westborough Financial Services $2,072,405 $2,873,465
========== ==========
If regulatory or market conditions change and we are required to sell
859,625 shares of stock, then we estimate the net offering proceeds to be
$8,043,549. If we sell 859,625 shares of stock, then our loan to the employee
stock ownership plan would be $687,700.
The net proceeds may vary because total expenses relating to the
reorganization may be more or less than our estimates. For example, our expenses
would increase if a syndicated community offering is used to sell shares not
purchased in the subscription offering and community offering. The net proceeds
will also vary if the number of shares to be sold in the offering are adjusted
to reflect a change in the estimated pro forma market value of Westborough
28
<PAGE>
Financial Services and Westborough Bank. Payments for shares made through
withdrawals from existing deposit accounts will not result in the receipt of new
funds for investment by Westborough Bank but will result in a reduction of
Westborough Bank's deposits and interest expense as funds are transferred from
interest-bearing certificates of deposit or other deposit accounts.
Westborough Financial Services may use the proceeds it retains from the
offering:
o to invest in securities;
o to finance the possible acquisition of financial institutions or
other businesses that are related to banking;
o to repurchase shares of common stock issued in the offering,
subject to certain regulatory restrictions; and
o for general corporate purposes.
Westborough Bank may use the proceeds it receives from the offering:
o to fund new loans;
o to finance the possible establishment or acquisition of one or more
branch offices in its market area;
o to finance the expansion and renovation of its main office; and
o for general corporate purposes.
Westborough Savings has estimated that the expansion and renovation of
Westborough Bank's main office will cost approximately $2.5 million. In
anticipation of this project, however, Westborough Savings has budgeted to
use existing capital to fund such costs in the event the offering did not
take place. Given the availability of such funds, Westborough Bank's use of
proceeds from the offering for this purpose may vary depending on Westborough
Bank's assessment of its needs to support other uses of proceeds following
the reorganization.
Other than with respect to the expansion and renovation of Westborough
Bank's main office, neither Westborough Financial Services nor Westborough
Bank have any specific plans, or have made arrangements, for the uses of
proceeds other than for general corporate purposes as noted above. Accordingly,
we have not allocated specific amounts of proceeds for each purpose. Further,
we do not have any current plans nor have made any arrangements in connection
with the possible acquisition of financial institutions or other businesses
related to banking.
OUR POLICY REGARDING DIVIDENDS
We will have the authority to declare and pay dividends on our common
stock upon completion of the offering. Payment of dividends on the common stock
will be subject to determination and declaration by our Board of Directors and
the availability of funds for such dividends. Our Board of Directors currently
anticipates declaring and paying cash dividends on the common stock following
consummation of the reorganization. However, when the payment of dividends will
begin is currently unknown. Any dividend policy of Westborough Financial
Services, however, will also depend upon our debt and equity structure, earnings
and financial condition, need for capital in connection with possible future
acquisitions and other factors, including economic conditions, regulatory
restrictions and tax considerations. We can give no assurance that dividends
will be declared or as to the amount and frequency of dividends, if declared.
29
<PAGE>
If Westborough Financial Services pays dividends to its stockholders, it
will be required to pay dividends to Westborough Bancorp, MHC, unless
Westborough Bancorp, MHC elects to waive dividends. We do not currently
anticipate that Westborough Bancorp, MHC will waive dividends paid by
Westborough Financial Services. Any decision to waive dividends will be subject
to regulatory approval. See "Regulation of Westborough Savings Bank and
Westborough Financial Services, Inc. -- Dividend Waivers by Westborough Bancorp,
MHC."
The only funds available to us for the payment of dividends will be cash
and cash equivalents held at the holding company level, dividends paid by
Westborough Bank to us, and borrowings. Westborough Bank will be prohibited from
paying cash dividends to us to the extent that any such payment would reduce
Westborough Bank's capital below required capital levels or would impair the
liquidation account to be established for the benefit of the Westborough Bank's
eligible account holders and supplemental eligible account holders at the time
of the reorganization. See "The Reorganization and The Offering -- Effects of
the Reorganization -- Depositors' Rights If We Liquidate; Liquidation Account."
Under FDIC regulations, Westborough Bank is prohibited from paying
dividends if, among other things, it is not in compliance with applicable
regulatory capital requirements. In addition, Massachusetts law provides that
dividends may not be declared, credited or paid by Westborough Bank so long
as there is any impairment of capital stock. No dividend may be declared on
Westborough Bank's common stock for any period other than for which dividends
are declared upon preferred stock, except as authorized by the Commissioner
of the Massachusetts Division of Banks. The approval of the Commissioner is
also required for Westborough Bank to declare a dividend, if the total of all
dividends declared by it in any calendar year shall exceed the total of its
net profits for that year combined with its retained net profits of the
preceeding two years, less any required transfer to surplus or a fund for the
retirement of any preferred stock.
Any payment of dividends by Westborough Bank to Westborough Financial
Services that would be deemed to be drawn out of Westborough Bank's bad debt
reserves, would require a payment of taxes at the then-current tax rate by
Westborough Bank on the amount of earnings deemed to be removed from bad debt
reserves for such distribution. Westborough Bank does not intend to make any
distribution to Westborough Financial Services that would create this type of a
tax liability. See "Taxation."
MARKET FOR THE COMMON STOCK
We have not previously issued common stock, and there is currently no
established market for the common stock. We expect the common stock to trade
under the symbol "WFSM" on the over-the-counter market with quotations available
through the OTC Bulletin Board after completion of the offering. Trident
Securities has advised us that it intends to make a market in the common stock
following the reorganization, but is under no obligation to do so. We will seek
to encourage and assist additional market makers to make a market for our common
stock.
30
<PAGE>
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
any market maker. The number of active buyers and sellers of the common stock at
any particular time may be limited. Under such circumstances, you could have
difficulty selling your shares on short notice, and, therefore, you should not
view the common stock as a short-term investment. We cannot assure you that an
active trading market for the common stock will develop or that, if it develops,
it will continue, nor can we assure you that if you purchase shares you will be
able to sell them at or above $10.00 per share.
31
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At June 30, 1999, we exceeded all regulatory capital requirements. Set
forth below is a summary of our capital computed under generally accepted
accounting principles ("GAAP") and our compliance with regulatory capital
standards at June 30, 1999, on a historical and pro forma basis. We have assumed
that the indicated number of shares were sold as of June 30, 1999 and that
Westborough Bank received 50% of the net proceeds from the offering. For
purposes of the table below, the amount expected to be loaned to the employee
stock ownership plan and the cost of the shares expected to be acquired by the
management recognition plan are deducted from pro forma regulatory capital. For
a discussion of the capital requirements applicable to Westborough Savings and
Westborough Bank, see "Regulation of Westborough Savings Bank and Westborough
Financial Services, Inc. -- Federal Banking Regulation -- Capital Requirements."
32
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at June 30, 1999 Based Upon the Sale at $10.00 Per Share
------------------------------------------------------------------------------------------------
859,625
552,500 650,000 747,500 Shares
Historical at Shares Shares Shares (15% Above
June 30, (Minimum of the (Midpoint of the (Maximum of the (Maximum of the
1999 Range) Range) Range) Range)(1)
--------------- --------------- --------------- --------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets(2)
------ ------- ------ ------- ------ ------- ------ ------- ------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital and retained earnings
under generally accepted
accounting principles ...... $19,448 11.30% $21,299 12.24% $21,661 12.43% $22,022 12.61% $22,438 12.81%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Leverage Capital:
Leverage capital level(3) ....... $19,411 11.41% $21,262 12.37% $21,624 12.55% $21,985 12.73% $22,401 12.94%
Requirement(4) .................. 5,102 3.00% 5,158 3.00% 5,169 3.00% 5,179 3.00% 5,192 3.00%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess .......................... $14,309 8.41% $16,104 9.37% $16,455 9.55% $16,806 9.73% $17,209 9.94%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Tier I Risk-Based Capital:
Capital level(3)(5) ............. $19,411 20.60% $21,262 22.33% $21,624 22.66% $21,985 22.99% $22,401 23.37%
Requirement ..................... 3,769 4.00% 3,809 4.00% 3,817 4.00% 3,825 4.00% 3,834 4.00%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess .......................... $15,642 16.60% $17,453 18.33% $17,807 18.66% $18,160 18.99% $18,567 19.37%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total Risk-Based Capital:
Capital level(3)(4) ............. $20,280 21.52% $22,131 23.24% $22,493 23.57% $22,854 23.90% $23,270 24.27%
Requirement(4) .................. 7,538 8.00% 7,619 8.00% 7,635 8.00% 7,651 8.00% 7,669 8.00%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess .......................... $12,742 13.52% $14,512 15.24% $14,858 15.57% $15,203 15.90% $15,601 16.27%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated price range of up to 15%
as a result of changes in market conditions or general financial and
economic conditions following the commencement of the offering.
(2) Leverage capital levels are shown as a percentage of "total adjusted
assets," and risk-based capital levels are calculated on the basis of a
percentage of "risk-weighted assets," each as defined in the FDIC
regulations.
(3) Pro forma capital levels assume receipt by Westborough Bank of 50% of the
net proceeds from the shares of common stock sold at the minimum, midpoint
and maximum of the offering range. These levels assume funding by
Westborough Bank of the management recognition plan equal to 4% of the
common stock issued, including repayment of Westborough Financial
Services' loan to the employee stock ownership plan to enable the plan to
purchase 8% of the common stock issued.
(4) The current minimum leverage capital requirement for savings banks is 3%
of total adjusted assets for savings banks that receive the highest
supervisory ratings for safety and soundness and that are not experiencing
or anticipating significant growth. The current leverage capital ratio
applicable to all other savings banks is 4% to 5%.
(5) Assumes net proceeds are invested in assets that carry risk-weighting
equal to the actual risk weighting of Westborough Savings' assets as of
June 30, 1999.
33
<PAGE>
CAPITALIZATION
The following table presents the historical deposits and capitalization of
Westborough Savings at June 30, 1999, and the pro forma capitalization of
Westborough Financial Services after giving effect to the reorganization, based
upon the sale of the number of shares shown below and the other assumptions set
forth under "Pro Forma Data." A change in the number of shares to be sold in the
offering may affect materially the capitalization.
<TABLE>
<CAPTION>
Pro Forma Based Upon Sale at $10.00 Per Share
-------------------------------------------------------
859,625
552,500 650,000 747,500 Shares
Historical Shares Shares Shares (15% Above
as of June (Minimum (Midpoint (Maximum Maximum of
30, 1999 of Range) of Range) of Range) Range)(1)
----------- ------------ ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2) .............................................. $ 147,135 $ 147,135 $ 147,135 $ 147,135 $ 147,135
Borrowings ............................................... 4,000 4,000 4,000 4,000 4,000
--------- --------- --------- --------- ---------
Total deposits and borrowed funds ........................ $ 151,135 $ 151,135 $ 151,135 $ 151,135 $ 151,135
========= ========= ========= ========= =========
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000
shares authorized; none to be issued ........... $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value, 5,000,000
shares authorized; shares to be issued
as reflected(3)(4) ............................. -- 16 19 21 25
Additional paid-in capital)(4) ...................... -- 5,013 5,967 6,922 8,019
Retained earnings(5) ................................ 19,411 19,311 19,311 19,311 19,311
Accumulated other comprehensive income .............. 37 37 37 37 37
Less:
Common stock acquired by the employee stock
ownership plan(6) .............................. -- (442) (520) (598) (688)
Common stock acquired by the management
recognition plan(7) ............................ -- (221) (260) (299) (344)
--------- --------- --------- --------- ---------
Total stockholders' equity ............................... $ 19,448 $ 23,714 $ 24,554 $ 25,394 $ 26,360
========= ========= ========= ========= =========
</TABLE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering of up to 15% as a result of
regulatory considerations or changes in market or general financial and
economic conditions following the commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects shares to be issued to Westborough Bancorp, MHC as follows:
1,026,072 shares at the minimum, 1,207,143 shares at the midpoint,
1,388,214 shares at the maximum and 1,596,447 shares at 15% above the
maximum.
(4) Reflects the issuance of shares sold in the offering at a value of $10.00
per share. No effect has been given to the issuance of additional shares
of common stock pursuant to Westborough Financial Services' proposed stock
option plan intended to be adopted by Westborough Financial Services and
presented for approval of stockholders at a meeting of the stockholders to
be held at least six months following completion of the offering.
(5) The retained earnings of Westborough Bank will be substantially restricted
after the offering. The reduction in historical retained earnings reflects
the $100,000 initial capitalization of Westborough Bancorp, MHC by
Westborough Bank.
(6) Assumes that 8% of the shares issued in connection with the offering will
be purchased by the employee stock ownership plan and that the funds used
to acquire such shares will be borrowed from Westborough Financial
Services. The common stock acquired by the employee stock ownership plan
is reflected as a reduction of stockholders' equity.
(7) Assumes that, subsequent to the offering, an amount equal to 4% of the
shares of common stock issued in the offering is purchased by a management
recognition plan through open market purchases. The proposed management
recognition plan is intended to be adopted by Westborough Financial
Services and presented for approval of stockholders at a meeting of
stockholders to be held at least six months following completion of the
offering. The common stock purchased by the management recognition plan is
reflected as a reduction of stockholders' equity.
34
<PAGE>
PRO FORMA DATA
We can not determine the actual net proceeds from the sale of the common
stock until the offering is completed. However, we estimate that net proceeds
will be between $5.0 million and $6.9 million, or $8.0 million if the offering
range is increased by 15%, based upon the following assumptions:
o we will sell all shares of common stock in the subscription
offering;
o we will pay Trident Securities a fee equal to 2.0% of the aggregate
purchase price for sales in the subscription offerings except for
shares sold to the employee stock ownership plan, and officers,
trustees and their immediate families; and
o total expenses, excluding the marketing fees paid to Trident
Securities, will be approximately $405,780.
We calculated the pro forma consolidated net income and stockholders'
equity of Westborough Financial Services for the nine months ended June 30, 1999
and the year ended September 30, 1998, as if the common stock had been sold at
the beginning of the year and the net proceeds had been invested at 5.09% and
4.39%, respectively. We chose these yields because they represent the yield on
one-year U.S. Government securities at the corresponding period. In light of
changes in interest rates in recent periods, we believe this rate more
accurately reflects pro forma reinvestment rates than the arithmetic average
method which assumes reinvestment of the net proceeds at a rate equal to the
average of yield on interest-earning assets and cost of deposits for these
periods. We assumed a tax rate of 36% for both periods. This results in an
after-tax yield of 3.26% for the nine months ended June 30, 1999 and 2.81% for
the year ended September 30, 1998.
We calculated historical and pro forma per share amounts by dividing
historical and pro forma amounts of pro forma consolidated net income and
stockholders' equity by the indicated number of shares of common stock. We
adjusted these figures to give effect to the shares purchased by the employee
stock ownership plan. We computed per share amounts for each period as if the
common stock was outstanding at the beginning of the periods, but we did not
adjust per share historical or pro forma stockholders' equity to reflect the
earnings on the estimated net proceeds. As discussed under "How We Intend to Use
the Proceeds from the Offering," Westborough Financial Services intends to
retain up to 50% of the net proceeds from the offering and intends to make a
loan to the employee stock ownership plan to fund the employee stock ownership
plan's purchase of 8% of the common stock.
The following tables give effect to the management recognition plan, which
we expect to adopt following the reorganization and present, along with the
stock option plan, to stockholders for approval at an annual or special meeting
of stockholders to be held at least six months following the completion of the
reorganization. If the management recognition plan is approved by stockholders,
the management recognition plan will acquire an amount of common stock equal to
4% of the shares of common stock sold in the offering, either through open
market purchases or from authorized but unissued shares of common stock. In
preparing the following tables we assumed that stockholder approval has been
obtained and that the shares acquired by the management recognition plan are
purchased in the open market at the purchase price.
35
<PAGE>
The following tables do not give effect to:
o the shares to be reserved for issuance under the stock option plan,
which requires stockholder approval at a meeting following the
reorganization;
o withdrawals from deposit accounts for the purpose of purchasing
common stock in the reorganization;
o Westborough Financial Services' results of operations after the
reorganization; or
o the market price of the common stock after the reorganization.
The following pro forma information may not represent the financial
effects of the reorganization at the date on which the reorganization actually
occurs and you should not use the table to indicate future results of
operations. Pro forma stockholders' equity represents the difference between the
stated amount of assets and liabilities of Westborough Financial Services
computed in accordance with generally accepted accounting principles. We did not
increase or decrease stockholders' equity to reflect the difference between the
carrying value of loans and other assets and market value. Pro forma
stockholders' equity is not intended to represent the fair market value of the
common stock and may be different than amounts that would be available for
distribution to stockholders if we liquidated.
36
<PAGE>
<TABLE>
<CAPTION>
At or for the Nine Months Ended June 30, 1999
-------------------------------------------------------
Maximum as
Minimum Midpoint Maximum Adjusted
552,500 650,000 747,500 859,625
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share(1)
--------- --------- --------- ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds(2) ...................................................... $ 5,525 $ 6,500 $ 7,475 $ 8,596
Less: expenses .................................................. (496) (514) (532) (552)
-------- -------- -------- --------
Estimated net proceeds ................................................. 5,029 5,986 6,943 8,044
======== ======== ======== ========
Less: Common stock purchased by employee
stock ownership plan(3) ................................... (442) (520) (598) (688)
Less: Common stock purchased by
management recognition plan(4) ............................ (221) (260) (299) (344)
-------- -------- -------- --------
Estimated net proceeds, as adjusted ....................... $ 4,366 $ 5,206 $ 6,046 $ 7,012
======== ======== ======== ========
For the Nine Months Ended June 30, 1999:
Consolidated net income:
Historical income ............................................... $ 1,204 $ 1,204 $ 1,204 $ 1,204
Pro forma income on net proceeds(5) ............................. 41 61 82 105
Pro forma employee stock ownership plan
adjustment(3) ............................................. (21) (25) (29) (33)
Pro forma management recognition
plan adjustment(4) ........................................ (21) (25) (29) (33)
-------- -------- -------- --------
Pro forma net income ...................................... $ 1,203 $ 1,215 $ 1,228 $ 1,243
======== ======== ======== ========
Per share net income:
Historical income ............................................... $ 0.78 $ 0.67 $ 0.58 $ 0.50
Pro forma income on net proceeds(5) ............................. 0.03 0.03 0.04 0.04
Pro forma employee stock ownership plan
adjustment(3)(6) .......................................... (0.01) (0.01) (0.01) (0.01)
Pro forma management recognition
plan adjustment(4) ........................................ (0.01) (0.01) (0.01) (0.01)
-------- -------- -------- --------
Pro forma net income per share ............................ $ 0.79 $ 0.68 $ 0.60 $ 0.52
======== ======== ======== ========
At June 30, 1999
Stockholders' equity:
Historical ...................................................... $ 19,348 $ 19,348 $ 19,348 $ 19,348
Estimated net proceeds .......................................... 5,029 5,986 6,943 8,044
Less: Common stock acquired by employee
stock ownership plan(3) ................................... (442) (520) (598) (688)
Less: Common stock acquired by management
recognition plan(4) ....................................... (221) (260) (299) (344)
-------- -------- -------- --------
Pro forma stockholders' equity ............................ $ 23,714 $ 24,554 $ 25,394 $ 26,360
======== ======== ======== ========
Stockholders' equity per share(7):
Historical ...................................................... $ 12.26 $ 10.42 $ 9.06 $ 7.88
Estimated net proceeds .......................................... 3.19 3.22 3.25 3.27
Less: Common stock acquired by employee
stock ownership plan(3) ................................... (0.28) (0.28) (0.28) (0.28)
Less: Common stock acquired by management
recognition plan(4) ....................................... (0.14) (0.14) (0.14) (0.14)
-------- -------- -------- --------
Pro forma stockholders' equity per share .................. $ 15.03 $ 13.22 $ 11.89 $ 10.73
======== ======== ======== ========
Ratio of offering price to pro forma
net income per share (annualized)(8) ............................ 9.49x 11.03x 12.50x 14.42x
Offering price as a percentage of pro forma
stockholders' equity per share(8) ............................... 66.53% 75.64% 84.10% 93.20%
</TABLE>
37
<PAGE>
- ----------
(1) We reserve the right to issue up to a total of 859,625 shares at $10.00
per share, or 15% above the maximum of the offering range. Unless
otherwise required by the regulators, subscribers will not be given the
right to modify their subscriptions unless the aggregate purchase price of
the common stock is increased to exceed $8.6 million (i.e., 15% above the
maximum of the offering range).
(2) Withdrawals from deposit accounts for the purchase of stock have not been
reflected in these adjustments. We estimate that approximately 20% of all
subscription orders may utilize funds currently on deposit at Westborough
Savings.
(3) Assumes 8% of the shares to be sold in the offering are purchased by the
employee stock ownership plan under all circumstances, and that the funds
used to purchase such shares are borrowed from Westborough Financial
Services. The approximate amount expected to be borrowed by the employee
stock ownership plan is reflected in this table as a reduction of capital.
Although repayment of such debt will be secured solely by the shares
purchased by the employee stock ownership plan, we expect to make
discretionary contributions to the employee stock ownership plan in an
amount at least equal to the principal and interest payments on the
employee stock ownership plan debt. Pro forma net income has been adjusted
to give effect to such contributions, based upon a fully amortizing debt
with a ten-year term. Since Westborough Financial Services will be
providing the employee stock ownership plan loan, only principal payments
on the employee stock ownership plan loan are reflected as employee
compensation and benefits expense. The provisions of SOP 93-6 have been
applied for shares to be acquired by the employee stock ownership plan and
for purposes of computing earnings per share.
(4) Assumes a number of issued and outstanding shares of common stock equal to
4% of the common stock to be sold in the offering will be purchased by the
management recognition plan. Before the management recognition plan is
implemented, it must be approved by the stockholders. The dollar amount of
the common stock possibly to be purchased by the management recognition
plan is based on $10.00 per share and represents unearned compensation and
is reflected as a reduction of capital. Such amount does not reflect
possible increases or decreases in the price per share after the offering.
As we accrue compensation expenses to reflect the vesting of such shares
pursuant to the management recognition plan, the charge against capital
will be reduced accordingly. In the event the shares issued under the
management recognition plan consist of shares of common stock newly issued
and the price per share in the offering, the per share financial condition
and result of operations of Westborough Financial Services would be
proportionately reduced and to the extent the interest of existing
stockholders would be diluted by approximately 4.0%.
(5) Pro forma income reflects planned capital expenditures of $2.5 million
expected to be made in the first half of 2000 for the expansion and
renovation of our executive office.
(6) Westborough Bank intends to record compensation expense related to the
employee stock option plan in accordance with SOP 93-6. As a result, to
the extent the value of the common stock appreciates over time,
compensation expense related to the employee stock ownership plan will
increase. SOP 93-6 also changes the earnings per share computations for
leveraged employee stock ownership plans to include as outstanding only
shares that have been committed to be released to participants. For
purposes of the preceding table, it was assumed that the number of
employee stock ownership plan shares that were committed to be released
at June 30, 1999 was 3,315, 3,900, 4,485 and 5,158 for the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively.
(7) Stockholders' equity per share data is based upon 1,578,571, 1,857,143,
2,135,714 and 2,456,071 shares outstanding representing shares sold in the
offering, and shares purchased by the employee stock ownership plan and
management recognition plan.
(8) Assuming 100% of the outstanding common stock of Westborough Financial
Services is issued to the public rather than 35%, the offering price as a
percentage of pro forma stockholders' equity per share would be 48.34% at
the minimum of the offering range, 52.98% at the midpoint of the offering
range, 57.02% at the maximum of the offering range and 61.07% at 15% above
the maximum of the offering range, and the ratio of the offering price to
pro forma net income per share would be 9.60x at the minimum of the
offering range, 10.96x at the midpoint of the offering range, 12.25x at
the maximum of the offering range and 13.64x at 15% above the maximum of
the offering range.
38
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended September 30, 1999
---------------------------------------------------------
Maximum as
Minimum Midpoint Maximum Adjusted
552,500 650,000 747,500 859,625
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share(1)
--------- --------- --------- ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds(2) .................................................. $ 5,525 $ 6,500 $ 7,475 $ 8,596
Less: expenses .............................................. (496) (514) (532) (552)
-------- -------- -------- --------
Estimated net proceeds ............................................. 5,029 5,986 6,943 8,044
======== ======== ======== ========
Less: Common stock purchased by employee
stock ownership plan(3) ............................... (442) (520) (598) (688)
Less: Common stock purchased by
management recognition plan(4) ........................ (221) (260) (299) (344)
-------- -------- -------- --------
Estimated net proceeds, as adjusted ................... $ 4,366 $ 5,206 $ 6,046 $ 7,012
======== ======== ======== ========
For the Year Ended September 30, 1998:
Consolidated net income:
Historical income ........................................... $ 1,313 $ 1,313 $ 1,313 $ 1,313
Pro forma income on net proceeds(5) ......................... 47 70 94 121
Pro forma employee stock ownership plan
adjustment(3) ......................................... (28) (33) (38) (44)
Pro forma management recognition
plan adjustment(4) .................................... (28) (33) (38) (44)
-------- -------- -------- --------
Pro forma net income .................................. $ 1,304 $ 1,317 $ 1,331 $ 1,346
======== ======== ======== ========
Per share net income:
Historical income ........................................... $ 0.85 $ 0.73 $ 0.63 $ 0.55
Pro forma income on net proceeds ............................ 0.03 0.04 0.05 0.05
Pro forma employee stock ownership plan
adjustment(3)(6) ...................................... (0.02) (0.02) (0.02) (0.02)
Pro forma management recognition
plan adjustment(4) .................................... (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Pro forma net income per share ........................ $ 0.84 $ 0.73 $ 0.64 $ 0.56
======== ======== ======== ========
At September 30, 1998
Stockholders' equity:
Historical .................................................. $ 19,267 $ 19,267 $ 19,267 $ 19,267
Estimated net proceeds ...................................... 5,029 5,986 6,943 8,044
Less: Common stock acquired by employee
stock ownership plan(3) ............................... (442) (520) (598) (688)
Less: Common stock acquired by management
recognition plan(4) ................................... (221) (260) (299) (344)
-------- -------- -------- --------
Pro forma stockholders' equity ........................ $ 23,633 $ 24,473 $ 25,313 $ 26,279
======== ======== ======== ========
Stockholders' equity per share (7):
Historical .................................................. $ 12.21 $ 10.37 $ 9.02 $ 7.84
Estimated net proceeds ...................................... 3.19 3.22 3.25 3.27
Less: Common stock acquired by employee
stock ownership plan(3) ............................... (0.28) (0.28) (0.28) (0.28)
Less: Common stock acquired by management
recognition plan(4) ................................... (0.14) (0.14) (0.14) (0.14)
-------- -------- -------- --------
Pro forma stockholders' equity per share .............. $ 14.98 $ 13.17 $ 11.85 $ 10.69
======== ======== ======== ========
Ratio of offering price to pro forma
net income per share (annualized)(8) ........................ 11.90x 13.70x 15.63x 17.86x
Offering price as a percentage of pro forma
stockholders' equity per share(8) ........................... 66.76% 75.93% 84.39% 93.55%
</TABLE>
39
<PAGE>
- ----------
(1) We reserve the right to issue up to a total of 859,625 shares at $10.00
per share, or 15% above the maximum of the offering range. Unless
otherwise required by the regulators, subscribers will not be given the
right to modify their subscriptions unless the aggregate purchase price of
the common stock is increased to exceed $8.6 million (i.e., 15% above the
maximum of the offering range.)
(2) Withdrawals from deposit accounts for the purchase of stock have not been
reflected in these adjustments. We estimate that approximately 20% of all
subscription orders may utilize funds currently on deposit at Westborough
Savings.
(3) Assumes 8% of the shares to be sold in the offering are purchased by the
employee stock ownership plan under all circumstances, and that the funds
used to purchase such shares are borrowed from Westborough Financial
Services. The approximate amount expected to be borrowed by the employee
stock ownership plan is reflected in this table as a reduction of capital.
Although repayment of such debt will be secured solely by the shares
purchased by the employee stock ownership plan, we expect to make
discretionary contributions to the employee stock ownership plan in an
amount at least equal to the principal and interest payments on the
employee stock ownership plan debt. Pro forma net income has been adjusted
to give effect to such contributions, based upon a fully amortizing debt
with a ten-year term. Since Westborough Financial Services will be
providing the employee stock ownership plan loan, only principal payments
on the employee stock ownership plan loan are reflected as employee
compensation and benefits expense. The provisions of SOP 93-6 have been
applied for shares to be acquired by the employee stock ownership plan and
for purposes of computing earnings per share.
(4) Assumes a number of issued and outstanding shares of common stock equal to
4% of the common stock to be sold in the offering will be purchased by the
management recognition plan. Before the management recognition plan is
implemented, it must be approved by the stockholders. The dollar amount of
the common stock possibly to be purchased by the management recognition
plan is based on $10.00 per share and represents unearned compensation and
is reflected as a reduction of capital. Such amount does not reflect
possible increases or decreases in the price per share after the offering.
As we accrue compensation expenses to reflect the vesting of such shares
pursuant to the management recognition plan, the charge against capital
will be reduced accordingly. In the event the shares issued under the
management recognition plan consist of shares of common stock newly issued
and the price per share in the offering, the per share financial condition
and result of operations of Westborough Financial Services would be
proportionately reduced and to the extent the interest of existing
stockholders would be diluted by approximately 4.0%.
(5) Pro forma income reflects planned capital expenditures of $2.5 million
expected to be made in the first half of 2000 for the expansion and
renovation of our executive office.
(6) Westborough Bank intends to record compensation expense related to the
employee stock ownership plan in accordance with SOP 93-6. As a result, to
the extent the value of the common stock appreciates over time,
compensation expense related to the employee stock ownership plan will
increase. SOP 93-6 also changes the earnings per share computations for
leveraged employee stock ownership plans to include as outstanding only
shares that have been committed to be released to participants. For
purposes of the preceding table, it was assumed that the number of
employee stock ownership plan shares that were committed to be released
at September 30, 1998 was 4,420, 5,200, 5,980 and 6,877 for the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively.
(7) Stockholders' equity per share data is based upon 1,578,571, 1,857,143,
2,135,714 and 2,456,071 shares outstanding representing shares sold in the
offering, and shares purchased by the employee stock ownership plan and
management recognition plan.
(8) Assuming 100% of the outstanding common stock of Westborough Financial
Services is issued to the public rather than 35%, the offering price as a
percentage of pro forma stockholders' equity per share would be 48.34% at
the minimum of the offering range, 52.98% at the midpoint of the offering
range, 57.02% at the maximum of the offering range and 61.07% at 15% above
the maximum of the offering range, and the ratio of the offering price to
pro forma net income per share would be 9.60x at the minimum of the
offering range, 10.96x at the midpoint of the offering range, 12.25x at
the maximum of the offering range and 13.64x at 15% above the maximum of
the offering range.
40
<PAGE>
WESTBOROUGH SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
The Consolidated Statements of Income of Westborough Savings for the
years ended September 30, 1998, 1997 and 1996 have been audited by Wolf &
Company, P.C., independent certified public accountants. The Independent
Auditors' Report thereon appears on page F-2 of this prospectus. These
consolidated statements of income should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements in this prospectus and "Management's Discussion and
Analysis of the Financial Condition and Results of Operations" beginning on page
40 of this prospectus. The consolidated statements of income for the nine month
periods ended June 30, 1999 and 1998 are unaudited, but in the opinion of
management, reflect all adjustments necessary for a fair presentation of the
results for such periods. The results for the nine month period ended June 30,
1999 are not necessarily indicative of the results of Westborough Savings for
the entire year.
<TABLE>
<CAPTION>
For the Nine Months For the Years Ended
Ended June 30, September 30,
-------------------- ---------------------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans ................................ $4,742 $4,329 $5,884 $5,242 $4,868
Interest and dividends on investment securities:
Taxable interest .................................... 2,498 2,769 3,580 3,822 3,475
Non-taxable interest ................................ 43 3 11 -- --
Dividends ........................................... 270 115 152 131 103
Interest on federal funds sold ............................ 183 167 228 219 181
Interest on short-term investments ........................ 140 60 78 47 84
------ ------ ------ ------ ------
Total interest and dividend income .................. 7,876 7,443 9,933 9,461 8,711
====== ====== ====== ====== ======
Interest expense:
Interest on deposits ...................................... 3,573 3,392 4,555 4,285 4,037
Interest on borrowings .................................... 115 -- 2 141 --
------ ------ ------ ------ ------
Total interest expense .............................. 3,688 3,392 4,557 4,426 4,037
====== ====== ====== ====== ======
Net interest income ............................................. 4,188 4,051 5,376 5,035 4,674
Provision for loan losses ....................................... 35 30 39 96 105
------ ------ ------ ------ ------
Net interest income, after
provision for loan losses .................... 4,153 4,021 5,337 4,939 4,569
====== ====== ====== ====== ======
Other income:
Customer service fees ..................................... 206 193 259 242 271
Loan fees ................................................. 14 15 20 14 19
Income from covered call options .......................... 220 -- -- -- --
Gain on sales and dispositions of securities, net ......... 534 88 90 337 119
Miscellaneous ............................................. 9 5 14 15 45
------ ------ ------ ------ ------
Total other income .................................. 983 301 383 608 454
====== ====== ====== ====== ======
Operating expenses:
Salaries and employee benefits ............................ 1,817 1,457 1,995 1,963 1,756
Occupancy and equipment expenses .......................... 468 380 519 431 401
Data processing expenses .................................. 168 133 183 153 169
Marketing expenses ........................................ 163 103 144 162 110
Contributions ............................................. 17 4 19 124 6
Professional fees ......................................... 73 65 89 86 91
Other general and administrative expenses ................. 631 546 708 644 612
------ ------ ------ ------ ------
Total operating expenses ............................ 3,337 2,688 3,657 3,563 3,145
====== ====== ====== ====== ======
Income before income taxes ...................................... 1,799 1,634 2,063 1,984 1,878
Provision for income taxes ...................................... 595 574 750 676 695
------ ------ ------ ------ ------
Net income ...................................................... $1,204 $1,060 $1,313 $1,308 $1,183
====== ====== ====== ====== ======
</TABLE>
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
This discussion and analysis reflects Westborough Savings' financial
statements and other relevant statistical data and is intended to enhance your
understanding of our financial condition and results of operations. You should
read the information in this section in conjunction with Westborough Savings'
Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements in this prospectus, and the other statistical data provided
elsewhere in this prospectus.
- --------------------------------------------------------------------------------
General
Westborough Savings' results of operations depend primarily on net
interest income. Net interest income is the difference between the interest
income we earn on our interest-earning assets, primarily mortgage loans,
mortgage-backed securities and investment securities, and the interest we pay on
our interest-bearing liabilities, primarily certificates of deposit and savings
accounts. Our results of operations are also affected by our provision for loan
losses, other income and operating expense. Operating expense consists
primarily of salaries and employee benefits, occupancy expenses and other
general and administrative expenses. Other income consists mainly of service
fees and charges, income from writing covered call options and gains on sales of
securities.
Our results of operations may also be affected significantly by general
and local economic and competitive conditions, particularly those with respect
to changes in market interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact us. Additionally, our lending activity
is concentrated in loans secured by real estate located in Westborough,
Northborough, Shrewsbury and Grafton, Massachusetts. Accordingly, our results of
operations are affected by regional market and economic conditions.
Forward Looking Statements
This prospectus contains certain "forward-looking statements" which may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." 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 could cause actual results to differ materially from these
estimates. These factors include, but are not limited to, general and local
economic conditions, changes in interest rates, deposit flows, demand for
mortgage and other loans, real estate values, and competition; changes in
accounting principles, policies, or guidelines; changes in legislation or
regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and services.
42
<PAGE>
Management Strategy
Historically, Westborough Savings' primary management strategy has been to
offer savings and certificate of deposit accounts and residential mortgage loans
in the market area of Westborough, Massachusetts and surrounding communities. At
June 30, 1999, 88.7% of our loan portfolio consisted of one- to four-family
residential first mortgage loans, with relatively few commercial real estate or
commercial loans in our portfolio. In recent years, we have adopted a
growth-oriented strategy that has focused on expanding our product lines and
services, providing expanded delivery systems for our customers and extending
our branch network. We believe that this business strategy is best for our long
term success and viability, and complements our existing commitment to high
quality customer service. In connection with our overall growth strategy, we
seek to:
o continue to focus on expanding our residential lending and retail
banking franchise, and increasing the number of households served
within our market area;
o expand our commercial banking products and services for small- and
medium-sized businesses, as a means to increase the yield on our
loan portfolio and to attract lower cost transaction deposit
accounts;
o expand our branch network to increase our market share;
o increase the use of alternative delivery channels, such as on-line
and telephonic banking; and
o offer a variety of uninsured products and services as a means to
compete for an increased share of our customers' financial service
business.
In order to create a platform for the accomplishment of our goals, we have
begun to make significant investments in Westborough Savings' physical
infrastructure and human and technological resources. Such investments have been
and, in the future, will be necessary to ensure that adequate resources are in
place to offer increased products and services. As a result, for a period of
time, we expect operating expenses to increase and net income to be adversely
impacted. We believe, however, that Westborough Bank's long-term profitability
should improve as we realize the benefits of diversified product lines and
market share growth.
Following the reorganization, we intend to apply proceeds from the
offering to further the objectives of our growth-oriented strategy. We may also
use proceeds from the offering to acquire branch offices and make other
acquisitions. See "How We Intend to Use the Proceeds from the Offering."
Management of Interest Rate Risk
As a financial institution, a primary component of market risk is interest
rate volatility. Fluctuations in interest rates will ultimately impact both our
level of income and expense recorded on a large portion of our assets and
liabilities. Fluctuations in interest rates will also
43
<PAGE>
affect the market value of all interest-earning assets, other than those which
possess a short-term to maturity.
During fiscal year 1998 through the date of this prospectus, we have
operated under a "flat yield curve" in a declining interest rate environment. A
flat yield curve environment features little difference in interest rates
offered on short-term and long-term investments. In that environment, we
experienced both increased interest rate competition related to loan
originations and above-average prepayment rates related to mortgage loans and
mortgage-backed securities, both of which adversely impact long-term
profitability. The flat yield curve environment and modest declines in market
interest rates experienced during fiscal year 1998 kept our interest rate spread
static compared to the prior year. This spread, however, has narrowed during the
nine months ended June 30, 1999. In addition, recent troubled economic
conditions in several nations throughout Europe, Asia, and South and Central
America have contributed to interest rate volatility for U.S. government and
agency obligations. We cannot predict at this time what, if any, effect these
conditions will have on the local and regional economy, and real estate market.
Due to the nature of our operations, we are not subject to foreign
currency exchange or commodity price risk. On the other hand, our real estate
loan portfolio, concentrated in the towns of Westborough, Northborough,
Shrewsbury and Grafton, Massachusetts, is subject to risks associated with the
local economy.
The primary objective of our interest rate management strategy is to
optimize Westborough Savings' economic value and net income under likely market
rate scenarios. To achieve this objective we have developed policies and
procedures to assist senior management in evaluating and maintaining acceptable
levels of interest rate risk, liquidity risk and capital. In particular, we seek
to coordinate asset and liability decisions so that, under changing interest
rate scenarios, earnings will remain within an acceptable range.
Under our Asset/Liability Policy Statement, the Board of Investment is
charged with the responsibility to monitor senior management's compliance
with Westborough Savings' interest rate risk policies and procedures.
Responsibility for review, approval and establishment of, and exceptions to,
interest rate risk policies and procedures rests with the Asset/Liability
Management Committee ("ALCO"). This committee is appointed by our President,
subject to approval of the Board of Investment. The committee generally
consists of two members of the Board of Trustees, the President, the
Treasurer and the Senior Lending Officer. The ALCO meets on a quarterly basis
to discuss and monitor the market interest rate environment as compared to
interest rates that are offered on our products. The ALCO presents periodic
reports to the Board of Trustees at its regular meetings. The quarterly
reports address the results of activities and strategies and the effect that
changes in interest rates will have on our results of operations and the
value of our equity.
Historically, our lending activities have emphasized one- to four-family
residential mortgage loans, and our primary source of funds has been deposits.
In recent years, we have attempted to employ certain strategies to manage the
interest rate risk inherent in this asset/liability mix, including:
44
<PAGE>
o investing in securities with relatively short maturities or call
dates;
o maintaining through tiered-rate savings accounts and other programs
a concentration of less interest rate sensitive "core deposits;"
o emphasizing the origination and retention of adjustable-rate one- to
four-family loans;
o emphasizing the orgination of commercial loans with short-term
maturities; and
o borrowing funds from the Federal Home Loan Bank of Boston, which may
be used to originate fixed-rate loans with matching maturities.
We believe that the frequent repricing of our adjustable-rate mortgage
loans and adjustable-rate securities, which reduces the exposure to interest
rate fluctuations, will stabilize our net interest margin. Although we have
emphasized the origination of variable-rate mortgage products, the prevailing
low interest rate environment has resulted in the increased demand for
fixed-rate first mortgage loans. The result has been an increase in the
proportion of fixed-rate loans in our portfolio. This may have an adverse impact
on our net interest income, particularly in a rising interest rate environment.
In addition, the actual amount of time before mortgage loans and
mortgage-backed securities are repaid can be significantly impacted by changes
in mortgage prepayment rates and market interest rates. Mortgage prepayment
rates will vary due to a number of factors, including the regional economy in
the area where the underlying mortgages were originated, seasonal factors,
demographic variables and the assumability of the underlying mortgages. However,
the major factors affecting prepayment rates are prevailing interest rates,
related mortgage refinancing opportunities and competition. We monitor interest
rate sensitivity so that we can make adjustments to our asset and liability mix
on a timely basis.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is deemed to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At June 30, 1999, Westborough Savings' cumulative one year gap
position, the difference between the amount of interest-earning assets maturing
or repricing within one year, and interest-bearing liabilities maturing or
repricing within one year, was a negative -14.21% of total assets. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. Accordingly, during a period of rising interest
rates, an institution with a negative gap position generally would not be in as
favorable a position, compared to an institution with a positive gap, to invest
in higher yielding assets. The resulting yield on the institution's assets
generally would increase at a slower rate than the increase in its cost of
interest-bearing liabilities. Conversely, during a period of falling interest
rates, an institution with a negative gap would tend to experience a repricing
of its assets at a slower rate than its interest-bearing liabilities which,
consequently, would generally
45
<PAGE>
result in its net interest income growing at a faster rate than an institution
with a positive gap position.
The following table sets forth the amortized cost of interest-earning
assets and interest-bearing liabilities outstanding at June 30, 1999, which are
anticipated by Westborough Savings, based upon certain assumptions, to reprice
or mature in each of the future time periods shown. Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier term to
repricing/call date or the contractual maturity of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at June 30, 1999, on the basis of contractual maturities,
anticipated prepayments and scheduled rate adjustments within in a three month
period and subsequent projected time intervals. The loan amounts in the table
reflect principal balances expected to be redeployed and/or repriced as a result
of contractual amortization and as a result of contractual rate adjustments on
adjustable-rate loans.
46
<PAGE>
GAP Table
<TABLE>
<CAPTION>
Amounts Maturing or Repricing as of June 30, 1999
---------------------------------------------------------------------------
less than 3 3 to 6 6 months to 1 to 3 3 to 5 5 to 10
months months 1 year years years years
----------- ---------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets(1)
Short-term investments (2) .............. $ 10,542 $ -- $ -- $ -- $ -- $ --
Investment securities(3) ................ 10,480 1,516 5,644 19,643 8,803 1,384
Mortgage and assets-backed securities ... 52 -- 106 785 1,015 1,238
Loans(4) ................................ 8,356 1,844 6,388 12,012 3,891 10,431
-------- -------- -------- -------- -------- --------
Total interest earning assets .... $ 29,430 $ 3,360 $ 12,138 $ 32,440 $ 13,709 $ 13,053
======== ======== ======== ======== ======== ========
Interest-Bearing Liabilities
NOW accounts(5) ......................... $ 1,428 $ 1,428 $ 1,428 $ 1,428 $ -- $ --
Regular and other savings accounts(5) ... 6,469 6,469 6,469 6,469 -- --
Money market deposit accounts(5) ........ 692 692 692 691 -- --
Certificate of deposit accounts ......... 20,160 5,651 17,615 7,267 -- --
Federal Home Loan Bank borrowings(6) .... -- -- -- 2,000 -- 2,000
Mortgage escrow deposits ................ 195 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 28,944 $ 14,240 $ 26,204 $ 17,855 $ -- $ 2,000
======== ======== ======== ======== ======== ========
Interest sensitivity gap ....................... $ 486 $(10,880) $(14,066) $ 14,585 $ 13,709 $ 11,053
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap ............ $ 486 $(10,394) $(24,460) $ (9,875) $ 3,834 $ 14,887
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap as a
percent of total assets ................. 0.28% (6.04)% (14.21)% (5.74)% 2.23% 8.65%
Cumulative interest sensitivity gap as a
percent of total interest-earning assets 0.30% (6.33)% (14.91)% (6.02)% 2.34% 9.07%
Cumulative interest sensitivity gap as a
percent of total interest-bearing
liabilities ............................. 0.35% (7.38)% (17.38)% (7.01)% 2.72% 10.58%
<CAPTION>
Amounts Maturing or
Repricing as of
June 30, 1999
-------------------
10 years Total
---------- --------
<S> <C> <C>
Interest Earning Assets(1)
Short term investments (2) .............. $ -- $ 10,542
Investment securities(3) ................ 1,838 49,308
Mortgage and assets backed securities ... 10,755 13,951
Loans(4) ................................ 47,375 90,297
-------- --------
Total interest earning assets .... $ 59,968 $164,098
======== ========
Interest-Bearing Liabilities
NOW accounts(5) ......................... $ 8,566 $ 14,278
Regular and other savings accounts(5) ... 38,816 64,692
Money market deposit accounts(5) ........ 4,150 6,917
Certificate of deposit accounts ......... -- 50,693
Federal Home Loan Bank borrowings(6) .... -- 4,000
Mortgage escrow deposits ................ -- 195
-------- --------
Total interest bearing liabilities 51,532 $140,775
======== ========
Interest sensitivity gap ....................... $ 8,436 $ 23,323
======== ========
Cumulative interest sensitivity gap ............ $ 23,323
========
Cumulative interest sensitivity gap as a
percent of total assets ................. 13.55%
Cumulative interest sensitivity gap as a
percent of total interest earning assets 14.21%
Cumulative interest sensitivity gap as a
percent of total interest bearing
liabilities ............................. 16.57%
</TABLE>
- ----------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, call dates and contractual
maturities.
(2) Short-term investments include Federal Funds, Bank Investment Fund and
interest-earning amounts in the Federal Home Loan Bank of Boston.
(3) Investment securities are at market value. Common stock and stock in the
Federal Home Loan Bank are included in the less than 3 months column.
(4) Loans are principal balances, net of deferred loan costs and unadvanced
funds.
(5) 60% of NOW, regular and other savings and money market deposit accounts
are included in the over ten year period and the remaining allocated
evenly within the four intervals up to and including one to three years.
(6) Federal Home Loan Bank borrowings are categorized by contractual maturity
date.
Certain shortcomings are inherent in the method of analysis presented in the gap
table. For example, although certain assets and liabilities may have similar
maturities or periods to reprice, they may react in different degrees to changes
in market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets such as adjustable-rate loans, have features which
restrict changes in interest rates both on a short-term basis and over the life
of the asset. Further, in the event of changes in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
adjustable-rate loans may decrease in the event of an interest rate increase.
47
<PAGE>
Analysis of Net Interest Income
Net interest income represents the difference between the interest income
we earn on our interest-earning assets, such as mortgage loans, mortgage-backed
securities and investment securities, and the expense we pay on our
interest-bearing liabilities, such as deposits and borrowings. Net interest
income depends on our volume of interest-earning assets and interest-bearing
liabilities and the interest rates we earned or paid on them.
48
<PAGE>
Average Balance Sheet.
The following tables set forth certain information relating to our
financial condition and net interest income at and for the nine months ended
June 30, 1999 and 1998 and for the years ended September 30, 1998, 1997 and
1996, and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from
average daily balances. The yields include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
At June 30, For the Nine Months Ended June 30,
------------------ ----------------------------------------------------------------
1999 1999 1998
------------------ ------------------------------ --------------------------------
Average Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ---- ------- -------- ---- ------- -------- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments(1) ............ $ 10,542 4.38% $ 9,407 $ 323 4.58% $ 5,189 $ 227 5.83%
Investment securities(2) ............. 63,259 5.98 62,556 2,811 5.99 62,149 2,887 6.19
Loans(3) ............................. 89,428 7.27 85,507 4,742 7.39 74,432 4,329 7.75
-------- -------- -------- -------- --------
Total interest-earning assets .... 163,229 6.58 157,470 7,876 6.67 141,770 7,443 7.00
Noninterest-earning assets ........... 8,884 6,460 5,857
Total assets ..................... $172,113 $163,930 $147,627
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts ......................... $ 14,278 0.50% $ 13,392 $ 50 0.50% $ 11,395 $ 58 0.68%
Savings accounts(4) .................. 64,887 3.29 62,414 1,562 3.34 54,620 1,353 3.30
Money market deposit accounts ........ 6,917 2.26 6,787 143 2.81 8,419 185 2.93
Certificate of deposit accounts ...... 50,693 4.96 48,248 1,818 5.02 46,058 1,796 5.20
-------- -------- -------- -------- --------
Total interest-bearing deposits .. 136,775 3.57 130,841 3,573 3.64 120,492 3,392 3.75
Borrowed funds ....................... 4,000 5.09 2,930 115 5.23 -- -- --
-------- -------- -------- -------- --------
Total interest-bearing liabilities 140,775 3.61 133,771 3,688 3.68 120,492 3,392 3.75
Noninterest-bearing deposits ......... 10,555 9,801 8,259
Other noninterest bearing
liabilities ...................... 1,335 843 981
-------- -------- --------
Total noninterest bearing
liabilities ................. 11,890 10,644 9,240
Total liabilities .................... 152,665 144,415 129,732
Total surplus ........................ 19,448 19,515 17,895
-------- -------- --------
Total liabilities and surplus ........ $172,113 $163,930 $147,627
======== ======== ========
Net interest income ....................... $ 4,188 $ 4,051
======== ========
Net interest rate spread(5) ............... 2.97% 2.99% 3.25%
====== ====== ======
Net interest margin(6) .................... 3.55% 3.81%
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities ......... 115.95% 117.72% 117.66%
====== ====== ======
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended September 30,
--------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments(1) ............ $ 5,358 $ 306 5.71% $ 4,762 $ 266 5.59%
Investment securities(2) ............. 61,307 3,743 6.11 62,091 3,953 6.37
Loans(3) ............................. 76,357 5,884 7.71 67,618 5,242 7.75
-------- -------- -------- --------
Total interest-earning assets .... 143,022 9,933 6.95 134,471 9,461 7.04
Noninterest-earning assets ........... 5,857 5,701
-------- --------
Total assets ..................... $148,879 $140,172
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts ......................... $ 11,743 $ 73 0.62% $ 10,575 $ 108 1.02%
Savings accounts (4) ................. 55,403 1,848 3.34 46,959 1,457 3.10
Money market deposit accounts ........ 8,082 238 2.94 9,973 294 2.95
Certificate of deposit accounts ...... 46,105 2,396 5.20 46,484 2,426 5.22
-------- -------- -------- --------
Total interest-bearing deposits .. 121,333 4,555 3.75 113,991 4,285 3.76
Borrowed funds ....................... 33 2 6.06 2,330 141 6.05
-------- -------- -------- --------
Total interest-bearing liabilities 121,366 4,557 3.75 116,321 4,426 3.80
Noninterest-bearing deposits ......... 8,480 6,590
Other noninterest bearing
liabilities ...................... 923 1,027
-------- --------
Total noninterest-bearing
liabilities ................. 9,403 7,617
Total liabilities .................... 130,769 123,938
Total surplus ........................ 18,110 16,234
-------- --------
Total liabilities and surplus ........ $148,879 $140,172
======== ========
Net interest income ....................... $ 5,376 $ 5,035
======== ========
Net interest rate spread(5) ............... 3.20% 3.24%
======== ========
Net interest margin(6) .................... 3.76% 3.74%
======== ========
Ratio of interest-earning assets to
interest-bearing liabilities ......... 117.84% 115.60%
======== ========
<CAPTION>
For the Years Ended September 30,
---------------------------------
1996
--------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments(1) ............ $ 4,650 $ 265 5.70%
Investment securities(2) ............. 58,709 3,578 6.09
Loans(3) ............................. 61,544 4,868 7.91
-------- --------
Total interest-earning assets .... 124,903 8,711 6.97
Noninterest-earning assets ........... 5,541
--------
Total assets ..................... $130,444
========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts ......................... $ 10,540 $ 119 1.13%
Savings accounts (4) ................. 37,265 1,006 2.70
Money market deposit accounts ........ 12,921 363 2.81
Certificate of deposit accounts ...... 47,726 2,549 5.34
-------- --------
Total interest-bearing deposits .. 108,452 4,037 3.72
Borrowed funds ....................... 42 0.00
-------- --------
Total interest-bearing liabilities 108,494 4,037 3.72
Noninterest-bearing deposits ......... 5,613
Other noninterest-bearing
liabilities ...................... 1,183
--------
Total noninterest-bearing
liabilities ................. 6,796
Total liabilities .................... 115,290
Total surplus ........................ 15,154
--------
Total liabilities and surplus ........ $130,444
========
Net interest income ....................... $ 4,674
========
Net interest rate spread(5) ............... 3.25%
========
Net interest margin(6) .................... 3.74%
========
Ratio of interest-earning assets to
interest-bearing liabilities ......... 115.12%
========
</TABLE>
- ----------
(1) Short-term investments includes 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 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.
50
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to:
o changes attributable to changes in volume (changes in volume
multiplied by prior rate);
o changes attributable to changes in rate (changes in rate multiplied
by prior volume); and
o the net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
For the
Nine Months Ended
June 30, 1999 Year Ended Year Ended
Compared to September 30, 1998 September 30, 1997
Nine Months Compared to Year Ended Compared to Year Ended
Ended June 30, 1998 September 30, 1997 September 30, 1996
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
------------------------- ----------------------- ------------------------
Due to Due to Due to
--------------- -------------- --------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments(1) .................... $ 153 $ (57) $ 96 $ 34 $ 6 $ 40 $ 6 $ (5) $ 1
Investment securities(2) ..................... 19 (95) (76) (50) (160) (210) 209 166 375
Loans(3) ..................................... 621 (208) 413 669 (27) 642 473 (99) 374
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets .......... 793 (360) 433 653 (181) 472 688 62 750
----- ----- ----- ----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
NOW accounts ................................. 9 (17) (8) 11 (46) (35) 1 (12) (11)
Savings accounts(4) .......................... 193 16 209 273 118 391 287 164 451
Money market deposit accounts ................ (34) (8) (42) (55) (1) (56) (86) 17 (69)
Certificate of deposit accounts .............. 84 (62) 22 (21) (9) (30) (66) (57) (123)
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing deposits ........ 252 (71) 181 208 62 270 136 112 248
Borrowed funds ............................... 115 -- 115 (139) -- (139) 141 -- 141
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing liabilities ..... 367 (71) 296 69 62 131 277 112 389
----- ----- ----- ----- ----- ----- ----- ----- -----
Net change in net interest income ................. $ 426 $(289) $ 137 $ 584 $(243) $ 341 $ 411 $ (50) $ 361
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ----------
(1) Short-term investments includes 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 and unadvanced loan funds.
(4) Savings accounts include the balance in mortgagors' escrow accounts.
51
<PAGE>
Comparison of Financial Condition at June 30, 1999 and September 30, 1998
During this nine month period, Westborough Savings' total assets increased
by $13.6 million, or 8.6%, to $172.1 million at June 30, 1999 from $158.5
million at September 30, 1998. Our asset growth reflected a $7.1 million
increase in net loans, primarily consisting of originations of fixed-rate loans
on residential real estate. Net loans were $89.4 million, or 52.0% of total
assets, at June 30, 1999 as compared to $82.3 million, or 51.9%, at September
30, 1998. Our asset growth also reflected a $3.1 million net increase in
securities available for sale. Within the securities available for sale
category, marketable equity securities at June 30, 1999 were $7.9 million
compared to $5.1 million at September 30, 1998. The increase in loans and
securities was funded through an increase in deposits and Federal Home Loan Bank
advances. Total deposits increased by $11.2 million to $147.1 million at June
30, 1999 compared to $136.0 million at September 30, 1998. The increase in
deposits was predominantly attributable to Westborough Savings' tiered-rate
savings accounts and to certificate of deposit accounts. Total advances
outstanding from the Federal Home Loan Bank of Boston were $4.0 million at June
30, 1999 compared to $2.0 million at September 30, 1998. Total surplus increased
$81 thousand, or 0.4% to $19.4 million at June 30, 1999 as a result of net
income of $1.2 million and a decline in the net unrealized gain on securities
available for sale of $1.1 million.
Comparison of Financial Condition at September 30, 1998 and September 30, 1997
Westborough Savings' total assets increased by $14.6 million, or 10.2%, to
$158.5 million at September 30, 1998 from $143.9 million at September 30, 1997.
Our asset growth reflected a $11.8 million increase in net loans due to
increased origination of fixed-rate loans and commencement of our emphasis on
commercial and commercial real estate lending during 1998. Net loans were $82.3
million, or 51.9% of total assets, at September 30, 1998 as compared to $70.6
million, or 49.1% of total assets, at September 30, 1997. The increase in loans
was funded through an increase in deposits. Securities held by Westborough
Savings decreased by $1.6 million, or 2.6%, to $59.3 million at September 30,
1998 from $60.9 million at September 30, 1997. Total deposits increased by $10.8
million, or 8.6%, to $136.0 million at September 30, 1998 from $125.2 million at
September 30, 1997. Deposits increased due to increases in NOW, demand deposit
and tiered-rate savings accounts. Total advances from the Federal Home Loan Bank
of Boston were $2.0 million at September 30, 1998 compared to none at September
30, 1997. Total equity increased by $1.9 million, or 11.0%, to $19.4 million at
September 30, 1998 from $17.5 million at September 30, 1997 as a result of net
income of $1.3 million and an increase in the net unrealized gain on securities
available for sale of $600 thousand.
52
<PAGE>
Comparison of Operating Results for the Nine Months Ended June 30, 1999
and June 30, 1998
Net Income
Westborough Savings' net income depends primarily on its net interest
income, which is the difference between interest earned on interest-earning
assets, consisting primarily of loans and securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits and borrowing.
Net interest income is the function of Westborough Savings' interest rate
spread, which is the difference between the average yield earned on interest
earning assets and the average rate paid on interest-bearing liabilities, as
well as a function of the average volumes of interest-earning assets as compared
to interest-bearing liabilities. Westborough Savings' earnings were also
affected by its level of banking service fees, investment activity, and other
income, as well as its level of operating expenses, including salaries and
employee benefits, occupancy and equipment expenses, data processing, marketing
and other expenses.
Net income for the nine months ended June 30, 1999 was $1.2 million
compared to $1.1 million for the nine months ended June 30, 1998. The increase
was primarily due to an increase in net gains on the sales and disposition of
securities, income from options written on equity securities held in our
portfolio as part of our "covered call" program and increased net interest
income, offset by increases in the level of operating expenses.
Our "covered call" program involves the sale of options which convey the
right, but not the obligation, to buyers to purchase a particular stock held by
Westborough Savings at a particular price up to a certain expiration date. It is
"covered" because Westborough Savings holds the security in its portfolio.
Westborough Savings writes call options only on stock it desires to own, and
such sales represent an income enhancement to a stock purchased on its own
merit. However, Westborough Savings is willing to have the stock called if an
option is written and exercised. We expect to continue writing options on equity
securities which are held in our investment portfolio as a way to secure a gain
on appreciated securities.
Interest and Dividend Income
Total interest and dividend income increased by $433 thousand, or 5.8%, to
$7.9 million for the nine months ended June 30, 1999 from $7.4 million for the
nine months ended June 30, 1998. The increase was primarily due to an increase
in the average volume of interest-earning assets offset by a decline in the
average rate earned on interest-earning assets. Average loan balances increased
$11.1 million during this period and average short-term investments and
investment security balances increased by $4.6 million. However, the average
rate earned on investment securities and loans declined during this period and
reflected the effects on a generally declining interest rate environment for new
loans and investments. The average yield for the investment portfolio declined
to 5.99% for the nine months ended June 30, 1999, from 6.19% for the nine months
ended June 30, 1998. The average yield on loans declined to 7.39% for the nine
months ended June 30, 1999 as compared to 7.75% for the nine months ended June
30, 1998, reflecting the origination of loans at less than the yield on the
existing loan portfolio. The increase in average loan balances resulted
primarily from the origination and refinancing of one-to-four family fixed-rate
mortgage loans in a continuing low
53
<PAGE>
interest rate environment. We also experienced an increase in the average volume
of investments in equity investments. The average balance of equity investments
increased to $8.3 million for the nine months ended June 30, 1999 from $3.0
million for the nine months ended June 30, 1998. The additional investments were
comprised of rated trust preferred securities and equity securities.
Interest Expense
Total interest expense increased by $296 thousand, or 8.7%, to $3.7
million for the nine months ended June 30, 1999 from $3.4 million for the
nine months ended June, 1998. The increase was primarily due to an increase
in the average volume of interest-bearing liabilities offset by a decline in
the average rate paid on interest-bearing liabilities. The average balance of
interest-bearing liabilities increased by $13.3 million during the most
recent period and such increases occurred mostly in the savings account and
borrowed funds categories. The average balance of savings accounts for the
nine months ended June 30, 1999 was $62.4 million as compared to an average
balance for the nine months ended June 30, 1998 of $54.6 million. Westborough
Savings offers a tiered-rate savings account which has a rate that increases
based upon rising balances. The relatively low interest rate environment
makes this type of deposit very popular. Also during this period, the average
balance of NOW and interest-bearing accounts for the nine months ended June
30, 1999 was $13.4 million as compared to an average balance for the nine
months ended June 30, 1998 of $11.4 million. Alternatively, during this
period, the average balance of money market deposit accounts for the nine
months ended June 30, 1999 was $6.8 million as compared to an average balance
for the nine months ended June 30, 1998 of $8.4 million. Westborough Savings
experienced a shift to tiered-rate savings accounts from money market deposit
accounts, as customers searched for higher yielding accounts. Borrowings from
the Federal Home Loan Bank of Boston also increased during this period to
fund prospective loans. The average borrowing from the Federal Home Loan Bank
for the nine months ended June 30, 1999 was $2.9 million as compared to $-0-
for the nine months ended June 30, 1998. The average cost of all
interest-bearing liabilities was 3.68% for the nine months ended June 30,
1999, down from 3.75% for the period ended June 30, 1998. Due to a declining
interest rate market during the nine month period ended June 30, 1999, as
certificates of deposit matured, they were generally reinvested at lower
rates of interest. Also, during this most recent period, we reduced the rate
paid on NOW and interest-bearing checking accounts to 0.50% from 1.00%.
Net Interest Income
For the nine months ended June 30, 1999 and 1998, net interest income was
$4.2 million and $4.1 million, respectively. The $137 thousand increase in net
interest income was primarily attributable to a $2.4 million increase in average
net earning assets (interest-earning assets less interest-bearing liabilities),
coupled with a 0.26% decline in the net interest rate spread to 2.99% from
3.25%.
54
<PAGE>
Provision for Loan Losses
Westborough Savings records a provision for loan losses, which is charged
to earnings, in order to maintain the allowance for loan losses at a level which
is considered appropriate to absorb loan losses inherent in the existing
portfolio. In determining the appropriate level of the allowance for loan
losses, management considers past the current performance of borrowers, loss
experience, evaluations of real estate collateral, current economic
conditions, volume and type of lending and the levels of non-performing and
other classified loans. The amount of the allowance is based on estimates and
the ultimate losses may vary from such estimates. Management of Westborough
Savings assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses in order to maintain the adequacy of the allowance.
Westborough Savings' provision increased by $5 thousand to $35 thousand
for the nine months ended June 30, 1999 from $30 thousand for the nine months
ended June 30, 1998. This moderate increase reflects our continued loan
portfolio growth, including commercial real estate loans. Westborough Savings
has historically had an extremely low level of non-performing loans. At June 30,
1999, we had no non-performing loans. As we expand our commercial lending,
however, increases in the provision are likely.
Other Income
Other income consists primarily of fee income for Westborough Savings'
services, gains and losses from the sale of securities and income from the sale
of options to buy common stock held in our portfolio at a certain price. Total
other income increased by $682 thousand to $983 thousand for the nine months
ended June 30, 1999 from $301 thousand for the nine month period ended June 30,
1998. Gains on the sale of securities, primarily common stocks, accounted for
approximately $446 thousand of the increase. Income from the sale of "covered
call" options accounted for $220 thousand of the increase in other income. To a
lesser extent, customer service fees increased $13 thousand during the period
due to higher volume of checking accounts and income from the sale of
non-insured investments products offered through FISCO Equity, Inc.
Operating Expense
For the nine months ended June 30, 1999, operating expenses increased $649
thousand, to $3.3 million from $2.7 million for the nine month period ended
June 30, 1998. The increase was primarily due to a $360 thousand increase in
salaries and benefits, an $88 thousand increase in occupancy and equipment, a
$35 thousand increase in data processing, a $60 thousand increase in marketing
expenses and an $85 thousand increase in other general expenses.
Salary and benefits expenses increased mainly due to senior management
bonuses of $48 thousand, additional staff in marketing and commercial services,
retail staff incentive
55
<PAGE>
commissions and general increases in salary based upon merit. Occupancy and
equipment expenses increased due to occupancy expenses associated with
Westborough Savings' lease of space for its operations center and also increased
depreciation on equipment. Data processing expenses increased due to a higher
level of transaction-based activity and increases in expenses associated with
Westborough Savings' data processing service, NCR. Marketing expenses increased
due to expenses associated with opening a new supermarket branch and a more
focused effort to promote our products and services. Other general expenses have
increased primarily due to an increase in the frequency of board meetings,
mostly associated with strategic planning issues and meetings concerning the
formation of a mutual holding company. Operating expenses are also expected to
increase in future periods due to future branch, products and service expansion,
and the increased cost of operating as a mutual holding company.
Income Taxes
Income tax expense was $595 thousand for the nine months ended June 30,
1999, compared to $574 thousand for the nine month period ended June 30, 1998,
representing an effective income tax rate of 33.1% and 35.1%, respectively. The
lower effective tax rate reflected, in part, the tax benefits associated with a
higher level of dividend received deductions on our increased level of
investment securities. The effective tax rate also reflects the utilization of
two securities investment subsidiaries to substantially reduce state income
taxes.
Comparison of Operating Results for the Years Ended September 30, 1998 and
September 30, 1997
Net Income
Westborough Savings' net income remained stable at $1.3 million for the
years ended September 30, 1998 and 1997. The return on average assets and the
return on average equity for the year ended September 30, 1998 were 0.88% and
7.25%, respectively, compared to 0.93% and 8.06% for the year ended September
30, 1997.
Interest and Dividend Income
Total interest and dividend income increased by $472 thousand, or 5.0%,
to $9.9 million for the year ended September 30, 1998 from $9.5 million for the
year ended September 30, 1997. The increase in interest and dividend income was
primarily a result of a higher volume of loan originations. While the average
balance of loans increased $8.7 million during this period, the average rate for
those loans declined to 7.71%, from 7.75%.
Interest Expense
Total interest expense increased by $131 thousand, or 3.0%, to $4.6
million for the year ended September 30, 1998 from $4.4 million for the year
ended September 30, 1997. Interest expense on deposits increased $270 thousand,
or 6.3%, from $4.3 million for the year ended
56
<PAGE>
September 30, 1997 to $4.6 million for the year ended September 30, 1998.
Interest expense on advances from the Federal Home Loan Bank declined by $139
thousand for the year ended September 30, 1998 from $141 thousand for year ended
September 30, 1997 compared to $2 thousand for year ended September 30, 1998
based on a lower average balance during the period. The overall increase in
interest expenses of $131 thousand was primarily due to a higher average balance
of interest-bearing liabilities. Average balances of savings accounts increased
by $8.4 million for the year ended September 30, 1998 compared to the year ended
September 30, 1997.
Net Interest Income
Net interest income for the year ended September 30, 1998 was $5.4 million
as compared to $5.0 million for the year ended September 30, 1997. The $341
thousand, or 6.8%, increase can be attributed mainly to an increased balance of
interest-earning assets, resulting from a greater volume of loan originations,
offset by an increased balance of interest-bearing deposits. The average yield
on interest-earning assets decreased 9 basis points to 6.95% for the year ended
September 30, 1998 from 7.04% for the year ended September 30, 1997, while the
average cost of interest-bearing liabilities decreased by 5 basis points to
3.75% for the year ended September 30, 1998 from 3.80% for the year ended
September 30, 1997.
Westborough Savings' net interest rate spread, which reflects the
difference between the weighted average yield on interest-earning assets and
the weighted average cost of interest-bearing liabilities, declined 4 basis
points to 3.20% for the year ended September 30, 1998 compared to 3.24% for
the year ended September 30, 1997. The average balance of loans on real
estate increased by $8.1 million for the year ended September 30, 1998
compared to the year ended September 30, 1997. The average balance of
commercial loans increased by $733 thousand for the year ended September 30,
1998 compared to the year ended September 30, 1997. However, due to customer
refinancing of existing adjustable- and fixed-rate loans from higher rates to
lower rates, coupled with a declining interest rate environment for new
loans, the overall rate earned on our loan portfolio declined to 7.71% for
the year ended September 30, 1998 compared to 7.75% for the year ended
September 30, 1997. The average balance of savings accounts increased by $8.4
million for the year ended September 30, 1998 compared to the year ended
September 30, 1997.
Provision for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses which is a charge to operations. The provision for loan losses was $39
thousand for the year ended September 30, 1998 as compared to $96 thousand for
the year ended September 30, 1997. The higher provision in 1997 was established
to accommodate a higher level of commercial lending in the future. At September
30, 1998, the balance of the allowance for loan losses was $827 thousand, or
0.99% of total loans before the allowance for loan losses. During the year ended
September 30, 1998, there were no charge-offs against the allowance for loan
losses. At September 30, 1997, the balance of the allowance for loan losses was
$786 thousand, or 1.10% of total loans before the allowance for loan losses.
During the year ended September 30, 1997, there was $2 thousand in charge-offs
against the allowance for loan losses and $2 thousand in recoveries of
previously charged-off loans.
57
<PAGE>
Other Income
Other income was $383 thousand for the year ended September 30, 1998
compared to $608 thousand for the year ended September 30, 1997. The $225
thousand, or 37.0% decrease, was primarily the result of a $247 thousand
decrease in the net gain on sale and disposition of securities offset by
moderate increases in customer service fees and loan fees due to higher volume.
This decrease is attributable, in part, to the establishment by Westborough
Savings of a private charitable foundation which we funded by a donation of
marketable equity securities with a fair value of $110 thousand at the date of
transfer. We anticipate increases to other income as we continue to expand the
volume of our deposit and lending relationships. It is also our goal to increase
its level of other income by continually considering additional sources of
revenue, including expanding the offering of various uninsured investment
products, including fixed-rate and variable annuities and mutual funds, through
relationships with third party broker-dealers and/or money managers and
affiliations with insurance agencies.
Operating Expense
Operating expense for the year ended September 30, 1998 remained
relatively stable at $3.7 million when compared to the year ended September 30,
1997 in which operating expense totaled $3.6 million. While the amounts of
operating expense were comparable, the 1998 period includes increased occupancy
and equipment expenses of $88 thousand associated with our leased operations
department space and equipment depreciation. Annual operating expenses are also
expected to increase in future periods due to future branch, product and service
expansion, and the increased cost of operating as a mutual holding company.
Income Taxes
Income tax expense was $750 thousand for the year ended September 30, 1998
as compared to $676 thousand for the year ended September 30, 1997, resulting in
an effective tax rate at September 30, 1998 of 36.4% compared to 34.1% for the
prior period. The effective tax rate reflects the utilization of two securities
investment subsidiaries to substantially reduce state income taxes and the
establishment of Westborough Savings' charitable foundation.
Liquidity and Capital Resources
The term "liquidity" refers to our ability to generate adequate amounts of
cash to fund loan originations, deposit withdrawals and operating expenses. Our
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 our operations. We also have
expanded our use of borrowings from the Federal Home Loan Bank of Boston as part
of our management of interest rate risk. At June 30, 1999, we had $4.0 million
in outstanding borrowings.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic
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conditions and competition in the marketplace. These factors reduce the
predictability of the timing of these sources of funds.
Our primary investing activities are the origination of one- to
four-family real estate and other loans, the purchase of mortgage-backed
securities and the purchase of investment securities. During the nine months
ended June 30, 1999 and the years ended September 30, 1998 and 1997, we
originated loans of $31.4 million, $38.9 million and $34.1 million,
respectively. Purchases of mortgage-backed securities were $6.4 million for the
nine months ended June 30, 1999, and $6.4 million and $1.4 million for the years
ended September 30, 1998 and 1997, respectively. Purchases of investment
securities were $13.8 million for the nine months ended June 30, 1999, and $14.5
million and $11.1 million for the years ended September 30, 1998 and 1997,
respectively.
These investing activities were funded by deposit growth, principal
payments on mortgage loans and mortgage-backed securities, calls and maturities
on investment securities, Federal Home Loan Bank borrowings and funds provided
by our operating activities. Principal repayments on loans and mortgage-backed
securities totaled $28.0 million for the nine months ended June 30, 1999 and
$31.0 million and $31.3 million for the years ended September 30, 1998 and 1997,
respectively. Maturities of investment securities totaled $6.3 million during
the nine months ended June 30, 1999 and $1.3 million and $3.5 million during the
years ended September 30, 1998 and 1997, respectively. Sales and calls of
investment securities provided cash flows of $5.9 million, $18.0 million and
$8.0 million during the nine months ended June 30, 1999 and the years ended
September 30, 1998 and 1997, respectively.
At June 30, 1999, Westborough Savings had loan commitments to borrowers of
$3.1 million, and available home equity lines of credit of $5.4 million. We had
no commitments to purchase mortgage-backed securities at June 30, 1999. Total
deposits increased $11.2 million, $10.8 million and $4.9 million during the nine
months ended June 30, 1999 and the years ended September 30, 1998 and 1997,
respectively. Deposit flows are affected by the level of interest rates, the
interest rates and products offered by competitors and other factors.
Certificate of deposit accounts scheduled to mature within one year were $42.1
million at June 30, 1999. Based on our deposit retention experience and current
pricing strategy, we anticipate that a significant portion of these certificates
of deposit will remain with Westborough Savings. We are committed to maintaining
a strong liquidity position; therefore, we monitor our liquidity position on a
daily basis. We also periodically review liquidity information prepared by the
Depositors Insurance Fund and other available reports that compare our liquidity
with banks in our peer group. We anticipate that we will have sufficient funds
to meet our current funding commitments.
In May 1999, we expanded our retail banking franchise by opening an
additional branch location in the town of Shrewsbury. This branch is located in
the Shaws supermarket and start-up costs were approximately $300 thousand. In
the first half of 2000, we also plan to begin to expand our facilities by
constructing an addition to our existing executive office. The construction
expenses for this addition are expected to total approximately $2.5 million. We
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anticipate that Westborough Bank will have sufficient funds to meet these
planned capital expenditures throughout 2000.
At June 30, 1999, we exceeded each of the applicable regulatory capital
requirements. Our leverage (tier 1) capital was approximately $19.4 million, or
11.41%. In order to be classified as "well-capitalized" by the FDIC, we were
required to have leverage (tier 1) capital of $8.5 million, or 5.0%. To be
classified as a well-capitalized bank by the FDIC, we must also have a
risk-based total capital ratio of 10.0%. At June 30, 1999, we had a risk-based
total capital ratio of 21.52%. See "Regulation of Westborough Savings Bank and
Westborough Financial Services, Inc." for a discussion of the regulatory capital
requirements applicable to Westborough Savings, and see "Regulatory Capital
Compliance" for information regarding the impact of the offering on our capital
position.
Other than with respect to the capital expenditures that are to be made in
connection with our executive office as noted above, we do not anticipate any
material capital expenditures. Further, we do 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 noted above.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
a Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." This Statement encourages all entities to adopt a
fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principle Board Opinion No. 25, "Accounting
for Stock Issued to Employees," whereby compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock. Entities
electing to remain with the accounting in Opinion No. 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value based
method of accounting had been applied.
The accounting requirements of this Statement are generally effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The disclosure requirements of this Statement are generally effective for
financial statements for fiscal years beginning after December 15, 1995. It is
anticipated that we will adopt Opinion No. 25 for accounting treatment of stock
options and make the pro forma disclosures required by this Statement.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. This Statement simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 14, "Earnings per
Share," and makes them comparable to international earnings per share standards.
It replaces the presentation of primary earnings per share with a presentation
of basic earnings per share. It also requires dual presentation of basic and
diluted earnings per share on
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the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. This Statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure" which establishes standards for
disclosing information about an entity's capital structure. This Statement
continues the previous disclosure requirements found in Accounting Principle
Board Opinions. No. 10, "Omnibus Opinion - 1996," and No. 15, "Earnings Per
Share," and FASB Statement No. 47, "Disclosure of Long-Term Obligations" and
eliminates the exemption of nonpublic entities from certain disclosure
requirements of Opinion No. 15. Additionally, this Statement consolidates
capital disclosure requirements for ease of retrieval and greater visibility to
nonpublic entities. This Statement is effective for financial statements for
periods ending after December 15, 1997 and is not expected to have a material
impact on us.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for the way
that public business enterprises report selected information about operating
segments in annual financial statements. This Statement requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. This Statement supersedes FASB
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise."
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement is effective for financial statements for periods
beginning after December 15, 1997 and is not expected to have a material impact
on us.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits," effective for fiscal years
beginning after December 15, 1997. The Statement revises employers' disclosures
about pension and other postretirement plans. It does not change the measurement
or recognition of those plans. The Statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practical, requires additional information on changes in the benefits
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that were previously required by
generally accepted accounting principles. We will adopt these disclosure
requirements beginning in the year ending September 30, 1999, and it is not
expected to have a material impact on us.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was amended by SFAS No. 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. This Statement standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities in the
balance sheet and measure them at fair value. If certain conditions are met, an
entity may elect to designate a derivative as follows: a hedge of the exposure
or changes in the fair value of a recognized asset or liability, or of an
unrecognized firm commitment that are attributable to a
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particular risk. A hedge of the exposure to variability in the cash flows of a
recognized asset or liability, or of a forecasted transaction, that is
attributable to a particular risk. Or, a hedge of the foreign currency exposure
of an unrecognized firm commitment, an available-for-sale security, a forecasted
transaction, or a net investment in a foreign operation. This Statement
generally provides for matching the timing of the recognition of the gain or
loss of the hedging instrument with the recognition of the changes in the fair
value of the item being hedged. Depending on the type of hedge, such recognition
will be in either net income or other comprehensive income. For a derivative not
designated as a hedging instrument, changes in fair value are recognized in net
income in the period of change. Adoption of this Statement by us will require
that changes in fair value of covered call options be recognized in net income.
Currently, such changes are included in a separate component of surplus. We will
adopt SFAS No. 133 commencing October 1, 2000, and it is not expected to have a
material impact on us.
Year 2000 Readiness Disclosure
Background. A significant challenge that is confronting the business
community, including Westborough Savings and its competitors, centers on the
inability of many computer systems and software applications to recognize the
Year 2000 (referred to as the "Y2K issue"). Many existing computer systems and
software applications originally were programmed to provide only two digits to
identify the calendar year. With the Year 2000 approaching, these systems and
applications may recognize "00" as 1900 rather than 2000. If the Y2K issue is
not resolved, our operations could be adversely affected due to the
date-sensitive nature of much of our financial information.
Financial institution regulators have focused on Y2K compliance in recent
years and have issued guidance concerning the responsibilities of our management
and our Board of Trustees. The Federal Financial Institutions Examination
Council ("FFIEC"), a group comprised of representatives from the various
financial institution regulators, has issued several interagency statements on
Y2K issues. These statements have required financial institutions to evaluate
their Y2K exposure, measure their risk of Y2K issues and prepare a plan to
remedy the Y2K issue. Financial institutions also are required to examine the
Y2K implications of their reliance on third-party vendors and the potential
impact of Y2K issues on customers, borrowers and suppliers.
Risk. Similar to other financial institutions and companies that utilize
computer technology, our operations may be significantly affected by the Y2K
issue because of our reliance on electronic data processing technology and
date-sensitive information. The Y2K issue also impacts other aspects of our
non-technical business processes. If the Y2K issue is not adequately addressed,
and systems are not modified to properly identify the Year 2000, computer
systems and software applications may fail or create erroneous information.
If we are affected by the Y2K issue, information that relies on dates,
such as interest calculations, loan payment schedules and other operating
functions, could be significantly incorrect. We may not be able to process
withdrawals or deposits, prepare account statements, or engage in any of the
many transactions that constitute our normal operations. Our inability to
adequately address the Y2K issue could also have a significant adverse effect on
our suppliers
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and service providers. Should we experience a Y2K failure that cannot readily be
fixed, it may result in a significant adverse impact on our financial condition
and results of operations.
State of Readiness. We believe that technology plays a critical role in
our overall business strategy. We have attempted to stay current with
technological advances in the industry. In this regard, the Board of Trustees
and senior management have consistently supported investment in established and
proven technologies. Because of this philosophy, the Board of Trustees and
senior management have been actively engaged in managing our Y2K project.
Management has consistently allocated both human and financial resources to this
project to achieve the objectives and time frames mandated by the FFIEC. As
discussed below, we believe that we have considered all material Y2K issues and
that we are taking the proper action to correct them.
We have identified the following mission-critical systems: core account
processing, our internal general ledger system, automatic teller services,
electronic funds transfer and our internal network operating system. They are
provided or serviced by NCR, Interactive Planning Systems, Mellon, the Federal
Reserve Bank of Boston, and Novell, respectively. Each of the above listed
services or systems providers have provided Y2K remediated products which have
been tested internally . Based upon our testing, we believe that our
applications critical to daily operations are Y2K compliant.
Our Action Plan for the Year 2000, in accordance with regulatory guidance,
outlines our plans to achieve a successful transition to the Year 2000. The
following summarizes the various phases of our Y2K plan:
Awareness Phase - This initial phase of the Y2K project involved the
appointment of a Y2K review team in June 1997 lead by Westborough
Savings' Operations Officer, and the subsequent development of a formal
Action Plan in April 1998. The review team, through the development of
the Action Plan, identified the issues to be resolved, defined objectives
to be achieved and outlined an approach to implement the objectives set
forth in the Action Plan.
Assessment Phase - During this phase, the review team developed an
inventory listing of all internal computer systems and software
applications, as well as third-party vendors and suppliers upon whom we
rely for goods and services. We also obtained copies of all
computer-related licensing agreements and maintenance contracts, which we
reviewed to determine whether they addressed the issue of Y2K compliance.
Based upon this information, we corresponded with each computer hardware
manufacturer, software vendor, and other third party vendors and suppliers
requesting information regarding their Y2K readiness. The review team
evaluated each response received and, based upon such responses,
determined which computer systems and software applications were Y2K
compliant. For those that were not, the review team determined the
appropriate corrective action required and developed a plan for its
implementation.
We also have reviewed our customer base to determine whether they
pose any significant Y2K risks. Our customer base consists primarily of
individual depositors and residential mortgage loan borrowers.
Individually, these customers are not likely to pose
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significant Y2K risks to our operations. However, it is not possible at
this time to evaluate the indirect risks that could be faced if employers
of our individual customers encounter unresolved Y2K issues.
With respect to our commercial customers, we have corresponded with
them regarding Y2K risks, the nature and scope of the problem and remedial
options available to them. Further, we have asked them to complete a
worksheet and questionnaire regarding their Y2K readiness. Based upon our
review of these worksheets and questionnaires, we have concluded that
these borrowers do not represent a significant risk to our commercial loan
portfolio. Nonetheless, we intend to continue to monitor commercial
customers throughout 1999 and early 2000 to mitigate any adverse impact to
Westborough Savings' financial stability. We also carefully consider the
Y2K readiness of potential commercial borrowers in the lending process.
Renovation Phase - Our Operations Officer continues to work closely
with the providers of our mission-critical systems. These, as well as
other significant systems, have been upgraded to Y2K compliant versions of
vendor-supported software. In certain situations, we replaced or upgraded
existing non-compliant systems with new Y2K compliant hardware and
software. We have relatively few data transmission interfaces with third
party servicers and substantially all of these systems have been renovated
for Year 2000 compliance. We have no mission-critical systems that we
developed on our own.
The review team continues to monitor the Y2K progress of those third
parties who provide us with services or products to ensure that they are
taking adequate measures in addressing the Y2K issue. We are seeking
written assurances from these third parties as to their current Year 2000
compliance or that they are in the process of addressing the Y2K issue.
However, we can not assure you that these third parties will be prepared
for the Y2K issue. The failure of these third parties to achieve Y2K
compliance may have an adverse impact on our operations.
Validation/Implementation Phases - The validation phase is
considered to be the most critical stage of the Y2K readiness process. It
is designed to test the ability of the renovated systems to accurately
process date sensitive data. Westborough Savings successfully completed
its validation phase prior to the June 30, 1999 estimated completion date
in its Testing Plan. All systems and software have been tested and are
currently Y2K compliant. The testing involved not only internal testing of
systems and software, but also the testing of third party processors that
Westborough Savings relies on for providing it with mission-critical
applications. All systems and software that have been tested are currently
Y2K compliant.
Use of Resources. Managing theY2K project has resulted in additional
direct and indirect costs. Direct costs include charges by third-party software
vendors for product replacements, upgrades and enhancements, costs involved in
testing for Y2K compliance, costs for customer awareness programs, etc. Indirect
costs consist primarily of time devoted to the project by existing employees for
project development and implementation, the testing of
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systems, monitoring third-party vendor and service provider progress, and the
development of contingency plans. The costs of the Y2K project have not been
significant to date, and we believe that the total cost of the project will not
be material to our results of operations or financial condition in any one year.
Although we currently estimate that the total cost of the Y2K project, excluding
the reallocation of internal resources, will be approximately $65 thousand, of
which we have already incurred $56 thousand, we cannot guarantee that such costs
would not become material in the future.
Contingency Planning. Regulatory guidance requires that we consider two
types of contingency planning:
(1) remediation contingency planning, which addresses the failure of an
institution to successfully fix, test or implement its Y2K readiness
plan; and
(2) business resumption contingency planning, which addresses the risks
associated with the failure of systems at critical dates, such as
January 1, 2000.
The regulatory guidance provides that if a mission-critical application or
system has been remediated, tested and implemented, a remediation contingency
plan is not required. Based on the overall progress of our Y2K project,
specifically the testing and implementation results relative to our mission-
critical applications, our review team has concluded that a remediation
contingency plan is not required for such applications.
While we expect to complete our Y2K project in a timely manner, we cannot
guarantee that the systems of companies with whom we conduct business, will also
be completed in a timely manner. The failure of these entities to adequately
address the Y2K issue could adversely affect our ability to conduct business. In
the event that these entities do not adequately address the Y2K issue, we do not
believe that we will have enforceable actions against them.
To address the risks associated with the failure of mission-critical
systems at critical dates, we have developed a business resumption
contingency plan to augment our existing disaster recovery plan. This plan
identifies our operating systems, their criticality, and suggests alternative
processing if mission-critical systems are adversely affected by the century
date change.
We understand that certain events beyond our control may diminish our
ability to provide minimum levels of service. Management considers the
worst-case scenario to be extended power outages and loss of telecommunications.
Failure of these services will affect companies, individuals and the government,
and cannot be remedied by anyone other than the responsible party. We are
preparing to provide minimum levels of service during sporadic power outages and
temporary loss of communications. However, during extensive losses of power
and/or telecommunications, we may temporarily close our operations.
For some systems, contingency plans will consist of using or reverting to
manual systems until the problems can be corrected. We, however, do not
anticipate any adverse material impact on our operations as a result of the Y2K
issue.
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, sercurities firms and other financial
service providers. Generally, the Act:
o repeals the historical restrictions and eliminates many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
o provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
o broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
o provides an enhanced framework for protecting the privacy of
consumer information;
o adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank system;
o modifies the laws governing the implementation of the Community
Reinvestment Act and
o addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
Bank holding companies will be permitted to engage in a wider variety
of financial activities than permitted under prior law, particularly with
respect to insurance and securities activities. In addition, in a change
from prior law, bank holding companies will be in a position to be owned,
controlled or acquired by any company engaged in financially-related
activities.
We do not believe that the Act will have a material adverse effect on
our operations in the near-term. However, to the extent that it permits
banks, securities firms and insurance companies to affiliate, the financial
services industry may experience further consolidation. This could result in
a growing number of larger financial institutions that offer a wider variety
of financial services than we currently offer and that can aggressively
compete in the market we currently serve.
Impact of Inflation and Changing Prices
The Financial Statements and accompanying Notes of Westborough Savings
have been prepared in accordance with GAAP. GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike industrial companies, our assets and
liabilities are primarily monetary in nature. As a result, changes in market
interest rates have a greater impact on performance than do the effects of
inflation.
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BUSINESS OF WESTBOROUGH SAVINGS BANK
General
We are a community- and customer-oriented retail savings bank offering
traditional deposit products, residential real estate mortgage loans and, to
a lesser extent, consumer and commercial loans. In addition, we purchase
mortgage-backed securities, securities issued by the U.S. Government and
agencies and other investments permitted by applicable laws and regulations.
We retain substantially all of the loans we originate.
Our revenues are derived principally from interest on our mortgage loans
and mortgage-backed securities and interest and dividends on our investment
securities. Our primary sources of funds are deposits, scheduled amortization
and prepayments of loan principal and mortgage-backed securities, maturities and
calls of investment securities, funds provided by operations and borrowings. See
"-- Source of Funds."
Market Area
We conduct our operations out of our main office in Westborough,
Massachusetts. We also operate four other full service branches in the towns of
Westborough, Northborough and Shrewsbury, and a non-public, self-contained
office at the "Willows," a retirement community in Westborough. Our deposits are
gathered from the general public in these towns and the surrounding communities.
Our lending activities are concentrated primarily in the towns where we have
offices, as well as the town of Grafton. These towns are located in east central
Massachusetts, near the central Route 495 belt.
Our market area has grown steadily to achieve a blend of industry, office
parks and residences. The town of Westborough is approximately 12 miles east of
Worcester and 29 miles west of Boston, located at the junction of major
interstate highways constructed in the 1950s and 1960s. The convenient access
provided by Routes 20, 9, I-90 and I-495 has contributed to the diverse economic
base consisting of a retail and commercial section, and a high-tech
manufacturing section.
Among the largest employers in our market area are EMC, New England
Electric Systems, Massachusetts Electric Company, First Data Investors and
ASTRA
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Pharmaceutical. The Tufts University School of Veterinary Medicine also is
located in our market area. The unemployment rate for Westborough was 2.2% as of
September 1998, compared to the state unemployment rate of 3.3% at that time.
Public transportation within our market area is expanding with the
addition of two new mass transit stations. The Massachusetts Bay Transportation
Authority is currently constructing a station in Grafton and has plans to
construct a station in Westborough in late 2000. These stations will provide
direct access to Worcester and Boston for residents in our market area.
Since 1980, our primary market area has experienced increases in both
population and households as individuals and families moved from urban areas
surrounding Boston to more outlying areas with lower cost and newer housing
stock. Estimated 1998 per capita annual income for residents of Westborough was
over $24 thousand, 34% above the Worcester County average and 21% above the
state average. Median household income in Westborough also exceeded the
county-wide average by 23%.
Our future growth opportunities will be influenced by the growth and
stability of the statewide and regional economies, other demographic population
trends and the competitive environment. We believe that we have developed
lending products and marketing strategies to address the diverse credit-related
needs of the residents in our market area.
Competition
We face intense competition both in making loans and attracting deposits.
Central Massachusetts has a high concentration of financial institutions, many
of which are branches of large money center and regional banks which have
resulted from the consolidation of the banking industry in Massachusetts and
surrounding states. Some of these competitors have greater resources than we do
and may offer services that we do not provide.
Our competition for loans comes principally from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms. Our most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations and credit unions. We face
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from brokerage firms and insurance
companies. As of June 30, 1998, our market share of deposits in Westborough was
26.3%.
Lending Activities
Loan Portfolio Composition. Our loan portfolio primarily consists of one-
to four-family residential first mortgage loans. To a lesser degree, the loan
portfolio includes commercial real estate loans, consumer loans and commercial
loans.
At June 30, 1999, we had total loans of $91.8 million, of which $81.4
million, or 88.7%, were residential first mortgage loans. Of residential first
mortgage loans outstanding at that date, 29.8% were adjustable-rate mortgage, or
ARM loans, and 70.2% were fixed-rate loans. The remainder of our loans at
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June 30, 1999, amounting to $10.4 million, or 11.3% of total loans, consisted
primarily of commercial real estate and consumer loans, including home equity
credit lines. Commercial real estate loans outstanding at June 30, 1999 totaled
approximately $3.0 million, or 3.3% of total loans. Commercial loans outstanding
at June 30, 1999 totaled $2.2 million, or 2.4% of total loans. Consumer loans
outstanding at June 30, 1999 totaled approximately $1.6 million, or 1.7% of
total loans.
Our loans are subject to federal and state law and regulations. The
interest rates we charge on loans are affected principally by the demand for
loans, the supply of money available for lending purposes and the interest rates
offered by our competitors. These factors are, in turn, affected by general and
local economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies and governmental
budgetary matters.
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The following table presents the composition of our loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At September 30,
-------------------- ---------------------------------------------------------------
1999 1998 1997 1996
-------------------- ------------------ ------------------ -------------------
Percent Percent Percent Percent
of of of of
Amount Total Amount Total Amount Total Amount Total
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Fixed rate mortgage ......... $ 57,165 62.26% $ 47,239 55.81% $ 29,450 40.64% $ 27,599 41.35%
Variable rate mortgage ...... 24,264 26.43 27,384 32.36 33,812 46.66 30,674 45.96
Commercial .................. 3,013 3.28 2,743 3.24 2,915 4.02 3,071 4.60
Home equity lines of credit 3,576 3.89 3,918 4.63 3,859 5.33 3,221 4.83
-------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans ... 88,018 95.86 81,284 96.04 70,036 96.65 64,565 96.74
-------- -------- -------- -------- -------- -------- -------- --------
Consumer loans:
Personal .................... 603 0.66 858 1.01 1,069 1.48 986 1.48
Deposit secured ............. 563 0.61 676 0.80 557 0.77 724 1.08
Home improvement ............ 400 0.44 132 0.16 73 0.10 83 0.12
-------- -------- -------- -------- -------- -------- -------- --------
Total consumer loans ...... 1,566 1.71 1,666 1.97 1,699 2.35 1,793 2.68
-------- -------- -------- -------- -------- -------- -------- --------
Commercial loans:
Commercial lines of credit .. 883 0.96 599 0.71 293 0.40 227 0.34
Commercial installment ...... 1,349 1.47 1,087 1.28 437 0.60 160 0.24
-------- -------- -------- -------- -------- -------- -------- --------
Total commercial loans .... 2,232 2.43 1,686 1.99 730 1.00 387 0.58
-------- -------- -------- -------- -------- -------- -------- --------
Total loans ................... 91,816 100.00% 84,636 100.00% 72,465 100.00% 66,745 100.00%
======== ======== ======== ========
Adjusted by:
Unadvanced loan funds ....... (1,639) (1,570) (1,177) (878)
Net deferred loan origination
costs (fees) .............. 120 109 78 66
Allowance for loan loss ..... (869) (827) (786) (690)
Net loans ................. $ 89,428 $ 82,348 $ 70,580 $ 65,243
======== ======== ======== ========
</TABLE>
69
<PAGE>
Loan Maturity and Repricing. The following table sets forth certain
information as of June 30, 1999 regarding the dollar amount of loans maturing in
our portfolio based on their contractual terms to maturity. Demand loans having
no stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they contractually mature, and fixed-rate loans
are included in the period in which the final contractual repayment is due. This
table does not include prepayments on scheduled principal amortizations.
<TABLE>
<CAPTION>
At June 30, 1999
----------------------------------------------------------------------------------------------
Fixed Variable Commercial Home Equity
Rate Rate Mortgage Lines of Consumer Commercial Total
Mortgages Mortgages Loans Credit Loans Loans Loans
--------- --------- ---------- ----------- -------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year ................... $ 380 $ 10,025 $ 1,048 $ 3,411 $ 982 $ 850 $ 16,696
After one year:
One to three years ............ 1,391 9,253 501 40 461 329 11,975
Three to five years ........... 716 2,328 99 -- 109 628 3,880
Five to ten years ............. 6,468 2,658 709 125 14 425 10,399
Ten to twenty years ........... 45,054 -- 656 -- -- -- 45,710
Over twenty years ............. 1,517 -- -- -- -- -- 1,517
-------- -------- -------- -------- -------- -------- --------
Total amount due ........... $ 55,526 $ 24,264 $ 3,013 $ 3,576 $ 1,566 $ 2,232 $ 90,177
======== ======== ======== ======== ======== ======== ========
Less:
Net deferred loan origination costs 120
Allowance for loan losses ......... (869)
--------
Loans, net .................... $ 89,428
========
</TABLE>
The following table presents, as of June 30, 1999, the dollar amount of
all loans due after June 30, 2000, and whether these loans have fixed interest
rates or adjustable interest rates.
Due After June 30, 2000
---------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Fixed rate mortgages .................... $55,146 $ -- $55,146
Variable rate mortgages ................. -- 14,239 14,239
Commercial mortgage loans ............... 954 1,011 1,965
Home equity lines of credit ............. 165 -- 165
Consumer loans .......................... 584 -- 584
Commercial loans ........................ 1,382 -- 1,382
------- ------- -------
Total loans ........................... $58,231 $15,250 $73,481
======= ======= =======
70
<PAGE>
The following table presents our loan originations, sales and principal
payments for the periods indicated.
<TABLE>
<CAPTION>
For the Nine
Months
Ended June 30, For the Year Ended September 30,
---------------------- ----------------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans, net:
Balance outstanding at beginning of period .............. $ 82,348 $ 70,580 $ 70,580 $ 65,243 $ 57,779
Originations:
Mortgage loans:
Residential ......................................... 25,397 25,611 32,346 25,928 19,630
Commercial .......................................... 1,049 476 476 3,217 --
Home equity lines of credit ......................... 2,369 2,387 3,397 3,187 2,173
-------- -------- -------- -------- --------
Total mortgage originations .................... 28,815 28,474 36,219 32,332 21,803
Commercial loans ........................................ 1,261 988 1,438 865 334
Consumer loans .......................................... 1,341 938 1,275 904 1,820
-------- -------- -------- -------- --------
Total originations ............................. 31,417 30,400 38,932 34,101 23,957
-------- -------- -------- -------- --------
Less:
Principal repayments, unadvanced funds and other,
net: ................................................ (24,295) (19,091) (26,780) (28,548) (16,388)
Sale of mortgage loans, principal balance ............... -- (269) (269) (120) --
Provision for loan losses ............................... (35) (30) (39) (96) (105)
Net loan charge-offs .................................... (7) (2) (2) -- --
Transfers to foreclosed real estate ..................... -- -- (74) -- --
-------- -------- -------- -------- --------
Total deductions ............................... (24,337) (19,392) (27,164) (28,764) (16,493)
-------- -------- -------- -------- --------
Net loan activity ....................................... 7,080 11,008 11,768 5,337 7,464
-------- -------- -------- -------- --------
Loans, net, end of period ........................... $ 89,428 $ 81,588 $ 82,348 $ 70,580 $ 65,243
======== ======== ======== ======== ========
</TABLE>
Residential Mortgage Loans. Our primary lending emphasis is the
origination of first mortgage loans secured by one- to four-family properties
that serve as the primary or secondary residence of the owner. As of June 30,
1999, loans on one- to four-family residential properties accounted for 88.7%
of our total loan portfolio.
Most of our loan originations are from existing or past customers, members
of our local communities or referrals from local real estate agents, attorneys
and builders. We believe that our branch network, particularly as it expands, is
a significant source of new loan generation. We also have a call program to real
estate agents in our market area to develop referral relationships between
agents and Westborough Savings.
71
<PAGE>
We currently offer loans that conform to underwriting standards specified
by FannieMae ("conforming loans") and also originate non-conforming loans, as
described below. These loans may be fixed-rate one- to four- family mortgage
loans or adjustable-rate one- to four-family mortgage loans with maturities of
between 5 and 30 years. The non-conforming loans generally follow FannieMae
guidelines except that the loan amount exceeds FannieMae guidelines' maximum
limit of $240 thousand. The average size of our first mortgage loans originated
during the nine months ended June 30, 1999 and the year ended September 30, 1998
was $154 thousand and $163 thousand, respectively. The average size of our first
mortgage loans was $102 thousand at June 30, 1999. We are an approved
seller/servicer for FannieMae. From time to time, we have sold loans in the
secondary market although such sales have been infrequent. The loans that we
sell are all fixed-rate mortgage loans with terms of 30 years. Such loans,
however, continue to be serviced by Westborough Savings.
Our originations of first mortgage loans amounted to $25.4 million in the
nine months ended June 30, 1999, $32.3 million in fiscal year 1998, $25.9
million in fiscal year 1997 and $19.6 million in fiscal year 1996. A significant
number of our first mortgage loan originations have been the result of
refinancing of our existing loans due to the relatively low interest rate levels
over the past three years.
We offer a variety of ARMs and fixed-rate one- to four-family mortgage
loans with maximum loan-to-value ratios that depend on the type of property and
the size of loan involved. The loan-to-value ratio is the loan amount divided by
the appraised value of the property. The loan-to-value ratio is a measure
commonly used by financial institutions to determine exposure to risk. The
majority of our loans on owner-occupied one- to four-family homes are originated
with a loan-to-value ratio of 80% or less. On occasion, under limited
circumstances, we have made loans on owner-occupied one- to four-family homes
with a loan-to-value ratio of up to 95%. In such cases, the borrower is required
to obtain mortgage insurance.
We currently offer fixed-rate mortgage loans with terms of 15, 20, 25 and
30 years secured by one- to four-family residences. We price our interest rates
on fixed rate loans to be competitive in light of market conditions.
We currently offer a variety of ARM loans secured by one- to four-family
residential properties that initially adjust after one year, three years, five
years or seven years. After the initial adjustment period, ARM loans adjust on
an annual basis. The ARM loans that we currently originate have a maximum 30
year amortization period and are subject to the same loan-to-value ratios
applicable to fixed-rate mortgage loans described above. The interest rates on
ARM loans fluctuate based upon a fixed spread above the average yield on United
States treasury securities and generally are subject to a maximum increase of 2%
per adjustment period and a limitation on the aggregate adjustment of 6% over
the life of the loan. We originated $8.2 million and $11.7 million of one- to
four-family ARM loans in the nine months ended June 30, 1999 and the year ended
September 30, 1998, respectively. At June 30, 1999, 26.4% of our total loans
consisted of ARM loans.
The volume and types of ARM loans we originate have been affected by the
level of market interest rates, competition, consumer preferences and the
availability of funds. During 1998, we experienced a decreased demand for ARM
loans due to the continued low interest rate
72
<PAGE>
environment. Although we will continue to offer ARM loans, we cannot guarantee
that we will be able to originate a sufficient volume of ARM loans to increase
or maintain the proportion that these loans bear to our total loans.
The retention of ARM loans in our loan portfolio helps reduce our exposure
to increases in interest rates. However, ARM loans can pose credit risks
different from the risks inherent in fixed-rate loans, primarily because as
interest rates rise, the underlying payments of the borrower may rise. This
increases the potential for default.
Our home equity credit line loans, which totaled $3.6 million, or 3.9% of
total loans at June 30, 1999, are fixed- and adjustable-rate loans secured by a
first or second mortgage on owner-occupied one- to four-family residences
located in our market area. Interest rates on home equity credit lines are based
upon the "prime rate" as published in the "Money Rates" section of the Wall
Street Journal (the "index") with a minimum monthly principal payment of
one-half of 1% of the outstanding principal balance of the loan. The maximum
credit line available is equal to the lesser of $100 thousand and 80% of
Westborough Savings' appraisal of the property or 50% of the tax assessment on
the property, in each case less the first mortgage balance. Such loans also have
a maximum term of 15 years. The underwriting standards applicable to these loans
generally are the same as one- to four-family first mortgage loans, except that
the combined loan-to-value ratio, including the balance of the first mortgage,
cannot exceed 80% of the appraised value of the property.
In conjunction with our residential mortgage lending, we offer
construction loans to the future occupants of single family homes. At June 30,
1999, $3.5 million, or 3.8% of our total loan portfolio consisted of gross
residential construction loans. Unadvanced funds on these loans amounted to $1.3
million at June 30, 1999, resulting in a net balance of $2.2 million. These
loans typically have a term of twelve months and are structured to become
permanent loans upon the completion of construction. All such loans are secured
by first liens on the property and are subject to a maximum loan-to-value ratio
of 80%, which is based upon the anticipated value of the property. During the
construction period, the interest rate for construction loans to individuals is
50 basis points below the index. Loans involving construction financing present
a greater risk than loans for the purchase of existing homes since collateral
values and construction costs can only be estimated at the time the loan is
approved.
Commercial Real Estate Loans. Origination of loans secured by commercial
real estate is a growing area of lending for Westborough Savings. At June 30,
1999, commercial real estate mortgage loans totaled $3.0 million, or 3.3% of
total loans. These loans are generally secured by office buildings,
condominiums, retail establishments and churches located within our market area.
Our commercial real estate loans are offered on a fixed- and
adjustable-rate basis. Typical terms for such loans provide for a maximum
seven-year repricing term with a 20 year amortization and a balloon payment in
five to seven years, and an interest rate based upon the index. Loans on
commercial properties are also subject to a maximum loan-to-value ratio of 80%
for the acquisition of the property and 75% for refinancing of the property.
73
<PAGE>
Pursuant to our underwriting standards, a number of factors are considered
before a commercial real estate loan is made. We evaluate qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property.
Factors that we consider in evaluating the underlying property include the net
operating income of the mortgaged property before debt service and depreciation,
the debt service coverage ratio (the ratio of operating income to debt service)
and, as noted above, the ratio of the loan amount to the appraised value of the
property.
Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Such loans typically involve large balances to single borrowers
or groups of related borrowers. Because payments on loans secured by commercial
real estate properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the
project decreases, or if leases are not obtained or renewed, the borrower's
ability to repay the loan may be impaired.
Our real estate loan portfolio also includes construction loans to
builders and developers of residential properties within our market area. At
June 30, 1999, $1.5 million, or 1.6% of our total loan portfolio, consisted of
gross commercial construction loans. Unadvanced funds on these loans amounted to
$316 thousand at June 30, 1999, resulting in a net balance of $1.2 million.
Construction loans to builders typically are in amounts equal to 70% of
the value of the property upon completion. Construction loans generally have
twelve month terms with a floating interest rate based upon the index. In
addition to securing the loan with the property under construction, we generally
obtain personal guarantees from the borrower. The proceeds of such loans are
disbursed after certification by in-house personnel that specified stages of
construction have been completed.
Construction lending is generally considered to carry a higher level of
risk than permanent mortgage financing because of the uncertainty of the value
of the collateral upon completion. Repayment of such loans are also dependent
upon the successful completion of the project and can be adversely affected by
market conditions and other factors not within the control of Westborough
Savings or the borrower. We seek to control such risks by tying the amount of
the loan advanced to the completion of construction and monitoring
subcontractors to ensure that loan proceeds are applied appropriately.
Consumer Loans. At June 30, 1999, $1.6 million, or 1.7% of our total
loans, consisted of consumer loans such as personal, deposit secured and
fixed-rate home improvement loans. Consumer loans generally have shorter terms
to maturity, which reduces our exposure to changes in interest rates. Consumer
loans also carry higher rates of interest than do one- to four-family
residential mortgage loans. In addition, we believe that offering consumer loan
products helps to expand and create stronger ties to our existing customer base
by increasing the number of customer relationships and providing cross-marketing
opportunities.
74
<PAGE>
Our personal loans consist of unsecured loans to individuals and secured
loans for the purchase of new and used automobiles. Our unsecured loans have a
maximum term of 48 months. The terms of our automobile loans generally are
determined by the age and condition of the vehicle. At June 30, 1999, our
personal loans totaled $603 thousand, or 0.7% of total loans.
We also make loans secured by deposit accounts up to 90% of the amount of
the depositor's savings account balance. The rate for such loans is 2.0% higher
than the rate paid on regular savings accounts and 3.0% higher than the rate
paid on term deposits. Deposit secured loans totaled $563 thousand, or 0.6% of
total loans at June 30, 1999.
We offer fixed-rate home improvement loans in amounts equal to that
available for home equity credit line loans as discussed above. These loans are
secured by owner-occupied one- to four-family residences for terms of up to 10
years. At June 30, 1999, these loans totaled $400 thousand, or 0.4% of total
loans. Interest rates on fixed-rate home improvement loans are periodically set
by our Loan Committee, consisting of our President, Treasurer and Senior Loan
Officer, after consultation with the Board of Investment and are based on market
conditions. The underwriting terms and procedures applicable to these loans are
substantially the same as for our home equity credit line loans.
Commercial Loans. Westborough Savings recently has made a commitment to
small business lending by developing certain products and services for the
small- and medium-sized businesses located in our market area. Such services are
designed to give business owners borrowing opportunities for, among other
things, modernization, inventory, equipment, consolidation and working capital.
In addition, we have tailored certain products and services, such as our
business checking accounts and treasury and tax loan service, to better serve
the needs of local businesses. We have also become an approved lender of the
Small Business Administration. At June 30, 1999, $2.2 million, or 2.4%, of our
total loans consisted of commercial loans. We expect that commercial loans will
comprise a growing portion of our total loan portfolio in the future.
Commercial loans generally are limited to terms of five years or less.
Substantially all commercial loans have variable interest rates tied to the
prime rate. Whenever possible, we collateralize these loans with a lien on
commercial real estate or, alternatively, with a lien on business assets and
equipment and the personal guarantees of the borrower's principal officers.
Our commercial services are administered by our loan department. Recently,
we hired an experienced commercial loan officer with considerable commercial
lending expertise, including 13 years of banking experience in Massachusetts and
personal ties to Westborough. We also intend to add additional qualified
employees as market conditions warrant.
Commercial loans generally are considered to involve a higher degree of
risk than residential mortgage loans because the primary collateral may be in
the form of intangible assets and/or inventory subject to market obsolescence.
Commercial loans also may involve relatively large loan balances to single
borrowers or groups of related borrowers, with the repayment of such loans
typically dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, commercial lending
75
<PAGE>
ordinarily requires substantially greater oversight efforts compared to
residential real estate lending. To minimize these risks, we conduct periodic
reviews of the commercial loan portfolio to ensure adherence to underwriting
standards and policy requirements.
Loan Approval Procedures and Authority. Our lending policies provide that
our Loan Committee has authority to approve one- to four-family mortgage loans
in amounts up to $250 thousand. One- to four-family mortgage loans in excess of
$250 thousand require the approval of our Board of Investment. Commercial real
estate loans in amounts up to $300 thousand may be approved by the Loan
Committee. All other commercial real estate loans must be approved by the Board
of Investment. Commercial and consumer loans in amounts up to $100 thousand may
be approved by our President, Treasurer or Senior Loan Officer. Together, these
individuals also may approve commercial and consumer loans in amounts up to $300
thousand.
The following generally describes our current lending procedures. Upon
receipt of a completed loan application from a prospective borrower, we order a
credit report and verify certain other information. If necessary, we obtain
additional financial or credit related information. We require an appraisal for
all mortgage loans, except for some loans made to refinance existing mortgage
loans. Appraisals are performed by a licensed or certified third-party appraisal
firms and are reviewed by our lending department. We require title insurance on
all mortgage loans, except for home equity credit lines and fixed-rate home
improvement loans. For these loans, we require evidence of previous title
insurance. We require borrowers to obtain hazard insurance and we may require
borrowers to obtain flood insurance prior to closing. For properties with a
private sewage disposal system, we also require evidence of compliance with
applicable law. Further, we require borrowers to advance funds on a monthly
basis together with each payment of principal and interest to a mortgage escrow
account from which we make disbursements for items such as real estate taxes,
flood insurance and private mortgage insurance premiums, if required.
76
<PAGE>
Asset Quality
One of our key operating objectives has been, and continues to be, to
maintain a high level of asset quality. Our concentration on one- to four-family
mortgage lending, our maintenance of sound credit standards for new loan
originations and relatively favorable economic and real estate market conditions
have resulted in historically low delinquency ratios and, in recent years, a low
level of non-performing assets. These factors have helped strengthen our
financial condition.
Delinquent Loans and Foreclosed Assets. Management and the Loan Committee
perform a monthly review of all delinquent loans. One of the primary tools we
use to manage and control problem loans is our "Watch List." This list
identifies all of the loans or commitments that are considered to have
characteristics that could result in loss to us if not properly supervised. The
list is managed by the Loan Committee which, together with the Board of
Investment, meets periodically to discuss the status of the loans on the Watch
List and to add or delete loans from the list. At June 30, 1999, we had no loans
more than 90 days past due and had $337 thousand and $427 thousand in assets
classified as pass and substandard, respectively. No assets were classified as
special mention, doubtful or loss.
Westborough Savings had no non-performing assets at June 30, 1999 and
1998.
The following table presents information regarding non-accrual mortgage
and consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated. At June 30, 1999 and September
30, 1998, 1997, and 1996, we had no non-accrual loans.
<TABLE>
<CAPTION>
At
June 30, At September 30,
-------- -----------------------------
1999 1998 1997 1996
-------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Non-accrual first mortgage loans ............ $ -- $ -- $ -- $ --
Non-accrual consumer and other loans ........
Accruing loans delinquent 90 days or more ... -- 55 -- 9
------- ------- ------- -------
Total non-performing and delinquent loans ... -- 55 -- 9
Foreclosed real estate, net ................. -- 74 19 144
------- ------- ------- -------
Total non-performing assets and delinquent
loans ................................ $ -- $ 129 $ 19 $ 153
======= ======= ======= =======
Non-performing and delinquent loans to total
loans ................................ -- 0.06% -- 0.01%
Non-performing assets and delinquent loans to
total assets ......................... -- 0.08% 0.01% 0.11%
</TABLE>
77
<PAGE>
At June 30, 1999, we were aware of eight loans in an aggregate amount of
$764 thousand that are not currently classified as non-accrual or 90 days past
due but which may be so classified in the near future because of concerns over
the borrowers' ability to comply with repayment terms.
Loans are placed on non-accrual status when they are 90 days past due or,
in the opinion of management, the collection of principal and interest is
doubtful. When we designate loans as non-accrual loans, we reverse outstanding
interest that we previously credited. We may recognize income in the period that
we collect it when the ultimate collectibility of principal is no longer in
doubt. We return a non-accrual loan to accrual status when none of its principal
or interest is due and unpaid or when it otherwise becomes well secured and in
the process of collection.
Impaired loans generally are individually assessed to determine whether a
loan's carrying value is not in excess of the fair value of the collateral or
the present value of the loan's cash flows. Groups of smaller balance loans,
however, are collectively evaluated for impairment. Accordingly, Westborough
Savings does not separately identify individual consumer loans for impairment
disclosures. We had no loans classified as impaired at June 30, 1999 and $269
thousand and $352 thousand loans classified as impaired at September 30, 1998
and September 30 1997, respectively. In addition at September 30, 1998 and 1997,
we had no loans classified as troubled debt restructurings, as defined in SFAS
No. 15.
78
<PAGE>
Foreclosed real estate consists of property we acquired through
foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties
are initially recorded at the lower of the investment in the loan or fair value.
Thereafter, we carry foreclosed real estate at fair value less estimated selling
costs, net of a valuation allowance account established through provisions
charged to income, which result from the ongoing periodic valuations of
foreclosed real estate properties.
Allowance for Loan Losses. The following table presents the activity in
our allowance for loan losses at or for the dates indicated.
<TABLE>
<CAPTION>
At or for the At or for
Nine Months Ended the Year Ended September 30,
June 30,
------------------- -------------------------------
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ......... $ 827 $ 786 $ 786 $ 690 $ 585
Provision for loan losses .............. 35 30 39 96 105
Charge-offs:
Mortgage loans .................... -- -- -- -- --
Commercial loans .................. -- -- -- -- --
Consumer loans .................... (6) -- -- (2) (8)
------- ------- ------- ------- -------
Total charge-offs ......... (6) -- -- (2) (8)
Recoveries ............................. 13 2 2 2 8
------- ------- ------- ------- -------
Balance at end of period ............... $ 869 $ 818 $ 827 $ 786 $ 690
======= ======= ======= ======= =======
Net charge-offs for the period ......... (7) (2) (2) -- --
------- ------- ------- ------- -------
Ratio of net charge-offs to average
loans outstanding during the period(1) (0.008)% (0.003)% (0.003)% 0.000% 0.000%
Allowance for loan losses as a
percent of total loans before the
allowance for loan losses ......... 0.96% 0.99% 0.99% 1.10% 1.05%
Allowance for loan losses as a
percent of non-performing loans ... -- -- -- -- --
</TABLE>
- ----------
(1) Ratio is annualized for the nine month period.
The allowance for loan losses is a valuation account that reflects our
evaluation of the losses inherent in our loan portfolio. We maintain the
allowance through provisions for loan losses that we charge to income. We charge
losses on loans against the allowance for loan losses when we believe the
collection of loan principal is unlikely.
We establish the provision for loan losses after considering the results
of our review of delinquency and charge-off trends, the amount of the allowance
for loan losses in relation to the total loan balance, loan portfolio growth by
type of loan, generally accepted accounting principles and regulatory guidance.
We have applied this process consistently, and we have made minimal changes in
the assumptions used.
79
<PAGE>
As part of our analysis, each month we prepare an allowance for loan loss
worksheet. This worksheet categorizes the entire loan portfolio by certain risk
characteristics such as loan type, guarantees associated with a group of loans
and payment status. Loans with known potential losses are categorized
separately. We assign potential loss factors to the categories on the basis of
our assessment of each category's status and the potential risk inherent in that
type of lending. We use this worksheet, together with loan portfolio balances
and delinquency reports, to evaluate the adequacy of the allowance for loan
losses. Other key factors we consider in this process are national, state and
local economic considerations, history of loan loss experience for major
credits, trends in charge-off recovery, past and current trends in delinquency,
trends in watch list activity, and trends in loan concentration.
Although we believe that we have established and maintained the allowance
for loan losses at adequate levels, future additions may be necessary if
economic and other conditions in the future differ substantially from the
current operating environment.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our loan and foreclosed real estate
portfolios and the related allowance for loan losses and valuation allowance for
foreclosed real estate. These agencies, including the FDIC and the Massachusetts
Division of Banks, may require us to increase the allowance for loan losses or
the valuation allowance for foreclosed real estate based on their judgments of
information available to them at the time of their examination, thereby
adversely affecting our results of operations.
80
<PAGE>
The following table presents our allocation of the allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------------------------------ --------------------------------------------------------------
1999 1998 1998 1997 1996
-------------------- -------------------- ------------------- -------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category to Category to Category to Category to Category to
Loan Category Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ------------- ------ ----------- ------ ----------- ------------------- ------ ----------- ------ -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential(1) ....... $ 294 92.58% $ 331 92.43% $ 309 92.80% $ 253 92.63% $ 265 92.14%
Commercial ........... 214 3.28 251 3.89 184 3.24 289 4.02 272 4.60
Commercial loans(2) .... 128 2.43 79 1.66 103 1.99 39 1.00 -- 0.58
Consumer ............... 15 1.71 23 2.02 24 1.97 27 2.35 50 2.68
Unallocated ............ 218 -- 134 -- 207 -- 178 -- 103 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses ........ $ 869 100.00% $ 818 100.00% $ 827 100.00% $ 786 100.00% $ 690 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Includes home equity lines of credit and construction loans.
(2) Prior to September 30, 1997, the allowance for loan losses for commercial
loans was included in consumer loans.
81
<PAGE>
Investment Activities
The Board of Trustees reviews and approves our investment policy on an
annual basis. The President and Treasurer, as authorized by the Board, implement
this policy. Management reports securities transactions to the Board of
Investment for review and approval on a monthly basis.
Our investment policy is designed primarily to manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our lending
activities and to provide and maintain liquidity within established guidelines.
In establishing our investment strategies, we consider our interest rate
sensitivity, the types of securities to be held, liquidity and other factors.
Massachusetts chartered savings banks have authority to invest in various types
of assets, including U.S. Treasury obligations, securities of various federal
agencies, mortgage-backed securities, certain certificates of deposit of insured
banks and savings institutions, certain bankers' acceptances, repurchase
agreements, loans of federal funds, and, subject to certain limits, corporate
debt and equity securities, commercial paper and mutual funds.
As part of our investment strategy, we also engage in a "covered call"
program in which we write options on securities we hold. The sale of a covered
call conveys the right, but not the obligation, to the buyer to buy a particular
security held by us at a particular price up to a certain expiration date. The
sale is "covered" because we hold the security in our portfolio. Under this
program, we write options only on publicly traded securities we own. However, we
are willing to have the securities called if an option is written and exercised.
At June 30, 1999 and September 30, 1998, our liquidity ratio was 74.01%
and 90.05%, respectively. For information regarding the carrying values, yields
and maturities of our investment securities and mortgage-backed securities, see
"-- Carrying Values, Yields and Maturities."
At June 30, 1999, our U.S. Government and federal agency securities
portfolio totaled $22.8 million. This portfolio consists primarily of securities
with maturities of one to five years. Our agency debentures are callable on a
semi-annual basis following a holding period of twelve months. We generally do
not purchase structured notes, and at June 30, 1999, there were no structured
notes in our portfolio.
At June 30, 1999, our portfolio of other debt obligations totaled $17.8
million. Our policy generally requires that investment in corporate debt
obligations be limited to corporate bonds with an "A" rating or better by at
least one nationally recognized rating service at the time of purchase.
The fair market value of our marketable equity securities portfolio
totaled $7.9 million at June 30, 1999. These securities consisted of $4.6
million of common stock, $206 thousand of preferred stock and $3.1 million of
rated trust preferred securities issued by financial service corporations.
Under our investment policy, the aggregate amount of common stock that we may
purchase may not exceed 10% of our total investment portfolio. Our policy
also has limitations against acquiring concentrations of such securities in
any one issuer or industry. We purchase marketable equity
82
<PAGE>
securities as growth investments that can provide the opportunity for capital
appreciation that is taxed on a more favorable basis than operating income.
There can be no assurance that investment in marketable equity securities will
appreciate in value and, therefore, such investments involve higher risk than
U.S. Government or federal agency securities. Aggregate purchases of marketable
equity securities totaled $6.1 million for the nine months ended June 30, 1999
and $3.9 million and $276 thousand for the years ended September 30, 1998 and
1997. At June 30, 1999, pre-tax net unrealized gains on marketable equity
securities amounted to $478 thousand.
Unless otherwise noted with respect to certain securities or required by
regulators or accounting standards, we classify securities available for sale at
the date of purchase. Available for sale securities are reported at fair market
value. We currently have no securities classified as trading. During fiscal year
1998 and during the nine months ended June 30, 1999, we sold investment
securities in the aggregate amounts of $17.9 million and $5.4 million,
respectively.
At June 30, 1999, our mortgage-backed securities, all of which were
classified as available for sale, totaled $13.2 million, or 7.7% of total
assets. We generally purchase mortgage-backed securities as a means to deploy
excess liquidity at more favorable yields than other investment alternatives. In
addition, mortgage-backed securities generate positive interest rate spreads
with minimal administrative expense and lower our overall credit risk due to the
fact that they are directly or indirectly insured or guaranteed.
At June 30, 1999, the mortgage-backed securities portfolio had a weighted
average yield of 6.28% and a market value of $13.2 million. Purchases of
mortgage-backed securities may decline in the future if we experience an
increase in demand for one- to four-family mortgage loans. We did not sell any
of our mortgage-backed securities during fiscal year 1998 or during the nine
months ended June 30, 1999.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. However, mortgage-backed securities are
more liquid than individual mortgage loans and may be used to collateralize our
borrowings. In general, mortgage-backed securities issued or guaranteed by GNMA,
FannieMae and FreddieMac are weighted at no more than 20% for risk-based capital
purposes, compared to the 50% risk-weighting assigned to most non-securitized
residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as compared
to whole loans, they remain subject to the risk of a fluctuating interest rate
environment. Along with other factors, such as the geographic distribution of
the underlying mortgage loans, changes in interest rates may alter the
prepayment rate of those mortgage loans and affect both the prepayment rates and
value of mortgage-backed securities.
During the year ended September 30, 1997, we established a private
charitable foundation to provide grants to charitable organizations in the
Westborough area. The foundation is not a subsidiary of Westborough Savings, but
was funded by a donation from Westborough Savings of marketable equity
securities. These securities had a cost basis and fair value of $21 thousand and
$110 thousand, respectively, at the date of transfer. Such securities had been
classified as
83
<PAGE>
available for sale and accordingly, the transfer resulted in Westborough Savings
recognizing the unrealized appreciation of the securities of $89 thousand in its
consolidated statement of income.
84
<PAGE>
The following table presents activity in our investment securities
portfolio (including Federal Home Loan Bank stock) for the periods indicated:
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30, For the Year Ended September 30,
-------------------- --------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance .................... $ 60,107 $ 61,654 $ 61,654 $ 62,743 $ 57,371
Purchases ............................ 20,169 16,250 20,880 12,517 28,705
Maturities ........................... (6,251) (5,250) (1,250) (3,520) (3,550)
Sales and calls ...................... (5,382) (11,441) (17,886) (7,653) (16,118)
Principal repayments ................. (3,729) (3,281) (4,214) (2,777) (3,300)
Premium and discount amortization, net (66) (66) (88) (93) (200)
Charitable contributions in the form
of equity securities ............... -- -- -- (110) --
Recognition of expired options ....... 220 -- -- -- --
Change in net unrealized gains ....... (1,809) 332 1,011 547 (165)
-------- -------- -------- -------- --------
Ending balance ....................... $ 63,259 $ 58,153 $ 60,107 $ 61,654 $ 62,743
======== ======== ======== ======== ========
</TABLE>
85
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of our securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------- ---------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations .... $ 13,085 $13,224 $ 13,091 $13,579 $ 22,661 $22,867 $ 22,211 $22,196
Federal agency obligations ..... 9,806 9,569 9,504 9,660 10,428 10,427 10,407 10,335
Banking and finance obligations 4,527 4,476 5,534 5,624 4,539 4,564 3,289 3,293
Other bonds and obligations .... 13,421 13,311 13,412 13,762 10,518 10,588 12,362 12,278
--------- ------- --------- ------- --------- ------- --------- -------
Total debt securities ........ 40,839 40,580 41,541 42,625 48,146 48,446 48,269 48,102
========= ======= ========= ======= ========= ======= ========= =======
Mortgage-backed and
mortgage-related securities:
FHLMC .......................... 1,464 1,475 2,079 2,139 3,233 3,234 3,916 3,843
FNMA ........................... 6,111 6,037 4,021 4,063 2,912 2,889 3,697 3,661
GNMA ........................... 2,953 2,942 4,185 4,192 4,044 4,077 3,477 3,462
Other .......................... 2,817 2,761 1,190 1,219 306 307 353 359
--------- ------- --------- ------- --------- ------- --------- -------
Total mortgage-backed and
mortgage-related securities 13,345 13,215 11,475 11,613 10,495 10,507 11,443 11,325
========= ======= ========= ======= ========= ======= ========= =======
Asset-backed securities ........ 738 736 -- -- 243 330 911 1,012
Marketable equity securities ... 7,400 7,878 4,433 5,107 1,168 1,654 1,139 1,661
Federal Home Loan Bank stock ... 850 850 762 762 717 717 643 643
--------- ------- --------- ------- --------- ------- --------- -------
Total securities ............. $ 63,172 $63,259 $ 58,211 $60,107 $ 60,769 $61,654 $ 62,405 $62,743
========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
86
<PAGE>
The following table sets forth the amortized cost and fair value of our
mortgage-backed and mortgage-related securities, all of which were classified as
available for sale at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------------------- -----------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
Amortized of Fair Amortized of Fair Amortized of Fair
Cost Total(1) Value Cost Total(1) Value Cost Total(1) Value
--------- ------ --------- --------- ------ --------- --------- ------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and mortgage-
related securities:
FHLMC ..................... $ 1,464 10.97% $ 1,475 $ 2,079 18.12% $ 2,139 $ 3,233 30.80% $ 3,234
FNMA ...................... 6,111 45.79 6,037 4,021 35.04 4,063 2,912 27.75 2,889
GNMA ...................... 2,953 22.13 2,942 4,185 36.47 4,192 4,044 38.53 4,077
Other ..................... 2,817 21.11 2,761 1,190 10.37 1,219 306 2.92 307
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Total mortgage-backed
and mortgage-related
securities ............ $ 13,345 100.00% $ 13,215 $ 11,475 100.00% $ 11,613 $ 10,495 100.00% $ 10,507
========= ====== ========= ========= ====== ========= ========= ====== =========
<CAPTION>
At September 30,
-------------------------------
1996
-------------------------------
Percent
Amortized of Fair
Cost Total(1) Value
--------- ------ ---------
(In thousands)
<S> <C> <C> <C>
Mortgage-backed and mortgage-
related securities:
FHLMC ..................... $ 3,916 34.22% $ 3,843
FNMA ...................... 3,697 32.31 3,661
GNMA ...................... 3,477 30.39 3,462
Other ..................... 353 3.08 359
--------- ------ ---------
Total mortgage-backed
and mortgage-related
securities ............ $ 11,443 100.00% $ 11,325
========= ====== =========
</TABLE>
- ----------
(1) Based on amortized cost.
87
<PAGE>
Carrying Values, Yields and Maturities. The table below presents
information regarding the carrying values, weighted average yields and
contractual maturities of our investment securities and mortgage-backed
securities at June 30, 1999. Mortgage-backed securities are presented by issuer.
Yields on tax exempt obligations were not computed on a tax equivalent basis.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------------------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less to Five Years to Ten Years More than Ten Years
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations .... $ 3,033 6.25% $ 10,191 6.29% $ -- -% $ -- --%
Federal agency obligations ..... -- -- 4,000 6.60 5,569 6.37 -- --
Banking and finance obligations 504 6.28 3,490 6.30 482 6.02 -- --
Other bonds and obligations .... 2,622 5.24 7,949 6.47 902 4.96 1,838 5.87
Total debt securities ........ 6,159 5.82 25,630 6.40 6,953 6.16 1,838 5.87
Mortgage-backed and mortgage-related
securities:
FHLMC .......................... 158 4.53 333 6.21 -- -- 984 6.56
FNMA ........................... -- -- 731 6.45 1,238 6.56 4,068 6.30
GNMA ........................... -- -- -- -- -- -- 2,942 5.97
Other .......................... -- -- -- -- -- -- 2,761 6.44
Total mortgage-backed and
mortgage-related securities: 158 4.53 1,064 6.37 1,238 6.56 10,755 6.27
Asset-backed securities .......... -- -- 736 5.47 -- -- -- --
Marketable equity securities ..... 7,878 4.40 -- -- -- -- -- --
Federal Home Loan Bank stock ..... 850 4.02 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total securities ............. $ 15,045 4.96% $ 27,430 6.22% $ 8,191 6.22% $ 12,593 6.21%
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
At June 30, 1999
-------------------
Total
-------------------
Weighted
Carrying Average
Amount Yield
-------- --------
(In thousands)
<S> <C> <C>
Debt securities:
U.S. Government obligations .... $ 13,224 6.28%
Federal agency obligations ..... 9,569 6.47
Banking and finance obligations 4,476 6.27
Other bonds and obligations .... 13,311 6.04
Total debt securities ........ 40,580 5.24
Mortgage-backed and mortgage
related securities:
FHLMC .......................... 1,475 5.26
FNMA ........................... 6,037 5.37
GNMA ........................... 2,942 5.97
Other .......................... 2,761 6.44
Total mortgage backed and
mortgage related securities: 13,215 6.28
Asset-backed securities .......... 736 5.47
Marketable equity securities ..... 7,878 4.40
Federal Home Loan Bank stock ..... 850 4.02
-------- --------
Total securities ............. $ 63,259 5.98%
======== ========
</TABLE>
88
<PAGE>
Sources of Funds
General. Deposits, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of investments
securities and funds provided by operations are our primary sources of funds for
use in lending, investing and for other general purposes. We also utilize
borrowed funds from the Federal Home Loan Bank of Boston to fund certain loans
in connection with our management of the interest rate sensitivity of our assets
and liabilities, as well as for other general purposes.
Deposits. We offer a variety of deposit accounts having a range of
interest rates and terms. We currently offer regular savings deposits, NOW
accounts, personal and business demand accounts, money market accounts and
certificates of deposit. We also offer Individual Retirement Accounts ("IRAs"),
which at June 30, 1999 totaled $9.4 million.
Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from areas surrounding our
offices, and we rely primarily on paying competitive rates, service and
long-standing relationships with customers to attract and retain these deposits.
We also have developed deposit products to attract and retain individual and
commercial depositors. One such product is a tiered-rate savings account in
which deposits over certain amounts earn interest at higher rates. Other
programs involve the introduction of commercial deposit products tailored to
small- and medium-sized businesses, such as our business and commercial checking
accounts. We do not use brokers to obtain deposits.
When we determine our deposit rates, we consider local competition, U.S.
Treasury securities offerings and the rates charged on other sources of funds.
Core deposits (defined as total savings accounts, NOW accounts, money market
accounts and demand accounts) represented 65.6% of total deposits on June 30,
1999. At June 30, 1999, certificates of deposit with remaining terms to maturity
of less than one year amounted to $42.1 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Analysis of Net
Interest Income" for information relating to the average balances and costs of
our deposit accounts for the nine months ended June 30, 1999 and 1998 and for
the years ended September 30, 1998 and 1997.
The following table presents our deposit activity for the periods
indicated.
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30, For the Year Ended September 30,
-------------------- --------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance ................... $135,962 $125,170 $125,170 $120,282 $109,549
Net deposits ........................ 7,667 1,735 6,321 710 6,824
Interest credited on deposit accounts 3,506 3,329 4,471 4,178 3,909
-------- -------- -------- -------- --------
Ending balance ...................... $147,135 $130,234 $135,962 $125,170 $120,282
======== ======== ======== ======== ========
Total increase in deposit accounts .. $ 11,173 $ 5,064 $ 10,792 $ 4,888 $ 10,733
Percentage increase ................. 8.22% 4.05% 8.62% 4.06% 9.80%
</TABLE>
89
<PAGE>
At June 30, 1999, we had $10.9 million in certificates of deposit with
balances of $100,000 and over maturing as follows:
Weighted
Average
Amount Rate
------- --------
(In thousands)
Maturity Period:
Three months or less ................................ $ 2,731 4.95%
Over three months through six months ................ 1,902 4.92
Over six months through 12 months ................... 4,264 4.97
Over 12 months ...................................... 2,030 5.29
------- ----
Total ................................................. $10,927 5.02%
======= ====
90
<PAGE>
The following table presents the distribution of our deposit accounts at
the dates indicated by dollar amount and percent of portfolio, and the weighted
average interest rate on each category of deposits.
<TABLE>
<CAPTION>
At June 30, At September 30,
--------------------------------- ---------------------------------
1999 1998
--------------------------------- ---------------------------------
Weighted Weighted
Percent average Percent average
of total nominal of total nominal
Amount deposits rate Amount deposits rate
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts ... $ 10,555 7.18% 0.00% $ 8,592 6.32% -%
NOW accounts ..................... 14,278 9.70 0.50 15,221 11.19 0.50
Savings accounts:
Regular ........................ 29,624 20.13 2.60 28,239 20.77 2.60
Tiered rate .................... 35,068 23.84 3.89 29,733 21.87 4.33
Total savings accounts ....... 64,692 43.97 3.30 57,972 42.64 3.49
Money market deposit accounts .... 6,917 4.70 2.26 7,218 5.31 2.95
-------- ------
Total non-certificate accounts 96,442 65.55 2.45 89,003 65.46 2.60
Certificates of deposit
Due within 1 year .............. 42,083 28.60 4.90 37,005 27.22 5.06
Over 1 year through 3 years .... 8,610 5.85 5.28 9,954 7.32 5.45
Over 3 years ................... -- -- -- -- -- --
Total certificate accounts ... 50,693 34.45 4.96 46,959 34.54 5.14
-------- ------ ------ -------- ------ ------
Total deposits ............... $147,135 100.00% 3.32% $135,962 100.00% 3.48%
======== ====== ====== ======== ====== ======
<CAPTION>
At September 30,
--------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
Weighted Weighted
Percent average Percent average
of total nominal of total nominal
Amount deposits rate Amount deposits rate
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts ... $ 6,910 5.52% -% $ 6,941 5.77% -%
Now accounts ..................... 11,310 9.04 1.01 11,604 9.65 1.10
Savings accounts:
Regular ........................ 31,001 24.77 2.60 34,423 28.62 2.60
Tiered rate .................... 20,729 16.56 4.47 8,126 6.75 4.56
Total savings accounts ....... 51,730 41.33 3.35 42.549 35.37 2.97
Money market deposit accounts .... 9,003 7.19 2.95 11,140 9.26 2.95
Total non-certificate accounts 78,953 63.08 2.68 72,234 60.05 2.38
Certificates of deposit
Due within 1 year .............. 37,119 29.65 5.24 39,811 33.10 5.11
Over 1 year through 3 years .... 9,094 7.27 5.40 8,192 6.81 5.88
Over 3 years ................... 4 -- 5.50 45 0.04 5.35
Total certificate accounts ... 46,217 36.92 5.27 48,048 39.95 5.24
-------- ------ ------ -------- ------ ------
Total deposits ............... $125,170 100.00% 3.63% $120,282 100.00% 3.52%
======== ====== ====== ======== ====== ======
</TABLE>
91
<PAGE>
Borrowings. We borrow funds from the Federal Home Loan Bank of Boston for
use in connection with our management of the interest rate sensitivity of our
assets and liabilities, as well as for other general purposes. These advances
are collateralized by certain of our mortgage loans and by our investment in the
stock of the Federal Home Loan Bank. The maximum amount that the Federal Home
Loan Bank will advance to its members, including Westborough Savings, fluctuates
from time to time in accordance with the Federal Home Loan Bank's policies. At
June 30, 1999, Westborough Savings had $4.0 million in outstanding advances from
the Federal Home Loan Bank and had the capacity to increase that amount to $80.7
million based on Westborough Savings' available qualified collateral. We
expect to continue to borrow from the Federal Home Loan Bank of Boston.
The following table presents certain information regarding our borrowed
funds at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or for the Nine
Months Ended At or for the
June 30, Year Ended September 30,
------------------ --------------------------
1999 1998 1998 1997 1996
------- ------- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Bank advances:
Average balance outstanding ........ $2,930 -- $ 33 $2,330 $ 42
Maximum amount outstanding at any
month-end during the period . 4,000 -- 2,000 3,000 3,000
Balance outstanding at end of period 4,000 -- 2,000 -- 3,000
Weighted average interest rate
during the period ........... 5.23% -- 6.06% 6.05% --
Weighted average interest rate at
end of period ............... 5.09% -- 5.29% -- 5.50%
</TABLE>
Subsidiary Activities
Eli Whitney Security Corporation. Eli Whitney Security Corporation is a
wholly-owned subsidiary of Westborough Savings. Eli Whitney was established in
1995 as a Massachusetts security corporation for the purpose of buying, selling
and holding investment securities on its own behalf and not as a broker. The
income earned on Eli Whitney's investment securities is subject to a
significantly lower rate of state tax than that assessed on income earned on
investment securities maintained by us. At June 30, 1999, Eli Whitney had total
assets of $12.1 million virtually all of which were in investment securities.
One Hundredth Security Corporation. One Hundredth Security Corporation is
a wholly-owned subsidiary of Westborough Savings established in 1993. One
Hundredth is also a Massachusetts security corporation that was formed for the
purpose of buying, selling and holding investment securities on its own behalf
and not as a broker. The income earned on One Hundredth investment securities is
subject to a significantly lower rate of state tax than that assessed on income
earned on investment securities maintained by us. At June 30, 1999, One
Hundredth had total assets of $19.4 million, virtually all of which were in
investment securities.
92
<PAGE>
The Hundredth Corporation. The Hundredth Corporation is a wholly-owned
subsidiary of Westborough Savings. The Hundredth Corporation was established in
1991 for the disposal of interests in real or personal property acquired by
Westborough Savings through foreclosure, deed in lieu of foreclosure or
otherwise. At June 30, 1999, The Hundredth Corporation had total assets of $75
thousand.
Properties
We currently conduct our business through our executive and administrative
offices and our six retail banking offices, five of which are full service
branches. As of June 30, 1999, the properties and leasehold improvements owned
by us had an aggregate net book value of $1.6 million.
Original Date
Leased or Leased or Date of Lease Deposits
Location Owned Acquired Expiration at June 30, 1999
- -------------------- --------- ------------- ------------- ----------------
(In thousands)
Main Office:
100 E. Main Street Owned 06/10/75 -- $56,657
Westborough, MA
Branch Offices:
33 W. Main Street Owned 05/01/54 -- $30,494
Westborough, MA
53 W. Main Street Owned 07/01/81 -- $41,354
Northborough, MA
19 Maple Avenue Leased 12/01/95 11/30/00 $12,216
Shrewsbury, MA
Shaw's Supermarket Leased 05/01/99 04/30/04 $482
Shrewsbury, MA
Other Offices:
The Willows(1) Leased 08/01/87 07/31/00 $5,932
One Lyman Street
Westborough, MA
Operations Center Leased 01/01/98 12/31/99 --
176 E. Main Street
Westborough, MA
- ----------
(1) This office provides limited retail banking services to the residents of the
Willows. It is not open to the general public and maintains restricted operating
hours.
93
<PAGE>
Legal Proceedings
We are not involved in any pending legal proceeding other than routine
legal proceedings occurring in the ordinary course of business. We believe that
these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operation.
Personnel
As of June 30, 1999, we had 45 full-time employees and 26 part-time
employees. The employees are not represented by a collective bargaining unit,
and we consider our relationship with our employees to be excellent.
BUSINESS OF WESTBOROUGH FINANCIAL SERVICES, INC.
Westborough Financial Services has not engaged in any business to date.
Upon completion of the reorganization, Westborough Financial Services will own
The Westborough Bank. Westborough Financial Services will retain up to 50% of
the net proceeds from the offering. We will invest our initial capital as
discussed in "How We Intend to Use the Proceeds from the Offering."
In the future, Westborough Financial Services may pursue other business
activities, including the acquisition of other financial institutions or other
entities, borrowing funds for investment in Westborough Bank and diversification
of Westborough Financial Services' operations. Westborough Financial Services
has no current plans for such activities. Our cash flow will depend upon
earnings from the investment of the portion of net proceeds we retain and any
dividends Westborough Financial Services receives from Westborough Bank.
Initially, Westborough Financial Services will neither own nor lease any
property, but will instead use the premises, equipment and furniture of
Westborough Bank. At the present time, we intend to employ only persons who are
officers of Westborough Bank to serve as officers of Westborough Financial
Services. However, we will use the support staff of Westborough Bank from time
to time. These persons will not be separately compensated by Westborough
Financial Services. Westborough Financial Services will hire additional
employees, as appropriate, to the extent it expands its business in the future.
See "How We Intend to Use the Proceeds from the Offering."
REGULATION OF WESTBOROUGH SAVINGS AND
WESTBOROUGH FINANCIAL SERVICES, INC.
General
Westborough Savings is a Massachusetts-chartered savings bank, and its
deposit accounts are insured up to applicable limits by the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation and by the Depositors
Insurance Fund. Westborough Savings is subject to extensive regulation,
examination and supervision by the Commonwealth of Massachusetts Division of
Banks (the "Division") as its primary corporate regulator, and by the FDIC as
the deposit insurer. Westborough Savings must file reports with the Division
and the FDIC concerning its activities and financial condition, and
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it must obtain regulatory approval prior to entering into certain transactions,
such as mergers with, or acquisitions of, other depository institutions and
opening or acquiring branch offices. The Division and the FDIC conduct periodic
examinations to assess our compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the deposit insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
Westborough Bancorp, MHC and Westborough Financial Services, as bank
holding companies controlling Westborough Bank, will be subject to the Bank
Holding Company Act of 1956, as amended, (the "BHCA") and the rules and
regulations of the Federal Reserve Board (the "FRB") under the BHCA and to the
provisions of the Massachusetts General Laws applicable to savings banks and
other depository institutions and their holding companies (the "Massachusetts
banking laws") and the regulations of the Division under the Massachusetts
banking laws applicable to bank holding companies. Westborough Bancorp, MHC and
Westborough Financial Services will be required to file reports with, and
otherwise comply with the rules and regulations of the FRB and the Division.
Westborough Financial Services will be required to file certain reports with,
and otherwise comply with, the rules and regulations of the Securities and
Exchange Commission under the federal securities laws.
Any change in such laws and regulations, whether by the Division, the
FDIC, or the FRB, or through legislation, could have a material adverse impact
on Westborough Bancorp, MHC, Westborough Financial Services and Westborough
Savings and their operations and stockholders.
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Certain of the laws and regulations applicable to Westborough Bancorp, MHC,
Westborough Financial Services and Westborough Savings are summarized below or
elsewhere in this prospectus. These summaries do not purport to be complete and
are qualified in their entirety by reference to such laws and regulations.
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Massachusetts Banking Regulation
Activity Powers. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the Massachusetts
banking laws and its related regulations. Under these laws and regulations,
savings banks, including Westborough Savings, generally may, invest in:
o real estate mortgages;
o consumer and commercial loans;
o specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments
and agencies;
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o certain types of corporate equity securities; and
o certain other assets.
A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the Massachusetts banking laws. "Leeway"
investments must comply with a number of limitations on the individual and
aggregate amounts of "leeway" investments. A savings bank may also exercise
trust powers upon approval of the Division. Massachusetts savings banks may also
exercise any power and engage in any activity permissible for national banks in
accordance with regulations adopted by the Division with respect to such power
or activity . The exercise of these lending, investment and activity powers are
limited by federal law and the related regulations. See "-- Federal Banking
Regulation -- Activity Restrictions on State-Chartered Banks" below.
Community Reinvestment Act. Westborough Savings is also subject to
provisions of the Massachusetts banking laws that, like the provisions of the
federal Community Reinvestment Act ("CRA"), impose continuing and affirmative
obligations upon a banking institution organized in Massachusetts to serve
the credit needs of its local communities ("Massachusetts CRA"). The
obligations of the Massachusetts CRA are similar to those imposed by the CRA,
with the exception of the assigned exam ratings. Massachusetts banking law
provides for an additional exam rating of "high satisfactory" in addition to
the federal CRA ratings of "outstanding," "satisfactory," "needs to improve"
and "substantial non-compliance." The division has adopted regulations to
implement the Massachusetts CRA that are based on the CRA. See "Federal
Banking Regulation -- Community Reinvestment Act." The Division is required
to consider a bank's Massachusetts CRA rating when reviewing the bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller
machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Massachusetts CRA requires the Division
to assess a bank's compliance with the Massachusetts CRA and to make such
assessment available to the public. Westborough Savings' most recent
Massachusetts CRA rating, received by letter, dated March 22, 1999, from the
Division was a rating of "Satisfactory."
Loans-to-One-Borrower Limitations. With specified exceptions, the total
obligations of a single borrower to a Massachusetts chartered savings bank may
not exceed 20% of the savings bank's surplus account. A savings bank may lend
additional amounts up to 100% of the bank's surplus account if secured by
collateral meeting the requirements of the Massachusetts banking laws.
Westborough Savings currently complies with applicable loans-to-one-borrower
limitations.
Loans to a Bank's Insiders. Provisions of the Massachusetts banking laws
prohibit a savings bank from making a loan or otherwise extending credit to any
of its officers and directors or trustees and prohibits any such officer,
director or trustee from borrowing, otherwise becoming indebted, or becoming
liable for a loan or other extension of credit by such bank to any other person
except for any of the following loans after approval by a majority of the all of
the members of the bank's Board of Investment, excluding any member involved in
such loan or extension of credit:
o loan or extension of credit, secured or unsecured, to an officer of
the bank in an amount not exceeding $20,000;
o loan or extension of credit intended or secured for educational
purposes to an officer of the bank in an amount not exceeding
$75,000;
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o loan or extension of credit secured by a mortgage on residential
real estate to be occupied in whole or in part by the officer to
whom the loan or extension of credit is made, in an amount not
exceeding $275,000;
o loan or extension of credit to a director or trustee of the bank who
is not also an officer of the bank in an amount permissible under
the bank's loan-to-one borrower limit. See "Massachusetts Banking
Regulation -- Loans-to-One Borrower Limitations" above.
No such loan may be granted with an interest rate or on other terms that are
preferential in comparison to loans granted to persons not affiliated with the
savings bank.
Dividends. Under the Massachusetts banking laws, a stock savings bank may,
subject to several limitations, declare and pay a dividend on its capital stock,
which is the bank's common stock and any preferred stock, out of the bank's net
profits. A dividend may not be declared, credited or paid by a stock savings
bank so long as there is any impairment of capital stock. No dividend may be
declared on the bank's common stock for any period other than for which
dividends are declared upon preferred stock, except as authorized by the
Commissioner. The approval of the Commissioner is also required for a stock
savings bank to declare a dividend, if the total of all dividends declared by
the savings bank in any calendar year shall exceed the total of its net
profits for that year combined with its retained net profits of the
preceeding two years, less any required transfer to surplus or a fund for the
retirement of any preferred stock.
In addition, Federal law may also limit the amount of dividends that may be paid
by Westborough Savings. See "-- Federal Banking Regulation -- Prompt Corrective
Action" below.
Examination and Enforcement. The Division is required to periodically
examine savings banks at least once every calendar year or at least once each 18
month period if the savings bank qualifies as well capitalized under the prompt
corrective action provisions of the Federal Deposit Insurance Act. See "--
Federal Banking Regulation -- Prompt Corrective Action" below. The Division may
also examine a savings bank whenever the Division deems an examination
expedient. If the Division finds, after an inquiry, that any trustee, director
or officer of a savings bank has, among other things, violated any law related
to such bank or has conducted the business of such bank in an unsafe or unsound
manner, the Division may take various actions that could result in the
suspension or removal of such person as an officer, director or trustee of the
savings bank. If the Division determines that, among other things, a savings
bank has violated its charter or any Massachusetts law or is conducting its
business in an unsafe or unsound manner or is in an unsafe or unsound condition
to transact its banking
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business, the Division may take possession of the property and business of the
savings bank and may, if the facts warrant, initiate the liquidation of the
bank.
Federal Banking Regulation
Capital Requirements. FDIC regulations require BIF-insured banks, such as
Westborough Savings, to maintain minimum levels of capital. The FDIC regulations
define two tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of common stockholders' equity
(excluding the unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying servicing
rights), and any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan losses. Allowance
for possible loan losses includible in Tier 2 capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be
included in total capital can not exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other banks, the minimum leverage capital
requirement is 4.0%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution.
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2
capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
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The following table shows Westborough Savings' leverage ratio, its Tier 1
risk-based capital ratio, and its total risk-based capital ratio, at June 30,
1999:
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------------------------------------------------------------
Pro Pro Forma
Historical Percent of Forma Percent of Capital Percent of
Capital Assets(2) Capital(1) Assets(2) Requirements Assets(2)
---------- ---------- ---------- ---------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Regulatory Tier 1 leverage capital $19,411 11.41% $21,624 12.55% 5,169 3.00%
Tier 1 risk-based capital ........ $19,411 20.60% $21,624 22.66% 3,817 4.00%
Total risk-based capital ......... $20,280 21.52% $22,493 23.57% $7,635 8.00%
</TABLE>
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(1) Based on the midpoint of the Current Valuation Range.
(2) For purposes of calculating Regulatory Tier 1 leverage capital, assets are
based on adjusted total leverage assets. In calculating Tier 1 risk based
capital and total risk-based capital, assets are based on total
risk-weighted assets.
As the table shows, Westborough Savings exceeded the minimum capital
adequacy requirements at the date indicated.
Activity Restrictions on State-Chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended (the "FDIA"), which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), generally
limits the activities and investments of state-chartered FDIC insured banks and
their subsidiaries to those permissible for federally chartered national banks
and their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if:
o the bank held such types of investments during the 14-month period
from September 30, 1990 through November 26, 1991;
o the state in which the bank is chartered permitted such investments
as of September 30, 1991; and
o the bank notifies the FDIC and obtains approval from the FDIC to
make or retain such investments. Upon receiving such FDIC approval,
an institution's investment in such equity securities will be
subject to an aggregate limit up to the amount of its Tier 1
capital.
Westborough Savings received approval from the FDIC to retain and acquire such
equity investments subject to a maximum permissible investment equal to the
lesser of 100% of Westborough Savings' Tier 1 capital or the maximum permissible
amount specified by the Massachusetts banking laws. Section 24 also provides an
exception for majority owned
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subsidiaries of a bank, but Section 24 limits the activities of such
subsidiaries are limited to those permissible for a national bank, permissible
under Section 24 of the FDIA and the FDIC regulations issued pursuant thereto,
or as approved by the FDIC.
Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including Westborough Savings. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
o insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others);
o substantial dissipation of assets or earnings through violations of
law or unsafe or unsound practices;
o existence of an unsafe or unsound condition to transact business;
o likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of
business; and
o insufficient capital, or the incurring or likely incurring of losses
that will deplete substantially all of the institution's capital
with no reasonable prospect of replenishment of capital without
federal assistance.
Deposit Insurance. Pursuant to FDICIA, the FDIC established a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending six months before the assessment period. The three
capital categories are (1) well capitalized, (2) adequately capitalized and (3)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital
ratios, institutions are classified as well capitalized, adequately capitalized
or undercapitalized using ratios that are substantially similar to the
prompt corrective action capital ratios discussed below. The FDIC also assigns
an institution to supervisory subgroup based on a supervisory evaluation
provided to
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the FDIC by the institution's primary federal regulator and information that the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including Westborough Savings.
Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the bonds (the "FICO bonds") issued in the
late 1980's by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation was expanded to include, beginning
January 1, 1997, the deposits of BIF-insured institutions, such as Westborough
Savings. Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
will be one-fifth of the rate imposed on deposits insured by the Savings
Association Insurance Fund (the "SAIF"). The annual rate of assessments for the
payments on the FICO bonds for the quarterly period beginning on January 1, 1999
was 0.0122% for BIF-assessable deposits and 0.0610% for SAIF-assessable
deposits.
Under the FDIA, the FDIC may terminate the insurance of an institution's
deposits upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC. The management of Westborough Savings does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Transactions with Affiliates of Westborough Savings. Transactions
between an insured bank, such as Westborough Savings, and any of its
affiliates is governed by Sections 23A and 23B of the Federal Reserve Act. An
affiliate of a bank is any company or entity that controls, is controlled by
or is under common control with the bank. Currently, a subsidiary of a bank
that is not also a depository institution is not treated as an affiliate of
the bank for purposes of Sections 23A and 23B, but the FRB has proposed
treating any subsidiary of a bank that is engaged in activities not
permissible for bank holding companies under the BHCA, as an affiliate for
purposes of Sections 23A and 23B. Sections 23A and 23B (1) limit the extent
to which the bank or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such bank's capital stock
and surplus, and limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (2) require that
all such transactions be on terms that are consistent with safe and sound
banking practices. The term "covered transaction" includes the making of
loans, purchase of assets, issuance of guarantees and other similar types of
transactions. Further, most loans by a bank to any of its affiliates must be
secured by collateral in amounts ranging from 100 to 130 percent of the loan
amounts. In addition, any covered
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transaction by a bank with an affiliate and any purchase of assets or services
by a bank from an affiliate must be on terms that are substantially the same, or
at least as favorable, to the bank as those that would be provided to a
non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. ss. 1972 on certain tying arrangements. A depository
institution is prohibited, subject to certain exceptions, from extending credit
to or offering any other service, or fixing or varying the consideration for
such extension of credit or service, on the condition that the customer obtain
some additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution.
Uniform Real Estate Lending Standards. Pursuant to FDICIA, the federal
banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the federal
banking agencies, all insured depository institutions must adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
o for loans secured by raw land, the supervisory loan-to-value limit
is 65% of the value of the collateral;
o for land development loans (i.e., loans for the purpose of improving
unimproved property prior to the erection of structures), the
supervisory limit is 75%;
o for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
o for loans for the construction of one- to four-family properties,
the supervisory limit is 85%; and
o for loans secured by other improved property (e.g., farmland,
completed commercial property and other income-producing property
including non-owner occupied, one- to four-family property), the
limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
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Community Reinvestment Act. Under the Community Reinvestment Act, any
insured depository institution, including Westborough Savings, has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the FDIC,
in connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for additional branches and acquisitions.
Among other things, the current CRA regulations replace the prior
process-based assessment factors with a new evaluation system that rates an
institution based on its actual performance in meeting community needs. In
particular, the current evaluation system focuses on three tests:
o a lending test, to evaluate the institution's record of making loans
in its service areas;
o an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing, and
programs benefitting low or moderate income individuals and
businesses; and
o a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
For a small bank, which is a bank with less than $250 million in assets in the
year prior to the CRA examination, such as Westborough Savings, the CRA
assessment will be based on
o the bank's loan-to-deposit ratio;
o the percentage of the bank's loans and any other appropriate lending
related activities located in the bank's assessment areas;
o the bank's record of lending to, and other appropriate lending
related activities for borrowers of different income levels and
businesses and farms of different sizes;
o the geographic distribution of the bank's loans; and
o the bank's record in acting in response to written complaints about
the bank's performance in helping to meet the credit needs of its
assessment areas.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. Westborough
Savings received a "satisfactory" rating in its CRA examination conducted by the
FDIC on March 1, 1999.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general
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standards relating to internal controls, information and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
asset quality, earnings, and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. If a bank fails to comply with such an order, the FDIC may
seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
defines the five capital categories as follows: Generally, an institution will
be treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the bank receives the highest rating under
the Uniform Financial Institutions Rating System) and it is not a
well-capitalized institution. An institution that has total risk-based capital
of less than 8%, Tier 1 risk-based-capital of less than 4% or a leverage ratio
that is less than 4% (or less than 3% if the institution is rated a composite
"1" under the Uniform Financial Institutions Rating System) would be considered
to be "undercapitalized." An institution that has total risk-based capital of
less than 6%, Tier 1 capital of less than 3% or a leverage ratio that is less
than 3% would be considered to be "significantly undercapitalized," and an
institution that has a tangible capital to assets ratio equal to or less than 2%
would be deemed to be "critically undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any
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parent holding company. The aggregate liability of a parent holding company is
limited to the lesser of:
o an amount equal to the five percent of the bank's total assets at
the time it became "undercapitalized," and
o the amount that is necessary (or would have been necessary) to bring
the bank into compliance with all capital standards applicable with
respect to such bank as of the time it fails to comply with the
plan.
If a bank fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions.
The FDIC has a broad range of grounds under which it may appoint a
receiver or conservator for an insured depositary bank. If one or more grounds
exist for appointing a conservator or receiver for a bank, the FDIC may require
the bank to issue additional debt or stock, sell assets, be acquired by a
depository bank holding company or combine with another depository bank. Under
FDICIA, the FDIC is required to appoint a receiver or a conservator for a
critically undercapitalized bank within 90 days after the bank becomes
critically undercapitalized or to take such other action that would better
achieve the purposes of the prompt corrective action provisions. Such
alternative action can be renewed for successive 90-day periods. However, if the
bank continues to be critically undercapitalized on average during the quarter
that begins 270 days after it first became critically undercapitalized, a
receiver must be appointed, unless the FDIC makes certain findings that the bank
is viable.
Loans to a Bank's Insiders. A bank's loans to its executive officers,
directors, any owner of 10% or more of its stock (each, an "insider") and any of
certain entities affiliated to any such person (an insider's related interest)
are subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the FRB's Regulation O thereunder. Under these
restrictions, the aggregate amount of the loans to any insider and the insider's
related interests may not exceed the loans-to-one-borrower limit applicable to
national banks, which is comparable to the loans-to-one-borrower limit
applicable to Westborough Savings' loans. See "Massachusetts Banking Regulation
- -- Loans-to-One Borrower Limitations." All loans by a bank to all insiders and
insiders' related interests in the aggregate may not exceed the bank's
unimpaired capital and unimpaired surplus. With certain exceptions, loans to an
executive officer, other than loans for the education of the officer's children
and certain loans secured by the officer's residence, may not exceed the lesser
of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank's capital and
unimpaired surplus. Regulation O also requires that any proposed loan to an
insider or a related interest of that insider be approved in advance by a
majority of the Board of Trustees of the bank, with any interested director not
participating in the voting, if such loan, when aggregated with any existing
loans to that insider and the insider's related interests, would exceed either
(1) $500,000 or (2) the greater of $25,000 or 5% of the bank's unimpaired
capital and surplus. Generally, such loans must be made on substantially the
same terms as, and follow credit underwriting procedures that are not less
stringent than, those that are prevailing at the time for comparable
transactions with other persons. An exception is made for extensions of credit
made pursuant to a benefit or compensation plan of a bank that is widely
available to
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employees of the bank and that does not give any preference to insiders of the
bank over other employees of the bank.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
Federal Reserve System
Under FRB regulations, Westborough Savings is required to maintain
noninterest-earning reserves against its transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves of 3% must be maintained against aggregate transaction accounts of
$46.5 million or less (subject to adjustment by the FRB) and an initial reserve
of $1.4 million plus 10% (subject to adjustment by the FRB between 8% and 14%)
against that portion of total transaction accounts in excess of $46.5 million.
The first $4.9 million of otherwise reservable balances (subject to adjustments
by the FRB) are exempted from the reserve requirements. Westborough Savings is
in compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a noninterest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the FRB, the effect
of this reserve requirement is to reduce Westborough Savings' interest-earning
assets.
Holding Company Regulation
Federal Regulation. After the reorganization, Westborough Bancorp, MHC and
Westborough Financial Services will be governed as bank holding companies. Bank
holding companies are subject to examination, regulation and periodic reporting
under the BHCA, as administered by the FRB. The FRB has adopted capital adequacy
guidelines for bank holding companies on a consolidated basis substantially
similar to those of the FDIC for Westborough Savings. As of December 31, 1998,
Westborough Financial Services' total capital and Tier 1 capital ratios for
Westborough Bancorp, MHC and Westborough Financial Services would, on a pro
forma basis, exceed these minimum capital requirements. See "Regulatory Capital
Compliance."
Regulations of the FRB provide that a bank holding company must serve as a
source of strength to any of its subsidiary banks and must not conduct its
activities in an unsafe or unsound manner. Under the prompt corrective action
provisions of FDICIA, a bank holding company parent of an undercapitalized
subsidiary bank would be directed to guarantee, within limitations, the capital
restoration plan that is required of such an undercapitalized bank. See "--
Federal Banking Regulation -- Prompt Corrective Action" above. If the
undercapitalized bank fails to file an acceptable capital restoration plan or
fails to implement an accepted plan, the Federal Reserve Board may prohibit the
bank holding company parent of the undercapitalized bank from paying any
dividend or making any other form of capital distribution without the prior
approval of the FRB.
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As bank holding companies, Westborough Bancorp, MHC and Westborough
Financial Services will be required to obtain the prior approval of the FRB to
acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior FRB approval will be required for Westborough Bancorp, MHC or
Westborough Financial Services to acquire direct or indirect ownership or
control of any voting securities of any bank or bank holding company if, after
giving effect to such acquisition, it would, directly or indirectly, own or
control more than 5% of any class of voting shares of such bank or bank holding
company.
A bank holding company is required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the company's consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company inspection by the FRB, and that is not the
subject of any unresolved supervisory issues.
In addition, a bank holding company, which does not qualifiy as a
financial holding company under the Gramm-Leach-Bliley Financial Services
Modernization Act, is generally prohibited from engaging in, or acquiring
direct or indirect control of any company engaged in non-banking activities.
One of the principal exceptions to this prohibition is for activities found
by the FRB to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the principal activities
that the FRB has determined by regulation to be so closely related to banking
as to be a proper incident thereto are:
o making or servicing loans;
o performing certain data processing services;
o providing discount brokerage services;
o acting as fiduciary, investment or financial advisor;
o leasing personal or real property;
o making investments in corporations or projects designed primarily to
promote community welfare; and
o acquiring a savings and loan association.
Bank holding companies that do qualify as a financial holding company
may engage in activities that are financial in nature or incidental thereto.
Bank holding companies may qualify to become a financial holding company if
each of its depository institution subsidiaries is "well capitalized," "well
managed," has at least a "satisfactory" CRA rating at its most recent
examination and the bank holding company has filed a certification with the
FRB that it elects to become a financial holding company.
Under the Federal Deposit Insurance Act, depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in connection
with the default of a commonly controlled depository institution or any
assistance provided by the FDIC to such an institution in danger of default.
This law would have potential applicability if Westborough Bancorp, MHC or
Westborough Financial Services ever acquired as a separate subsidiary a
depository institution in addition to Westborough Bank.
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Massachusetts Regulation. Under the Massachusetts banking laws, a company
owning or controlling two or more banking institutions, including a savings
bank, is regulated as a bank holding company. The term "company" is defined by
the Massachusetts banking laws similarly to the definition of "company" under
the BHCA. Each Massachusetts bank holding company must:
o Obtain the approval of the Massachusetts Board of Bank Incorporation
before engaging in certain transactions, such as the acquisition of
more than 5% of the voting stock of another banking institution; and
o Must register, and file certain reports, with the Division and is
subject to examination by the Division.
Westborough Bancorp, MHC or Westborough Financial Services will become a
Massachusetts bank holding company if they acquire a second banking institution
and hold and operate it separately from Westborough Bank.
Acquisition of Westborough Financial Services
Under federal law, no person may acquire control of Westborough Financial
Services or Westborough Bank without first obtaining, as summarized below,
approval of such acquisition of control by the FRB.
Federal Restrictions. Under the federal Change in Bank Control Act,
any person (including a company), or group acting in concert, seeking
to acquire 10% or more of the outstanding shares of Westborough Financial
Services' common stock will be required to submit prior notice to the FRB,
unless the FRB has found that the acquisition of such shares will not result in
a change in control of Westborough Financial Services. Under the BHCA, the FRB
has 60 days within which to act on such notices, taking into consideration
certain factors, including the financial and managerial resources of the
acquiror, the convenience and needs of the communities served by Westborough
Financial Services and Westborough Bank, and the anti-trust effects of the
acquisition. Under the BHCA, any company would be required to obtain prior
approval from the FRB before it may obtain "control," within the meaning of the
BHCA, of Westborough Financial Services. The term "control" is defined generally
under the BHCA to mean the ownership or power to vote 25% more of any class of
voting securities of an institution or the ability to control in any manner the
election of a majority of the institution's directors.
Massachusetts Restrictions. Under the Massachusetts banking laws, the
prior approval of the Division is required before any person may acquire a
Massachusetts bank holding company, such as Westborough Financial Services. For
this purpose, the term "person" is defined broadly to mean a natural person or a
corporation, company, partnership, or other forms of organized entities. The
term "acquire" is defined differently for an existing bank holding company and
for other companies or persons. A bank holding company will be treated as
"acquiring" a Massachusetts bank holding company if the bank holding company
acquires more than 5% of any class of the voting shares of the bank holding
company. Any other person will be treated as "acquiring" a Massachusetts bank
holding company if it acquires ownership or control of more than 25% of any
class of the voting shares of the bank holding company.
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Dividend Waivers by Westborough Bancorp, MHC
Certain mutual holding companies have waived the receipt of dividends
declared by its savings institution subsidiary. Any such dividend waiver by
Westborough Bancorp, MHC will be subject to the following restrictions:
Massachusetts Restrictions. Under applicable Massachusetts regulations, a
mutual holding company may not waive any dividends to be paid by any of its
subsidiary institutions if any shares of the stock to which the waiver would
apply is held by an insider (any officer, director, or corporator of the mutual
holding company or a subsidiary banking institution) or a stock benefit plan of
the mutual holding company unless prior written notice of the waiver has been
given to the Division and the Division does not object to the waiver. The
Division may not object to a dividend waiver notice if:
o The waiver would not be detrimental to the safe and sound operation
of the subsidiary banking institution, and
o The board of directors of the mutual holding company expressly
determines, as evidenced by a resolution of the board of directors,
that such waiver is consistent with the directors' fiduciary duties
to the mutual members of the mutual holding company.
Federal Restrictions. In connection with its approval of the
reorganization, however, it is expected that the Federal Reserve Board will
impose certain conditions on the waiver by Westborough Bancorp, MHC of dividends
paid on the common stock by Westborough Financial Services. In particular, the
Federal Reserve Board is expected to require that Westborough Bancorp, MHC
obtain the prior approval of the Federal Reserve Board before Westborough
Bancorp, MHC may waive any dividends from Westborough Financial Services. As of
the date hereof, we are not aware that the Federal Reserve Board has given its
approval to any waiver of dividends by any mutual holding company that has
requested such approval.
We also expect that the terms of the Federal Reserve Board approval of the
reorganization will require that the amount of any dividends waived by
Westborough Bancorp, MHC will not be available for payment to its public
stockholders of Westborough Financial Services (i.e., stockholders except for
Westborough Bancorp, MHC) and that such amount will be excluded from Westborough
Financial Services' capital for purposes of calculating dividends payable to the
public stockholders. Moreover, Westborough Savings is required to maintain the
cumulative amount of dividends waived by Westborough Bancorp, MHC in a
restricted capital account that would be added to the liquidation account
established in the reorganization. This amount would not be available for
distribution to public stockholders. See "The Reorganization and The Offering --
Effects of the Reorganization -- Depositors' Rights If We Liquidate; Liquidation
Account." The restricted capital account and liquidation account amounts would
not be reflected in Westborough Bank's financial statements, but would be
considered as a notational or memorandum account of Westborough Bank. These
accounts would be maintained in accordance with the laws, rules, regulations and
policies of the Division of Banks and the plan of reorganization. The plan of
reorganization also provides that if Westborough Bancorp, MHC converts to stock
form in the future, (commonly referred to as a second-step conversion), any
waived dividends would reduce the percentage of the converted company's shares
of common
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stock issued to public stockholders in connection with any such transaction. For
additional information regarding the possible second-step conversion of
Westborough Bancorp, MHC, see "The Reorganization and The Offering -- Possible
Conversion of Westborough Bancorp, MHC to Stock Form."
Westborough Bancorp, MHC does not expect initially to waive dividends
declared by Westborough Financial Services. If Westborough Bancorp, MHC decides
that it is in its best interest to waive a particular dividend to be paid by
Westborough Financial Services and the Federal Reserve Board approves such
waiver, then Westborough Financial Services would pay such dividend only to its
public stockholders. The amount of the dividend waived by Westborough Bancorp,
MHC would be treated in the manner described above. Westborough Bancorp, MHC's
decision as to whether or not to waive a particular dividend will depend on a
number of factors, including Westborough Bancorp, MHC's capital needs, the
investment alternatives available to Westborough Bancorp, MHC as compared to
those available to Westborough Financial Services, and the possibility of
regulatory approvals. We cannot guarantee:
o that after the reorganization, Westborough Bancorp, MHC will waive
dividends paid by Westborough Financial Services;
o that if the application is made to waive a dividend, that the
Federal Reserve Board will approve such dividend waiver request; or
o what conditions might be imposed by the Federal Reserve Board on any
dividend waiver.
TAXATION
Federal
General. The following discussion is intended only as a summary and
does not purport to be a comprehensive description of the tax rules
applicable to Westborough Bank, Westborough Bancorp, MHC or Westborough
Financial Services. For federal income tax purposes, we report income on the
basis of a taxable year ending September 30, using the accrual method of
accounting, and we are generally subject to federal income taxation in the
same manner as other corporations. Following the reorganization, Westborough
Bank and Westborough Financial Services will constitute an affiliated group
of corporations and, therefore, will be eligible to report their income on a
consolidated basis. Because Westborough Bancorp, MHC will own less than 80% of
the common stock of Westborough Financial Services, it will not be a member
of such affiliated group and will report its income on a separate return.
Westborough Savings is not currently under audit by the Internal Revenue
Service ("IRS"), but its September 30, 1994 return was audited in 1996.
Bad Debt Reserves. Westborough Savings, as a "small bank" (one with assets
having an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to "qualifying loans" which, in general, are
loans secured by certain interests in real property, and to make, within
specified formula limits, annual additions to the reserve which are deductible
for purposes of computing its taxable income. Pursuant to
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the Small Business Job Protection Act of 1996, Westborough Savings is now
recapturing (taking into income) over a multi-year period a portion of the
balance of its bad debt reserve as of September 30, 1996.
Distributions. To the extent that Westborough Bank makes "non-dividend
distributions" to stockholders, such distributions will be considered to result
in distributions from our unrecaptured tax bad debt reserve "base year reserve,"
i.e., our reserve as of September 30, 1988, to the extent thereof and then from
our supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in Westborough Bank's taxable income. Non-dividend
distributions include distributions in excess of our current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. Dividends paid out of our current or
accumulated earnings and profits will not be included in our income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of our base year reserve and supplemental
reserve for losses on loans or an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus, in
certain situations, approximately one and one-half times the non-dividend
distribution would be includible in gross income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. We do not intend to
pay dividends that would result in the recapture of any portion of its bad debt
reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended, imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at
a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers
of which we currently have none. AMTI is also adjusted by determining the tax
treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. We have not been
subject to AMT during the past five years.
Elimination of Dividends; Dividends Received Deduction. Westborough
Financial Services may exclude from its income 100% of dividends received from
Westborough Bank as a member of the same affiliated group of corporations.
Because, following the reorganization, Westborough Bancorp, MHC will not be a
member of such affiliated group, it will not qualify for such 100% dividends
exclusion, but will be entitled to deduct 80% of the dividends it receives from
Westborough Financial Services so long as it owns more than 20% of the common
stock.
State
We file Massachusetts Savings Institution income tax returns. Generally,
the income of savings institutions in Massachusetts, which is calculated based
on federal taxable income, subject to certain adjustments, is subject to
Massachusetts tax. We are not currently under audit with respect to its
Massachusetts income tax returns and our state tax returns have not been audited
for the past five years.
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Westborough Financial Services will be required to file a Massachusetts
income tax return and will generally be subject to a state income tax rate that
is the same tax rate as the tax rate for savings institutions in Massachusetts.
However, if Westborough Financial Services meets certain requirements, it may be
eligible to elect to be taxed as a Massachusetts Security Corporation, which
would allow Westborough Financial Services to be taxed at a rate that is
currently lower than income tax rates for savings institutions in Massachusetts.
MANAGEMENT
Shared Management Structure
Westborough Financial Services has the same directors and executive
officers as the current trustees and executive officers of Westborough Savings.
We expect that Westborough Financial Services and Westborough Bank will continue
to have common directors and common executive officers until there is a business
reason to establish separate management structures.
To date, Westborough Savings has compensated its trustees and executive
officers for their services. Westborough Financial Services does not pay any
additional compensation. We expect to continue this practice after the
reorganization until we have a business reason to establish separate
compensation programs. Until then, we expect Westborough Financial Services to
reimburse Westborough Savings and, following the reorganization, Westborough
Bank for a part of the compensation paid to each director and executive officer
that is proportionate to the amount of time which he or she devotes to
performing services for Westborough Financial Services.
Corporators
Corporators are individuals that constitute a governing body for
Massachusetts-chartered mutual savings banks and mutual holding companies.
Under Massachusetts law, such mutual institutions must have at least 25
corporators who are residents of the communities in which the savings bank
conducts its business. Corporators serve for a term of ten years and have
such powers as are expressly reserved to them under Massachusetts law to act
on such matters that are properly brought before them by trustees. The duties
of corporators typically include the annual election of trustees and
executive officers and the approval of significant events involving the
governance and corporate structure of the mutual institution, such as
amendments to the institution's charter and bylaws and the institution's
reorganization or conversion from mutual to stock form. Under Massachusetts
laws, the corporators of Westborough Bancorp, MHC will initially consist of
the current corporators of Westborough Savings who will continue to serve as
corporators of Westborough Bancorp, MHC for the balance of their ten year
terms.
Directors
Composition of Our Boards. We have 16 directors. Each director belongs
to one of three groups with staggered three-year terms of office. Six
directors are in Group One and have terms expiring in 2000. Five directors
are in Group Two and have terms expiring in 2001. Five directors are in Group
Three and have terms expiring in 2002. At each of Westborough Financial
Services' annual stockholder meetings, the stockholders will elect directors
to fill the seats of the directors whose terms are expiring in that year and
any vacant seats. Westborough Financial Services, as Westborough Bank's sole
stockholder, will elect Westborough Bank's directors.
Who Our Directors Are. The following table states our directors' names,
their ages at the date of this prospectus, their positions, the years when
they began serving as directors (including time spent on the Board of
Trustees of Westborough Savings in mutual form before the reorganization) and
the years when their current terms of office as directors will expire:
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Positions at Bank
Westborough Bank and Trustee Term
Name Age Westborough Financial Services Since Expires
- ----------------------- --- ------------------------------ ------- -------
Nelson P. Ball 68 Director 1980 2001
Edward S. Bilzerian 66 Director 1993 2002
David E. Carlstrom 65 Director 1976 2000
John L. Casagrande 53 Senior Vice President,
Treasurer and Director 1994 2000
William W. Cotting, Jr. 53 Director 1988 2000
Robert G. Daniel 70 Director 1969 2001
Earl W. Hutt 72 Director 1988 2001
Walter A. Kinell, Jr. 70 Chairman of the Board of
Directors 1967 2000
Robert A. Klugman 48 Director 1991 2000
Roger B. Leland 70 Director 1974 2001
Joseph F. MacDonough 54 President, Chief Executive
Officer and Director 1982 2001
Paul F. McGrath 53 Director 1993 2002
Charlotte C. Spinney 63 Director 1991 2002
Phyllis A. Stone 56 Director 1999 2002
James E. Tashjian 58 Director 1973 2002
Daniel G. Tear 73 Director 1985 2000
Our Directors' Backgrounds. The business experience of each of our
directors is as follows:
Nelson P. Ball is the owner of Ball Financial Services, Co., located in
Westborough, Massachusetts. He has served as a financial services advisor for
over 20 years and is a member of the National Association of Securities Dealers,
Inc.
Edward S. Bilzerian is President of Bilzerian Consulting Group, Inc., a
privately held company located in Worcester, Massachusetts, specializing in
small business turnarounds. He has been self-employed for over ten years.
David E. Carlstrom has served as President of Carlstrom Pressed Metal Co.,
Inc. for over 25 years. Carlstrom Pressed Metal is located in Westborough,
Massachusetts.
John L. Casagrande has served as the Senior Vice President and Treasurer
of Westborough Savings since 1993. He joined Westborough Savings after having
been employed as a senior bank officer and certified public accountant for over
15 years at various times by several financial institutions (including mutual
and stock institutions) and the accounting firm of Peat Marwick.
William W. Cotting, Jr. has been an attorney in private practice for over
20 years. His practice is located in Northborough, Massachusetts.
Robert G. Daniel was employed in various capacities, including President
and Treasurer, at Carlson Daniel Insurance Agency, Inc., located in Westborough,
Massachusetts from 1958 to 1994. Mr. Daniel sold insurance from 1994 to 1996 for
Allied American Agency following its acquisition of Carlson Daniel. Mr. Daniel
currently serves as President and Treasurer of
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Westborough Insurance Agency, Inc., a non-active corporation used as a vehicle
for payments from Allied American as negotiated in connection with the
acquisition of Carlson Daniel.
Earl H. Hutt has served as an investment advisor and portfolio manager for
private industry for over 20 years.
Walter A. Kinell, Jr. has been Chairman of the Board since 1994. Mr.
Kinell joined Westborough Savings in 1949 as an assistant treasurer, became
President and Chief Executive Officer in 1969 and retired from this position in
1994.
Robert A. Klugman, M.D. has practiced general medicine in Westborough,
Massachusetts for over 20 years.
Roger B. Leland has practiced estate, tax and real estate law at Leland
Law Associates for over 30 years. During that time, he also served as an
insurance broker, selling life and casualty insurance products, through Leland
Insurance Agency, Inc. Leland Law Associates and Leland Insurance Agency are
located in Northborough, Massachusetts.
Joseph F. MacDonough has served as President and Chief Executive Officer
of Westborough Savings since 1994. He joined Westborough Savings in 1981 and
served as Vice President and Treasurer until his appointment as President. Mr.
MacDonough serves on the Board of Trustees of the Savings Bank Employees'
Retirement Association and is a certified public accountant.
Paul F. McGrath is a certified public accountant and has served as
President of Mottle McGrath Braney & Flynn, P.C. for over five years. Mottle
McGrath is a certified public accounting firm, located in Worcester,
Massachusetts, that provides accounting, tax and business advisory services
throughout central New England.
Charlotte C. Spinney is a retired social studies teacher. She taught at
Westborough High School for 41 years and, during that time, she created the
curriculum for the community service component of the school's Sociology course.
Phyllis A. Stone has served as Vice President and Treasurer of Comey Oil
Co., Inc., located in Westborough, Massachusetts, for the past three years.
Prior to her appointment as Vice President, she served in various other
capacities within Comey Oil for over 30 years. She is past Treasurer of the
Regatta Point Community Sailing Inc. of Worcester, Massachusetts.
James E. Tashjian is a partner in the law firm of Tashjian, Simsarian &
Wickstrom, located in Westborough, Massachusetts. He has engaged in the general
practice of law for over 30 years.
Daniel G. Tear has served as a consultant to businesses in the area of
management psychology for the past 30 years.
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Meetings of the Board of Directors and Its Committees
Our Boards of Directors meet on a quarterly basis and may hold additional
special meetings. During 1998, Westborough Savings' Board of Trustees held five
regular meetings and no special meetings.
The Boards of Directors of Westborough Bank and Westborough Financial
Services maintain Executive (which in the case of Westborough Savings was known
as the Board of Investment), Auditing, Compensation, and Long Range Planning
Committees with identical compositions. Westborough Bank's Board of Directors
also maintains an Asset/Liability Management Committee. No committee of
Westborough Financial Services' Board of Directors held any meetings in 1998.
The Executive Committee (formerly known as the Board of Investment)
consists of Messrs. Carlstrom, Daniel, Klugman, Leland, MacDonough and Tashjian,
with Mr. MacDonough serving as Chairman. The Executive Committee exercises the
powers of the Board of Directors in between its meetings. The Board of
Investment met 52 times during 1998.
The Auditing Committee consists of Messrs. Bilzerian, Hutt and McGrath,
with Mr. Hutt serving as Chairman. This committee reviews the annual audit
prepared by the independent accountants, recommends the appointment of
accountants and receives reports from the firm of Healy and Healy, independent
internal auditors. It met four times during 1998.
The Compensation Committee consists of Messrs. Carlstrom, Daniel and
Leland, with Mr. Daniel serving as Chairman. This committee provides advice and
recommendations to the Board of Directors in the areas of employee salaries and
benefit programs. It met three times during 1998.
The Long Range Planning Committee consists of Mr. Leland who is Chairman
and Messrs. Carlstrom, Daniel, Kinell, Klugman, MacDonough, Tashjian and Tear.
This Committee sets long range goals and objectives and develops plans for their
achievement. It met seven times during 1998.
Westborough Savings' Asset/Liability Management Committee consists of
Messrs. Casagrande, Daniel, Kinell, Tautkas and MacDonough, who serves as the
Chairman. This committee has general oversight of Westborough Savings
investments and the management of its interest rate risk. It met three times
during 1998.
Director Compensation
Fees. Westborough Savings pays a fee of $200 to each of its
non-management trustees for attendance at each board meeting and each meeting
of a committee of which they are members, with the Chairman of each committee
receiving a fee of $225. Westborough Savings paid fees totaling approximately
$92,000 to its non-employee trustees for the year ended September 30, 1998.
In addition to the meeting fees, for fiscal quarter ended September 30, 1999,
we paid an aggregate retainer fee of $7,500 to non-management tustees. Going
forward, we currently plan to pay, for fiscal year ending September 30, 2000,
such retainer fee to non-management trustees in advance. In the aggregate,
the annual retainer fee would amount to $30,000.
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We anticipate that the directors will be eligible to participate in the
stock option and management recognition plans expected to be implemented
following the completion of the reorganization.
Executive Officers
Executive Officers Who are Not Directors. In addition to Messrs.
Casagrande and MacDonough, Westborough Financial Services and Westborough
Savings have the following executive officers:
Vickie A. Bouvier has worked for Westborough Savings since 1976 and has
been the Vice President, Operations Officer since 1994.
Alexander P. Tautkas is currently the Vice President and Senior Loan
Officer of Westborough Savings, an office which he has held since 1997. He is
responsible in this capacity for Westborough Savings' loan portfolio. He has
been employed by Westborough Savings in various positions since 1977.
Margaret I. Duquette has worked for Westborough Savings as its Director of
Human Resources since 1997. Prior to 1997, she held the position of Director of
Human Resources at Bay State Savings Bank in Worcester, Massachusetts where she
worked for 19 years.
Executive Officer Compensation
Summary Compensation Table. The following table provides information about
the compensation paid for 1998 to our Chief Executive Officer and any other
executive officers whose total annual salary and bonus for 1998 was at least
$100,000.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------------------------- ---------------
Name and Other Annual All Other
Principal Position Year Salary($) Bonus($) Compensation($)(1) LTIP Payouts($) Compensation(2)
------------------ ---- --------- -------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Joseph F. MacDonough
President and Chief
Executive Officer 1998 $156,846 -- -- -- $ 36,580
</TABLE>
- ----------
(1) Westborough Savings provides Mr. MacDonough with certain non-cash benefits
and perquisites, such as the use of an automobile, club membership dues
and certain other personal benefits, the aggregate value of which did not
exceed the lesser of $50,000 or 10% of the total annual salary and annual
bonus reported for him in the Summary Compensation Table.
(2) Includes the dollar value of the benefit to Mr. MacDonough of the premiums
paid by Westborough Savings under his split dollar life insurance
arrangement and contributions on behalf of Mr. MacDonough to the
Westborough Savings 401(k) plan. The full amount of the premiums paid by
Westborough Savings under the split dollar life insurance arrangement will
be refunded to it from the proceeds of the split dollar life insurance
policy.
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<PAGE>
Employment Agreements
Effective upon the reorganization, Westborough Financial Services
intends to enter into separate employment agreements with Messrs. MacDonough
and Casagrande to secure their services as President and Chief Executive
Officer, and Senior Vice President and Treasurer, respectively. The
employment agreements will provide for an initial term of three years in the
case of Mr. MacDonough, and two years in the case of Mr. Casagrande.
Commencing on the first anniversary of the effective date of each agreement,
and continuing on each anniversary date thereafter, the employment agreements
may be extended, after review by the Compensation Committee of the Board of
the executive's performance, for an additional one-year period, so that the
remaining term will be three years in the case of Mr. MacDonough, and two
years in the case of Mr. Casagrande. The current base salaries for Mr.
MacDonough and Mr. Casagrande are $180,000 and $100,000, respectively. The
employment agreements provide for each executive's base salary to be reviewed
annually by the Board, and it is anticipated that each executive's base
salary will be adjusted based on his job performance and the overall
performance of Westborough Financial Services and Westborough Bank. In
addition to base salary, each employment agreement provides for participation
in stock, retirement, and welfare benefit plans and eligibility for fringe
benefits applicable to executive personnel. Mr. MacDonough's agreement
provides for the reimbursement of his ordinary and necessary business
expenses, which specifically include travel and entertainment expenses,
expenses related to the use of an automobile, and fees for membership in
clubs and organizations that he and Westborough Financial Services agree are
for business purposes. Mr. Casagrande's agreement provides for the
reimbursement of his ordinary and necessary business expenses, which
specifically include certain travel and entertainment expenses.
Westborough Financial Services may terminate each executive's employment
at any time with or without cause, and each executive may resign at any time
provided he provides 30 days prior written notice and fully cooperates in the
transition of his duties. In the event an executive's employment is terminated
without cause during the term of the employment agreement, the executive will be
entitled to severance benefits. These severance benefits include a lump sum
payment equal to the present value of the base salary and bonus payments that
would have been made to the executive for the remaining term of his employment
agreement, assuming the executive would have been awarded a bonus for each year
remaining in the agreement term equal to the highest annual bonus paid to him in
the preceding three year period and paid his base salary during the remaining
agreement term at the annual rate in effect as of the termination. In addition,
the executive will be entitled to continue his participation in the group life,
health, dental, accidental death and long-term disability plans sponsored by
Westborough Bank for the remaining term of his employment agreement. The same
severance benefits will be payable if the executive resigns during the term of
the employment agreement following: failure of the Board to reappoint the
executive to the position provided for in his employment agreement; failure of
Westborough Financial Services to vest in the executive the duties set forth in
the agreement, if not cured; and Westborough Financial Services' material breach
of the agreement. The employment agreements also provide certain uninsured
benefits in the event the executive's employment terminates because of death or
disability.
Under his employment agreement, Mr. MacDonough agrees that for the three
year period following his termination of employment, he will not take a position
with
117
<PAGE>
any competitor that would require him to work within a 50 mile radius of the
headquarters of Westborough Financial Services or Westborough Bank. Mr.
Casagrande agrees under his employment agreement that for a period of two years
following his termination of employment he will not take a position with any
competitor that would require him to work within a 30 mile radius of the
headquarters of Westborough Financial Services or Westborough Bank.
Change in Control Provisions. In the event Mr. MacDonough or Mr.
Casagrande resigns for any reason or is terminated without cause following a
change in control of Westborough Financial Services or Westborough Bank, he will
be entitled to certain severance benefits. These severance benefits include a
lump sum payment equal to the present value of the base salary and bonus
payments that would have been made to the executive for the remaining term of
his employment agreement, assuming the executive would have been awarded a bonus
for each year remaining in the agreement term equal to the highest annual bonus
paid to him in the preceding three year period and paid his base salary during
the remaining agreement term at the annual rate in effect as of the termination.
However, in no event will the amount of this lump sum payment be less than 2.99
multiplied by the executive's average annual compensation for the preceding five
years. In addition, the executive will be entitled to continue his participation
in the group life, health, dental, accidental death and long-term disability
plans sponsored by Westborough Bank for the remaining term of his employment
agreement. A second-step conversion will not trigger additional benefits or
accelerate benefits under the employment agreements or under any other
arrangement.
If Westborough Financial Services or Westborough Bank experiences a
change in ownership, a change in effective ownership or control or a change
in the ownership of a substantial portion of their assets as contemplated by
section 280G of the Internal Revenue Code ("Code"), a portion of any
severance payments under the employment agreements might constitute an
"excess parachute payment" under current federal tax laws. Any excess
parachute payment would be subject to a 20% federal excise tax payable by the
executive. Neither Westborough Bank nor Westborough Financial Services could
claim a federal income tax deduction for an excess parachute payment. The
employment agreements require Westborough Financial Services to indemnify
each executive against the financial effects of the excise tax.
Benefit Plans
Pension Plans. Westborough Savings maintains a tax-qualified pension
plan that covers substantially all employees who have attained age 21 and
have at least one year of service. The following table shows the estimated
aggregate benefits payable under the pension plan upon retirement at age 65
with various years of service and average compensation combinations.
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<PAGE>
Years of Service
Average ----------------------------------------------------------------
Compensation 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
$100,000 $ 24,948 $ 33,265 $ 41,581 $ 41,581 $ 41,581
$125,000 $ 31,886 $ 42,515 $ 53,143 $ 53,143 $ 53,143
$150,000 $ 38,823 $ 51,765 $ 64,706 $ 64,706 $ 64,706
$160,000 $ 41,598 $ 55,465 $ 69,331 $ 69,331 $ 69,331
$175,000 $ 41,598 $ 55,465 $ 69,331 $ 69,331 $ 69,331
$200,000 $ 41,598 $ 55,465 $ 69,331 $ 69,331 $ 69,331
$300,000 $ 41,598 $ 55,465 $ 69,331 $ 69,331 $ 69,331
$400,000 $ 41,598 $ 55,465 $ 69,331 $ 69,331 $ 69,331
The benefits shown in the preceding table are annual benefits payable in
the form of a single life annuity and are not subject to any deduction for
Social Security benefits or other offset amounts. At September 30, 1998, Mr.
MacDonough's average compensation and estimated years of service were $142,525
and 20.9 years of service.
Mr. MacDonough and Mr. Casagrande are entitled to supplemental retirement
benefits under an Executive Supplemental Compensation Agreement each has entered
into with Westborough Savings. Under each agreement, the executive is entitled
to an annual retirement benefit, payable at age 65 in the form of a single life
annuity, equal to 70% of his benefit computation base in the case of Mr.
MacDonough and 50.4% of his benefit computation base in the case of Mr.
Casagrande, but reduced by the sum of: 2% multiplied by the executive's annual
primary Social Security benefit multiplied by his years of service, plus his
annual retirement benefit under any tax-qualified pension plan, plus the annual
annuity payable to the executive under his Split Dollar Agreement. Under the
agreements, the executive's benefit computation base is his average annual
compensation during the 12 consecutive calendar quarters in which his
compensation is the highest.
401(k) Plan. Westborough Savings maintains a tax-qualified 401(k) defined
contribution plan for employees who have attained age 21 and have at least one
year of service. Eligible employees may take pre-tax contributions to the plan
through salary reduction elections from 1% to 15% of annual compensation,
subject to limitations of the Internal Revenue Code (for 1998, the annual limit
was $10,000). Westborough Savings makes a matching contribution to the plan
equal to 25% of the first four percent of annual compensation contributed to the
plan on a pre-tax basis by the eligible employee.
This plan has an individual account for each participant's contributions
and allows each participant to direct the investment of his or her account. As
of the completion of the reorganization, one permitted investment will be
Westborough Financial Services' common stock. The plan itself is not an eligible
account holder. However, participants who are eligible account holders may use
their subscription rights to purchase stock for their plan accounts in the
initial offering. This plan will purchase common stock for other participants
from Westborough Financial Services in the initial offering, to the extent that
shares are available to investors who are not eligible account holders, and in
open market transactions. Participants will direct the voting of shares
purchased for their plan accounts.
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<PAGE>
Employee Stock Ownership Plan. This plan is a tax-qualified plan that
covers substantially all employees of Westborough Bank and Westborough Financial
Services who have at least one year of service and have attained age 21 and will
take effect at the completion of the reorganization.
Westborough Financial Services intends to lend this plan enough money to
purchase 8% of the shares issued to investors other than Westborough Bancorp,
MHC. The plan will purchase these shares from Westborough Financial Services to
the extent that shares are available after filling the subscriptions of eligible
account holders. Otherwise, the plan will purchase these shares in private
transactions or on the open market after completion of the reorganization to the
extent that shares are available for purchase on reasonable terms. If this plan
cannot purchase the shares that it wants directly from Westborough Financial
Services in the offering, there is no assurance that it will purchase shares
after the reorganization, or that such purchases will occur during any
particular time period or at any particular price.
Although contributions to this plan will be discretionary, Westborough
Bank intends to contribute enough money each year to make the required principal
and interest payments on the loan from Westborough Financial Services. It is
expected that this loan will be for a term of 10 years and will call for level
annual payments of principal and interest. The plan will initially pledge the
shares it purchases as collateral for the loan and hold them in a suspense
account.
The plan will not distribute the pledged shares right away. Instead, it
will release a portion of the pledged shares annually. The plan will allocate
the shares released each year among the accounts of participants in proportion
to their base salary for the year. For example, if a participant's base salary
for a year represents 1% of the total base salaries of all participants for the
year, the plan would allocate to that participant 1% of the shares released for
the year. Participants direct the voting of shares allocated to their accounts.
Shares in the suspense account will usually be voted in a way that mirrors the
votes which participants cast for shares in their individual accounts.
This plan may purchase additional shares in the future, and may do so
using borrowed funds, cash dividends, periodic employer contributions or other
cash flow.
Benefit Restoration Plan. Effective as of the reorganization,
Westborough Financial Services intends to adopt a benefit restoration plan
for Mr. MacDonough. This plan is designed to provide Mr. MacDonough with the
benefits that would otherwise be earned by him as a participant in the 401(k)
plan and the employee stock ownership plan if such benefits were not limited
by certain provisions of the Internal Revenue Code. For example, the amount of
annual compensation that may be counted in determining Mr. MacDonough's annual
allocation of shares under the employee stock ownership plan and annual
allocation of employer matching contributions under the 401(k) plan is
restricted to $160,000, as adjusted for cost-of-living increases from time to
time by IRS regulation. The benefit restoration plan provides for a benefit
equal in value to the allocations under the employee stock ownership plan and
the 401(k) that would have been made on Mr. MacDonough's behalf but for these
IRS limits, including employer matching contributions that would have been made
under the 401(k) plan if Mr. MacDonough had elected to make pre-tax
contributions to the 401(k) plan up to the maximum percentage of salary
permitted under the terms of the plan and the annual IRS limit on pre-tax
contributions did not apply ($10,000 in 1999).
Under the benefit restoration plan, a bookkeeping account will be
established for Mr. MacDonough which will be credited with a number of "stock
units" equal to the number of shares that could not be allocated on his behalf
under the employee stock ownership plan each year because of the IRS limits. The
value of this supplemental employee stock ownership plan bookkeeping account at
any time is equal to the number of stock units credited to the account
multiplied by the current fair market value per share. A bookkeeping account
also will be established for Mr. MacDonough which will be credited each year
with an amount equal to the employer matching contributions that could not be
allocated to his account under the 401(K) plan because of the IRS limits. Each
year, this supplemental employer matching contribution bookkeeping account will
be credited with hypothetical investment earnings as if the amount credited to
the account were invested either in 30-year Treasury securities or in other
investment funds selected by the Compensation Committee.
Unless a different time or form of distribution is elected by Mr.
MacDonough within the 30 day period following the effective date of the plan,
the value of his supplemental employee stock ownership plan and employer
matching contribution bookkeeping accounts will be paid to him in one lump sum
cash payment as soon as possible following the end of the calendar year in which
his employment terminates. The benefit restoration plan is an unfunded plan, and
benefits payable thereunder will be paid from the general assets of Westborough
Financial Services.
Future Stock Benefit Plans
Stock Option Plan. We intend to implement a stock option plan for our
directors and officers after the reorganization. Applicable regulations prohibit
us from implementing this plan until six months after the reorganization. If we
implement this plan within one year after the reorganization, applicable
regulations require that we first obtain the approval of the holders of a
majority of the outstanding shares of Westborough Financial Services that are
not owned by Westborough Bancorp, MHC. We have not decided whether we will
implement this plan before or after the one-year anniversary of the
reorganization.
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<PAGE>
We expect to adopt a stock option plan that will authorize the
Compensation Committee to grant options to purchase up to 10% of the shares
issued to investors other than Westborough Bancorp, MHC over a period of 10
years. The Compensation Committee will decide which directors and officers will
receive options and what the terms of those options will be. However, no stock
option will permit its recipient to purchase shares at a price that is less than
the fair market value of a share on the date the option is granted, and no
option will have a term that is longer than 10 years. If we implement a stock
option plan before the first anniversary of the reorganization, applicable
regulations will require that we observe the following restrictions:
o We must limit the total number of shares that are optioned to
outside directors to 30% of the shares authorized for the plan.
o We must also limit the number of shares that are optioned to any one
outside director to 5% of the shares authorized for the plan and the
number of shares that are optioned to any executive officer to 25%
of the shares that are authorized for the plan.
o We must not permit the options to become vested at a more rapid rate
than 20% per year beginning on the first anniversary of stockholder
approval of the plan.
o We must not permit accelerated vesting for any reason other than
death or disability.
After the first anniversary of the reorganization, we may amend the plan to
change or remove these restrictions. If we adopt a stock option plan within one
year after the reorganization, we expect to amend the plan later to remove these
restrictions and to provide for accelerated vesting in cases of retirement and
change of control.
We may obtain the shares needed for this plan by issuing additional shares
or through stock repurchases. Because we cannot issue new shares that would
reduce Westborough Bancorp, MHC's ownership position to less than a majority of
Westborough Financial Services' outstanding shares, we expect to obtain most or
all of the shares for this plan through stock repurchases. Our ability to
engage in stock repurchases, however, may be restricted by federal and state
banking regulators. Unless we are well-capitalized before and immediately after
a stock repurchase, we must give written notice to the Federal Reserve Bank of
Boston before repurchasing our common stock if the dollar amount of the
repurchase, together with the dollar amounts of repurchases paid by us during
the preceding 12 months, is equal to 10% or more of our consolidated net worth.
In addition, Massachusetts banking regulations prohibit us from repurchasing
our common stock in the first three years following the stock's issuance,
unless, among other things, the stock is purchased in the open market by a
tax-qualified or nontax-qualified employee stock benefit plan in an amount
reasonable and appropriate to fund such plan or the repurchases are limited to
no greater than 5% of our outstanding stock where compelling and valid business
reasons are established to the Commissioner's satisfaction.
We expect the stock option plan will permit the Compensation Committee to
grant either incentive stock options that qualify for special federal income tax
treatment or non-qualified stock options that do not qualify for special
treatment. Incentive stock options may be granted only to employees and will not
create federal income tax consequences when they are granted. If they are
exercised during employment or within three months after termination of
employment, the exercise will not create federal income tax consequences either.
When the shares acquired on exercise of an incentive stock option are resold,
the seller must pay federal income taxes on the amount by which the sales price
exceeds the purchase price. This amount will be taxed at capital gains rates if
the sale occurs at least two years after the option was granted and at least one
year after the option was exercised. Otherwise, it is taxed as ordinary income.
Non-qualified stock options may be granted to either employees or
non-employees such as directors, consultants and other service providers.
Incentive stock options that are exercised more than three months after
termination of employment are treated as non-qualified stock
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<PAGE>
options. Non-qualified stock options will not create federal income tax
consequences when they are granted. When they are exercised, federal income
taxes must be paid on the amount by which the fair market value of the shares
acquired by exercising the option exceeds the exercise price. When the shares
acquired on exercise of a non-qualified stock option are resold, the seller must
pay federal income taxes on the amount by which the sales price exceeds the
purchase price plus the amount included in ordinary income when the option was
exercised. This amount will be taxed at capital gains rates, which will vary
depending upon the time that has elapsed since the exercise of the option.
Westborough Financial Services will recognize compensation expense for
accounting purposes when stock options are exercised. The measurement of this
expense will depend on whether treasury shares or newly issued shares are
used to complete the option exercise. When a non-qualified stock option is
exercised, Westborough Financial Services and Westborough Bank may be allowed a
federal income tax deduction for the same amount that the option holder
includes in his or her ordinary income. This amount may be the same as the
related compensation expense or it may be different. When an incentive stock
option is exercised, there is no tax deduction unless the shares acquired are
resold sooner than two years after the option was granted or one year after
the option was exercised.
Management Recognition Plan. We intend to implement a management
recognition plan for our directors and officers after the reorganization.
Applicable regulations prohibit us from implementing this plan until 6 months
after the reorganization. If we implement this plan within one year after the
reorganization, the regulations require that we first obtain the approval of the
holders of a majority of the outstanding shares of Westborough Financial
Services that are not held by Westborough Bancorp, MHC. We have not decided
whether we will implement this plan before or after the one-year anniversary of
the reorganization.
We expect to adopt a management recognition plan that will authorize the
Compensation Committee to make restricted stock awards of up to 4% of the shares
issued to investors other than Westborough Bancorp, MHC. The Compensation
Committee will decide which directors and officers will receive restricted stock
and what the terms of those awards will be. If we implement a management
recognition plan before the first anniversary of the reorganization, applicable
regulations will require that we observe the following restrictions:
o We must limit the total number of shares that are awarded to outside
directors to 30% of the shares authorized for the plan.
o We must also limit the number of shares that are awarded to any one
outside director to 5% of the shares authorized for the plan and the
number of shares that are awarded to any executive officer to 25% of
the shares that are authorized for the plan.
o We must not permit the awards to become vested at a more rapid rate
than 20% per year beginning on the first anniversary of stockholder
approval of the plan.
o We must not permit accelerated vesting for any reason other than
death or disability.
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<PAGE>
After the first anniversary of the reorganization, we may amend the plan to
change or remove these restrictions. If we adopt a management recognition plan
within one year after the reorganization, we expect to amend the plan later to
remove these restrictions and to provide for accelerated vesting in cases of
retirement and change of control.
We may obtain the shares needed for this plan by issuing additional shares
or through stock repurchases. Because we cannot issue new shares that would
reduce Westborough Bancorp, MHC's ownership position to less than a majority of
Westborough Financial Services' outstanding shares, we expect to obtain most or
all of the shares for this plan through stock repurchases. Our ability to
engage in stock repurchases, however, may be restricted by federal and state
banking regulators. Unless we are well-capitalized before and immediately after
a stock repurchase, we must give written notice to the Federal Reserve Bank of
Boston before repurchasing our common stock if the dollar amount of the
repurchase, together with the dollar amounts of repurchases paid by us during
the preceding 12 months, is equal to 10% or more of our consolidated net worth.
In addition, Massachusetts banking regulations prohibit us from repurchasing our
common stock in the first three years following the stock's issuance, unless the
stock is purchased in the open market by a tax-qualified or nontax-qualified
employee stock benefit plan in an amount reasonable and appropriate to fund such
plan or the repurchases are limited to no greater than 5% of our outstanding
stock where compelling and valid business reasons are established to the
Commissioner's satisfaction.
Restricted stock awards under this plan may feature employment
restrictions that require continued employment for a period of time for the
award to be vested. They may feature restrictions that require the
achievement of specified corporate or individual performance goals for the
award to be vested. Or, they may feature a combination of employment and
performance restrictions. Awards are not vested unless the specified
employment restrictions and performance goals are met. However, pending
vesting, the award recipient may have voting and dividend rights. When an
award becomes vested, the recipient must include the current fair market
value of the vested shares in his income for federal income tax purposes.
Westborough Financial Services and Westborough Bank may be allowed a federal
income tax deduction in the same amount. Depending on the nature of the
restrictions attached to the restricted stock award, Westborough Financial
Services may have to recognize a compensation expense for accounting purposes
ratably over the vesting period or in a single charge when the performance
conditions are satisfied.
Certain Transactions with Directors/Trustees and Executive Officers
We do not make loans to our executive officers or employees. However, we
do make loans to our trustees/directors. These loans bear interest at the same
rate as loans offered to non-trustee/director borrowers and have the same
underwriting terms that apply to non-trustee/director borrowers.
We retain the law firm of Tashjian, Simsarian & Wickstrom. Mr. James
Tashjian, a director of Westborough Financial Services and Westborough Bank, and
a trustee of Westborough Bancorp, MHC, has been a partner of Tashjian, Simsarian
& Wickstrom since 1995. For 1998, the firm received approximately $75 thousand
from borrowers of Westborough Savings to review loan documentation.
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Proposed Purchases of Common Stock by Management
The following table presents, for each of our directors and executive
officers, the amount of stock they wish to purchase in the offering. We have
assumed that a sufficient number of shares will be available to satisfy their
subscriptions. The amounts include shares that may be purchased through
individual retirement accounts and by associates of the trustees and executive
officers. Collectively our trustees and executive officers expect to purchase a
total of 50,800 shares, or approximately 7.8% of shares we sell in the offering
(assuming the sale of 650,000 shares of common stock). These shares do not
include shares expected to be issued under any stock benefit plans of
Westborough Financial Services. If all shares issuable under such stock
benefit plans were issued to executive officers and directors of Westborough
Financial Services, such individuals would own 141,800 shares, or 21.82% of
the shares we sell in the offering (assuming the sale of 650,000 shares of
common stock.)
<TABLE>
<CAPTION>
Number Percent of
Name Amount of shares Shares Sold
- -------------------------------- -------- --------- -----------
<S> <C> <C> <C>
Directors:
Walter A. Kinell, Jr $ 50,000 5,000 0.77%
Nelson P. Ball 20,000 2,000 0.31
Edward S. Bilzerian 20,000 2,000 0.31
David E. Carlstrom 20,000 2,000 0.31
John L. Casagrande 10,000 1,000 0.15
William W. Cotting, Jr 10,000 1,000 0.15
Robert G. Daniel 50,000 5,000 0.77
Earl H. Hutt 25,000 2,500 0.38
Robert A. Klugman 65,000 6,500 1.00
Roger B. Leland 50,000 5,000 0.77
Joseph F. MacDonough 50,000 5,000 0.77
Paul F. McGrath 50,000 5,000 0.77
Charlotte C. Spinney 15,000 1,500 0.23
Phyllis A. Stone 10,000 1,000 0.15
James E. Tashjian 25,000 2,500 0.38
Daniel G. Tear 20,000 2,000 0.31
Executive Officers who
are not Directors:
Vickie A. Bouvier 10,000 1,000 0.15
Alexander P. Tautkas 7,500 750 0.12
Margaret I. Duquette 500 50 0.01
-------- ------ ----
Total $508,000 50,800 7.81%
======== ====== ====
</TABLE>
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THE REORGANIZATION AND THE OFFERING
- --------------------------------------------------------------------------------
The Board of Trustees of Westborough Savings has adopted and the Commissioner
of Banks of the Commonwealth of Massachusetts has approved the plan of
reorganization, subject to the satisfaction of certain conditions.
Approval by the Commissioner does not constitute a recommendation or endorsement
of the reorganization by the Commissioner.
- --------------------------------------------------------------------------------
General
On March 15, 1999, Westborough Savings' Board of Trustees unanimously
adopted the plan of reorganization pursuant to which Westborough Savings
will reorganize into a mutual holding company structure. This reorganization
includes the formation of an intermediate stock holding company, Westborough
Financial Services and the offering by Westborough Financial Services of a
minority of its shares to depositors of Westborough Savings and certain other
persons. Under the terms of the plan of reorganization, Westborough Financial
Services will own The Westborough Bank, and Westborough Bancorp, MHC will own at
least 51% of the outstanding common stock of Westborough Financial Services. The
reorganization will be effected as described under "--Tax Aspects" or in any
other manner that is permitted by the Division and the FDIC and is consistent
with the intent of the plan of reorganization. See " Our Reorganization and
Stock Offering" in the Summary section of this prospectus for a chart which
reflects our structure after the reorganization.
Westborough Financial Services and Westborough Bancorp, MHC have
requested approval from the Federal Reserve Bank of Boston to become bank
holding companies and to acquire Westborough Bank. The plan of reorganization
was approved by the Division, and Westborough Savings has received a notice
of intent not to object to the plan of reorganization from the FDIC, subject
to, the satisfaction of certain conditions. The FDIC also has agreed to waive
its requirement of a depositor vote in connection with the reorganization due
to the fact that the requirement is in conflict with long-standing provisions
of Massachusetts law that require reorganizations of Massachusetts mutual
banking institutions to be approved by a majority vote of the Corporators
present and voting at a special or annual meeting. Corporators are
individuals that constitute a governing body for Massachusetts-chartered
mutual savings banks and mutual holding companies and, under Massachusetts
law, are required to approve certain transactions of the bank, including any
proposed mutual holding company reorganization. Depositors do not have voting
rights with respect to Massachusetts-chartered mutual savings banks.
Westborough Savings has called a special meeting of corporators for
this purpose which was held on October 20, 1999. In accordance with
Massachusetts law, the plan of reorganization was approved by an affirmative
vote of a majority of Westborough Savings' corporators and a majority of
Westborough Savings' independent corporators, who constitute not less than
60% of all corporators. An independent corporator is a person who is not an
employee, officer, trustee or significant borrower of Westborough Savings. We
will complete the reorganization
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only upon completion of the sale of the shares of common stock offered in this
prospectus.
The aggregate price of the shares of common stock to be issued in the
reorganization will be within the offering range. The offering range has been
established by the Board of Trustees to be between $5.5 million and $7.5 million
and is based upon an independent appraisal of the estimated pro forma market
value of the common stock of Westborough Financial Services. The appraisal was
prepared by RP Financial, a consulting firm experienced in the valuation and
appraisal of savings institutions. All shares of common stock to be issued and
sold in the reorganization will be sold at the same price ($10.00) per share.
The independent appraisal will be affirmed or, if necessary, updated at the
completion of the offering. See "-- How We Determined the Offering Range and the
$10.00 Price Per Share" for additional information as to the determination of
the estimated pro forma market value of the common stock.
- --------------------------------------------------------------------------------
The following is a brief summary of pertinent aspects of the reorganization. The
summary is qualified in its entirety by reference to the provisions of the plan
of reorganization. A copy of the plan is available from Westborough Savings upon
request and is available for inspection at the offices of Westborough Savings
and at the Division of Banks. The plan is also filed as an exhibit to the
Registration Statement of which this prospectus is a part, copies of which may
be obtained from the SEC. See "Where You Can Find Additional Information."
- --------------------------------------------------------------------------------
Reasons for the Reorganization
Formation of The Westborough Bank as a capital stock savings bank
subsidiary of Westborough Financial Services will permit Westborough Financial
Services to issue common stock, which is a source of capital not available to
mutual savings banks.
Westborough Savings' mutual form of ownership will be preserved in
Westborough Bancorp, MHC. Westborough Bancorp, MHC, as a mutual savings bank
holding company, will own at least a majority of the common stock of Westborough
Financial Services as long as Westborough Bancorp, MHC remains in existence. The
reorganization will allow Westborough Savings to achieve certain benefits of a
stock company without a loss of control that is possible in a full savings
institution conversion from mutual to stock form. In a standard conversion, a
newly converted savings institution or its newly formed holding company sells
100% of its common stock in a single stock offering. The mutual holding company
structure also will give Westborough Financial Services flexibility to issue its
common stock at various times and in varying amounts as market conditions
permit, rather than in a single stock offering. This makes the deployment of the
capital that we raise more manageable.
The proceeds from the sale of common stock of Westborough Financial
Services will provide Westborough Bank with new capital, which will support
future diversification of its product lines and market share growth. In
particular, such proceeds will enhance Westborough Bank's ability to expand its
franchise through increased lending, make necessary capital investments in
facilities and technology, diversify products offered to its customers and
establish
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additional branch locations. The reorganization also will enable Westborough
Financial Services and Westborough Bank to better manage its capital by
providing broader investment opportunities through the holding company
structure, and by enabling Westborough Bank to distribute capital to
stockholders of Westborough Financial Services in the form of dividends.
The ability of Westborough Financial Services to sell additional common
stock also will enable Westborough Financial Services and Westborough Bank to
increase their capital in response to any future regulatory capital requirement
levels. While Westborough Savings currently exceeds all regulatory capital
requirements, the sale of common stock in connection with the reorganization
will assist Westborough Bank with the orderly preservation and expansion of its
capital base and will provide flexibility to respond to sudden and unanticipated
capital needs.
After completion of the reorganization, the unissued common and preferred
stock authorized by Westborough Financial Services' Articles of Organization
will permit Westborough Financial Services to raise additional equity capital
through further sales of securities and to issue securities in connection with
possible acquisitions, subject to market conditions and any required regulatory
approval of an offering. Westborough Financial Services, however, currently has
no plans with respect to additional offerings of securities. Following the
reorganization, we intend to use stock-related incentive programs to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management."
The mutual holding company form of organization will provide additional
flexibility to diversify our business activities through acquisitions of or
mergers with both mutual and stock savings institutions, as well as other
companies. Although there are no current arrangements, understandings or
agreements, written or oral, regarding any such opportunities, Westborough
Financial Services will be in a position after the reorganization to take
advantage of any such favorable opportunities that may arise. See "How We Intend
to Use the Proceeds from the Offering" for a description of our intended use of
proceeds.
While there are benefits associated with the mutual holding company form
of organization, this form of organization involves additional costs associated
with its maintenance and regulation, including additional administrative
expenses, taxes, regulatory filings and examination fees.
After considering the advantages and disadvantages of the reorganization,
as well as applicable fiduciary duties, the Board of Trustees of Westborough
Savings unanimously approved the reorganization as being in the best interests
of Westborough Savings, its depositors and the communities it serves.
Effects of the Reorganization
General. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the equity of
the savings institution based upon the balance in the depositor's account. This
interest may only be realized in the event of a liquidation of the savings
institution. However, this ownership interest is tied to the depositor's account
and has no tangible market value separate from such deposit account. Any
depositor who opens a deposit account obtains a pro rata ownership interest in
the equity of the institution
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without any additional payment beyond the amount of the deposit. A depositor who
reduces or closes such depositor's account receives the balance in the account
but receives nothing for such depositor's ownership interest in the equity of
the institution, which is lost to the extent that the balance in the account is
reduced. Consequently, depositors of a mutual savings bank have no way to
realize the value of their ownership interest, except in the unlikely event that
the mutual savings bank is liquidated. In such event, the depositors of record
at that time would share pro rata in any residual surplus and reserves after
other claims, including claims of depositors to the amounts of their deposits,
are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of depositors is
thereafter represented exclusively by their liquidation rights. Such capital
stock is separate and apart from deposit accounts and cannot be and is not
insured by the FDIC or any other governmental agency. Certificates are issued to
evidence ownership of the capital stock. The stock certificates are
transferable, and, therefore, the stock may be sold or traded with no effect on
any deposit account the seller may hold in the institution.
Continuity. While the reorganization is being accomplished, and after
completion of the reorganization, the routine business of Westborough Savings
of accepting deposits and making loans will continue without interruption.
Westborough Bank will continue to be subject to regulation by the Division and
the FDIC. After the reorganization, Westborough Savings will continue to provide
services for depositors and borrowers under current policies by its management
and staff.
The Board of Trustees and corporators serving Westborough Savings
immediately before the reorganization will serve as the Board of Directors of
Westborough Bank and the corporators of Westborough Bancorp, MHC, respectively,
after the reorganization. The directors of Westborough Financial Services and
the trustees of Westborough Bancorp, MHC will consist of all of the individuals
currently serving on the Board of Trustees of Westborough Savings. We anticipate
that all officers of Westborough Savings serving immediately before the
reorganization will retain their positions after the reorganization. See
"Management."
Deposit Accounts and Loans. Under the plan of reorganization, each
depositor in Westborough Savings at the time of the reorganization will
automatically continue as a depositor of Westborough Bank after the
reorganization. Each deposit account will remain the same with respect to
deposit balance, interest rate and other terms, except to the extent affected by
withdrawals made to purchase common stock in the offering. See "-- Procedure for
Purchasing Shares in Subscription and Community Offerings." Each deposit account
will be insured by the FDIC and the Depositors Insurance Fund to the same extent
as before the reorganization. Depositors will continue to hold their existing
certificates of deposit, passbooks and other evidences of their accounts.
Furthermore, no loan outstanding from Westborough Savings will be affected
by the reorganization, and the amount, interest rate, maturity and security for
each loan will remain as they were contractually fixed prior to the
reorganization.
Voting Rights. Voting rights and control of Westborough Savings, as a
mutual savings bank, are vested in the corporators and the Board of Trustees.
After the reorganization, direction of
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Westborough Bank will be under the control of the Board of Directors of
Westborough Bank. Westborough Financial Services, as the holder of all of the
outstanding common stock of Westborough Bank, will have exclusive voting rights
with respect to any matters concerning Westborough Bank requiring stockholder
approval, including the election of directors of Westborough Bank.
After the reorganization, the holders of the common stock of Westborough
Financial Services will have exclusive voting rights with respect to any matters
concerning Westborough Financial Services. These voting rights will be exclusive
except to the extent Westborough Financial Services in the future issues
preferred stock with voting rights. Each holder of common stock will be entitled
to vote on any matters to be considered by Westborough Financial Services'
stockholders, including the election of directors of Westborough Financial
Services, subject to the restrictions and limitations set forth in Westborough
Financial Services' Articles of Organization discussed below.
By virtue of its ownership of a majority of the outstanding shares of
common stock, Westborough Bancorp, MHC will be able to elect all members of the
Board of Directors of Westborough Financial Services and generally will be able
to control the outcome of most matters presented to the stockholders of
Westborough Financial Services for resolution by vote. However, current
regulations and regulatory policies require that adoption of a stock option
plan, management recognition plan or second-step conversion of Westborough
Bancorp, MHC be approved by a majority vote of the shares held by the public
stockholders (i.e., all stockholders except Westborough Bancorp, MHC).
Westborough Bancorp, MHC will be controlled by its Board of Trustees,
which will initially consist of the current trustees of Westborough Savings.
Following the reorganization, approximately one-third of the trustees of
Westborough Bancorp, MHC will be elected annually by the corporators of
Westborough Bancorp, MHC. The initial corporators of Westborough Bancorp, MHC
will consist of all of the corporators of Westborough Savings at the time of the
reorganization. Thereafter, corporators of Westborough Bancorp, MHC will be
nominated by the Board of Trustees and elected by the corporators pursuant to
the Bylaws of Westborough Bancorp, MHC.
Depositors' Rights if We Liquidate; Liquidation Account. In the unlikely
event of a complete liquidation of Westborough Savings in its current mutual
form, each depositor would receive a pro rata share of any assets of Westborough
Savings remaining after payment of claims of all creditors (including the claims
of all depositors to the withdrawable value of their accounts). Each depositor's
pro rata share of such liquidating distribution would be in the same proportion
as the value of such depositor's deposit account was to the total value of all
deposit accounts in Westborough Savings at the time of liquidation.
Upon a complete liquidation of Westborough Bank after the reorganization,
each depositor would have a claim as a creditor of the same general priority as
the claims of all other general creditors of Westborough Bank. However, except
as described below, a depositor's claim would be solely for the amount of the
balance in such depositor's deposit account plus accrued interest. Such
depositor would not have an interest in the value or assets of Westborough Bank
above that amount. Instead, the holder of Westborough Bank's common stock (i.e.,
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Westborough Financial Services) would be entitled to any assets remaining upon a
liquidation of Westborough Bank.
The plan of reorganization provides for the establishment, upon the
completion of the reorganization, of a special "liquidation account" for the
benefit of eligible account holders and supplemental eligible account holders in
an amount equal to the net worth of Westborough Savings as of the date of its
latest balance sheet contained in this prospectus. Upon a complete liquidation
of Westborough Bank after the reorganization, each eligible account holder and
supplemental eligible account holder, who continues to maintain such account
holder's deposit account at Westborough Bank, would be entitled to an interest
in the liquidation account prior to any payment to the holders of Westborough
Bank's capital stock. Each eligible account holder and supplemental eligible
account holder will have a pro rata interest in the total liquidation account
for the account holder's deposit accounts based on the proportion that the
aggregate balance of such person's qualifying deposit accounts on December 31,
1997 (the eligibility record date) and December 31, 1998 (the supplemental
eligibility record date), as applicable, bore to the aggregate balance of all
qualifying deposit accounts of all eligible account holders and supplemental
eligible account holders. For this purpose, qualifying deposit accounts include
all savings, certificate of deposit, demand, negotiable orders of withdrawal
(NOW), money market and passbook accounts maintained at Westborough Bank
(excluding any escrow accounts).
If, however, on any annual closing date (i.e., the anniversary of the
eligibility record date or supplemental eligibility record date, as applicable)
of Westborough Savings, commencing on or after the effective date of the
reorganization, the amount in any deposit account is less than the amount in
such deposit account on December 31, 1997 (with respect to an eligible account
holder), or December 31, 1998 (with respect to a supplemental eligible account
holder) or any other annual closing date, then the interest in the liquidation
account relating to the deposit account would be reduced from time to time by
the proportion of any such reduction, and such interest will cease to exist if
such deposit account is closed. For purposes of the liquidation account,
certificates of deposit will be deemed to be closed upon maturity regardless of
renewal. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related deposit account.
Any assets remaining after the above liquidation rights of eligible
account holders and supplemental eligible account holders are satisfied would be
distributed to Westborough Financial Services as the sole stockholder of
Westborough Bank.
Upon a complete liquidation of Westborough Financial Services, each holder
of shares of the common stock of Westborough Financial Services, including
Westborough Bancorp, MHC, would be entitled to receive a pro rata share of
Westborough Financial Services' assets, following payment of all debts,
liabilities and claims of greater priority of or against Westborough Financial
Services including the rights of depositors in the liquidation account of
Westborough Bank, if any.
If liquidation of Westborough Bancorp, MHC occurs following completion of
the reorganization, all depositors of Westborough Bank at that time will be
entitled, pro rata to the value of their deposit accounts, to a distribution of
any assets of Westborough Bancorp, MHC remaining after payment of all debts and
claims of creditors.
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Tax Aspects. The reorganization may be effected in any manner approved by
the Division that is consistent with the purposes of the plan of reorganization
and applicable law, regulations and policies. However, Westborough Savings
intends to consummate the reorganization using a series of transactions as
described below. This structure enables Westborough Savings to retain all of its
historical tax attributes and produces significant savings to Westborough
Savings because it simplifies regulatory approvals and conditions associated
with the completion of the reorganization.
The merger structure will be accomplished as follows:
o Westborough Savings will organize Westborough Bancorp as a mutual
savings bank;
o Westborough Bancorp will organize a capital stock corporation
(i.e., Westborough Financial Services) as its wholly owned
subsidiary;
o Westborough Bancorp will also organize an interim Massachusetts
stock savings bank as its wholly owned subsidiary ("Interim"). The
following transactions will then occur simultaneously;
o Westborough Savings will exchange its charter for a Massachusetts
stock savings bank charter and become Westborough Bank (the
"Conversion");
o Westborough Bancorp will exchange its charter for a Massachusetts
mutual holding company charter and become Westborough Bancorp,
MHC;
o Interim will merge with and into Westborough Bank with Westborough
Bank being the surviving institution; and
o the initially issued stock of Westborough Bank (which will be
constructively received by former Westborough Savings depositors
when Westborough Savings becomes a stock savings bank pursuant to
step (4)) will be issued to Westborough Bancorp, MHC in exchange for
liquidation interests in Westborough Bancorp, MHC (the "Exchange"),
which will be held by former Westborough Savingss' depositors.
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Westborough Bancorp, MHC will then contribute 100% of the stock of Westborough
Bank to Westborough Financial Services . Westborough Financial Services will
subsequently offer for sale up to 49% of its common stock pursuant to the plan
of reorganization. As a result of these transactions, (a) Westborough Bank will
be a wholly owned subsidiary of Westborough Financial Services; (b) Westborough
Financial Services will be a majority owned subsidiary of Westborough Bancorp,
MHC ; and (c) the depositors of Westborough Bank will hold liquidation interests
in Westborough Bancorp, MHC.
Under this structure: (i) the Conversion is intended to be a tax-free
reorganization under Code section 368(a)(1)(F); and (ii) the Exchange is
intended to be a tax-free exchange under Code section 351.
Under the plan of reorganization, consummation of the reorganization is
conditioned upon, among other things, the prior receipt by Westborough
Savings of either a private letter ruling from the IRS and from the
Massachusetts taxing authorities or an opinion of Thacher Proffitt & Wood as
to the federal income tax consequences and from Wolf & Company, P.C. as to
the Massachusetts income tax consequences of the reorganization to
Westborough Savings (in both its mutual and stock form), Westborough
Financial Services and depositors of Westborough Savings. In Revenue Procedure
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99-3, 1999-1 I.R.B. 103, the IRS announced that it will not rule on whether a
transaction qualifies as a tax-free reorganization under Code section
368(a)(1)(F) or as a tax-free exchange of stock for stock in the formation of a
holding company under Code section 351, but that it will rule on significant
sub-issues that must be resolved to determine whether the transaction qualifies
under either of these Code sections.
Westborough Savings has requested a private letter ruling from the IRS
regarding certain significant sub-issues associated with the reorganization. We
cannot assure you that we will obtain a private letter ruling.
Based in part upon certain representations of Westborough Savings or its
officers and in part upon the private letter ruling of the IRS, the opinion of
Thacher Proffitt & Wood regarding certain federal income tax consequences of
the reorganization will state that:
o the Conversion will constitute a "reorganization" under Code section
368(a)(1)(F), and neither Westborough Savings nor Westborough Bank
will recognize gain or loss as a result of the Conversion;
o Westborough Savings' depositors will recognize no gain or loss upon
their constructive receipt of shares of Westborough Bank common
stock solely in exchange for their interest (i.e., liquidation
rights) in Westborough Savings;
o Westborough Savings' depositors will recognize no gain or loss upon
the issuance to them of deposits in Westborough Bank in the same
dollar amount as their deposits in Westborough Savings;
o the Exchange will qualify as an exchange of property for stock
under Code section 351;
o Westborough Savings' depositors will recognize no gain or loss upon
their constructive transfer to Westborough Bancorp, MHC of the
shares of Westborough Bank common stock they constructively received
in the Conversion in exchange for interests (i.e., liquidation
rights) in Westborough Bancorp, MHC;
o Westborough Bancorp, MHC will recognize no gain or loss upon its
receipt from Westborough Savings' depositors of the shares of
Westborough Bank common stock in exchange for the interests (i.e.,
liquidation rights) in Westborough Bancorp, MHC;
o Westborough Financial Services will recognize no gain or loss
upon the sale of shares of its common stock under Westborough
Savings' plan of reorganization;
o Westborough Savings' depositors will recognize no gain or loss
upon the distribution to them of nontransferable subscription
rights to purchase shares of Westborough Financial Services
common stock under the plan of reorganization, provided that the
amount to be paid for such shares is equal to the fair market
value of such shares; and
o the basis to the shareholders of shares of Westborough Financial
Services common stock purchased under the plan of reorganization
pursuant to such subscription rights will be the amount paid
therefor and the holding period for such shares will begin on the
date on which such subscription rights are exercised.
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Unlike private rulings of the IRS, an opinion of counsel is not binding on
the IRS and the IRS could disagree with conclusions reached in the opinion. If
there is a disagreement, we can not guarantee that the IRS would not prevail in
a judicial or administrative proceeding.
Wolf & Company, P.C. intends to opine, subject to the limitations and
qualifications in its opinion, that, for purposes of the Massachusetts
corporate income tax, the reorganization will not become a taxable
transaction to Westborough Savings (in either its status as a mutual savings
bank or stock savings bank), Westborough Bancorp, MHC, Westborough Financial
Services, the stockholders of Westborough Financial Services or the
depositors of Westborough Savings. Such opinion, however, is not binding on
the Massachusetts Department of Revenue and it could disagree with
conclusions reached by Wolf & Company, P.C. If there is a disagreement, we
can not guarantee that the Massachusetts Department of Revenue would not
prevail in a judicial or administrative proceeding.
Accounting Consequences. The reorganization will be accounted for in a
manner similar to a pooling-of-interests under generally accepted accounting
principles. Accordingly, the carrying value of our assets, liabilities, and
capital will be unaffected by the reorganization and will be reflected in the
Westborough Financial Services' and Westborough Bank's consolidated financial
statements based on their historical amounts.
How We Determined the Offering Range and the $10.00 Price Per Share
The plan of reorganization requires that the purchase price of the common
stock must be based on the appraised pro forma market value of the common stock,
as determined on the basis of an independent valuation. Westborough Savings and
Westborough Financial Services have retained RP Financial to make the
independent valuation. RP Financial's fees for its services in making such
appraisal are estimated to be $27,500. Westborough Savings and Westborough
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Financial Services will indemnify RP Financial and its employees and affiliates
against losses (including any losses in connection with claims under the federal
securities laws) arising out of its services as appraiser, except where RP
Financial's liability results from its negligence or bad faith.
An appraisal has been made by RP Financial in reliance upon the
information contained in this prospectus, including the financial statements. RP
Financial also considered the following factors, among others:
o the present and projected operating results and financial condition
of Westborough Financial Services and Westborough Savings, and the
economic and demographic conditions in Westborough Savings' existing
market area;
o historical, financial and other information relating to Westborough
Savings;
o a comparative evaluation of the operating and financial statistics
of Westborough Savings with those of other similarly situated
publicly traded mutual holding companies, savings associations and
savings institutions located in New England;
o the aggregate size of the offering of the common stock;
o the impact of the reorganization on Westborough Savings' equity and
earnings potential;
o the proposed dividend policy of Westborough Financial Services and
Westborough Bank; and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
On the basis of the foregoing, RP Financial has advised Westborough
Financial Services and Westborough Savings that, in its opinion, dated September
17, 1999, the estimated pro forma market value of the common stock on a fully
converted basis ranged from a minimum of $15.8 million to a maximum of $21.4
million with a midpoint of $18.6 million (the "estimated valuation range").
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The Board of Trustees of Westborough Savings held a meeting to review and
discuss the original appraisal report prepared by RP Financial. Representatives
of RP Financial participated in the meeting to explain the contents of the
appraisal report. The Board of Trustees reviewed the methods that RP Financial
used to determine the pro forma market value of the common stock and the
appropriateness of the assumptions that RP Financial used in determining this
value. The Board of Trustees determined that 35% of the shares to be issued by
Westborough Financial Services will be offered to public stockholders. In
addition the Board of Trustees determined that the common stock will be sold at
$10.00 per share, which is the price most commonly used in stock offerings
involving converting savings institutions.
The Board of Trustees established an offering range of $5.5 million to
$7.5 million, with a midpoint of $6.5 million. Westborough Financial Services
expects to issue between 552,500 and 747,500 shares of common stock. The
offering range takes into account that Westborough Bank must be a majority-owned
subsidiary of Westborough Financial Services or Westborough Bancorp, MHC as long
as Westborough Bancorp, MHC is in existence. The estimated valuation range and
the offering range may be amended with the approval of the Division and FDIC (if
required), due to subsequent developments in the financial condition of
Westborough Financial Services or Westborough Savings or market conditions
generally.
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The valuation prepared by RP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the financial statements
and other information provided by Westborough Savings, nor did RP Financial
value independently the assets or liabilities of Westborough Savings. The
valuation considers Westborough Savings as a going concern and should not be
considered as an indication of the liquidation value of Westborough Savings.
Moreover, because such valuation is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing such shares in the
reorganization will thereafter be able to sell such shares at prices at or above
the purchase price.
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The maximum of the estimated valuation range may be increased up to 15%
and the number of shares of common stock to be issued in the reorganization may
be increased to 859,625 shares due to regulatory considerations, changes in the
market and general financial and economic conditions without the resolicitation
of subscribers. See "-- Limitations on Common Stock Purchases" as to the method
of distribution and allocation of additional shares that may be issued in the
event of an increase in the estimated valuation range to fill unfilled orders in
the subscription and community offerings.
We may not sell any shares of common stock unless RP Financial confirms to
Westborough Savings, Westborough Financial Services, the Division and the FDIC
that, to the best of its knowledge, nothing of a material nature has occurred
which, taking into account all relevant factors, would cause RP Financial to
conclude that the aggregate value of the common
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stock is incompatible with its estimate of the pro forma market value of the
common stock at the conclusion of the offering.
If RP Financial concludes that the pro forma market value of the common
stock is either more than 15% above the maximum of the estimated valuation range
or less than the minimum of the estimated valuation range, Westborough Savings
and Westborough Financial Services, after consulting with the Division and the
FDIC, may:
o terminate the Plan and return all funds promptly with interest at
Westborough Savings' passbook rate of interest on payments made by
check, bank check or money order;
o establish a new estimated valuation range and either;
o hold new subscription and community offerings; or
o provide subscribers the opportunity to change or cancel their
orders (a "resolicitation"); or
o take such other actions as permitted by the Division and the FDIC in
order to complete the reorganization.
If a resolicitation is commenced, unless an affirmative response is received
from a subscriber within a designated period of time, all funds will be promptly
returned to the subscriber as described above.
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If all shares of common stock are not sold through the subscription and
community offerings, then Westborough Savings and Westborough Financial Services
expect to offer the remaining shares in a syndicated community offering, which
would commence during or just after the subscription offering. See "--
Syndicated Community Offering."
Copies of the appraisal report of RP Financial, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of Westborough Savings and the other locations specified under "Where You
Can Find Additional Information."
Subscription Offering and Subscription Rights
In accordance with the plan of reorganization, rights to subscribe for the
purchase of common stock have been granted under the plan of reorganization to
the following persons in the following order of priority:
o depositors with deposits in Westborough Savings with balances
aggregating $50 or more ("qualifying deposits") as of December 31,
1997 ("eligible account holders"); for this purpose, deposit
accounts include any withdrawable deposits offered by Westborough
Savings, including negotiable orders of withdrawal (NOW),
certificates of deposit, demand deposits and IRA and Keogh plans for
which Westborough Savings acts as custodian or trustee;
o depositors with qualifying deposits in Westborough Savings on
December 31, 1998, other than those depositors who would otherwise
qualify as eligible account holders ("supplemental eligible account
holders"); and
** o tax-qualified employee benefit plans of Westborough Financial
Services, Westborough Savings or Westborough Bancorp, MHC, including
the employee stock ownership plan.
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of reorganization and as described below under "--
Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each eligible account holder will
receive, as first priority and without payment therefor, non-transferable rights
to subscribe for shares of common stock in the subscription offering.
Subscriptions by eligible account holders are subject to maximum and minimum
purchase limitations. See "-- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated so as to permit each subscribing eligible account
holder to purchase a number of shares sufficient to make such eligible account
holder's total allocation equal to the lesser of 100 shares
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or the number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing eligible account holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective aggregate qualifying deposits bear to the total amount of qualifying
deposits of all remaining eligible account holders whose subscriptions remain
unfilled. However, no fractional shares shall be issued.
To ensure a proper allocation of stock, each eligible account holder must
list on his or her stock order form all deposit accounts in which such eligible
account holder had an ownership interest at December 31, 1997. Failure to list
an account could result in fewer shares being allocated than if all accounts had
been disclosed. The subscription rights of eligible account holders who are also
trustees or executive officers of Westborough Savings or their associates will
be subordinated to the subscription rights of other eligible account holders to
the extent attributable to increased deposits in the one-year period preceding
December 31, 1997.
Priority 2: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of the subscriptions by
eligible account holders, each supplemental eligible account holder will
receive, as a second priority and without payment therefor, non-transferable
rights to subscribe for shares of common stock in the subscription offering.
Subscriptions by supplemental eligible account holders are subject to maximum
and minimum purchase limitations. See "-- Limitations on Common Stock
Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all supplemental eligible account holders, after purchases
by eligible account holders, available shares first will be allocated among
subscribing supplemental eligible account holders so as to permit each
supplemental eligible account holder to purchase a number of shares
sufficient to make such supplemental eligible account holder's total
allocation equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be allocated among the
remaining subscribing supplemental eligible account holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective aggregate qualifying deposits bear to the total amount of
qualifying deposits of all remaining supplemental eligible account holders
whose subscriptions remain unfilled. However, no fractional shares shall be
issued.
To ensure a proper allocation of stock, each supplemental eligible account
holder must list on his or her stock order form all deposit accounts in which
such supplemental eligible account holder had an ownership interest at December
31, 1998. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed.
Priority 3: The Tax-Qualified Employee Benefit Plans. To the extent that
there are sufficient shares remaining after satisfaction of the subscriptions by
eligible account holders and supplemental eligible account holders, the
tax-qualified employee benefit plans, including the employee stock ownership
plan, will receive, as a third priority and without payment therefor,
non-transferable subscription rights to purchase up to 10% of the common stock
to be issued in the offering. As a tax-qualified employee benefit plan, the
employee stock ownership plan intends to purchase 8% of the shares to be issued
in the offering, or 44,200 shares, based on the issuance of 552,500 shares at
the minimum of the offering range or 59,800 shares based on the issuance of
747,500 at the maximum of the offering range. Subscriptions by the employee
stock ownership plan will not be aggregated with shares of common stock
purchased directly by or which are otherwise attributable to any other
participants in the subscription and community offerings, including
subscriptions of any of Westborough Savings' trustees, officers, employees or
associates thereof. To the extent shares are not available in the offering to
fill all or part of the purchase order of the employee stock ownership plan,
this plan intends to purchase shares in private transactions or on the open
market after completion of the offering.
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Expiration Date for the Subscription Offering. The subscription
offering will expire at 12:00 noon, Massachusetts Time, on December 15, 1999,
unless we extend this period for an initial period of up to 45 days. We may
further extend this period for additional 60 day periods with the approval of
the Division and, if necessary, the FDIC. Subscription rights which have not
been exercised prior to the expiration date, as extended, will become void.
If all shares have not been subscribed for or sold by the expiration date,
as extended, all funds delivered to Westborough Savings will be returned with
interest promptly to the subscribers and all withdrawal authorizations will be
canceled. If an extension beyond the 45-day period following the expiration date
is granted, Westborough Savings will notify subscribers of the extension of time
and of any rights of subscribers to change or cancel their orders. Each
extension may not exceed 60 days, and all extensions, in the aggregate, may not
last beyond the second anniversary of the date of approval of the plan of
reorganization by the corporators of Westborough Savings, which took place on
October 20, 1999.
Persons in Non-qualified States or Foreign Countries. Westborough
Financial Services and Westborough Savings will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for stock pursuant to the plan or reorganization
reside. However, Westborough Savings and Westborough Financial Services are not
required to offer stock in the subscription offering to any person who resides
in a foreign country.
Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions received in the subscription offering, Westborough Savings
may offer shares pursuant to the plan of reorganization in the community
offering to residents in the towns of Grafton, Hopkinton, Northborough,
Shrewsbury, Southborough and Westborough (the "Community"). The term "residents"
includes persons who occupy a dwelling within the Community and establish an
ongoing physical presence within it, together with an indication that such
presence is not merely transitory in nature (the determination of resident
status will be made by Westborough Savings, in its sole discretion).
Orders received in the community offering are subject to maximum and
minimum purchase limitations. See "-- Limitations on Common Stock Purchases."
The community
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offering, if any, shall commence concurrently with or subsequent to the
commencement of the subscription offering and shall terminate no later than 45
days after the expiration of the subscription offering unless extended by
Westborough Savings and Westborough Financial Services, with the approval of the
Division and the FDIC, if necessary.
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The opportunity to subscribe for shares of common stock in the community
offering category is subject to the right of Westborough Savings and Westborough
Financial Services, in their discretion, to accept or reject any such orders in
whole or in part either at the time of receipt of an order or as soon as
practicable following the expiration date. If Westborough Financial Services
rejects a subscription in part, the subscriber will not have the right to cancel
the remainder of his or her subscription.
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If there is an oversubscription for shares in the community offering,
shares will be allocated on a priority basis in the following order: natural
persons residing in the Community, any other person subscribing for shares in
the community offering such that each person may receive 1,000 shares, and on a
pro rata basis to such persons based on the amount of their respective
subscriptions. If an oversubscription occurs in the other depositors category,
shares will be allocated first to each subscriber whose order is accepted by
Westborough Savings in an amount equal to the lesser of 100 shares or the number
of shares subscribed for by each such subscriber, if possible. Thereafter, we
will allocate the unallocated shares among such subscribers whose order remains
unsatisfied in the same proportion that each such subscriber's qualifying
deposit bears to the total amount of qualifying deposits of all subscribers
whose subscriptions remain unfilled.
Marketing Arrangements
Trident Securities, Westborough Savings, Westborough Financial Services
and Westborough Bancorp, MHC have engaged Trident Securities as a financial
and sales agent in connection with the offering of the common stock. Trident
Securities has agreed to use its best efforts to assist Westborough Financial
Services with the solicitation of subscriptions and orders for shares of
common stock in the offering.
Trident Securities will receive fees for services provided in
connection with the offering equal to 2.0% of the aggregate purchase price of
common stock sold in the offering. No fees will be paid to Trident Securities
with respect to any shares of common stock purchased by any trustee,
executive officer, employee or employee benefit plan of Westborough Savings
or Westborough Financial Services. Additionally, no fees will be paid to
Trident Securities with respect to any shares of common stock purchased by
associates of Westborough Savings' trustees or executive officers. If there
is a syndicated community offering, we will pay Trident Securities a fee to
be agreed upon by Westborough Financial Services, Westborough Savings and
Trident Securities. However, the aggregate fees payable to Trident Securities
and any selected dealers in connection with any syndicated community offering
will not exceed 4.5% of the aggregate purchase price of the common stock sold
in the syndicated community offering. Total fees to Trident Securities, Inc.
are estimated to be $90,410 and $126,290 at the minimum and the maximum of
the offering range, respectively. See "Pro Forma Data" for
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the assumptions used to arrive at these estimates. Trident Securities will also
be reimbursed for its reasonable out-of-pocket expenses, including legal fees of
up to $30 thousand and non-legal expenses up to a maximum of $15 thousand.
Directors/Trustees and Employees. Directors and executive officers of
Westborough Financial Services and trustees and executive officers
Westborough Savings may participate in the solicitation of offers to purchase
common stock. Other employees of Westborough Savings may participate in the
offering in ministerial capacities or provide clerical work in effecting a
sales transaction. Such other employees have been instructed not to solicit
offers to purchase common stock or provide advice regarding the purchase of
common stock. Westborough Financial Services will rely on Rule 3a4-1 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
sales of common stock will be conducted within the requirements of Rule
3a4-1, so as to permit directors, trustees and employees to participate in
the sale of common stock. No director or trustee, as the case may be, or
employee of Westborough Financial Services or Westborough Savings will be
compensated in connection with his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on
transactions in common stock.
Procedure for Purchasing Shares in Subscription and Community Offerings
Use of Order Forms. To purchase shares in the subscription offering and
the community offering, an executed order form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal
from a subscriber's deposit account at Westborough Savings (which may be
given by completing the appropriate blanks in the stock order form), must be
received by Westborough Savings by 12:00 noon, Massachusetts Time, on the
expiration date. You must submit your order form by mail or overnight
courier, or may drop off your order forms at any of our branch offices. Stock
order forms which are not received by such time or are executed defectively
or are received without full payment (or correct withdrawal instructions) are
not required to be accepted. In addition, we are not obligated to accept
orders submitted on photocopied or facsimiled order forms. We have the power
to waive or permit the correction of incomplete or improperly executed forms,
but do not represent that we will do so. Once received, an executed order
form may not be modified, amended or rescinded without our consent unless
subscribers are resolicited or the reorganization has not been completed
within 45 days after the end of the subscription offering, unless such 45 day
period has been extended.
In order to ensure that eligible account holders and supplemental eligible
account holders are properly identified as to their stock purchase eligibility
and priority, depositors must list on the stock order form all deposit accounts
as of the applicable eligibility record date giving all names in each account
and the account numbers.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the expiration date for the offering, in accordance with Rule 15c2-8 of
the Exchange Act, no prospectus will be mailed later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the stock order form will confirm receipt or delivery in accordance
with Rule 15c2-8. Order forms will only be distributed when preceded or
accompanied by a prospectus.
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Payment for Shares. Payment for subscriptions may be made by cash (if
hand delivered), check, bank check, money order or by authorization of
withdrawal from deposit accounts maintained with Westborough Savings.
Interest will be paid on payments made by cash, check, bank check or money
order at Westborough Savings' passbook rate (as opposed to tiered-rate) of
interest from the date payment is received until the completion or
termination of the reorganization. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn will
continue to accrue interest at the contractual rates until completion or
termination of the reorganization, but a hold immediately will be placed on
such funds, thereby making them unavailable to the depositor.
If a subscriber validly authorizes Westborough Savings to withdraw the
amount of the purchase price from a deposit account at Westborough Savings, the
withdrawal will be made as of the completion of the reorganization. Westborough
Savings will waive any applicable penalties for early withdrawal from
certificates of deposit. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds actually are transferred under the authorization, the certificate will be
canceled at the time of the withdrawal, without penalty, and the remaining
balance will be converted into a statement savings account and will earn
interest at the passbook rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes. Rather, the employee stock
ownership plan may pay for such shares of common stock subscribed for at the
purchase price upon completion of the offering; provided, that there is in force
from the time of its subscription until such time, a loan commitment acceptable
to Westborough Financial Services from an unrelated financial institution or
Westborough Financial Services to lend to the employee stock ownership plan the
aggregate purchase price of the shares for which it subscribed. Westborough
Financial Services intends to provide such a loan to the employee stock
ownership plan.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of common stock in the subscription and community offerings, provided
that such IRAs are not maintained at Westborough Savings. Persons with IRAs
maintained at Westborough Savings must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of common stock in the
subscription and community offerings. In addition, the provisions of ERISA and
IRS regulations require that officers, trustees and ten percent stockholders who
use self-directed IRA funds to purchase shares of common stock in the
subscription and community offerings make such purchases for the exclusive
benefit of the IRAs. Instructions on how to transfer IRAs maintained at
Westborough Savings can be obtained from the stock information center.
Depositors interested in using funds in an IRA to purchase common stock should
contact the stock information center as soon as possible.
Certificates representing shares of common stock purchased will be mailed
to purchasers to the addresses specified in properly completed order forms, as
soon as practicable following completion of the sale of all shares of common
stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
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Restrictions on Transfer of Subscription Rights and Shares of Common Stock
Prior to the completion of the reorganization, regulations prohibit any
person with subscription rights from transferring or entering into any agreement
or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the plan of reorganization or the shares of
common stock to be issued upon their exercise. Such rights may be exercised only
by the person to whom they are granted and only for such person's account. Each
person exercising such subscription rights will be required to certify that such
person is purchasing shares solely for such person's own account and that such
person has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or an intent to make an offer to purchase such
subscription rights or shares of common stock prior to the completion of the
reorganization.
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Westborough Savings and Westborough Financial Services will pursue any and all
legal and equitable remedies (including forfeiture) in the event they become
aware of the transfer of subscription rights and will not honor orders known by
them to involve the transfer of such rights.
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Syndicated Community Offering
The plan of reorganization provides that all shares of common stock not
purchased in the subscription offering or the community offering may be offered
for sale to the general public in a syndicated community offering on a best
efforts basis through a selling group of broker-dealers to be arranged by
Trident Securities acting as agent of Westborough Financial Services. Trident
Securities has not selected any particular broker-dealers to participate in a
syndicated community offering. Westborough Financial Services and Westborough
Savings have reserved the right to reject orders in whole or in part in their
sole discretion in the syndicated community offering. If Westborough Financial
Services or Westborough Savings rejects an order in part, the subscriber will
not have the right to cancel the remainder of his or her subscription. Neither
Trident Securities nor any registered broker-dealer shall have any obligation to
take or purchase any shares of the common stock in the syndicated community
offering. However, Trident Securities has agreed to use its best efforts in the
sale of shares in any syndicated community offering.
The syndicated community offering may commence concurrently with the
community offering or after the community offering is terminated. The
syndicated community offering will terminate no more than 45 days following
the expiration date, unless extended by Westborough Financial Services with
the approval of the Division and FDIC. Such extensions may not be beyond the
second anniversary of the date of approval of the plan of reorganization by
the corporators of Westborough Savings, which took place on October 20, 1999.
See "-- How We Determined the Offering Range and the $10.00 Price Per Share"
above for a discussion of rights of subscribers, if any, in the event an
extension is granted.
Limitations on Common Stock Purchases
The plan of reorganization includes the following limitations on the
number of shares of common stock which may be purchased during the
reorganization:
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o The aggregate amount of outstanding common stock of Westborough
Financial Services owned or controlled by persons other than
Westborough Bancorp, MHC, at the close of the offering will be less
than 50% of Westborough Financial Services' total outstanding common
stock;
o No subscription for fewer than 25 shares will be accepted;
o Except for the tax qualified employee benefit plans, the maximum
amount of shares of common stock subscribed for or purchased in all
categories of the reorganization by any person, together with
associates of, and groups of persons acting in concert with, such
persons, shall not exceed $100,000;
o Each eligible account holder may subscribe for and purchase common
stock in the subscription offering in an amount up to $100,000,
subject to increase as described below;
o The tax-qualified employee benefit plans are permitted to purchase
up to 10% of the shares of common stock issued in the offering and,
as a tax-qualified employee benefit plan, the employee stock
ownership plan intends to purchase 8% of the shares of common stock
issued in the offering;
o Each supplemental eligible account holder may subscribe for and
purchase common stock in the subscription offering in an amount up
to $100,000, subject to increase as described below;
o Persons purchasing shares of common stock in the community offering,
together with associates of and groups of persons acting in concert
with such persons, may purchase common stock in the community
offering in an amount up to $100,000, subject to increase as
described below;
o The trustees, officers and corporators of Westborough Savings and
their associates in the aggregate, excluding purchases by the
tax-qualified employee benefit plans, may purchase up to 32% of the
outstanding shares held by persons other than Westborough Bancorp,
MHC at the close of the offering;
o The trustees, officers and corporators of Westborough Savings and
their associates in the aggregate, excluding purchases by the
tax-qualified employee benefit plans, may purchase up to 32% of the
stockholders' equity of Westborough Financial Services held by
persons other than Westborough Bancorp, MHC.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the corporators
of Westborough Savings, the $100,000 individual amount permitted to be
subscribed for may be increased up to a maximum of 5% of the shares offered for
sale in the offering, exclusive of an increase in the total number of shares
issued due to an increase in the offering range of up to 15% (i.e., up to
859,625 shares), at the sole discretion of Westborough Financial Services and
Westborough Savings. It is currently anticipated that the individual and overall
maximum purchase limitations may be increased if, after a community offering,
Westborough Financial Services has not received subscriptions for an aggregate
amount equal to at least the minimum of the offering range. If the
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maximum purchase limitations are increased, subscribers for the maximum amount
will be given the opportunity to increase their subscriptions up to the then
applicable limit. Requests to purchase additional shares of common stock under
this provision will be determined by the Board of Directors of Westborough
Financial Services and the Board of Trustees of Westborough Savings and, if
approved, allocated on a pro rata basis giving priority in accordance with the
priorities set forth in the plan of reorganization and described herein.
If we sell 859,625 shares, the additional shares will be allocated in
accordance with the priorities and procedures described in "--Subscription
Offering and Subscription Rights" and "--Community Offering."
The term "associate" of a person is defined to mean:
(1) any corporation or organization (other than Westborough Financial
Services, Westborough Bancorp, MHC, Westborough Savings or a
majority-owned subsidiary of Westborough Savings) of which such
person is a director, officer or partner or is directly or
indirectly, the beneficial owner of 10% or more of any class of
equity securities;
(2) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity; and
(3) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or
officer of Westborough Financial Services, Westborough Bancorp, MHC,
Westborough Savings or any subsidiary of Westborough Bancorp, MHC or
Westborough Financial Services or any affiliate thereof; and
(4) any person "acting in concert" with any of the persons or entities
specified in clauses (1) through (3) above; provided, however, that
any tax-qualified or non-tax-qualified employee plan will not be
deemed to be an associate of any director, trustee or officer of
Westborough Bancorp, MHC, Westborough Financial Services or
Westborough Saving, for purposes of aggregating total shares that
may be acquired or held by directors, trustees and officers and
their associates
We have the sole discretion to determine whether prospective purchasers are
"associates" or "acting in concert."
Trustees, directors and officers are not treated as associates of each other
solely by virtue of holding such positions.
Certain Restrictions on Purchase or Transfer of Shares After the Reorganization
All shares of common stock purchased in connection with the reorganization
by a director, trustee or an executive officer of Westborough Savings,
Westborough Bancorp, MHC or Westborough Financial Services, or their associates,
will be subject to a restriction that the shares not be sold for a period of one
year following the reorganization, except in the event of the death
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or judicial declaration of incompetence of such director, trustee or executive
officer. Each certificate for restricted shares will bear a legend giving notice
of this restriction on transfer, and instructions will be issued to the effect
that any transfer within such time period of any certificate or record ownership
of such shares other than as provided above is a violation of the restriction.
Any shares of common stock issued at a later date as a stock dividend, stock
split, or otherwise, with respect to such restricted stock will be subject to
the same restrictions. The directors and executive officers of Westborough
Financial Services and Westborough Savings will also be subject to the federal
insider trading rules and any other applicable requirements of the federal
securities laws.
Purchases of outstanding shares of common stock of Westborough Financial
Services by directors, trustees, corporators or executive officers of
Westborough Financial Services, Westborough Bancorp, MHC or Westborough Bank
(and any person who was a trustee, corporator or executive officer of
Westborough Savings; a trustee, corporator or executive officer of Westborough
Bancorp, MHC or a director or executive officer of Westborough Financial
Services at any time after the date on which the Board of Trustees of
Westborough Savings adopted the plan of reorganization), and their associates
during the three-year period following reorganization may be made only through a
broker or dealer registered with the SEC, except with the prior written approval
of the Division. This restriction does not apply, however, to negotiated
transactions involving more than 1% of the outstanding common stock, or
purchases of common stock made and held by any tax-qualified or
non-tax-qualified employee plan of Westborough Bank or Westborough Financial
Services. In addition, no officer or director of Westborough Bank or their
associates may purchase capital stock from Westborough Bank for a period of
three years following the reorganization.
Interpretation, Amendment and Termination
All interpretations of the plan of reorganization by the Board of Trustees
of Westborough Savings will be final, subject to the authority of the Division
and FDIC. The plan of reorganization provides that, if deemed necessary or
desirable by the Board of Trustees of Westborough Savings, the plan of
reorganization may be substantively amended by a majority vote of the Board of
Trustees as a result of comments from regulatory authorities or otherwise, at
any time prior to approval of the plan by the corporators. Amendment of the plan
of reorganization thereafter requires a majority vote of the Board of Trustees
and the approval of the Division and the FDIC. The plan of reorganization shall
be terminated if the reorganization is not completed within 24 months from the
date on which the corporators of Westborough Savings approve the plan, and such
time may not be extended by Westborough Savings. The plan of reorganization may
be terminated by a majority vote of the Board of Trustees of Westborough Savings
at any time prior to date of the special meeting of corporators, and thereafter
by such a vote with the approval of the Division and the FDIC.
Possible Conversion of Westborough Bancorp, MHC to Stock Form
Federal and state regulations and the plan of reorganization permit
Westborough Bancorp, MHC to convert from mutual to stock form. Such a
transaction is commonly known as a "second-step conversion." There can be no
assurance when, if ever, a second-step conversion
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will occur, and the Board of Trustees has no current intention or plan to
undertake a second-step conversion. If a second-step conversion does not occur,
Westborough Bancorp, MHC will always own a majority of the common stock of
Westborough Financial Services. The Board of Trustees of Westborough Bancorp,
MHC and the Board of Directors of Westborough Financial Services will not
undertake a second-step conversion for three years following the offering,
unless compelling and valid business reasons exist to do so.
In a second-step conversion, Westborough Bancorp, MHC would merge with and
into Westborough Bank or Westborough Financial Services, with Westborough Bank
or Westborough Financial Services as the resulting entity. Certain depositors of
Westborough Bank would receive the right to subscribe for additional shares of
Westborough Financial Services. The additional shares of common stock of the
holding company issued in the second step conversion would be sold at their
aggregate pro forma market value.
In a second-step conversion, each share of common stock outstanding
immediately prior to the completion of the second-step conversion held by
persons other than Westborough Bancorp, MHC would be automatically converted
into and become the right to receive a number of shares of common stock of
Westborough Financial Services determined pursuant to an exchange ratio. This
exchange ratio would ensure that after the second-step conversion, subject to
the adjustments described below (if required by the applicable banking
regulators) and any adjustment to reflect the receipt of cash in lieu of
fractional shares, the percentage of the to-be-outstanding shares of the
resulting entity issued to stockholders other than Westborough Bancorp, MHC in
exchange for their common stock would be equal to the percentage of the
outstanding shares of common stock held by public stockholders immediately prior
to the second-step conversion.
As set forth in the plan of reorganization, the percentage of the
to-be-outstanding shares of the resulting entity issued in exchange for public
shares would be adjusted to reflect the aggregate amount of dividends waived by
Westborough Bancorp, MHC, if any, and the market value of the assets of
Westborough Bancorp, MHC, other than common stock of Westborough Financial
Services. Pursuant to this adjustment, the percentage of the to-be outstanding
shares of the resulting entity issued to public stockholders in exchange for
their minority shares (the "Adjusted Minority Ownership Percentage") is equal to
the percentage of the outstanding shares of common stock held by public
stockholders multiplied by the dividend waiver fraction. The dividend waiver
fraction is equal to the product of:
o a fraction, of which the numerator is equal to Westborough Financial
Services' stockholders' equity at the time of the second-step
conversion less the aggregate amount of dividends waived by
Westborough Bancorp, MHC, and the denominator is equal to
Westborough Financial Services' stockholders' equity at the time of
the second-step conversion, and
o a fraction, of which the numerator is equal to the appraised pro
forma market value of the resulting entity in the second-step
conversion minus the value of Westborough Bancorp, MHC's assets
other than common stock and the denominator is equal to the
appraised pro forma market value of the resulting entity in the
second-step conversion.
Under this calculation, the percentage of common stock of the resulting
entity issued to public stockholders will decrease each time Westborough
Bancorp, MHC waives the receipt of dividends declared by Westborough
Financial Services. If Westborough Bancorp, MHC continues to waive the
receipt of dividends, the aggregate amount of waived dividends will increase
over time, however, the extent to which such waived dividends reduce the
ownership interest of public stockholders in the event of any future
second-step conversion will depend on many factors, including Westborough
Financial Services' dividend policy, the amount of dividends paid, whether
Westborough Bancorp, MHC waives the receipt of dividends, and the results of
operations.
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RESTRICTIONS ON ACQUISITION OF WESTBOROUGH FINANCIAL SERVICES, INC.
AND THE WESTBOROUGH BANK
General
The plan of reorganization provides for the reorganization of Westborough
Savings in which a mutual holding company and stock holding company are formed,
and Westborough Savings is reorganized from the mutual to the stock form of
organization. See "The Reorganization and The Offering -- General." Certain
provisions in Westborough Financial Services' Articles of Organization and
Bylaws and in its benefit plans and agreements entered into in connection with
the reorganization, together with provisions of the Massachusetts General Laws
("MGL") and certain governing regulatory restrictions, may have anti-takeover
effects.
Mutual Holding Company Structure
The mutual holding company structure will restrict the ability of our
stockholders to effect a change of control of management because, as long as
Westborough Bancorp, MHC remains in existence as a mutual holding company, it
will control a majority of our voting stock. Moreover, the trustees of
Westborough Bancorp, MHC will be the directors of Westborough Financial Services
and Westborough Bank. Westborough Bancorp, MHC will be able to elect all of the
members of the Board of Directors of Westborough Financial Services and, as a
general matter, will be able to control the outcome of most matters presented to
the stockholders of Westborough Financial Services for vote. Therefore, a change
in control of Westborough Financial Services or Westborough Bank cannot occur
unless Westborough Bancorp, MHC, first converts to the stock form of
organization or is dissolved. See "The Reorganization and The Offering --
Possible Conversion of Westborough Bancorp, MHC to Stock Form."
Westborough Financial Services' Articles of Organization and Bylaws
Westborough Financial Services' Articles of Organization and Bylaws
contain a number of provisions, relating to corporate governance and certain
rights of stockholders, that might discourage future takeover attempts. As a
result, stockholders who might desire to participate in such transactions may
not have an opportunity to do so. In addition, such provisions will also render
the removal of the Board of Directors or management of Westborough Financial
Services more difficult.
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The following description is necessarily general and qualified by reference to
the Articles of Organization and Bylaws. See "Where You Can Find Additional
Information" as to how to obtain a copy of these documents.
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Directors. Certain provisions of Westborough Financial Services' Articles
of Organization and Bylaws will impede changes in control of the Board of
Directors. Westborough Financial Services' Articles of Organization provide that
the Board of Directors will be divided into three classes, with directors in
each class elected for three-year staggered terms except for the initial
directors. Thus, it would take two annual elections to replace a majority of
Westborough Financial Services' Board. Westborough Financial Services' Articles
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of Organization provide that the size of the Board of Directors may be increased
or decreased only by a majority vote of the Board. The Articles of Organization
also provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Finally, the Articles of Organization and Bylaws impose certain notice
and information requirements in connection with the nomination by stockholders
of candidates for election to the Board of Directors or the proposal by
stockholders of business to be acted upon at an annual meeting of stockholders.
The Articles of Organization provide that a director may only be removed
for cause by the affirmative vote of either two-thirds of the authorized Board
of Directors of Westborough Financial Services, or 80% of the shares eligible to
vote. In the absence of these provisions, the vote of the holders of a majority
of the shares of Westborough Financial Services could remove the entire Board,
with or without cause, and replace it with persons of such holders' choice.
Restrictions on Call of Special Meetings. The Articles of Organization
provide that a special meeting of stockholders may be called by a majority of
the authorized Board of Directors of Westborough Financial Services or the
affirmative vote of a majority of the disinterested directors then in office,
or, upon written application, by stockholders holding at least 80% of the
capital stock entitled to vote at the meeting.
Votes of Stockholders. The Articles of Organization prohibit cumulative
voting for the election of directors. No cumulative voting means that
Westborough Bancorp, MHC, as the holder of a majority of the shares voted at a
meeting of stockholder, may elect all directors of Westborough Financial
Services to be elected at that meeting. This could prevent public stockholder
representation on Westborough Financial Services' Board of Directors. In
addition, the Articles of Organization also provide that any action required or
permitted to be taken by the stockholders of Westborough Financial Services may
be taken only at an annual or special meeting and prohibits stockholder action
by written consent in lieu of a meeting.
Authorization of Preferred Stock. The Articles of Organization
authorize one million shares of serial preferred stock, par value $0.01 per
share. Westborough Financial Services is authorized to issue preferred stock
from time to time in one or more series subject to applicable provisions of
law, and the Board of Directors is authorized to fix the designations, and
relative preferences, limitations, voting rights, if any, including without
limitation, offering rights of such shares (which could be multiple or as a
separate class). In the event of a proposed merger, tender offer or other
attempt to gain control of Westborough Financial Services that the Board of
Directors does not approve, it might be possible for the Board of Directors
to authorize the issuance of a series of preferred stock with rights and
preferences that would impede that completion of the transaction. An effect
of the possible issuance of preferred stock, therefore, may be to deter a
future attempt to gain control of Westborough Financial Services. The Board
of Directors has no present plan or understanding to issue any preferred
stock.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Articles of Organization requires the approval of the holders
of at least 80% of Westborough Financial Services' outstanding shares of voting
stock to approve certain "Business Combinations" and related transactions.
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The vote of at least 80% of the stockholders is required in connection
with any transaction involving an Interested Stockholder except in cases where
the proposed transaction has been approved in advance by a majority of those
members of Westborough Financial Services' Board of Directors who are
unaffiliated with the Interested Stockholder and were directors prior to the
time when the Interested Stockholder became an Interested Stockholder. However,
if the proposed transaction meets certain conditions set forth in the Articles
of Organization designed to afford the stockholders a fair price in
consideration for their shares, approval of only a majority of the outstanding
shares of voting stock would be sufficient.
The term "Interested Stockholder" is defined to include, among others, any
individual, corporation, partnership or other entity (other than Westborough
Bancorp, MHC, Westborough Financial Services or its subsidiary or any employee
benefit plan maintained by Westborough Financial Services or its subsidiary)
which owns beneficially or controls, directly or indirectly, more than 5% of the
outstanding shares of voting stock of Westborough Financial Services.
A "Business Combination" means:
o any merger or consolidation of Westborough Financial Services or any
of its subsidiaries with or into any Interested Stockholder or its
affiliate;
o any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition to or with any Interested Stockholder or its affiliate
of 25% or more of the assets of Westborough Financial Services or
combined assets of Westborough Financial Services and its
subsidiary;
o the issuance or transfer to any Interested Stockholder or its
affiliate by Westborough Financial Services (or any subsidiary) of
any securities of Westborough Financial Services in exchange for
cash, securities or other property having an aggregate fair market
value equaling or exceeding 25% of the combined fair market value of
the outstanding common stock of Westborough Financial Services and
its subsidiaries, except for any issuance or transfer pursuant to an
employee benefit plan of Westborough Financial Services or any
subsidiary;
o the adoption of any plan for the liquidation or dissolution of
Westborough Financial Services proposed by or on behalf of any
Interested Stockholder or its affiliate; and
o any reclassification of securities, recapitalization, merger or
consolidation of Westborough Financial Services which has the effect
of increasing the proportionate share of common stock or any class
of equity or convertible securities of Westborough Financial
Services owned directly or indirectly by an Interested Stockholder
or its affiliate.
Evaluation of Offers. The Articles of Organization further provide that
the Board of Directors of Westborough Financial Services shall when evaluating
any offer to Westborough Financial Services from another party to:
o make a tender offer or exchange offer for any outstanding equity
security of Westborough Financial Services;
151
<PAGE>
o merge or consolidate Westborough Financial Services with another
corporation or entity; or
o purchase or otherwise acquire all or substantially all of the
properties and assets of Westborough Financial Services;
in connection with the exercise of its judgment in determining what is in the
best interest of Westborough Financial Services and its stockholders, give due
consideration to the extent permitted by law to all relevant factors, including,
without limitation, Westborough Financial Services' employees, suppliers,
creditors and customers; the economy of the state, region and nation; community
and societal considerations; and the long- and short-term interests of
Westborough Financial Services and its stockholders, including the possibility
that these interests will be best served by the continued independence of
Westborough Financial Services.
By having these standards in the Articles of Organization of Westborough
Financial Services, the Board of Directors may be in a stronger position to
oppose such a transaction if the Board concludes that the transaction would not
be in the best interests of Westborough Financial Services, even if the price
offered is significantly greater than the then market price of any equity
security of Westborough Financial Services.
Amendment to Articles of Organization and Bylaws. The Articles of
Organization may be amended by the affirmative vote of 80% of the total votes
eligible to be cast by stockholders, voting together as a single class;
provided, however, that if at least two-thirds of the Directors recommend
approval of the amendment, then such amendment shall require the affirmative
vote of a majority of the total votes eligible to be cast by stockholders,
voting together as a single class.
The Bylaws may be amended by the affirmative vote of two-thirds of the
Board of Directors of Westborough Financial Services or the affirmative vote of
at least 80% of the total votes eligible to be cast by stockholders, voting
together as a single class. These provisions could have the effect of
discouraging a tender offer or other takeover attempt where the ability to make
fundamental changes through Bylaw amendments is an important element of the
takeover strategy of the acquiror.
Anti-Takeover Effects of Westborough Financial Services' Articles of
Organization, Bylaws and Benefit Plans Adopted in the Reorganization
The provisions described above are intended to reduce Westborough
Financial Services' vulnerability to takeover attempts and certain other
transactions which have not been negotiated with and approved by members of its
Board of Directors. The provisions of the employment agreements, the management
recognition plan and the stock option plan to be established may also discourage
takeover attempts by increasing the costs to be incurred by Westborough Bank and
Westborough Financial Services in the event of a takeover. See "Management --
Employment Agreement," and "-- Benefits."
Westborough Financial Services' Board of Directors believes that the
provisions of the Articles of Organization, Bylaws and benefit plans to be
established are in the best interests of Westborough Financial Services and its
stockholders. An unsolicited non-negotiated proposal
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<PAGE>
can seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the Board of Directors believes it is in the best
interests of Westborough Financial Services and its stockholders to encourage
potential acquirors to negotiate directly with management and that these
provisions will encourage such negotiations and discourage non-negotiated
takeover attempts. It is also the Board of Directors' view that these provisions
should not discourage persons from proposing a merger or other transaction at a
price that reflects the true value of Westborough Financial Services and that
otherwise is in the best interests of all stockholders.
Regulatory Restrictions
Federal Change in Bank Control Act. Federal law provides that no person,
acting directly or indirectly or through or in concert with one or more other
persons, may acquire control of a bank unless the FDIC has been given 60 days
prior written notice. For this purpose, the term "control" means the acquisition
of the ownership, control or holding of the power to vote 25% or more of any
class of a bank holding company's voting stock, and the term "company" includes
an individual, corporation, partnership, and various other entities, acting
individually or in concert. In addition, an acquiring person is presumed to
acquire control if the person acquires the ownership, control or holding of the
power to vote of 10% or more of any class of the holding company's voting stock
if (a) Westborough Financial Services' shares are registered pursuant to Section
12 of the Exchange Act or (b) no other person will own, control or hold the
power to vote a greater percentage of that class of voting securities. The
Federal Reserve Board is authorized by the Change in Bank Control Act and its
own regulations to disapprove a proposed transaction on certain specified
grounds. Accordingly, the prior approval of the Federal Reserve Bank would be
required before any person could acquire 10% or more of the common stock of
Westborough Financial Services.
Federal Bank Holding Company Act. Federal law provides that no company may
acquire control of a bank holding company without the prior approval of the
Federal Reserve. Any company that acquires control becomes a "bank holding
company" subject to registration, examination and regulation by the Federal
Reserve. Pursuant to federal regulations, the term "company" is defined to
include banks, corporations, partnerships, associations, and certain trusts and
other entities, and the term "control" is deemed to exist if a company has
voting control of at least 25% of any class of a bank's voting stock, and may be
found to exist if a company controls in any manner the election of a majority of
the directors of the bank or has the power to exercise a controlling influence
over the management or policies of the bank. In addition, a bank holding company
must obtain Federal Reserve Board approval prior to acquiring voting control of
more than 5% of any class of voting stock of a bank or another bank holding
company. The foregoing restrictions do not apply to the acquisition of stock by
one or more tax-qualified employee stock benefit plans, provided that the plan
or plans do not have beneficial ownership in the aggregate of more than 25
percent of any class of our equity security.
An acquisition of control of a bank that requires the prior approval of
the Federal Reserve Board under the Bank Holding Company Act is not subject to
the notice requirements of the Change in Bank Control Act. Accordingly, the
prior approval of the Federal Reserve Board under the Bank Holding Company Act
would be required (a) before any bank holding company could acquire 5% or more
of the common stock of Westborough Financial Services and (b)
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<PAGE>
before any other company could acquire 25% or more of the common stock of
Westborough Financial Services.
The Federal Reserve may prohibit an acquisition of control if:
(1) it would result in a monopoly or substantially lessen competition;
(2) the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or
of the public to permit the acquisition of control by such person.
Massachusetts Banking Law. Massachusetts banking law also prohibits any
"company," defined to include banking institutions as well as corporations, from
directly or indirectly controlling the voting power of 25% or more of the voting
stock of two or more banking institutions without the prior approval of the
Board of Bank Incorporation. Additionally, an out-of-state company which already
directly or indirectly controls voting power of 25% or more of the voting stock
of two or more banking institutions may not also acquire direct or indirect
ownership or control of more than 5% of the voting stock of a Massachusetts
banking institution without the prior approval of the Board of Bank
Incorporation. Finally, for a period of three years following completion of a
conversion to stock form, no person may directly or indirectly offer to acquire
or acquire beneficial ownership of more than 10% of any class of equity security
of a converting mutual savings bank without prior written approval of the Board
of Bank Incorporation.
With respect to laws governing change in bank control, Massachusetts
banking law provides that no person may acquire control of a bank unless the
Commissioner has been given 60 days prior written notice and, within that
time, the Commissioner has not issued a notice disapproving the proposed
acquisition or extended for up to another 30 days the period during which
such disapproval may issue.
DESCRIPTION OF CAPITAL STOCK OF
WESTBOROUGH FINANCIAL SERVICES, INC.
General
Westborough Financial Services is authorized to issue five million
(5,000,000) shares of common stock having a par value of $.01 per share and
one million (1,000,000) shares of preferred stock having a par value of $.01
per share. Westborough Financial Services currently expects to sell 747,500
shares of common stock (or 859,625 in the event of an increase of 15% in the
Estimated Valuation Range) to purchasers of common stock in the offering. In
addition, Westborough Financial Services expects to issue 1,388,214 shares of
the common stock to Westborough Bancorp, MHC (or 1,596,446 in the event of an
increase of 15% in the Estimated Valuation Range). Westborough Financial
Services will not issue any shares of preferred stock in the offering. Except
as discussed above in "Restrictions on Acquisition of Westborough Financial
Services, Inc. and The Westborough Bank," each share of Westborough Financial
Services' common stock will have the same relative rights as, and will be
identical in all respects with, every other share of common stock. Upon
payment of the purchase price for the common stock in accordance with the
plan of reorganization, all such stock will be duly authorized, fully paid
and non-assessable.
154
<PAGE>
The shares of common stock:
o are not deposit accounts and are subject to investment risk;
o are not insured or guaranteed by the FDIC, the Depositors
Insurance Fund or any other government agency; and
o are not guaranteed by Westborough Financial Services, Westborough
Bancorp, MHC or Westborough Savings.
Common Stock
Dividends. Westborough Financial Services can pay dividends from net
profits if, as and when declared by its Board of Directors. The payment of
dividends by Westborough Financial Services is subject to limitations which are
imposed by law. See "Our Policy Regarding Dividends" and "Regulation of
Westborough Savings Bank and Westborough Financial Services, Inc." Westborough
Bancorp, MHC currently does not intend to waive any dividends paid by
Westborough Financial Services. The owners of common stock of Westborough
Financial Services, including Westborough Bancorp, MHC, will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. If Westborough Financial
Services issues preferred stock, the holders of the preferred stock may have a
priority over the holders of the common stock with respect to dividends.
Voting Rights. Upon the effective date of the reorganization, the holders
of common stock of Westborough Financial Services will possess exclusive voting
rights in Westborough Financial Services. They will elect Westborough Financial
Services' Board of Directors and act on such other matters as are required to be
presented to them under law or Westborough Financial Services' Articles of
Organization or as are otherwise presented to them by the Board of Directors.
Each holder of common stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. Under certain
circumstances, shares in excess of 10% of Westborough Financial Services' common
stock, exclusive of the shares held by Westborough Bancorp, MHC, may be
considered "Excess Shares" and may therefore not be entitled to vote. See
"Restrictions on Acquisition of Westborough Financial Services, Inc. and
The Westborough Bank." If Westborough Financial Services issues preferred stock,
holders of the preferred stock may also possess voting rights. Certain matters,
including the removal of directors, the approval of business combinations and
amending the Articles of Organization or Bylaws, generally requires an 80%
stockholder vote. See "Restrictions on Acquisition of Westborough Financial
Services, Inc. and The Westborough Bank."
Liquidation. In the event of any liquidation, dissolution or winding up of
Westborough Bank, Westborough Financial Services, as owner of Westborough Bank's
capital stock, would be entitled to receive, after payment or provision for
payment of all debts and liabilities of Westborough Bank (including all deposit
accounts and accrued interest thereon) and after distribution of the balance in
the special liquidation account to eligible account holders and the supplemental
eligible account holders (see "The Reorganization and The Offering -- Effects of
the Reorganization -- Liquidation Rights"), all assets of Westborough Bank
available for distribution. In the event of liquidation, dissolution or winding
up of Westborough Financial Services, the holders of its common stock would be
entitled to receive, after payment or
155
<PAGE>
provision for payment of all its debts and liabilities, all of the assets of
Westborough Financial Services available for distribution. If preferred stock is
issued, the holders thereof may have a priority over the holders of the common
stock in the event of the liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of Westborough
Financial Services will not be entitled to preemptive rights with respect to any
shares which may be issued. The common stock is not subject to redemption.
Preferred Stock
Westborough Financial Services will not issue any shares of its authorized
preferred stock in the reorganization. We may issue with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
LEGAL AND TAX OPINIONS
Thacher Proffitt & Wood, Washington, D.C. will issue its opinion to us of
the legality of the issuance of the common stock being offered and certain
matters relating to the reorganization and federal taxation. Certain matters
relating to state taxation will be passed upon for us by Wolf & Company, P.C.,
Boston, Massachusetts. Certain legal matters will be passed upon for Trident
Securities, Inc. by Housley Kantarian & Bronstein, P.C., Washington, D.C.
EXPERTS
The consolidated balance sheets of Westborough Savings as of September 30,
1998 and 1997 and consolidated statements of income, changes in surplus and cash
flows for each of the three years ended September 30, 1998, 1997 and 1996 have
been included in this prospectus in reliance upon the report of Wolf & Company,
P.C., independent certified public accountants, appearing elsewhere in this
prospectus, and upon the authority of said firm as experts in accounting and
auditing.
RP Financial has consented to the publication in this document of a
summary of its letter to Westborough Savings setting forth its opinion as to the
estimated pro forma market value of Westborough Savings in the reorganized form
and its letter setting forth the value of subscription rights and to the use of
its name and statements with respect to it appearing in this document.
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<PAGE>
REGISTRATION REQUIREMENTS
Our common stock is registered pursuant to Section 12(g) of the
Exchange Act. We will be subject to the information, proxy solicitation,
insider trading restrictions, tender offer rules, periodic reporting and
other requirements of the SEC under the Exchange Act. We may not deregister
the common stock under the Exchange Act for a period of at least three years
following the reorganization.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act and
must file reports and other information with the SEC.
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, with respect to the common stock offered in
this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. You may examine this information without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain copies of this material from the SEC at prescribed
rates. You may obtain information on the operations of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet address
("web site") that contains reports, proxy and information statements and other
information regarding registrants, including Westborough Financial Services,
that file electronically with the SEC. The address for this web site is
"http://www.sec.gov."
This document contains a description of the features of certain
exhibits to the Form SB-2. The statements as to the contents of such
exhibits, however, are, of necessity, brief descriptions and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
A copy of Westborough Financial Services' Articles of Organization and
Bylaws, as well as those of Westborough Bank and Westborough Bancorp, MHC, are
available without charge from Westborough Savings. Copies of the plan of
reorganization are also available from Westborough Savings without charge.
Westborough Savings has filed an application for the establishment of a
mutual holding company and associated stock issuance with the Board of Bank
Incorporation and the Division of Banks of the Commonwealth of Massachusetts.
In addition, Westborough Savings has filed copies of that application with
the FDIC. Westborough Financial Services and Westborough Bancorp, MHC have
filed an application with the Federal Reserve Bank of Boston to become a bank
holding companies. This prospectus omits certain information contained in
those applications.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTBOROUGH SAVINGS BANK
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 30, 1999
(unaudited) and September 30, 1998 and 1997 F-3
Consolidated Statements of Income for the Nine Months
Ended June 30, 1999 and 1998 (unaudited) and for the
Years Ended September 30, 1998, 1997 and 1996 39
Consolidated Statements of Changes in Surplus for the
Nine Months Ended June 30, 1999 (unaudited) and for
the Years Ended September 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1999 and 1998 (unaudited) and for the
Years Ended September 30, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
- --------------------------------------------------------------------------------
Other schedules are omitted as they are not required or are not applicable or
the required information is shown in the consolidated financial statements or
related notes thereto.
Financial statements of Westborough Bancorp, MHC and Westborough Financial
Services, Inc. have not been provided because they have conducted no operations.
Westborough Bancorp, MHC has not yet been organized and Westborough Financial
Services, Inc. has no assets and no liabilities.
- --------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Audit Committee
Westborough Savings Bank
Westborough, Massachusetts
We have audited the accompanying consolidated balance sheets of Westborough
Savings Bank and subsidiaries as of September 30, 1998 and 1997, and the related
consolidated statements of income, changes in surplus and cash flows for each of
the years in the three-year period ended September 30, 1998. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westborough Savings
Bank and subsidiaries as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1998, in conformity with generally accepted
accounting principles.
WOLF & COMPANY, P.C.
Boston, Massachusetts
November 9, 1998, except for Note 15 as to which the
date is March 15, 1999
F-2
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30,
June 30, -------------------------------
1999 1998 1997
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 2,511 $ 2,698 $ 2,884
Federal funds sold 5,385 6,659 4,660
Short-term investments 5,157 3,084 366
-------------- -------------- --------------
Total cash and cash equivalents 13,053 12,441 7,910
Securities available for sale 62,409 59,345 60,937
Federal Home Loan Bank stock, at cost 850 762 717
Loans, net 89,428 82,348 70,580
Foreclosed real estate, net -- 74 19
Banking premises and equipment, net 1,645 1,522 1,473
Accrued interest receivable 997 1,116 1,170
Deferred income taxes 501 -- 290
Life insurance policies 2,872 704 627
Other assets 358 211 173
-------------- -------------- --------------
$ 172,113 $ 158,523 $ 143,896
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND SURPLUS
Deposits $ 147,135 $ 135,962 $ 125,170
Federal Home Loan Bank advances 4,000 2,000 -
Mortgagors' escrow accounts 195 218 180
Accrued taxes and expenses 789 960 1,063
Other liabilities 546 16 36
-------------- -------------- --------------
Total liabilities 152,665 139,156 126,449
-------------- -------------- --------------
Commitments and contingencies
Surplus 19,411 18,207 16,894
Accumulated other comprehensive income 37 1,160 553
-------------- -------------- --------------
Total surplus 19,448 19,367 17,447
-------------- -------------- --------------
$ 172,113 $ 158,523 $ 143,896
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
NINE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND THE
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Total
Surplus Income Surplus
------------- ---------------- --------------
<S> <C> <C> <C>
Balance at September 30, 1995 $ 14,403 $ 292 $ 14,695
--------------
Comprehensive income:
Net income 1,183 - 1,183
Change in net unrealized gain on securities
available for sale, after reclassification
adjustment and tax effects - (89) (89)
--------------
Total comprehensive income 1,094
------------- ---------------- --------------
Balance at September 30, 1996 15,586 203 15,789
--------------
Comprehensive income:
Net income 1,308 - 1,308
Change in net unrealized gain on securities
available for sale, after reclassification
adjustment and tax effects - 350 350
--------------
Total comprehensive income 1,658
------------- ---------------- --------------
Balance at September 30, 1997 16,894 553 17,447
--------------
Comprehensive income:
Net income 1,313 - 1,313
Change in net unrealized gain on securities
available for sale, after reclassification
adjustment and tax effects - 607 607
--------------
Total comprehensive income 1,920
------------- ---------------- --------------
Balance at September 30, 1998 18,207 1,160 19,367
--------------
Comprehensive income (unaudited):
Net income 1,204 1,204
Change in net unrealized gain on securities
available for sale, after reclassification
adjustment and tax effects (1,123) (1,123)
--------------
Total comprehensive income 81
------------- ---------------- --------------
Balance at June 30, 1999 (unaudited) $ 19,411 $ 37 $ 19,448
------------- ---------------- --------------
------------- ---------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
June 30 Years Ended September 31,
------------------- --------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,204 $ 1,060 $ 1,313 $ 1,308 $ 1,183
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 35 30 39 96 105
Charitable contribution in the form of equity
securities -- -- -- 110 --
Provision (credit) for losses on foreclosed real estate 1 (22) (22) -- 44
Amortization of premiums on securities 66 66 88 93 200
Amortization of net deferred loan (fees) costs (11) (28) (31) (9) 10
Depreciation and amortization expense 208 141 228 206 165
Gain on sales and dispositions of securities, net (534) (88) (90) (337) (119)
Recognition of expired covered call options (220) -- -- -- --
Loans originated for sale -- (269) (269) (120) --
Proceeds from loan sales -- 269 269 120 --
Decrease (increase) in accrued interest receivable 119 212 54 (72) (162)
Deferred income tax provision (benefit) 12 21 59 (37) (98)
Other, net 289 (366) (411) (54) (401)
-------- -------- -------- -------- --------
Net cash provided by operating activities 1,169 1,026 1,227 1,304 927
-------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sales and calls of securities available
for sale 5,916 11,529 17,976 7,990 16,237
Proceeds from maturities of securities available for sale 6,251 5,250 1,250 3,520 3,550
Purchase of securities available for sale (20,081) (16,160) (20,835) (12,442) (28,661)
Principal payments received on mortgage and
asset-backed securities 3,729 3,281 4,214 2,777 3,300
Purchase of Federal Home Loan Bank stock (88) (45) (45) (75) (44)
Loans originated, net of principal payments (7,104) (11,010) (11,850) (5,424) (7,579)
Proceeds from sales of foreclosed real estate 74 57 57 164 140
Capitalized costs associated with foreclosed real
estate (1) (16) (16) (39) (125)
Purchase of banking premises and equipment (331) (197) (277) (285) (386)
Purchase of life insurance policies (2,072) -- -- -- --
-------- -------- -------- -------- --------
Net cash used by investing activities (13,707) (7,311) (9,526) (3,814) (13,568)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
June 30, Years Ended September 30,
--------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 11,173 5,064 10,792 4,888 10,733
Proceeds from Federal Home Loan Bank advances 2,000 - 2,000 - 3,000
Repayment of Federal Home Loan Bank advances - - - (3,000) -
Net increase (decrease) in mortgagors' escrow accounts (23) (14) 38 43 49
------------ ------------ ------------ ------------ ----------
Net cash provided by financing
activities 13,150 5,050 12,830 1,931 13,782
------------ ------------ ------------ ------------ ----------
Net change in cash and cash equivalents 612 (1,235) 4,531 (579) 1,141
Cash and cash equivalents at beginning of period 12,441 7,910 7,910 8,489 7,348
------------ ------------ ------------ ------------ ----------
Cash and cash equivalents at end of period $ 13,053 $ 6,675 $ 12,441 $ 7,910 $ 8,489
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
Supplemental cash flow information:
Interest paid on deposits $ 3,573 $ 3,391 $ 4,556 $ 4,284 $ 4,037
Interest paid on Federal Home Loan Bank
advances 100 - - 132 -
Income taxes paid 483 695 835 656 789
Transfer from loans to foreclosed
real estate - - 74 - -
Transfer of securities from held to maturity to
available for sale - - - - 17,174
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998 (UNAUDITED) AND SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of
Westborough Savings Bank (the "Bank") and its wholly-owned subsidiaries,
The Hundredth Corporation, which owns foreclosed real estate and the One
Hundredth Security Corporation and Eli Whitney Security Corporation,
which are Massachusetts security corporations. All significant
intercompany balances and transactions have been eliminated in
consolidation.
With respect to information for the nine months ended June 30, 1999 and
1998, which is unaudited, in the opinion of management, all adjustments
necessary for a fair presentation of such interim periods have been
included and are of a normal recurring nature. Results for the nine
months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended September 30, 1999.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles ("GAAP"), management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the consolidated
balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
determination of the allowance for losses on loans is a material
estimate that is particularly susceptible to significant change in the
near term.
BUSINESS
The Bank provides a variety of financial services to individuals and
small businesses through its five offices in Westborough, Northborough
and Shrewsbury, Massachusetts. Its primary deposit products are
checking, savings and term certificate accounts and its primary lending
products are residential mortgage loans.
RECLASSIFICATIONS
Certain amounts have been reclassified in the 1998, 1997 and 1996
consolidated financial statements to conform to the 1999 presentation.
F-7
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
Cash equivalents include amounts due from banks, federal funds sold on a
daily basis and short-term investments.
SECURITIES AVAILABLE FOR SALE
Investments classified as "available for sale" are reflected on the
consolidated balance sheet at fair value, with unrealized gains and
losses excluded from earnings and reported in accumulated other
comprehensive income.
Purchase premiums and discounts are amortized to earnings by the
interest method over the terms of the investments. Declines in the value
of investments that are deemed to be other than temporary are reflected
in earnings when identified. Gains and losses on disposition of
investments are computed by the specific identification method.
LOANS
The Bank grants mortgage, commercial and consumer loans to its
customers. A substantial portion of the loan portfolio consists of
mortgage loans in Westborough and the surrounding communities. The
ability of the Bank's debtors to honor their contracts is dependent upon
the local economy and the local real estate market.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported
at their outstanding unpaid principal balances adjusted for the
allowance for loan losses and deferred costs on originated loans.
Interest income is accrued on the unpaid principal balance. Net loan
origination costs are deferred and recognized as an adjustment of the
related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued
when in the judgment of management the collection of principal or
interest is doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The
interest on these loans is accounted for on the cash-basis until
qualifying for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
F-8
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Impairment is measured on a
loan by loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent. Substantially all of the Bank's loans which
have been identified as impaired have been measured by the fair value of
existing collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer loans for impairment disclosures.
FORECLOSED REAL ESTATE
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value, less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
F-9
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and equipment
are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of
the assets.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for betterments are
capitalized and amortized.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when control
over the assets has been surrendered. Control over transferred assets is
deemed to be surrendered when (1) the assets have been isolated from the
Bank, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) the Bank does not maintain effective
control over the transferred assets through an agreement to repurchase
them before their maturity.
RETIREMENT PLAN
The Bank accounts for pension benefits on the net periodic pension cost
method for financial reporting purposes. This method recognizes the
compensation cost of an employee's pension benefit over the employee's
approximate service period. Pension costs are funded in the year of
accrual using the aggregate cost method.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted accordingly through the provision for income taxes. The
Bank's base amount of its federal income tax reserve for loan losses
that arose before 1987 is a permanent difference for which there is no
recognition of a deferred tax liability. However, the allowance for loan
losses maintained for financial reporting purposes is treated as a
temporary difference with allowable recognition of a related deferred
tax asset, if it is deemed realizable.
F-10
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Bank adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," as of October 1, 1998.
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses
on securities available for sale are reported as a separate component of
the surplus section of the balance sheet, such items, along with net
income, are components of comprehensive income. The adoption of SFAS No.
130 had no effect on the Bank's net income or surplus.
The components of the change in accumulated other comprehensive income
and related tax effects are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended September 30,
June 30, ---------------------------------
1999 1998 1997
---------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
Change in net unrealized holding gains
(losses) on securities available for sale $ (1,275) $ 1,101 $ 884
Reclassification adjustment for gains
realized in income (534) (90) (337)
---------------- --------------- ---------------
(1,809) 1,011 547
Tax effect 686 (404) (197)
---------------- --------------- ---------------
Net-of-tax amount $ (1,123) $ 607 $ 350
---------------- --------------- ---------------
---------------- --------------- ---------------
</TABLE>
F-11
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," effective for fiscal years beginning after
December 15, 1997. The Statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. The Statement standardizes
the disclosure requirements for pensions and other postretirement
benefits to the extent practical, requires additional information on
changes in the benefits obligations and fair values of plan assets that
will facilitate financial analysis, and eliminates certain disclosures
that were previously required by GAAP. The Bank will adopt these
disclosure requirements beginning in the year ending September 30, 1999.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. This Statement
standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring
that an entity recognize those items as assets or liabilities in the
balance sheet and measure them at fair value. If certain conditions are
met, an entity may elect to designate a derivative as follows: a hedge
of the exposure to changes in the fair value of a recognized asset or
liability, or of an unrecognized firm commitment that is attributable to
a particular risk; a hedge of the exposure to variability in the cash
flows of a recognized asset or liability, or of a forecasted
transaction, that is attributable to a particular risk; or, a hedge of
the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a forecasted transaction, or a net
investment in a foreign operation. This Statement generally provides for
matching the timing of the recognition of the gain or loss on the
hedging instrument with the recognition of the changes in the fair value
of the item being hedged. Depending on the type of hedge, such
recognition will be in either net income or other comprehensive income.
For a derivative not designated as a hedging instrument, changes in fair
value are recognized in net income in the period of change. Adoption of
this Statement by the Bank will require that changes in fair value of
covered call options be recognized in net income. Currently, such
changes are included in accumulated other comprehensive income.
In June 1999, FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133" which deferred the effective date of SFAS No.
133 until June 15, 2000.
F-12
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SHORT-TERM INVESTMENTS
Short-term investments consist of funds invested in money market funds.
The fair value at June 30, 1999 (unaudited) and September 30, 1998 and
1997 approximates the carrying value and the funds are available on a
daily basis.
3. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for
sale, with gross unrealized gains and losses, is as follows:
<TABLE>
<CAPTION>
June 30,1999
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ------------ ----------
(unaudited)
<S> <C> <C> <C> <C>
U.S. Government obligations $13,085 $ 144 $ 5 $13,224
Federal agency obligations 9,806 3 240 9,569
Banking and finance obligations 4,527 6 57 4,476
Mortgage backed securities 13,345 20 150 13,215
Asset-backed securities 738 -- 2 736
Other bonds and obligations 13,421 41 151 13,311
------- ------- ------- -------
Total debt securities 54,922 214 605 54,531
Marketable equity securities 7,400 980 502 7,878
------- ------- ------- -------
Total securities
available for sale $62,322 $ 1,194 $ 1,107 $62,409
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
F-13
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE (CONTINUED)
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Government obligations $13,091 $ 488 $ -- $13,579
Federal agency obligations 9,504 156 -- 9,660
Banking and finance obligations 5,534 90 -- 5,624
Mortgage-backed securities 11,475 150 12 11,613
Other bonds and obligations 13,412 350 -- 13,762
------- ------- ------- -------
Total debt securities 53,016 1,234 12 54,238
Marketable equity securities 4,433 935 261 5,107
------- ------- ------- -------
Total securities
available for sale $57,449 $ 2,169 $ 273 $59,345
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
September 30, 1997
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Government obligations $22,661 $ 237 $ 31 $22,867
Federal agency obligations 10,428 33 34 10,427
Banking and finance obligations 4,539 26 1 4,564
Mortgage-backed securities 10,495 55 43 10,507
Asset-backed securities 243 89 2 330
Other bonds and obligations 10,518 77 7 10,588
------- ------- ------- -------
Total debt securities 58,884 517 118 59,283
Marketable equity securities 1,168 491 5 1,654
------- ------- ------- -------
Total securities
available for sale $60,052 $ 1,008 $ 123 $60,937
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
F-14
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE (CONCLUDED)
During the year ended September 30, 1997, the Bank established a private
charitable foundation (the "Foundation") to provide grants to charitable
organizations in the Westborough area. The Foundation is not a
subsidiary of the Bank. The Foundation was funded by a donation from the
Bank of marketable equity securities with a cost basis and fair value of
$21 and $110, respectively, at the date of transfer. Such securities had
been classified as available for sale and, accordingly, the transfer
resulted in the Bank recognizing the unrealized appreciation of the
securities of $89 in the consolidated statement of income.
Proceeds from sales and calls of investment securities amounted to
$5,916 and $11,529 for the nine months ended June 30, 1999 and 1998
(unaudited), respectively. Gross gains of $537 and $123, and gross
losses of $3 and $35 were realized during the nine months ended June 30,
1999 and 1998 (unaudited), respectively.
Proceeds from sales and calls of investment securities amounted to
$17,976, $7,990 and $16,237 for the years ended September 30, 1998, 1997
and 1996, respectively. Gross realized gains amounted to $122, $252 and
$150, respectively. Gross realized losses amounted to $32, $4 and $31,
respectively.
At June 30, 1999 (unaudited) and September 30, 1998, the Bank has
pledged U.S. Government obligations with an amortized cost of $497 and
$500 and a fair value of $500 and $504, respectively, as collateral
against the Bank's treasury, tax and loan account.
The amortized cost and estimated fair value of debt securities by
contractual maturity are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
June 30, 1999 September 30,1998
------------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- ------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Within 1 year $ 6,135 $ 6,159 $ 9,520 $ 9,572
Over 1 year through 5 years 25,546 25,630 30,005 30,987
Over 5 years through 10 years 7,292 6,953 2,016 2,066
Over 10 years 1,866 1,838 -- --
------- ------- ------- -------
40,839 40,580 41,541 42,625
Mortgage and asset-backed securities 14,083 13,951 11,475 11,613
------- ------- ------- -------
$54,922 $54,531 $53,016 $54,238
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
F-15
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
September 30,
June 30, ------------------------------
1999 1998 1997
-------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Mortgage loans on real estate:
Fixed rate $57,165 $47,239 $29,450
Variable rate 24,264 27,384 33,812
Commercial 3,013 2,743 2,915
Home equity lines-of-credit 3,576 3,918 3,859
-------------- ------------- -------------
Total mortgage loans 88,018 81,284 70,036
-------------- ------------- -------------
Personal loans 603 858 1,069
Deposit secured loans 563 676 557
Home improvement loans 400 132 73
Commercial lines-of-credit 883 599 293
Commercial installment 1,349 1,087 437
-------------- ------------- -------------
Total other loans 3,798 3,352 2,429
-------------- ------------- -------------
Total loans 91,816 84,636 72,465
Due to borrowers on incomplete loans (1,639) (1,570) (1,177)
Net deferred loan costs 120 109 78
Allowance for loan losses (869) (827) (786)
-------------- ------------- -------------
Loans, net $89,428 $82,348 $70,580
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30, Years Ended September 30,
------------------------- ------------------------------------
1999 1998 1998 1997 1996
---------- --------- ---------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 827 $ 786 $786 $ 690 $ 585
Provision for loan losses 35 30 39 96 105
Charge-offs (6) - - (2) (8)
Recoveries 13 2 2 2 8
---------- --------- ---------- ---------- ---------
Balance at end of period $ 869 $ 818 $827 $ 786 $ 690
---------- --------- ---------- ---------- ---------
---------- --------- ---------- ---------- ---------
</TABLE>
F-16
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
LOANS (CONCLUDED)
The Bank has sold mortgage loans in the secondary mortgage market and
has retained the servicing responsibility and receives fees for the
services provided. Total loans serviced for others at June 30, 1999
(unaudited) and September 30, 1998 and 1997 amounted to $1,008, $1,402
and $1,187, respectively. Total loans sold during the nine months ended
June 30, 1999 and 1998 (unaudited) and the years ended September 30,
1998, 1997 and 1996 amounted to $0, $269, $269, $120 and $0,
respectively. Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets.
The following is a summary of impaired loans:
<TABLE>
<CAPTION>
September 30,
June 30, ------------------------
1999 1998 1997
------------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Total impaired loans (no valuation allowance) $ -- $ 269 $ 352
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
No additional funds are committed to be advanced in connection with
impaired loans.
<TABLE>
<CAPTION>
Nine Months Ended
June 30, Years Ended September 30,
------------------------- ----------------------------------
1999 1998 1998 1997 1996
---------- ---------- --------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Average balance of impaired loans $ -- $ 288 $ 283 $423 $360
---------- ---------- --------- -------- ---------
---------- ---------- --------- -------- ---------
Interest income recognized on impaired
loans on the accrual method $ -- $ 14 $ 19 $28 $28
---------- ---------- --------- -------- ---------
---------- ---------- --------- -------- ---------
</TABLE>
F-17
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. FORECLOSED REAL ESTATE
Foreclosed real estate consists of real estate acquired in settlement of
loans as follows:
<TABLE>
<CAPTION>
September 30,
June 30, -----------------------
1999 1998 1997
-------------- ---------- ---------
(unaudited)
<S> <C> <C> <C>
Real estate acquired in settlement of loans $ -- $ 74 $ --
Participation loan-land development 23 22 227
Less allowance for losses on foreclosed real estate (23) (22) (208)
-------------- ---------- ---------
Foreclosed real estate, net $ -- $ 74 $ 19
-------------- ---------- ---------
-------------- ---------- ---------
</TABLE>
6. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
September 30,
June 30, -------------------------- Estimated
1999 1998 1997 Useful Lives
--------------- ----------- ----------- -------------------
(unaudited)
<S> <C> <C> <C> <C>
Banking premises:
Land $ 222 $ 222 $ 222
Buildings 1,222 1,206 1,166 10 - 50 years
Leasehold improvements 213 126 126 5 years
Equipment 2,269 2,041 1,829 4 - 25 years
------------- ----------- -----------
3,926 3,595 3,343
Less accumulated depreciation
and amortization (2,281) (2,073) (1,870)
------------- ----------- -----------
$ 1,645 $1,522 $1,473
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
Depreciation and amortization expense for the nine months ended June 30,
1999 and 1998 (unaudited) and the years ended September 30, 1998, 1997
and 1996 amounted to $208, $141, $228, $206 and $165, respectively.
F-18
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998 1997
-------- -------- --------
(unaudited)
<S> <C> <C> <C>
Non-interest bearing accounts $ 10,555 $ 8,592 $ 6,910
NOW accounts 14,278 15,221 11,310
Regular and other savings accounts 64,692 57,972 51,730
Money market deposit accounts 6,917 7,218 9,003
-------- -------- --------
Total non-certificate accounts 96,442 89,003 78,953
-------- -------- --------
Six-month money market certificates 9,232 8,624 7,840
Other term deposit certificates 41,461 38,335 38,377
-------- -------- --------
Total certificate accounts 50,693 46,959 46,217
-------- -------- --------
Total deposits $147,135 $135,962 $125,170
-------- -------- --------
-------- -------- --------
</TABLE>
Certificate accounts greater than $100 amounted to approximately
$10,927, $9,535 and $8,071 at June 30, 1999 (unaudited) and September
30, 1998 and 1997, respectively.
A summary of certificates, by maturity, is as follows:
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998 September 30, 1997
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------- --------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Within 1 year $42,083 4.90% $37,005 5.06% $37,119 5.24%
Over 1 year through
3 years 8,610 5.28 9,954 5.45 9,094 5.40
Over 3 years -- -- -- -- 4 5.50
------- ------- -------
$50,693 4.96% $46,959 5.14% $46,217 5.27%
------- ------- -------
------- ------- -------
</TABLE>
F-19
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances, secured by a blanket lien on qualified
collateral, are as follows:
<TABLE>
<CAPTION>
Weighted
Maturing During Average
the Year Ending Interest June 30, September 30,
September 30, Rate 1999 1998
--------------- ---------- -------- -------------
(unaudited)
<S> <C> <C> <C>
2001 5.29% $ 2,000 $ 2,000
2009 4.88% 2,000 --
------- -------
$ 4,000 $ 2,000
------- -------
------- -------
</TABLE>
The Bank also has an available line of credit with the Federal Home Loan
Bank of Boston ("FHLB") at an interest rate the adjusts daily.
Borrowings under the line are limited to 2% of the Bank's total assets.
All borrowings from the Federal Home Loan Bank of Boston are secured by
a blanket lien on qualified collateral, defined principally as 75% of
the carrying value of first mortgage loans on owner-occupied residential
property and 90% of the market value of U.S. Government and federal
agency securities. As of June 30, 1999 (unaudited) and September 30,
1998 and 1997, there were no advances outstanding on the line of credit.
9. INCOME TAXES
Allocation of federal and state income taxes between current and
deferred portions is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
June 30, September 30,
-------------------- ----------------------------------
1999 1998 1998 1997 1996
------ ------ ------ ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current income tax provision:
Federal $ 526 $ 510 $ 661 $ 631 $ 662
State 57 43 30 82 131
------ ------ ------ ------- -------
583 553 691 713 793
------ ------ ------ ------- -------
Deferred income tax provision (benefit):
Federal 9 16 44 (28) (72)
State 3 5 15 (9) (26)
------ ------ ------ ------- -------
12 21 59 (37) (98)
------ ------ ------ ------- -------
Total provision for income taxes $ 595 $ 574 $ 750 $ 676 $ 695
------ ------ ------ ------- -------
------ ------ ------ ------- -------
</TABLE>
F-20
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES (CONTINUED)
The reasons for the differences between the statutory corporate federal
income tax rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
June 30, September 30,
-------------------- ----------------------------------
1999 1998 1998 1997 1996
------ ------- ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 2.2 1.9 1.4 2.4 3.7
Dividends received deduction (3.0) (1.1) (1.2) (1.0) (0.8)
Contribution of appreciated stock -- -- -- (1.5) --
Other, net (0.1) 0.3 2.2 0.2 0.1
------ ------- ------ ------ ------
Effective tax rates 33.1% 35.1% 36.4% 34.1% 37.0%
------ ------- ------ ------ ------
------ ------- ------ ------ ------
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
September 30,
June 30, --------------------
1999 1998 1997
-------- ------ ------
(unaudited)
<S> <C> <C> <C>
Deferred tax asset:
Federal $ 552 $565 $ 590
State 191 195 198
-------- ------ ------
743 760 788
-------- ------ ------
Deferred tax liability:
Federal (163) (746) (391)
State (79) (187) (107)
-------- ------ ------
(242) (933) (498)
-------- ------ ------
Net deferred tax asset (liability) $ 501 $(173) $ 290
-------- ------ ------
-------- ------ ------
</TABLE>
F-21
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES (CONCLUDED)
The tax effects of each type of income and expense item that give rise
to deferred taxes are:
<TABLE>
<CAPTION>
September 30,
June 30, -------------------
1999 1998 1997
-------- ------ ------
(unaudited)
<S> <C> <C> <C>
Employee benefit plans $ 310 $346 $ 364
Allowance for loan losses 415 397 386
Net unrealized gain on securities available for sale (50) (736) (332)
Depreciation and amortization (116) (125) (86)
Net deferred loan costs (49) (45) (32)
Other, net (9) (10) (10)
-------- ------ ------
Net deferred tax asset (liability) $ 501 $(173) $ 290
-------- ------ ------
-------- ------ ------
</TABLE>
A summary of the change in the net deferred tax asset (liability) is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
June 30, September 30,
--------------------- --------------------------
1999 1998 1998 1997 1996
------- ------ ------- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $(173) $ 290 $ 290 $ 450 $ 276
Deferred tax (provision) benefit (12) (21) (59) 37 98
Deferred tax effect on net unrealized gain
on securities available for sale 686 (133) (404) (197) 76
------- ------ ------- ------ ------
Balance at end of period $ 501 $ 136 $(173) $ 290 $ 450
------- ------ ------- ------ ------
------- ------ ------- ------ ------
</TABLE>
There was no valuation reserve as of June 30, 1999 (unaudited) and
September 30, 1998 and 1997.
The federal income tax reserve for loan losses at the Bank's base year
amounted to approximately $2,420. If any portion of the reserve is used
for purposes other than to absorb loan losses, approximately 150% of the
amount actually used (limited to the amount of the reserve) would be
subject to taxation in the fiscal year in which used. As the Bank
intends to use the reserve to only absorb loan losses, a deferred income
tax liability of approximately $990 has not been provided.
F-22
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table to follow) of total and Tier 1 capital (as defined)
to risk-weighted assets (as defined). Management believes, as of June
30, 1999 and September 30, 1998 and 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
The most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following
table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
F-23
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONCLUDED)
The Bank's actual and minimum required capital amounts and ratios as of
June 30, 1999 (unaudited) and September 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1999
(UNAUDITED)
Total capital (to risk
weighted assets) $20,280 21.5% $7,538 8.0% $9,422 10.0%
Tier 1 capital (to risk
weighted assets) 19,411 20.6% 3,769 4.0 5,653 6.0
Tier 1 capital (to average
assets) 19,411 11.4% 5,102- 3.0- 8,504 5.0
8,504 5.0
SEPTEMBER 30, 1998:
Total capital (to risk
weighted assets) $19,034 22.7% $6,697 8.0% $8,372 10.0%
Tier 1 capital (to risk
weighted assets) 18,207 21.8 3,349 4.0 5,023 6.0
Tier 1 capital (to average
assets) 18,207 12.0 4,562- 3.0- 7,603 5.0
7,603 5.0
SEPTEMBER 30, 1997:
Total capital (to risk
weighted assets) $17,680 24.0% $5,907 8.0% $7,383 10.0%
Tier 1 capital (to risk
weighted assets) 16,894 22.9 2,953 4.0 4,430 6.0
Tier 1 capital (to average
assets) 16,894 11.9 4,247- 3.0- 7,078 5.0
7,078 5.0
</TABLE>
F-24
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Bank provides basic and supplemental pension benefits for eligible
employees through the Savings Banks Employees Retirement Association
("SBERA") Pension Plan. Each employee reaching the age of 21 and having
completed at least 1,000 hours of service in one consecutive
twelve-month period, beginning with such employee's date of employment,
automatically becomes a participant in the retirement plan. All
participants are fully vested after three years of service.
Net periodic pension cost consists of the following:
<TABLE>
<CAPTION>
Plan Years Ended October 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost - benefits earned during year $ 136 $ 108 $ 113
Interest cost on projected benefits 125 119 113
Return on plan assets (127) (115) (100)
Net amortization and deferral 3 3 3
Amortization of net gain (20) (20) (2)
------- ------- -------
$ 117 $ 95 $ 127
------- ------- -------
------- ------- -------
</TABLE>
Total pension expense for the nine months ended June 30, 1999 and 1998
(unaudited) and the years ended September 30, 1998, 1997 and 1996
amounted to $94, $79, $105, $110 and $109, respectively.
F-25
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
EMPLOYEE BENEFIT PLANS (CONTINUED)
PENSION PLAN (CONTINUED)
According to SBERA, the funded status of the plan is as follows:
<TABLE>
<CAPTION>
October 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Plan assets at fair value $ 1,808 $ 1,594
Actuarial present value of projected benefit
obligation (substantially all vested) (1,951) (1,727)
------- -------
Excess of projected benefit obligation over plan
assets (143) (133)
Unamortized net obligation since adoption of
SFAS No. 87 37 40
Unrecognized net gain (385) (413)
------- -------
Accrued pension cost $ (491) $ (506)
------- -------
------- -------
</TABLE>
The accumulated benefit obligation (substantially all vested) at October
31, 1998 (latest available) amounted to $1,081 which was less than the
plan assets at fair value which amounted to $1,808.
Actuarial assumptions used in accounting were:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Discount rate on benefit obligations 7.25% 7.50%
Expected long-term rate of return on plan assets 8.00 8.00
Annual salary increases 6.00 6.00
</TABLE>
INCENTIVE COMPENSATION PLAN
Management and employees of the Bank participate in an annual incentive
compensation plan which is based on a percentage of the Bank's annual
net profits (as defined) and other factors and objectives set forth and
administered by the Board of Investment. Incentive compensation expense
for the nine months ended June 30, 1999 and 1998 (unaudited) and the
years ended September 30, 1998, 1997 and 1996 amounted to $121, $78,
$113, $128 and $102, respectively.
F-26
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
EMPLOYEE BENEFIT PLANS (CONCLUDED)
401(K) PLAN
The Bank has a 401(k) Plan whereby each employee reaching the age of 21
and having completed at least 1,000 hours of service in a twelve-month
period, beginning with date of employment, automatically becomes a
participant in the Plan. Employees may contribute up to 15% of their
compensation subject to certain limits based on federal tax laws. The
Bank makes matching contributions equal to 25% of the first 4% of an
employee's compensation contributed to the Plan. All participants are
fully vested. For the nine months ended June 30, 1999 and 1998
(unaudited) and the years ended September 30, 1998, 1997 and 1996,
expense attributable to the Plan amounted to $10, $9, $12, $10 and $8,
respectively.
SUPPLEMENTAL RETIREMENT PLANS
The Bank provides supplemental retirement benefits to certain executive
officers and trustees. In connection with the supplemental retirement
plans, the Bank has purchased life insurance contracts and has entered
into split-dollar life insurance agreements with certain participants.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the accompanying consolidated
balance sheets.
LOAN COMMITMENTS
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, which involve elements of credit and interest rate risk in
excess of the amount recognized in the accompanying consolidated balance
sheets. The contract amount of these instruments reflects the extent of
involvement the Bank has in these particular classes of financial
instruments.
The Bank's exposure to credit loss is represented by the contractual
amount of the instruments. The Bank uses the same credit policies in
making commitments as it does for on-balance sheet instruments.
F-27
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
LOAN COMMITMENTS (CONCLUDED)
A summary of financial instruments whose contract amounts represent
credit risk consist of:
<TABLE>
<CAPTION>
September 30,
June 30, --------------------
1999 1998 1997
-------- ------- ------
(unaudited)
<S> <C> <C> <C>
Commitments to grant residential mortgage
loans $ 2,659 $2,787 $1,129
Commitments to grant construction loans 460 1,182 405
Commitments to grant commercial mortgage
loans -- 450 2,900
Unadvanced funds on home equity
lines-of-credit 5,384 5,362 3,705
Unadvanced funds on commercial
lines-of-credit 1,228 736 581
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Unadvanced funds on lines-of-credit have fixed expiration
dates and may expire without being drawn upon. Therefore, the total
commitment amount does not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. Except for commercial lines-of-credit, these
financial instruments are secured by mortgage liens on real estate.
F-28
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
COMMITMENTS AND CONTINGENCIES (CONCLUDED)
OPERATING LEASE COMMITMENTS
Pursuant to the terms of noncancelable lease agreements in effect at
June 30, 1999 (unaudited) and September 30, 1998, pertaining to banking
premises and equipment, future minimum rent commitments are as follows:
<TABLE>
<CAPTION>
Years Ending At June 30, At September 30,
September 30, 1999 1998
-------------- ---------- -----------------
(unaudited)
<S> <C> <C>
1999 $ 33 $ 82
2000 96 46
2001 55 6
2002 50 --
2003 50 --
Thereafter 29 --
--------- --------
$ 313 $ 134
--------- --------
--------- --------
</TABLE>
The leases contain options to extend for periods from two to ten years.
The cost of such rentals is not included above. Total rent expense for
the nine months ended June 30, 1999 and 1998 (unaudited) and the years
ended September 30, 1998, 1997, and 1996 amounted to $79, $50, $73, $44
and $42, respectively.
CONTINGENCIES
Various legal claims may arise from time to time and, in the opinion of
management, these claims will have no material effect on the Bank's
consolidated financial statements.
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to its
Trustees. At June 30, 1999 (unaudited) and September 30, 1998 and 1997,
the amount of such loans, which exceeded $60 in the aggregate to each
related party, was approximately $0, $382 and $384, respectively. Such
loans are made in the ordinary course of business at the Bank's normal
credit terms, including interest rate and collateral requirements, and
do not represent more than a normal risk of collection.
F-29
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires disclosure of estimated
fair values of all financial instruments where it is practicable to
estimate such values. In cases where quoted market prices are not
available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of
the Bank.
The following methods and assumptions were used by the Bank in
estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and due
from banks, federal funds sold and short-term investments
approximate fair value.
SECURITIES AVAILABLE FOR SALE: Fair values for securities
available for sale are based on quoted market prices, where
available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
FEDERAL HOME LOAN BANK STOCK: The carrying amount approximates
fair value.
LOANS: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. Fair values for other types of loans are
estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for
non-performing loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
DEPOSITS: The fair values for non-certificate accounts are, by
definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). Fair values for certificate
accounts are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly
maturities on time deposits.
FEDERAL HOME LOAN BANK ADVANCES: The fair value is based upon the
Bank's current incremental borrowing rate for a similar advance.
F-30
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)
ACCRUED INTEREST: The carrying amounts of accrued interest
approximate fair value.
OFF-BALANCE SHEET INSTRUMENTS: Fair values for off-balance sheet
lending commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms
of the agreements and the counterparties' credit standing. The
estimated fair value of off-balance sheet financial instruments at
June 30, 1999 (unaudited) and September 30, 1998 and 1997, was
immaterial.
The carrying amounts and related estimated fair values of the Bank's
financial instruments are as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
June 30, 1999 1998 1997
------------------- ------------------- -------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
--------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 13,053 $ 13,053 $ 12,441 $ 12,441 $ 7,910 $ 7,910
Securities available for sale 62,409 62,409 59,345 59,345 60,937 60,937
Federal Home Loan Bank stock 850 850 762 762 717 717
Loans, net 89,428 89,078 82,348 84,714 70,580 71,594
Accrued interest receivable 997 997 1,116 1,116 1,170 1,170
Financial liabilities:
Deposits 147,135 147,251 135,962 135,954 125,170 125,205
Federal Home Loan
Bank advances 4,000 3,804 2,000 2,000 -- --
</TABLE>
F-31
<PAGE>
WESTBOROUGH SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(DOLLARS IN THOUSANDS)
15. PLAN OF REORGANIZATION (UNAUDITED)
On March 15, 1999, the Board of Trustees of Westborough Savings Bank
voted to reorganize from a Massachusetts chartered mutual savings bank
into a mutual holding company. Westborough Bancorp, MHC, will own more
than half of an intermediate stock holding company, Westborough
Financial Services, Inc., which in turn will own 100% of Westborough
Savings Bank. The reorganization is subject to approval by various state
and federal regulatory banking agencies and the Bank's Corporators.
As part of the Reorganization, the Bank will establish a liquidation
account for the benefit of eligible and supplemental eligible account
holders. The liquidation account will be reduced annually to the extent
that such account holders have reduced their qualifying deposits as of
each anniversary date. Subsequent increases will not restore an account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive
balances for accounts held by them.
In addition, the Company/Bank intends to establish an Employees' Stock
Ownership Plan, a Stock Option Plan, a Management Recognition Plan, and
enter into employment agreements with certain officers.
Subsequent to the Reorganization, the Company and the Bank may not
declare or pay dividends on, and the Company may not purchase any of its
shares of, its common stock if the effect thereof would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration, payment or repurchase
would otherwise violate regulatory requirements.
Reorganization costs will be deferred and deducted from the proceeds of
the shares sold. If the Reorganization is not completed, all costs will
be expensed. As of June 30, 1999, reorganization costs in the amount of
approximately $215 have been deferred and are included in other assets.
F-32
<PAGE>
================================================================================
You should rely only on the information contained in this document or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of Westborough Savings or Westborough Financial
Services may change after the date of this prospectus. Delivery of this document
and the sales of shares made hereunder does not mean otherwise.
TABLE OF CONTENTS
Page
Summary.....................................................................3
Risk Factors.............................................................. 12
Selected Consolidated Financial and Other Data............................ 16
Recent Developments....................................................... 18
Westborough Savings Bank.................................................. 26
Westborough Financial Services, Inc....................................... 26
Westborough Bancorp, MHC.................................................. 26
How We Intend to Use the Proceeds from the Offering....................... 27
Our Policy Regarding Dividends............................................ 28
Market for the Common Stock............................................... 29
Regulatory Capital Compliance............................................. 31
Capitalization............................................................ 32
Pro Forma Data............................................................ 33
Westborough Savings Bank
Consolidated Statements of Income.................................. 39
Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 40
Business of Westborough Savings Bank...................................... 65
Business of Westborough Financial Services, Inc........................... 91
Regulation of Westborough Savings Bank and
Westborough Financial Services, Inc................................ 91
Taxation..................................................................107
Management................................................................109
The Reorganization and The Offering.......................................123
Restrictions on Acquisition of Westborough
Financial Services, Inc. and The Westborough Bank..................144
Description of Capital Stock of
Westborough Financial Services, Inc................................150
Legal and Tax Opinions....................................................152
Experts...................................................................152
Registration Requirements.................................................152
Where You Can Find Additional Information.................................153
Index to Financial Statements.............................................F-1
Until the later of December 13, 1999 or 25 days after commencement of the
offering, all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
Up to 859,625 Shares of
Common Stock
Westborough Financial Services, Inc.
Proposed Holding Company
for The Westborough Bank
-------------
PROSPECTUS
-------------
TRIDENT SECURITIES
a Division of McDonald Investments, Inc.
November 12, 1999
