U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
Commission File No.: 000-27997
WESTBOROUGH FINANCIAL SERVICES, INC.
(Name of small business issuer in its charter)
Massachusetts 04-3504121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 E. Main Street, Westborough, Massachusetts 01581
(Address of principal executive offices)
(508) 366-4111
(Issuer's Telephone Number)
Securities registered pursuant to section 12(g) of the Exchange Act:
Title of each class
Common Stock, par value $0.01 per share
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---- ----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
The revenues for the issuer's fiscal year ended September 30, 2000 are
$13,086,000.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was sold, as of a specified date within the last 60 days.
On December 21, 2000: $4,939,208.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. The Company had
1,581,374 shares outstanding as of December 28, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
September 30, 2000 are incorporated by reference into Part II of this Form
10-KSB.
Portions of the Proxy Statement for the 2001 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-
KSB.
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
TABLE OF CONTENTS
Page
PART I
FORWARD LOOKING STATEMENTS (i)
ITEM 1. BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 43
ITEM 3. LEGAL PROCEEDINGS 44
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 44
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 44
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 44
ITEM 7. FINANCIAL STATEMENTS 44
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 45
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK
AND THE COMPANY 45
ITEM 10. EXECUTIVE COMPENSATION 45
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 45
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 46
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 46
SIGNATURES 48
Forward Looking Statements
Westborough Financial Services, Inc. (the "Company") and The
Westborough Bank (the "Bank") may from time to time make written or oral
"forward-looking statements." These forward-looking statements may be
contained in this annual filing with the Securities and Exchange Commission
(the "SEC"), other filings with the SEC, and in other communications by the
Company and the Bank, which are made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
The words "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar expressions are intended
to identify forward-looking statements.
Forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, which are subject to significant risks and
uncertainties. The following factors, many of which are subject to change
based on various other factors beyond the Company's control, and other
factors identified in the Company's filings with the SEC and those presented
elsewhere by management from time to time, could cause its financial
performance to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements:
* the strength of the United States economy in general and the
strength of the local economies in which the Company and the
Bank conduct operations;
* the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the
Federal Reserve Board;
* inflation, interest rate, market and monetary fluctuations;
* the timely development of and acceptance of new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
* the willingness of users to substitute competitors' products and
services for the Company's and the Bank's products and services;
* the Company's and the Bank's success in gaining regulatory
approval of their products and services, when required;
* the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking,
securities and insurance);
* the impact of technological changes;
* acquisitions;
* changes in consumer spending and saving habits; and
* the Company's and the Bank's success at managing the risks
involved in their business.
This list of important factors is not exclusive. The Company or the
Bank does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company or the Bank.
PART I
ITEM 1. BUSINESS
General
Westborough Financial Services, Inc. is a Massachusetts-chartered
stock holding company for The Westborough Bank, a Massachusetts-chartered
stock savings bank that conducts business from its main office located in
Westborough, Massachusetts. On February 15, 2000, the Bank reorganized into
a "two-tiered" mutual holding company structure pursuant to a Plan of
Reogranization from a Mutual Savings Bank to a Mutual Holding Company and
Stock Issuance Plan (the "Reorganization"). In connection with the
Reorganization: (i) the Bank formed Westborough Bancorp, MHC (the "MHC"), a
Massachusetts-chartered mutual holding company, which is the majority owner
of the Company; (ii) the Bank converted from mutual to stock form, changing
its name from "Westborough Savings Bank" to "The Westborough Bank" and
issued 100% of its capital stock to the Company; and (iii) the Company
issued shares of its common stock, $0.01 par value per share (the "Common
Stock"), to the public at a price of $10.00 per share (the "Stock
Offering"). The Company issued 1,581,374 shares of the Common Stock in the
Stock Offering, of which 35% of these shares, or 553,481 shares, were sold
to the public, including depositors of the Bank and the Company's Employee
Stock Ownership Plan, and 65% of these shares, 1,027,893 shares, were issued
to the MHC.
The Company also invests in long and short-term investment grade
marketable securities and other liquid investments. In the future, the
Company will consider using some of the proceeds of the Stock Offering
retained by it to expand its operations in its existing primary market and
other nearby areas by acquiring other financial institutions which could be
merged with the Bank or operated as separate subsidiaries. Presently, there
are no agreements or understandings for expansion of the Company's
operations. The Company's Common Stock is traded on the Over the Counter
Bulletin Board under the symbol "WFSM." Unless otherwise disclosed, the
information presented in this Annual Report on Form 10-KSB represents the
activity of the Bank and its subsidiaries for the fiscal year ended
September 30, 2000.
At September 30, 2000, the Bank had total loans of $115.1 million, of
which $100.2 million, or 87.1%, were residential first mortgage loans. Of
the residential first mortgage loans outstanding at that date, 52.1% were
adjustable-rate mortgage loans and 47.9% were fixed-rate loans. The Bank
retains substantially all of the loans that it originates. The Bank also
invests in mortgage-backed and investment securities, consisting primarily
of U.S. government, government agency and corporate securities. The Bank's
investment portfolio equaled $70.1 million, or 34.0% of its total assets at
September 30, 2000.
Market Area
The Bank 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. The
Bank operates five full service-banking offices located in the towns of
Westborough, Northborough and Shrewsbury, Massachusetts. The Bank also
operates a non-public, self-contained office at the "Willows," a retirement
community located in Westborough. Together, these offices serve the Bank's
"primary market area" consisting of Westborough, Northborough, Shrewsbury,
Grafton, Southborough and Hopkinton, Massachusetts. The Bank's deposits are
gathered from the general public in these towns and the surrounding
communities. The Bank's lending activities are concentrated primarily in the
towns where it has offices, as well as in the town of Grafton,
Massachusetts. These towns are located in east central Massachusetts, near
the central Route 495 belt.
The Bank's 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 industries in the Bank's market area are financial
services, health services, high tech and utilities.
Public transportation within the Bank's market area is expanding with
the addition of two new mass transit stations. The Massachusetts Bay
Transportation Authority recently completed construction of a station in
Grafton and has plans to construct a station in Westborough. These stations
will provide direct access to Worcester and Boston for residents in the
Bank's market area. Since 1980, the Bank's 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.
The Bank anticipates that its 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. The Bank believes that it has developed lending products and
marketing strategies to address the diverse credit-related needs of the
residents in its market area.
Business Strategy
Historically, the Bank's 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 September 30, 2000, 87.1% of the Bank's loan portfolio
consisted of one- to four-family residential first mortgage loans, with
relatively few commercial real estate or commercial loans in its portfolio.
In recent years, the Bank has adopted a growth-oriented strategy that has
focused on expanding its product lines and services, providing expanded
delivery systems for its customers and extending its branch network. The
Bank believes that this business strategy is best for its long-term success
and viability, and complements its existing commitment to high quality
customer service. In connection with the Bank's overall growth strategy, it
seeks to:
* continue to focus on expanding its residential lending and
retail banking franchise, and increasing the number of
households served within its market area;
* expand its commercial banking products and services for small-
and medium-sized businesses, as a means to increase the yield on
its loan portfolio and to attract lower cost transaction deposit
accounts;
* expand its branch network to increase its market share;
* increase the use of alternative delivery channels, such as on-
line and telephonic banking; and
* offer a variety of uninsured products and services as a means to
compete for an increased share of its customers' financial
service business.
In order to create a platform for the accomplishment of the Bank's
goals, the Bank has begun to make significant investments in its physical
infrastructure and human and technological resources. In particular, the
Bank is expanding and renovating its main office. The cost to complete this
expansion and renovation is approximately $1.9 million and is scheduled to
be completed in April 2001. The Bank also has a deposit on land in
Shrewsbury for the relocation of its current Maple Avenue branch in that
town. No formal estimates or contracts have been entered into for this
branch. 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, the Bank expects operating
expenses to increase and net income to be adversely impacted. The Bank
believes, however, that its long-term profitability should improve as it
realizes the benefits of diversified product lines and market share growth.
Lending Activities
General. The Bank originates loans through its offices located in
Westborough, Massachusetts and the surrounding communities. The principal
lending activities of the Bank are the origination and purchase of first
mortgage loans for the purpose of purchasing or refinancing owner-occupied,
one- to four-family residential properties. To a lesser extent, the Bank
also originates commercial real estate loans, consumer loans and commercial
loans.
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and percentages at the dates indicated.
<TABLE>
<CAPTION>
At
September 30,
--------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
Percent Of Percent Of Percent Of
Amount Total Amount Total Amount Total
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Fixed rate mortgage $ 47,964 41.68% $ 52,674 56.12% $ 47,239 55.81%
Variable rate mortgage 52,233 45.38 30,485 32.48 27,384 32.36
Commercial 6,309 5.48 3,198 3.41 2,743 3.24
Home equity lines of credit 4,027 3.50 3,598 3.83 3,918 4.63
-----------------------------------------------------------------------
Total real estate loans 110,533 96.04 89,955 95.84 81,284 96.04
-----------------------------------------------------------------------
Consumer loans:
Personal 911 0.79 571 0.61 858 1.01
Deposit secured 676 0.59 651 0.69 676 0.80
Home improvement 118 0.10 199 0.21 132 0.16
-----------------------------------------------------------------------
Total consumer loans 1,705 1.48 1,421 1.51 1,666 1.97
-----------------------------------------------------------------------
Commercial loans:
Commercial lines of credit 1,403 1.22 1,029 1.10 599 0.71
Commercial installment 1,450 1.26 1,457 1.55 1,087 1.28
-----------------------------------------------------------------------
Total commercial loans 2,853 2.48 2,486 2.65 1,686 1.99
-----------------------------------------------------------------------
Total loans 115,091 100.00% 93,862 100.00% 84,636 100.00%
====== ====== ======
Adjusted by:
Unadvanced loan funds (543) (1,013) (1,570)
Net deferred loan origination
costs (fees) 120 122 109
Discount purchased loans (235) 0 0
Allowance for loan loss (874) (879) (827)
-------- -------- --------
Net Loans $113,559 $ 92,092 $ 82,348
======== ======== ========
<CAPTION>
At
September 30,
------------------------------------------------
1997 1996
---------------------- ----------------------
Percent Of Percent Of
Amount Total Amount Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Real estate loans:
Fixed rate mortgage $ 29,450 40.64% $ 27,599 41.35%
Variable rate mortgage 33,812 46.66 30,674 45.96
Commercial 2,915 4.02 3,071 4.60
Home equity lines of credit 3,859 5.33 3,221 4.83
---------------------------------------------
Total real estate loans 70,036 96.65 64,565 96.74
---------------------------------------------
Consumer loans:
Personal 1,069 1.48 986 1.48
Deposit secured 557 0.77 724 1.08
Home improvement 73 0.10 83 0.12
---------------------------------------------
Total consumer loans 1,699 2.35 1,793 2.68
---------------------------------------------
Commercial loans:
Commercial lines of credit 293 0.40 227 0.34
Commercial installment 437 0.60 160 0.24
---------------------------------------------
Total commercial loans 730 1.00 387 0.58
---------------------------------------------
Total loans 72,465 100.00% 66,745 100.00%
====== ======
Adjusted by:
Unadvanced loan funds (1,177) (878)
Net deferred loan origination
costs (fees) 78 66
Discount purchased loans 0 0
Allowance for loan loss (786) (690)
-------- --------
Net Loans $ 70,580 $ 65,243
======== ========
</TABLE>
Residential Mortgage Loans. The Bank's 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 September 30, 2000, loans on one- to four-family residential properties
accounted for 87.1% of the Bank's total loan portfolio.
Most of the Bank's loan originations are from existing or past
customers, members of the Bank's local communities or referrals from local
real estate agents, attorneys and builders. The Bank believes that its
branch network, particularly as it expands, is a significant source of new
loan generation. The Bank also has a call program to real estate agents in
its market area to develop referral relationships between agents and the
Bank.
The Bank currently offers loans that conform to underwriting standards
specified by FannieMae ("conforming loans") and also originates 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 $275,000. The average size of the
Bank's first mortgage loans originated during the year ended September 30,
2000 and the year ended September 30, 1999 was $181,000 and $156,000,
respectively. The average size of the Bank's first mortgage loans was
$110,000 at September 30, 2000. The Bank is an approved seller/servicer for
FannieMae. From time to time, the Bank has sold loans in the secondary
market although such sales have been infrequent. The loans that the Bank
sells are all fixed-rate mortgage loans with terms of 30 years. Such loans,
however, continue to be serviced by the Bank.
The Bank's originations of first mortgage loans amounted to $17.2
million in fiscal year 2000, $31.3 million in fiscal year 1999 and $32.3
million in fiscal year 1998. A significant number of the Bank's first
mortgage loan originations have been the result of refinancing of its
existing loans due to the relatively low interest rate levels over the past
three years.
The Bank offers a variety of Adjustable Rate Mortgages ("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 the
Bank's 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, the Bank has 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.
The Bank currently offers fixed-rate mortgage loans with terms of 15,
20, 25 and 30 years secured by one- to four-family residences. The Bank
prices its interest rates on fixed-rate loans to be competitive in light of
market conditions.
The Bank currently offers a variety of ARM loans secured by one- to
four-family residential properties that initially adjust after one year,
three years, five years, seven years, or ten years. After the initial
adjustment period, ARM loans adjust on an annual basis. The ARM loans that
the Bank currently originates 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. The Bank originated $14.0 million and $11.1 million of
one- to four-family ARM loans in the years ended September 30, 2000 and
1999, respectively. During the year ended September 30, 2000, the Bank also
purchased $12.8 million residential adjustable-rate loans from a local bank.
These loans are being serviced by the seller and are located within the
Bank's market area. At September 30, 2000, 45.4% of the Bank's total loans
consisted of ARM loans, up from 32.5% at September 30, 1999.
The volume and types of ARM loans the Bank originates or purchases
have been affected by the level of market interest rates, competition,
consumer preferences and the availability of funds. Although the Bank will
continue to offer ARM loans, it cannot guarantee that it will be able to
originate or purchase a sufficient volume of ARM loans to increase or
maintain the proportion that these loans bear to its total loans.
The retention of ARM loans in the Bank's loan portfolio helps reduce
its 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.
The Bank's home equity credit line loans, which totaled $4.0 million,
or 3.5% of total loans at September 30, 2000, are fixed- and adjustable-rate
loans secured by a first or second mortgage on owner-occupied one- to four-
family residences located in the Bank's 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
(i) the lesser of $100,000 or 80% of the Bank's appraisal of the property,
or (ii) 50% of the tax assessment on the property. In each case, these
amounts are reduced by 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 the Bank's residential mortgage lending, the Bank
offers construction loans to the future occupants of single family homes. At
September 30, 2000, $1.5 million of the Bank's total loan portfolio
consisted of gross residential construction loans. Unadvanced funds on these
loans amounted to $0.5 million at September 30, 2000, resulting in a net
balance of $1.0 million, or 0.9% of the Bank's total loan portfolio. 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 the Bank. At
September 30, 2000, commercial real estate mortgage loans totaled $6.3
million, or 5.5% of total loans. These loans are generally secured by office
buildings, condominiums, retail establishments and churches located within
the Bank's market area.
The Bank's 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.
Pursuant to the Bank's underwriting standards, a number of factors are
considered before a commercial real estate loan is made. The Bank evaluates
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 the Bank considers 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.
The Bank's real estate loan portfolio also includes construction loans
to builders and developers of residential properties within the Bank's
market area. At September 30, 2000, $1.1 million, or 1.0% of the Bank's
total loan portfolio, consisted of gross commercial construction loans.
Unadvanced funds on these loans amounted to approximately $23,000 at
September 30, 2000.
Construction loans typically are in amounts equal to 70% of the
completed value. Construction loans generally have up to twelve months with
a floating or fixed interest rate based upon the index. In addition to
securing the loan with the property under construction, the Bank generally
obtains 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
the Bank or the borrower. The Bank seeks 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 September 30, 2000, $1.7 million, or 1.5 % of the
Bank's 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 the Bank's 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, the Bank
believes that offering consumer loan products helps to expand and create
stronger ties to the Bank's existing customer base by increasing the number
of customer relationships and providing cross-marketing opportunities.
The Bank's personal loans consist of unsecured loans to individuals
and secured loans for the purchase of new and used automobiles. The Bank's
unsecured loans have a maximum term of 48 months. The terms of the Bank's
automobile loans generally are determined by the age and condition of the
vehicle. At September 30, 2000, the Bank's personal loans totaled $0.9
million, or 0.8% of total loans.
The Bank also makes 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
$0.7 million, or 0.6% of total loans at September 30, 2000.
The Bank offers 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 September 30, 2000, these loans totaled $0.1 million,
or 0.1% of total loans. Interest rates on fixed-rate home improvement loans
are periodically set by the Bank's Loan Committee, consisting of the Bank's
President, Treasurer and Senior Loan Officer, after consultation with the
Executive Committee and are based on market conditions. The underwriting
terms and procedures applicable to these loans are substantially the same as
for the Bank's home equity credit line loans.
Commercial Loans. The Bank recently has made a commitment to small
business lending by developing certain products and services for the small-
and medium-sized businesses located in the Bank's 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, the Bank has tailored certain products and services,
such as its business checking accounts and treasury and tax loan service, to
better serve the needs of local businesses. The Bank also is an approved
lender of the Small Business Administration. At September 30, 2000, $2.9
million, or 2.5%, of the Bank's total loans consisted of commercial loans.
The Bank expects that commercial loans will comprise a growing portion of
its 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, the Bank collateralizes these loans with a
lien on business assets and equipment and the personal guarantees of the
borrower's principal officers (a lien may also be placed on one's primary
residence).
The Bank's commercial services are administered by the Bank's loan
department. The Bank has an experienced commercial loan officer with
considerable commercial lending expertise, including many years of banking
experience in Massachusetts and personal ties to Westborough. The Bank also
intends 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 ordinarily requires
substantially greater oversight efforts compared to residential real estate
lending. To minimize these risks, the Bank conducts periodic reviews of the
commercial loan portfolio to ensure adherence to underwriting standards and
policy requirements.
Origination of Loans. The Bank's lending activities are conducted
through its main and branch offices. The Bank's ability to originate loans
is dependent upon the relative customer demand for fixed-rate or adjustable-
rate mortgage loans, which is affected by the current and expected future
levels of interest rates.
The following table sets forth information with respect to
originations, sales of loans and principal payments for the periods
indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans, net:
Balance outstanding at beginning of period $ 92,092 $ 82,348 $ 70,580
Originations and Purchased Loans:
Mortgage loans:
Residential 17,194 31,280 32,346
Commercial 4,453 1,583 476
Home equity lines of credit 2,611 3,198 3,397
--------------------------------
Total mortgage originations 24,258 36,061 36,219
Commercial loans 2,705 1,987 1,438
Consumer loans 3,382 1,825 1,275
--------------------------------
Total originations 30,345 39,873 38,932
--------------------------------
Purchased Loans 12,791 0 0
--------------------------------
Less:
Principal repayments, unadvanced funds
and other, net: (21,674) (30,077) (26,780)
Sale of mortgage loans, principal balance 0 0 (269)
Provision for loan losses 0 (45) (39)
Net loan charge-offs (recoveries) 5 (7) (2)
Transfers to foreclosed real estate 0 0 (74)
--------------------------------
Total deductions (21,669) (30,129) (27,164)
--------------------------------
Net loan activity 21,467 9,744 11,768
--------------------------------
Loans, net, end of period $113,559 $ 92,092 $ 82,348
================================
<CAPTION>
For the Year Ended September 30,
--------------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Loans, net:
Balance outstanding at beginning of period $ 65,243 $ 57,779
Originations and Purchased Loans:
Mortgage loans:
Residential 25,928 19,630
Commercial 3,217 0
Home equity lines of credit 3,187 2,173
--------------------------
Total mortgage originations 32,332 21,803
Commercial loans 865 334
Consumer loans 904 1,820
--------------------------
Total originations 34,101 23,957
--------------------------
Purchased Loans 0 0
--------------------------
Less:
Principal repayments, unadvanced funds
and other, net: (28,548) (16,388)
Sale of mortgage loans, principal balance (120) 0
Provision for loan losses (recoveries) (96) (105)
Net loan charge-offs 0 0
Transfers to foreclosed real estate 0 0
--------------------------
Total deductions (28,764) (16,493)
--------------------------
Net loan activity 5,337 7,464
--------------------------
Loans, net, end of period $ 70,580 $ 65,243
==========================
</TABLE>
The following table presents, as of September 30, 2000, the dollar
amount of all loans due after September 30, 2001, and whether such loans
have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Due After September 30, 2001
--------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<S> <C> <C> <C>
Fixed rate mortgages $47,401 $ 0 $47,401
Variable rate mortgages 0 43,851 43,851
Commercial mortgage loans 2,862 570 3,432
Home equity lines of credit 207 0 207
Consumer loans 860 0 860
Commercial loans 1,154 0 1,154
--------------------------------
Total loans $52,484 $44,421 $96,905
================================
</TABLE>
Loan Commitments. The Bank generally makes loan commitments to
borrowers not exceeding 30 days. At September 30, 2000, the Bank had $3.5
million in loan commitments outstanding, primarily for the origination of
one- to four-family residential real estate loans, commercial loans and
commercial real estate loans. Unadvanced funds on home equity lines of
credit and commercial lines of credit at September 30, 2000 represented $5.5
million and $0.6 million, respectively.
Loan Solicitation. Loan originations are derived from a number of
sources, including the Bank's existing customers, referrals, realtors,
advertising and "walk-in" customers at the Bank's offices.
Loan Administration. The Bank's lending policies provide that the
Bank's Loan Committee has authority to approve one- to four-family mortgage
loans in amounts up to $500,000. One- to four-family mortgage loans in
excess of $500,000 require the approval of the Bank's Executive Committee.
Commercial real estate loans in amounts up to $750,000 may be approved by
the Loan Committee. All other commercial real estate loans must be approved
by the Executive Committee. Commercial and consumer loans in amounts up to
$150,000 may be approved by the Bank's President, Treasurer or Senior Loan
Officers. Together, these individuals also may approve commercial and
consumer loans in amounts up to $500,000.
The following generally describes the Bank's current lending
procedures. Upon receipt of a completed loan application from a prospective
borrower, the Bank orders a credit report and verifies certain other
information. If necessary, the Bank obtains additional financial or credit
related information. The Bank requires 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 the Bank's lending department. The Bank requires title insurance
on all mortgage loans, except for home equity credit lines and fixed-rate
home improvement loans. For these loans, the Bank requires evidence of
previous title insurance. The Bank requires borrowers to obtain hazard
insurance and may require borrowers to obtain flood insurance prior to
closing. For properties with a private sewage disposal system, the Bank also
requires evidence of compliance with applicable law. Further, the Bank
requires borrowers to advance funds on a monthly basis together with each
payment of principal and interest to a mortgage escrow account from which
the Bank makes disbursements for items such as real estate taxes, flood
insurance and private mortgage insurance premiums, if required.
Interest rates charged by the Bank on all loans are primarily
determined by competitive loan rates offered in its market area and interest
rate costs of the source of funding for the loan. The Bank generally charges
an origination fee on new mortgage loans. The origination fees, net of
direct origination costs, are deferred and amortized into income over the
life of the loan. At September 30, 2000, the amount of net deferred loan
origination costs was $120,000.
Loan Maturity and Repricing. The following table sets forth certain
information as of September 30, 2000 regarding the dollar amount of loans
maturing in the Bank's 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 September 30, 2000
-----------------------------------------------------------------------------------------
Home
Variable Commercial Equity
Fixed Rate Rate Mortgage Lines of Consumer Commercial Total
Mortgages(1) Mortgages Loans Credit Loans Loans Loans
------------ --------- ---------- -------- -------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 20 $ 8,382 $2,877 $3,820 $ 845 $1,699 $ 17,643
After one year:
One to three years 409 10,395 224 196 275 1,154 12,653
Over three to five years 1,393 8,929 180 11 535 0 11,048
Over five to ten years 6,529 18,040 939 0 50 0 25,558
Over ten to twenty years 38,954 6,487 2,089 0 0 0 47,530
Over twenty years 116 0 0 0 0 0 116
--------------------------------------------------------------------------------------
Total amount due $47,421 $52,233 $6,309 $4,027 $1,705 $2,853 114,548
========================================================================
Less:
Net deferred loan
origination costs 120
Discount on Purchased
Loans (235)
Allowance for loan losses (874)
--------
Loans, net $113,559
========
<FN>
--------------------
<F1> Net of unadvanced loan funds
</FN>
</TABLE>
Non-Performing Assets, Asset Classification and Allowances for Losses.
Management and the Loan Committee perform a monthly review of all delinquent
loans. One of the primary tools the Bank uses to manage and control problem
loans is the Bank's "Watch List." This list identifies all of the loans or
commitments that are considered to have characteristics that could result in
loss to the Bank if not properly supervised. The list is managed by the Loan
Committee which, together with the Executive Committee, meets periodically
to discuss the status of the loans on the Watch List and to add or delete
loans from the list. At September 30, 2000, the Bank had no loans more than
90 days past due and had $0.26 million and $0.41 million in assets
classified as pass and substandard, respectively. No assets were classified
as special mention, doubtful or loss.
The Bank had no non-performing assets at September 30, 2000 and 1999.
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 September 30,
2000, 1999, 1998, 1997 and 1996 the Bank had no non-accrual loans.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual first mortgage loans $ 0 $ 0 $ 0 $ 0 $ 0
Non-accrual consumer and other loans 0 0 0 0 0
Accruing loans delinquent 90 days or more 0 0 55 0 9
-------------------------------------------------
Total non-performing and delinquent loans 0 0 55 0 9
Foreclosed real estate, net 0 0 74 19 144
-------------------------------------------------
Total non-performing assets and
delinquent loans $ 0 $ 0 $ 129 $ 19 $ 153
=================================================
Non-performing and delinquent loans
to total loans 0.00% 0.00% 0.06% 0.00% 0.01%
Non-performing assets and delinquent
loans to total assets 0.00% 0.00% 0.08% 0.01% 0.11%
</TABLE>
At September 30, 2000, the Bank was aware of 6 loans in an aggregate
amount of $0.67 million 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 the Bank designates loans as non-accrual loans, it
reverses outstanding interest that it previously credited. The Bank may
recognize income in the period that its collects it when the ultimate
collectibility of principal is no longer in doubt. The Bank returns 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, the Bank does not separately identify individual consumer loans
for impairment disclosures. The Bank had no loans classified as impaired at
September 30, 2000, 1999 and had $0.3 million at September 30, 1998,
respectively. In addition at September 30, 2000, 1999 and 1998, the Bank had
no loans classified as troubled debt restructurings, as defined in SFAS No.
15.
Foreclosed real estate consists of property the Bank 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, the Bank carries 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 the Bank's allowance for loan losses at or for the dates indicated.
<TABLE>
<CAPTION>
At or for
the Year Ended September 30,
---------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 879 $ 827 $ 786 $ 690 $ 585
Provision for loan losses 0 45 39 96 105
Charge-offs:
Mortgage loans 0 0 0 0 0
Commercial loans 0 0 0 0 0
Consumer loans (6) (6) 0 (2) (8)
------------------------------------------------------------
Total charge-offs (6) (6) 0 (2) (8)
Recoveries 1 13 2 2 8
------------------------------------------------------------
Balance at end of period $ 874 $ 879 $ 827 $ 786 $ 690
============================================================
Net charge-offs/(recoveries)
for the period $ 5 $ (7) $ (2) $ 0 $ 0
Ratio of net charge-offs/(recoveries)
to average loans outstanding during
the period 0.005% (0.008)% (0.003)% 0.000% 0.000%
Allowance for loan losses as a
Percent of total loans before the
Allowance for loan losses 0.76% 0.95% .99% 1.10% 1.05%
Allowance for loan losses as a
Percent of non-performing loans 0% 0% 1,503.64% 0% 7,666.67%
</TABLE>
The allowance for loan losses is a valuation account that reflects the
Bank's evaluation of the losses inherent in its loan portfolio. The Bank
maintains the allowance through provisions for loan losses that it charges
to income. The Bank charges losses on loans against the allowance for loan
losses when it believes the collection of loan principal is unlikely.
The Bank establishes the provision for loan losses after considering
the results of its 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. The Bank has applied this process consistently, and
the Bank has made minimal changes in the assumptions used.
As part of the Bank's analysis, each month the Bank prepares 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. The Bank assigns potential loss
factors to the categories on the basis of its assessment of each category's
status and the potential risk inherent in that type of lending. The Bank
uses this worksheet, together with loan portfolio balances and delinquency
reports, to evaluate the adequacy of the allowance for loan losses. Other
key factors the Bank considers 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 the Bank believes that it has 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 the Bank's 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 the Bank 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 the Bank's results of
operations.
The following table presents the Bank's 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 September 30,
---------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------
Percent of Loans Percent of Loans Percent of Loans
in Category to in Category to in Category to
Amount Total Loans Amount Total Loans Amount Total Loans
---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential(1) $347 90.56% $279 92.43% $309 92.80%
Commercial 212 5.48 176 3.41 184 3.24
Commercial 70 2.48 60 2.65 103 1.99
Consumer 163 1.48 149 1.51 24 1.97
Unallocated 82 0 $215 0 207 0
---------------------------------------------------------------------------
Total allowance for loan losses $874 100.00% $879 100.00% $827 100.00%
===========================================================================
<CAPTION>
At September 30,
-----------------------------------------------------
1997 1996
-----------------------------------------------------
Percent of Loans Percent of Loans
in Category to in Category to
Amount Total Loans Amount Total Loans
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate - mortgage:
Residential(1) $253 92.63% $265 92.14%
Commercial 289 4.02 272 4.60
Commercial 39 1.00 0 0.58
Consumer 27 2.35 50 2.68
Unallocated 178 0 103 0
-----------------------------------------------
Total allowance for loan losses $786 100.00% $690 100.00%
===============================================
<FN>
--------------------
<F1> Includes home equity lines of credit and construction loans.
</FN>
</TABLE>
Investment Activities
The Board of Directors reviews and approves the Bank's 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 for review and approval on a monthly basis.
The Bank's investment policy is designed primarily to manage the
interest rate sensitivity of the Bank's assets and liabilities, to generate
a favorable return without incurring undue interest rate and credit risk, to
complement the Bank's lending activities and to provide and maintain
liquidity within established guidelines. In establishing the Bank's
investment strategies, the Bank considers its 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 the Bank's investment strategy, the Bank also engages in a
"covered call" program in which it writes options on securities it holds.
The sale of a covered call conveys the right, but not the obligation, to the
buyer to buy a particular security held by the Bank at a particular price up
to a certain expiration date. The sale is "covered" because the Bank holds
the security in its portfolio. Under this program, the Bank writes options
only on publicly traded securities it owns. However, the Bank is willing to
have the securities called if an option is written and exercised.
At September 30, 2000 and September 30, 1999, the Bank's liquidity
ratio was 70.4% and 67.9%, respectively. For information regarding the
carrying values, yields and maturities of the Bank's investment securities
and mortgage-backed securities, see "Carrying Values, Yields and
Maturities."
At September 30, 2000, the Bank's 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. Some of the
Bank's agency debentures are callable and call provisions vary following a
minimum holding period. The Bank generally does not purchase structured
notes, and at September 30, 2000, there were no structured notes in the
Bank's portfolio.
At September 30, 2000, the Bank's portfolio of other debt obligations
totaled $27.0 million. The Bank's 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 the Bank's marketable equity securities
portfolio totaled $8.8 million at September 30, 2000. These securities
consisted of $5.8 million of common stock, $0.4 million of preferred stock
and $2.6 million of rated trust preferred securities issued by financial
service corporations. Under the Bank's investment policy, the aggregate
amount of common stock that it may purchase may not exceed 13% of its total
investment portfolio. The Bank's policy also has limitations against
acquiring concentrations of such securities in any one issuer or industry.
The Bank purchases marketable equity 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 $3.4 million, $8.2 million and $3.9 million for the years
ended September 30, 2000, 1999 and 1998. At September 30, 2000, pre-tax net
unrealized gains on marketable equity securities amounted to $140,000.
Unless otherwise noted with respect to certain securities or required
by regulators or accounting standards, the Bank classifies securities
available for sale at the date of purchase. Available for sale securities
are reported at fair market value. The Bank currently has no securities
classified as trading. During fiscal year 2000, the Bank sold investment
securities in the aggregate amount of $5.4 million.
At September 30, 2000, the Bank's mortgage-backed securities, all of
which were classified as available for sale, totaled $10.3 million, or 5.0%
of total assets and had a weighted average yield of 6.39%. The Bank
generally purchases 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 the Bank's overall credit risk
due to the fact that they are directly or indirectly insured or guaranteed.
Purchases of mortgage-backed securities may decline in the future if the
Bank experiences an increase in demand for one- to four-family mortgage
loans. The Bank did not sell any of its mortgage-backed securities during
fiscal year 2000.
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 the Bank's 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.
The following table presents activity in the Bank's investment
securities portfolio (including Federal Home Loan Bank stock) for the
periods indicated:
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
2000 1999 1998
-------------------------------
(In thousands)
<S> <C> <C> <C>
Beginning balance $64,457 $ 60,107 $ 61,654
Purchases 19,101 26,868 20,880
Maturities (5,102) (3,750) (1,250)
Sales and calls (5,446) (11,491) (17,886)
Principal repayments (3,304) (5,012) (4,214)
Premium and discount amortization, net 29 (79) (88)
Recognition of expired options 425 352 0
Change in net unrealized gains/(losses) 61 (2,538) 1,011
Write-down (102) 0 0
-----------------------------------
Ending balance $70,119 $ 64,457 $ 60,107
===================================
</TABLE>
The following table sets forth certain information regarding the
amortized cost and fair value of the Bank's securities at the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------
2000 1999 1998
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U. S. Government obligations $10,574 $10,585 $12,084 $12,178 $13,091 $13,579
Federal agency obligations 12,622 12,251 10,632 10,314 9,504 9,660
Banking and finance obligations 10,982 10,930 6,501 6,433 5,534 5,624
Other bonds and obligations 16,203 16,063 13,649 13,469 13,412 13,762
------------------------------------------------------------------------
Total debt securities 50,381 49,829 42,866 42,394 41,541 42,625
------------------------------------------------------------------------
Mortgage-backed and mortgage-
related securities:
FHLMC 1,427 1,555 1,189 1,195 2,079 2,139
FNMA 4,633 4,505 5,597 5,506 44,021 4,063
GNMA 2,273 2,138 2,719 2,714 4,185 4,192
Other 2,089 2,058 2,608 2,538 1,190 1,219
------------------------------------------------------------------------
Total mortgage-backed and
mortgage-related securities 10,422 10,256 12,113 11,953 11,475 11,613
------------------------------------------------------------------------
Asset-backed securities 314 311 630 626 0 0
Marketable equity securities 8,680 8,820 8,640 8,634 4,433 5,107
Federal Home Loan Bank stock 903 903 850 850 762 762
------------------------------------------------------------------------
Total Securities $70,700 $70,119 $65,099 $64,457 $58,211 $60,107
========================================================================
</TABLE>
The following table sets forth the amortized cost and fair value of
the Bank's mortgage-backed and mortgage-related securities, all of which
were classified as available for sale at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------
Amortized Percent of Fair Amortized Percent of Fair Amortized Percent of Fair
Cost Total(1) Value Cost Total(1) Value Cost Total(1) Value
------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and mortgage-
related securities:
FHLMC $ 1,427 13.69% $ 1,555 $ 1,189 9.81% $ 1,195 $ 2,079 18.12% $ 2,139
FNMA 4,633 44.45 4,505 5,597 46.21 5,506 4,021 35.04 4,063
GN GNMA 2,273 21.81 2,138 2,719 22.45 2,714 4,185 36.47 4,192
Other 2,089 20.05 2,058 2,608 21.53 2,538 1,190 10.37 1,219
------------------------------------------------------------------------------------------------
Total mortgage-backed
and mortgage-related
securities $10,422 100.00% $10,256 $12,113 100.00% $11,953 $11,475 100.00% $11,613
================================================================================================
<FN>
--------------------
<F1> Based on amortized cost.
</FN>
</TABLE>
Carrying Values, Yields and Maturities. The table below presents
information regarding the carrying values, weighted average yields and
contractual maturities of the Bank's investment securities and mortgage-
backed securities at September 30, 2000. Mortgage-backed securities are
presented by issuer. Yields on tax exempt obligations were not computed on a
tax equivalent basis.
<TABLE>
<CAPTION>
At September 30, 2000
--------------------------------------------------------------------------------------------------
More than More than
One Year Five Years More than
One Year or Less to Five Years to Ten Years Ten Years Total
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations $ 5,501 6.38% $ 5,084 6.19% $ 0 0 $ 0 0 $10,585 6.29%
Federal agency obligations 0 0 5,647 6.58 6,604 6.52% 0 0 12,251 6.55
Banking and finance obligations 748 6.30 8,956 6.99 1,226 7.14 0 6.33% 10,930 6.96
Other bonds and obligations 3,991 6.66 7,569 7.06 3,849 6.25 654 6.33 16,063 6.74
------- ------- ------- ------- -------
Total debt securities 10,240 6.48 27,256 6.78 11,679 6.49 654 6.33 49,829 6.64
------- ------- ------- ------- -------
Mortgage-backed and
mortgage-related Securities:
FHLMC 0 0 0 0 0 0 1,555 6.33 1,555 6.33
FNMA 0 0 330 6.65 1,182 6.58 2,993 6.27 4,505 6.38
GNMA 0 0 0 0 0 0 2,138 5.98 2,138 5.98
Other 0 0 0 0 0 0 2,058 6.86 2,058 6.86
------- ------- ------- ------- -------
Total mortgage-backed and
mortgage-related securities: 0 0 330 6.65 1,182 6.58 8,744 6.35 10,256 6.39
------- ------- ------- ------- -------
Asset-backed securities 0 0 311 5.47 0 0 0 0 311 5.47
Marketable equity securities 8,820 3.48 0 0 0 0 0 0 8,820 3.48
Federal Home Loan Bank stock 903 6.50 0 0 0 0 0 0 903 6.50
------- ------- ------- ------- -------
Total securities $19,963 5.16% $27,897 6.76% $12,861 6.50% $ 9,398 6.35% $70,119 6.20%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
Deposit Activity and Other 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 the Bank's
primary sources of funds for use in lending, investing and for other general
purposes. The Bank also utilizes borrowed funds from the Federal Home Loan
Bank of Boston to fund certain loans in connection with the Bank's
management of the interest rate sensitivity of its assets and liabilities,
as well as for other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank currently offers regular savings
deposits, NOW accounts, personal and business demand accounts, money market
accounts and certificates of deposit. The Bank also offers Individual
Retirement Accounts ("IRAs"), which at September 30, 2000 totaled $8.6
million.
Deposit flows are influenced significantly by general and local
economic conditions, changes in prevailing interest rates, pricing of
deposits and competition. The Bank's deposits are primarily obtained from
areas surrounding its offices, and the Bank relies primarily on paying
competitive rates, service and long-standing relationships with customers to
attract and retain these deposits. The Bank also has 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 the Bank's business and commercial checking
accounts. The Bank does not use brokers to obtain deposits.
When the Bank determines its deposit rates, it considers 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 66.0%
of total deposits on September 30, 2000. At September 30, 2000, certificates
of deposit with remaining terms to maturity of less than one year amounted
to $44.0 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 the Bank's deposit
accounts for the years ended September 30, 2000 and 1999.
The following table presents the Bank's deposit activity for the
periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $150,111 $135,962 $125,170
Net deposits 8,164 9,428 6,321
Interest credited on deposit accounts 5,130 4,721 4,471
--------------------------------
Ending balance $163,405 $150,111 $135,962
================================
Total increase in deposit accounts $ 13,294 $ 14,149 $ 10,792
Percentage increase 8.86% 10.41% 8.62%
</TABLE>
At September 30, 2000, the Bank had $13.0 million in certificates of
deposit with balances of $100,000 and over maturing as follows:
<TABLE>
<CAPTION>
Weighted
Average
Amount Rate
------ --------
(Dollars in thousands)
<S> <C> <C>
Maturity Period:
Three months or less $ 3,599 5.04%
Over three months through six months 3,473 5.85
Over six months through 12 months 3,558 5.73
Over 12 months 2,321 6.21
-------
Total $12,951 5.66%
=======
</TABLE>
The following table presents the distribution of the Bank's 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 September 30,
---------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Percent average Percent average Percent average
of total nominal of total nominal of total nominal
Amount deposits rate Amount deposits rate Amount deposits rate
------ -------- -------- ------ -------- -------- ------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts $ 15,475 9.47% 0.00% $ 11,236 7.48% 0.00% $ 8,592 6.32% 0.00%
NOW accounts 15,281 9.35 0.50 13,132 8.75 0.50 15,221 11.19 0.50
Savings accounts:
Regular 32,339 19.79 2.40 29,985 19.98 2.53 28,239 20.77 2.60
Tiered-rate 38,808 23.75 4.52 37,167 24.76 3.85 29,733 21.87 4.33
------------------ ------------------ ------------------
Total savings accounts 71,147 43.54 3.56 67,152 44.74 3.26 57,972 42.64 3.49
------------------ ------------------ ------------------
Money market deposit accounts 5,868 3.59 2.17 6,619 4.41 2.17 7,218 5.31 2.95
------------------ ------------------ ------------------
Total non-certificate accounts 107,771 65.95 2.54 98,139 65.38 2.45 89,003 65.46 2.60
------------------ ------------------ ------------------
Certificates of deposit
Due within 1 year 44,049 26.96 5.47 42,905 28.58 4.89 37,005 27.22 5.06
Over 1 year through 3 years 11,578 7.09 5.84 9,043 6.02 5.20 9,954 7.32 5.45
Over 3 years 7 0 4.91 24 0.02 4.88 0 0 0
------------------ ------------------ ------------------
Total certificate accounts 55,634 34.05 5.55 51,972 34.62 4.94 46,959 34.54 5.14
------------------ ------------------ ------------------
Total deposits $163,405 100.00% 3.56% $150,111 100.00% 3.31% $135,962 100.00% 3.48%
================== ================== ==================
</TABLE>
Borrowings. The Bank borrows funds from the Federal Home Loan Bank of
Boston for use in connection with its management of the interest rate
sensitivity of its assets and liabilities, as well as for other general
purposes. These advances are collateralized by certain of the Bank's
mortgage loans and by its 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 the Bank, fluctuates from time to time in accordance with
the Federal Home Loan Bank's policies. At September 30, 2000, the Bank had
$16.5 million in outstanding advances from the Federal Home Loan Bank and
had the capacity to increase that amount to $ 80.3 million based on the
Bank's available qualified collateral. The Bank expects to continue to
borrow from the Federal Home Loan Bank of Boston.
The following table presents certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
-------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Federal Home Loan Bank advances:
Average balance outstanding $ 5,335 $3,198 $ 33
Maximum amount outstanding at any
month-end during the period $16,500 $4,000 $2,000
Balance outstanding at end of period $16,500 $4,000 $2,000
Weighted average interest rate
during the period 5.60% 5.22% 6.06%
Weighted average interest rate at
end of period 6.44% 5.09% 5.29%
</TABLE>
Selected Financial Ratios and Other Data
The following information in the table are selected financial ratios
and other data for the Company for the periods indicated:
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Selected Financial Ratios and Other
Data(1) Performance Ratios:
Return on average assets 0.68% 0.89% 0.88%
Return on average equity 5.70% 7.56% 7.25%
Average equity to average assets 11.88% 11.73% 12.16%
Equity to total assets at end of period 12.00% 11.04% 12.22%
Average interest rate spread 3.19% 3.01% 3.20%
Net interest margin(2) 3.73% 3.54% 3.76%
Average interest-earning assets to average
interest-bearing liabilities 116.88% 117.12% 117.84%
Total operating expense to average assets 3.16% 2.81% 2.46%
Efficiency ratio(3) 77.11% 67.81% 63.50%
Regulatory Capital Ratios (4)
Regulatory tier 1 leverage capital 12.82% 11.40% 12.00%
Tier 1 risk-based capital 20.99% 20.24% 21.80%
Total risk-based capital 21.73% 21.15% 22.70%
Asset Quality Ratios:
Non-performing loans as a percent of loans 0 0 0
Non-performing assets as a percent of total assets 0 0 0.05%
Allowance for loan losses as a percent of total
loans before the allowance for loan losses 0.76% 0.95% 0.99%
Number of:
Full-service offices(5) 5 5 4
Full-time equivalent employees 69 60 53
<FN>
--------------------
<F1> Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios.
<F2> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
<F3> The efficiency ratio represents the ratio of operating expenses
divided by the sum of net interest income and other income.
<F4> Ratios are based on consolidation.
<F5> The number of full-service offices shown does not include the Bank's
branch at the Willows or the Operations Center.
</FN>
</TABLE>
Competition
The Bank faces 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 that have resulted from the consolidation of the banking industry in
Massachusetts and surrounding states. Some of these competitors have
greater resources than the Bank does and may offer services that the Bank
does not provide.
The Bank's 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. The Bank's most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Bank faces additional competition for
deposits from short-term money market funds and other corporate and
government securities funds and from brokerage firms and insurance
companies.
Employees
At September 30, 2000, the Bank had 55 full-time and 26 part-time
employees. None of the Bank's employees is represented by a collective
bargaining agreement. Management of the Bank believes that it enjoys
excellent relations with its personnel.
Subsidiary Activities
Eli Whitney Security Corporation. Eli Whitney Security Corporation is
a wholly-owned subsidiary of the Bank. 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 the Bank. At September 30, 2000, Eli
Whitney had total assets of $13.0 million, virtually all of which were in
investment securities.
One Hundredth Security Corporation. One Hundredth Security Corporation
is a wholly-owned subsidiary of the Bank 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 the Bank. At September
30, 2000, One Hundredth had total assets of $20.9 million, virtually all of
which were in investment securities.
The Hundredth Corporation. The Hundredth Corporation is a wholly-owned
subsidiary of the Bank. The Hundredth Corporation was established in 1991
for the investment in real or personal property. At September 30, 2000, The
Hundredth Corporation had total assets of $70,301.
FEDERAL AND STATE TAXATION
Federal Taxation
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 the Bank, the MHC or the Company. For federal income tax
purposes, the Bank reports income on the basis of a taxable year ending
September 30, using the accrual method of accounting, and the Bank is
generally subject to federal income taxation in the same manner as other
corporations. The Bank and the Company constitute an affiliated group of
corporations and, therefore, are eligible to report their income on a
consolidated basis. Because the MHC owns less than 80% of the common stock
of the Company, it is not a member of such affiliated group and reports its
income on a separate return. The Bank is not currently under audit by the
Internal Revenue Service ("IRS"), but its September 30, 1994 return was
audited in 1996.
Bad Debt Reserves. The Bank, 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 and to make, within specified formula limits, annual
additions to the reserve which are deductible for purposes of computing its
taxable income. Pursuant to the Small Business Job Protection Act of 1996,
the Bank 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 the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to
result in distributions from the Bank's "Base year reserve," i.e., its reserve
as of April 30, 1988 to the extent thereof and then from its supplemental
reserve for losses on loans, and an amount based on the amount distributed
will be included in the Bank's taxable income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, distributions in redemption of stock and distributions in partial
or complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not constitute non-dividend distributions and, therefore, will
not be included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Bank's 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. The Bank does 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 the Bank currently has 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. The Bank has not been subject to AMT during the past five years.
Elimination of Dividends; Dividends Received Deduction. The Company
may exclude from its income 100% of dividends received from the Bank as a
member of the same affiliated group of corporations. Because the MHC is not
be a member of such affiliated group, it does not qualify for such 100%
dividends exclusion, but is entitled to deduct 80% of the dividends it
receives from the Company so long as it owns more than 20% of the Company's
common stock.
State Taxation
The Bank files 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. The Bank is not currently under audit with
respect to its Massachusetts income tax returns and its state tax returns
have not been audited for the past five years.
The Company is required to file a Massachusetts income tax return and
is generally subject to a state income tax rate that is the same tax rate as
the tax rate for savings institutions in Massachusetts. However, if the
Company meets certain requirements, it may be eligible to elect to be taxed
as a Massachusetts Security Corporation, which would allow the Company to be
taxed at a rate that is currently lower than income tax rates for savings
institutions in Massachusetts.
REGULATION
General
The Bank is a Massachusetts-chartered savings bank, and its deposit
accounts are insured up to applicable limits by the BIF of the FDIC and by
the Depositors Insurance Fund. The Bank 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. The Bank must file reports with the Division and the
FDIC concerning its activities and financial condition, and 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 the Bank's 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.
The MHC and the Company, as bank holding companies controlling the
Bank are 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. The MHC and the Company are required to file reports with, and
otherwise comply with the rules and regulations of the FRB and the Division.
The Company is 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 the MHC, the Company and the Bank, and their operations and
stockholders.
Certain of the laws and regulations applicable to the MHC, the Company
and the Bank are summarized below or elsewhere in this document. These
summaries do not purport to be complete and are qualified in their entirety
by reference to such laws and regulations.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the Gramm-
Leach-Bliley Financial Services Modernization Act of 1999 (the "GLB Act").
This federal legislation was intended to modernize the financial services
industry by establishing a comprehensive framework to permit affiliations
among commercial banks, insurance companies, securities firms and other
financial service providers. Generally, the Act:
* 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;
* provides a uniform framework for the functional regulation of
the activities of banks, savings institutions and their holding
companies;
* broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their
financial subsidiaries;
* provides an enhanced framework for protecting the privacy of
consumer information;
* adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank system;
* modifies the laws governing the implementation of the Community
Reinvestment Act and
* 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 who have elected to be regulated as a financial
holding company are now 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 are in a position to be owned, controlled or
acquired by any company engaged in financially-related activities. During
2000, the MHC and the Company elected to be regulated as financial holding
companies.
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 the Bank, generally may, invest in (a)
real estate mortgages; (b) consumer and commercial loans; (c) specific types
of debt securities, including certain corporate debt securities and
obligations of federal, state and local governments and agencies; (d)
certain types of corporate equity securities; and (e) 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. The Bank 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 noncompliance." 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. The Bank's 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. The Bank 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 Executive
Committee, excluding any member involved in such loan or extension of
credit: (a) loan or extension of credit, secured or unsecured, to an officer
of the bank in an amount not exceeding $20,000; (b) loan or extension of
credit intended or secured for educational purposes to an officer of the
bank in an amount not exceeding $75,000; (c) 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; or (d) 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 of Banks of the Commonwealth of Massachusetts
(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
preceding 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 the Bank. 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
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 the Bank, 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 cannot 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.
The following table shows the Bank's leverage ratio, its Tier 1 risk-
based capital ratio, and its total risk-based capital ratio, at September
30, 2000:
<TABLE>
<CAPTION>
As of September 30, 2000
------------------------------------------------------
Regulatory Regulatory
Capital Percent of Capital Percent of
Amount Assets(1) Requirements Assets
---------- ---------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 leverage capital $20,931 10.82% $7,735 4.00%
Tier 1 risk-based capital $20,931 17.53% $4,777 4.00%
Total risk-based capital $21,805 18.26% $9,554 8.00%
<FN>
--------------------
<F1> For purposes of calculating Regulatory Tier 1 leverage capital, assets
are based on adjusted total average assets. In calculating Tier 1
risk-based capital and total risk-based capital, assets are based on
total risk-weighted assets.
</FN>
</TABLE>
As the table shows, the Bank 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: (a) the bank held such types of
investments during the 14-month period from September 30, 1990 through
November 26, 1991; (b) the state in which the bank is chartered permitted
such investments as of September 30, 1991; and (c) 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. The Bank 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 the Bank's Tier 1 capital or the maximum
permissible amount specified by the Massachusetts banking laws. Section 24
also provides an exception for majority owned 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 the Bank. 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: (a) insolvency (whereby the assets of the bank are less
than its liabilities to depositors and others); (b) substantial dissipation
of assets or earnings through violations of law or unsafe or unsound
practices; (c) existence of an unsafe or unsound condition to transact
business; (d) 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 (e) 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 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 the Bank.
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
the Bank. 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 fourth
quarter of 1999 was 0.0202% for BIF-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 Bank's management does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.
Transactions with Affiliates of the Bank. Transactions between an
insured bank, such as the Bank, 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. 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 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. 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:
* for loans secured by raw land, the supervisory loan-to-value
limit is 65% of the value of the collateral;
* 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%;
* for loans for the construction of commercial, multi-family or
other non-residential property, the supervisory limit is 80%;
* for loans for the construction of one- to four-family
properties, the supervisory limit is 85%; and
* 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.
Community Reinvestment Act. Under the Community Reinvestment Act, any
insured depository institution, including the Bank, 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: (1) a
lending test, to evaluate the institution's record of making loans in its
service areas; (2) an investment test, to evaluate the institution's record
of investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and businesses; and
(3) 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 the Bank, the CRA
assessment will be based on: (a) the bank's loan-to-deposit ratio; (b) the
percentage of the bank's loans and any other appropriate lending related
activities located in the bank's assessment areas; (c) 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; (d)
the geographic distribution of the bank's loans; and (e) 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. The
Bank 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 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 parent holding company. The aggregate liability of a
parent holding company is limited to the lesser of: (a) an amount equal to
the five percent of the bank's total assets at the time it became
"undercapitalized," and (b) 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 the Bank's 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 Directors 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 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, the Bank 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. The Bank
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 the Bank's
interest-earning assets.
Holding Company Regulation
Federal Regulation. The MHC and the Company are governed as bank
holding companies under the BHCA. 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 the Bank. As of September 30, 2000, the Company's
total capital and Tier 1 capital ratios for the MHC and the Company exceed
these minimum capital requirements.
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 FRB 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.
As bank holding companies, the MHC and the Company are 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 are
required for the MHC or the Company 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 that has elected to be regulated
as a financial holding company under the GLB Act, such as the Company and
the MHC, may generally engage in securities, insurance and other activities
that are financial in nature or incidental to a financial activity. In order
to have qualified to be a financial holding company, each of the bank
holding companies' depository institution subsidiaries must have been "well
capitalized," "well managed," have at least a "satisfactory" CRA rating at
its most recent examination and have 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 the MHC or the
Company ever acquired as a separate subsidiary a depository institution in
addition to the Bank.
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: (a)
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 (b) must register, and
file certain reports, with the Division and is subject to examination by the
Division. The MHC or the Company will become a Massachusetts bank holding
company if they acquire a second banking institution and hold and operate it
separately from the Bank.
Acquisition of the Company
Under federal law, no person may acquire control of the Company or the
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 the Company's 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 the Company and the
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 the Company. 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 the Company. 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.
Dividend Waivers by the MHC
Any dividend declared by the Company that is waived by the MHC will be
subject to the following general 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: (a) the waiver would not be detrimental to the
safe and sound operation of the subsidiary banking institution, and (b) the
board of trustees of the mutual holding company expressly determines, as
evidenced by a resolution of the board of trustees, that such waiver is
consistent with the trustees' fiduciary duties to the mutual members of the
mutual holding company.
Federal Restrictions. The FRB may require that the MHC obtain the
prior approval of the FRB before the MHC may waive any dividends from the
Company. Generally, any dividends waived by the MHC will not be available
for payment to its public stockholders of the Company (i.e., stockholders
except for the MHC) or maybe excluded from the Company's capital for
purposes of calculating dividends payable to the public stockholders.
Moreover, the Company is required to maintain the cumulative amount of
dividends waived by the MHC in a restricted capital account that would be
added to the liquidation account established in the reorganization. This
amount is not available for distribution to public stockholders. The
restricted capital account and liquidation account amounts would not be
reflected in the Company's financial statements, but would be considered as
a notational or memorandum account of the Company. These accounts would be
maintained in accordance with the laws, rules, regulations and policies of
the Division and the plan of reorganization. In addition, if the MHC
converted 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 stock issued to public stockholders in
connection with any such transaction.
The MHC has not waived dividends declared by the Company. If the MHC
decides that it is in its best interest to waive a particular dividend to be
paid by the Company and the FRB approves such waiver, then the Company will
pay such dividend only to its public stockholders. The amount of the
dividend waived by the MHC would be treated in the manner described above.
The MHC's decision as to whether or not to waive a particular dividend will
depend on a number of factors, including the MHC's capital needs, the
investment alternatives available to the MHC as compared to those available
to the Company, and the possibility of regulatory approvals. The Company
cannot guarantee: (1) the MHC will waive dividends paid by the Company; (2)
that if the application is made to waive a dividend, that the FRB will
approve such dividend waiver request; or (3) what conditions might be
imposed by the Federal Reserve Board on any dividend waiver.
Federal Securities Laws
The Company's common stock issued in the offering was registered with
the SEC under the Exchange Act. The Company is therefore subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank currently conducts its business through its executive and
administrative offices and its six retail banking offices, five of which are
full service branches. As of September 30, 2000, the properties and
leasehold improvements owned by us had an aggregate net book value of $1.8
million.
<TABLE>
<CAPTION>
Original Date Deposits
Leased or Leased or Date of Lease at September 30,
Location Owned Acquired Expiration 2000
-------- --------- ------------- ---------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
100 E. Main Street Owned 06/10/75 N/A $61,965
Westborough, MA
Branch Offices:
33 W. Main Street Owned 05/01/54 N/A $32,903
Westborough, MA
53 W. Main Street Owned 07/01/81 N/A $43,964
Northborough, MA
19 Maple Avenue Leased 12/01/95 11/30/00 $15,714
Shrewsbury, MA
Shaw's Supermarket Leased 05/01/99 04/30/04 $ 2,823
Shrewsbury, MA
Other Offices:
The Willows(1) Leased 08/01/87 Tenant at Will $ 6,036
One Lyman Street
Westborough, MA
Operations Center Leased 01/01/98 Tenant at Will 0
176 E. Main Street
Westborough, MA
<FN>
--------------------
<F1> 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.
</FN>
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Although the Bank and the Company, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Bank or the Company, its directors
or its officers is a party or to which any of its property is subject as of
the date of this Form 10-KSB.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Information relating to the market for the Company's common equity,
related stockholder matters and payment of dividends by the Company appears
in the Annual Report to Shareholders, which is attached to this Form 10-KSB
as Exhibit 13, and is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain of the above-captioned information appears under "Management's
Discussion and Analysis of Financial Condition and Results of Operation" in
the Annual Report to Shareholders, which is attached to this Form 10-KSB as
Exhibit 13, and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in the Company's 2000 Annual
Report to Shareholders, which is attached to this Form 10-KSB as Exhibit 13,
is incorporated herein by reference.
Annual Report Section Pages in Annual Report
--------------------- ----------------------
Report of Independent Auditors F-1
Consolidated Balance Sheets as of F-2
September 30, 2000 and 1999
Consolidated Statements of Income for the
Years Ended September 30, 2000, 1999 and 1998 F-3
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
September 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the
Years Ended September 30, 2000, 1999 and 1998 F-5
Notes to the Consolidated Financial Statements F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK AND THE COMPANY
The information relating to directors and executive officers of the
Company is incorporated herein by reference to the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on January 25, 2001, a
copy of which will be filed not later than 120 days after the close of
fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on January 25, 2001, a copy of which will be
filed not later than 120 days after the close of fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating security ownership of certain beneficial
owners and management is incorporated herein by reference to the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on January
25, 2001, a copy of which will be filed not later than 120 days after the
close of fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on January 25,
2001, a copy of which will be filed not later than 120 days after the close
of fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
2.1 Plan of Reorganization from Mutual Savings Bank to Mutual
Holding Company and Stock Issuance Plan of Westborough
Savings Bank*
3.1 Articles of Organization of Westborough Financial Services,
Inc.*
3.2 Bylaws of Westborough Financial Services, Inc.*
3.3 Articles of Organization of The Westborough Bank*
3.4 Bylaws of The Westborough Bank*
3.5 Charter of Westborough Bancorp, MHC*
3.6 Bylaws of Westborough Bancorp, MHC*
4.1 Articles of Organization of Westborough Financial Services,
Inc. (See Exhibit 3.1)
4.2 Bylaws of Westborough Financial Services, Inc. (See
Exhibit 3.2)
4.3 Form of Stock Certificate of Westborough Financial Services,
Inc.*
10.1(a) Form of Employee Stock Ownership Plan of Westborough
Financial Services, Inc.*
10.1(b) Form of ESOP Trust Agreement*
10.2 Form of Executive Employment Agreement, by and between Joseph
F. MacDonough and Westborough Financial Services, Inc.*
10.3 Form of Executive Employment Agreement, by and between John
L. Casagrande and Westborough Financial Services, Inc.*
13 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule (only filed in electronic format)
[FN]
--------------------
* Incorporated herein by reference Registration Statement on Form SB-2
(Registration No. 333-80075), as filed with the Securities and
Exchange Commission on June 4, 1999, as amended.
</FN>
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Westborough Financial Services, Inc.
By: /s/ Joseph F. MacDonough
------------------------------------
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Name Title Date
---- ----- ----
/s/ Walter A. Kinell, Jr. Chairman of the Board December 27, 2000
----------------------------- of Directors
Walter A. Kinell, Jr.
/s/ Joseph F. MacDonough President, Chief Executive December 27, 2000
----------------------------- Officer and Director
Joseph F. MacDonough (Principal Executive and
Operating Officer)
/s/ Nelson P. Ball Director December 27, 2000
-----------------------------
Nelson P. Ball
/s/ Edward S. Bilzerian Director December 27, 2000
-----------------------------
Edward S. Bilzerian
/s/ David E. Carlstrom Director December 27, 2000
-----------------------------
David E. Carlstrom
/s/ John L. Casagrande Senior Vice President, December 27, 2000
----------------------------- Treasurer and Director
John L. Casagrande (Principal Financial and
Accounting Officer)
/s/ William W. Cotting, Jr. Director December 27, 2000
-----------------------------
William W. Cotting, Jr.
/s/Robert G. Daniel Director December 27, 2000
-----------------------------
Robert G. Daniel
/s/ Earl W. Hutt Director December 27, 2000
-----------------------------
Earl W. Hutt
/s/ Robert A. Klugman Director December 27, 2000
-----------------------------
Robert A. Klugman
/s/ Roger B. Leland Director December 27, 2000
-----------------------------
Roger B. Leland
/s/ Paul F. McGrath Director December 27, 2000
-----------------------------
Paul F. McGrath
/s/ Charlotte C. Spinney Director December 27, 2000
-----------------------------
Charlotte C. Spinney
/s/ Phyllis A. Stone Director December 27, 2000
-----------------------------
Phyllis A. Stone
/s/ James E. Tashjian Director December 27, 2000
-----------------------------
James E. Tashjian
/s/ Daniel G. Tear Director December 27, 2000
-----------------------------
Daniel G. Tear
