UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ To ___________
Commission file number: 000-27997
Westborough Financial Services, Inc.
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-3504121
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 E. Main Street
Westborough, Massachusetts 01581
(508) 366-4111
(Address of principal executive offices)
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding as of May 12, 2000
----- ------------------------------
<S> <C>
Common Stock, par value $0.01 1,581,374
</TABLE>
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
WESTBOROUGH FINANCIAL SERVICES, INC.
AND SUBSIDIARY
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION Page
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<S> <C>
Item 1 Financial Statements
Consolidated Balance Sheets 1
March 31, 2000 and September 30, 1999
Consolidated Statements of Income 2
For Three and Six Months Ended March 31, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity 3
For Six Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows 4
For Six Months Ended March 31, 2000 and 1999
Notes To Unaudited Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis 6
PART II. OTHER INFORMATION
-----------------
Item 1 Legal Proceedings 15
Item 2 Changes in Securities and Use of Proceeds 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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</TABLE>
This Quarterly Report on Form 10-QSB contains certain forward looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company and the Bank that are
subject to various factors which could cause actual results to differ
materially from these estimates. These factors include: changes in
general, economic, market, legislative and regulatory conditions, and the
development of an adverse interest rate environment that adversely affects
the interest rate spread or other income anticipated from the Bank's
operations and investments. The Company's and the Bank's actual results
may differ from the results discussed in the forward looking statements.
Part I - Financial Information
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
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(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 2,850 $ 4,157
Federal funds sold 4,776 4,632
Short-term investments 3,383 1,929
------------------------
Total cash and cash equivalents 11,009 10,718
Securities available for sale, at fair value 68,039 63,607
Federal Home Loan Bank stock, at cost 903 850
Loans, net 96,124 92,092
Banking premises and equipment, net 1,670 1,724
Accrued interest receivable 1,150 1,130
Deferred income taxes 1,236 833
Cash surrender value of life insurance 3,030 2,906
Other assets 444 734
------------------------
Total assets $183,605 $174,594
========================
Liabilities and Stockholders' Equity
Deposits $154,849 $150,111
Federal Home Loan Bank advances 4,000 4,000
Mortgagors' escrow accounts 212 231
Accrued taxes and expenses 572 865
Other liabilities 464 106
------------------------
Total liabilities 160,097 155,313
------------------------
Commitments and Contingencies
Preferred Stock, $.01 Par Value, 1,000,000 shares
authorized, none outstanding 0 0
Common Stock, $.01 Par Value, 5,000,000 shares authorized
1,581,374 shares issued and outstanding 16 0
Additional Paid in Capital 4,542 0
Retained Earnings 20,266 19,680
Accumulated other comprehensive loss (881) (399)
Unearned Comp - ESOP, 43,463 shares at March 31, 2000 (435) 0
------------------------
Total stockholders' equity 23,508 19,281
------------------------
Total liabilities and stockholders' equity $183,605 $174,594
========================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
(Dollars in Thousands)
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<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,741 $1,555 $3,440 $3,124
Interest and dividends on investment securities 1,054 913 2,052 1,853
Interest on federal funds sold 66 64 152 126
Interest on short term investments 31 41 72 76
----------------------------------------
Total interest and dividend income 2,892 2,573 5,716 5,179
Interest expense:
Interest on deposits 1,277 1,181 2,531 2,374
Interest on borrowings 53 28 105 55
----------------------------------------
Total interest expense 1,330 1,209 2,636 2,429
----------------------------------------
Net interest income 1,562 1,364 3,080 2,750
Provision for loan losses 0 10 0 25
----------------------------------------
Net interest income, after provision for loan losses 1,562 1,354 3,080 2,725
----------------------------------------
Other income:
Customer service fees 71 66 156 135
Loan fees 3 4 5 11
Income from covered call options 51 16 180 187
Gain on sales of securities available for sale, net 21 178 179 290
Miscellaneous 29 2 58 7
----------------------------------------
Total other income 175 266 578 630
----------------------------------------
Operating expenses:
Salaries and employee benefits 741 628 1,492 1,180
Occupancy and equipment expenses 216 159 414 298
Data processing expenses 81 60 153 109
Marketing expenses 63 37 120 73
Contributions 17 1 17 16
Professional fees 40 23 64 44
Other general and administrative expenses 286 214 585 398
----------------------------------------
Total operating expenses 1,444 1,122 2,845 2,118
----------------------------------------
Income before income taxes 293 498 813 1,237
Provision for income taxes 76 151 227 413
----------------------------------------
Net income $ 217 $ 347 $ 586 $ 824
========================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Comprehensive ESOP
Stock Capital Earnings Income (Loss) Shares Total
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ 0 $ 0 $18,207 $1,160 $ 0 $19,367
Comprehensive Income:
Net Income 0 0 824 0 0 824
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (580) 0 (580)
-------
Total comprehensive Income 244
-----------------------------------------------------------------------------
Balance at March 31, 1999 $ 0 $ 0 $19,031 $ 580 $ 0 $19,611
=============================================================================
Balance at September 30, 1999 $ 0 $ 0 $19,680 $ (399) $ 0 $19,281
Comprehensive Income:
Net Income 0 0 586 0 0 586
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (482) 0 (482)
-------
Total comprehensive Income 104
-------
Net proceeds from sale of common
stock 16 4,542 0 0 0 4,558
Purchase of ESOP shares; 44,200 shares at $10 0 0 0 0 (442) (442)
ESOP shares committed to be released 0 0 0 0 7 7
-----------------------------------------------------------------------------
Balance at March 31, 2000 $16 $4,542 $20,266 $ (881) $ (435) $23,508
=============================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 586 $ 824
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 0 25
Gain on sales of securities available for sale, net (179) (290)
Recognition of income from covered call options (180) (187)
Amortization of premiums on securties 1 47
Depreciation expense 168 134
Amortization of net deferred loan costs (fees) 10 (3)
Increase in accrued interest receivable (20) (12)
Other, net 118 81
--------------------------
Net cash provided by operating activities 504 619
Cash flows from investing activities:
Purchase of securities available for sale (12,103) (14,302)
Purchase of Federal Home Loan Bank Stock (53) 0
Proceeds from sales and calls of securities available for sale 4,596 3,638
Proceeds from maturities of securities available for sale 1,001 4,000
Principal repayments received on mortgage and asset
backed securities 1,659 2,305
Loans originated, net of payments received (4,042) (4,026)
Proceeds from sales of foreclosed real estate 0 74
Purchase of banking premises and equipment (114) (158)
--------------------------
Net cash used by investing activities (9,056) (8,469)
Cash flows from financing activities:
Net increase in deposits 4,738 7,009
Net decrease in mortgagors escrow accounts (19) (19)
Proceeds from Federal Home Loan Bank advances 0 2,000
Net proceeds received from stock offering 4,559 0
Purchase of ESOP shares (442) 0
Committed ESOP shares 7 0
--------------------------
Net cash provided by financing activities 8,843 8,990
Net increase in cash and cash equivalents 291 1,140
Cash and cash equivalents at beginning of period 10,718 12,441
--------------------------
Cash and cash equivalents at end of period $ 11,009 $ 13,581
==========================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Westborough Financial Services, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
1) Basis of Presentation and Consolidation.
The unaudited consolidated interim financial statements of
Westborough Financial Services, Inc. and subsidiary (the "Company")
presented herein should be read in conjunction with the consolidated
financial statements of Westborough Savings Bank (the "Bank", which has
since been renamed The Westborough Bank) for the year ended September 30,
1999, included in the Annual Report on Form 10-KSB of the Company, the
holding company for The Westborough Bank.
The unaudited consolidated interim financial statements herein have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for completed financial statements.
In the opinion of management, the consolidated interim financial
statements reflect all adjustments (consisting solely of normal recurring
accruals) necessary for a fair presentation of such information. Interim
results are not necessarily indicative of results to be expected for the
entire year.
2) Reorganization and Stock Offering.
The Bank was a Massachusetts chartered mutual savings bank founded in
1869 which reorganized into a two-tiered mutual holding company structure
on February 15, 2000 pursuant to the Bank's Plan of Reorganization 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, or 1,027,893 shares, were issued to the MHC.
3) Contingencies.
At March 31, 2000, the Bank had loan commitments to borrowers of $3.0
million, commitments of home equity loans of $209 thousand, available home
equity lines of credit of $5.3 million and unadvanced funds on commercial
lines of credit of $842 thousand. The Bank had no commitments to purchase
securities at March 31, 2000.
During the next quarter, the Bank plans to begin an expansion of its
facilities by constructing an addition to its existing executive office.
The construction expenses for this addition are expected to total
approximately $2.5 million. On December 16, 1999, the Bank entered into a
purchase and sale agreement to acquire approximately 0.8 acres of land and
buildings located at 23/25 Maple Avenue, Shrewsbury for the sum of $935
thousand, subject to adjustments and numerous conditions. The site is
adjacent to the Bank's current leased branch office at 19 Maple Avenue,
Shrewsbury. If the sale is completed, the Bank's plan is to relocate its
19 Maple Avenue branch to a newly constructed building located at 23/25
Maple Avenue. The Bank anticipates that it will have sufficient funds to
meet these planned capital expenditures throughout 2000.
4) Earnings per Share.
Earnings per share data is not presented for the three and six month
periods ended March 31, 2000 and 1999 because shares of common stock were
not issued until February 15, 2000.
Item 2. Management's Discussion and Analysis.
General
Westborough Savings Bank (now known as The Westborough Bank, the
"Bank") was a Massachusetts chartered mutual savings bank founded in 1869
which converted into a two-tiered mutual holding company structure on
February 15, 2000 pursuant to the Bank's Plan of Reorganization 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 Westborough
Financial Services, Inc. (the "Company"); (ii) the Bank converted from
mutual to stock form 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, or
1,027,893 shares, were issued to the MHC.
The Company's sole business activity consists of the business of the
Bank. 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 Quarterly Report on Form 10-QSB represents
the activity of the Bank and its subsidiaries.
The Bank is a community- and customer-oriented retail bank offering
traditional deposit products, residential and commercial real estate
mortgage loans as well as 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 results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income
that the Bank earns on its interest-earning assets, primarily loans,
mortgage-backed securities and investment securities, and the interest it
pays on its interest-bearing liabilities, primarily certificates of deposit
and savings accounts. The Bank's results of operations also are affected
by its provision for loan losses, other income and operating expense.
Operating expense consists primarily of salaries and employee benefits,
occupancy expenses and other general and administrative expenses. Other
income consists mainly of service fees and charges, income from writing
covered call options and gains on sales of securities.
The Bank's results of operations also may be affected significantly
by general and local economic and competitive conditions, particularly
those with respect to changes in market interest rates, government policies
and actions of regulatory authorities. Future changes in applicable law,
regulations or government policies may materially impact the Bank.
Additionally, the Bank's lending activity is concentrated in loans secured
by real estate located in Westborough, Northborough, Shrewsbury and
Grafton, Massachusetts. Accordingly, the Bank's results of operations are
affected by regional market and economic conditions.
Comparison of Financial Condition at March 31, 2000 and September 30, 1999
The Company's total assets increased by $9.0 million, or 5.2%, to
$183.6 million at March 31, 2000 from $174.6 million at September 30, 1999.
Total cash and cash equivalents increased by $291 thousand to $11.0 million
at March 31, 2000 from $10.7 million at September 30, 1999. Securities
available for sale increased by $4.4 million, to $68.0 million at March 31,
2000 from $63.6 million at September 30, 1999. This increase was mainly
attributable to increases in U.S. government, federal agency and corporate
obligations. Loans increased $4.0 million, or 4.4% to $96.1 million at
March 31, 2000, as compared to $92.1 million at September 30, 1999.
Total deposits increased by $4.7 million, or 3.1%, to $154.8 million
at March 31, 2000, from $150.1 million at September 30, 1999. This
increase was attributable primarily to increases in short-term certificates
of deposit and interest-bearing, tiered-rate and NOW accounts. The Bank
also experienced increases in non-interest bearing demand deposit accounts.
The Bank continues to promote growth in core-based checking accounts and,
as a result of further bank consolidation in our market, expects to
experience continued growth in these accounts.
Due primarily to the proceeds received from the Stock Offering, total
stockholders' equity increased 21.9%, or $4.2 million, to $23.5 million at
March 31, 2000, from $19.3 million at September 30, 1999. The Employee
Stock Ownership Plan Trust acquired 44,200 shares of stock in the Stock
Offering and the cost of these shares is reflected in stockholders' equity.
Net income for the six month period ending March 31, 2000 was $586
thousand, which was offset to some extent by an increase of $482 thousand
of net unrealized losses on securities available for sale, net of tax
effects. Stockholders' equity as a percent of assets was 12.8% at March
31, 2000 as compared to 11.0% at September 30, 1999.
Comparison of Operating Results for the Three Months Ended March 31, 2000
and 1999
Net Income: The Company's net income for the three months ended
March 31, 2000 declined by $130 thousand, or 37.4%, to $217 thousand from
$347 thousand for the three months ended March 31, 1999. This decline was
primarily the result of a decline in net gains on the sale of securities
available for sale, increases in operating expenses associated with branch
expansion, operational improvements and the addition of other personnel.
This was partially offset by an increase in net interest margin. The
Company's annual return on average assets for the three months ended March
31, 2000 was 0.48% as compared to 0.85% for the three months ended March
31, 1999.
Interest and Dividend Income: Interest and dividend income increased
by $319 thousand, or 12.4%, to $2.9 million for the quarter ended March 31,
2000, from $2.6 million for the quarter ended March 31, 1999. The increase
was due mainly to a higher level of average interest-earning assets, and to
a lesser extent by an increase in the average rate earned on earning
assets. The average volume of interest-earning assets for the quarter
ended March 31, 2000 was $170.1 million earning an average rate of 6.80% as
compared to an average volume of $157.1 million earning an average rate of
6.55% for the quarter ending March 31, 1999. The Bank experienced
continued growth in real estate and commercial lending and deployed
additional cash flows into investment securities. The average balance of
loans for the quarter ended March 31, 2000 was $94.4 million earning 7.38%
as compared to an average balance of $85.2 million earning 7.30% for the
quarter ending March 31, 1999. The average balance of investment
securities for the quarter ended March 31, 2000 was $68.2 million earning
6.18% as compared to an average balance of $62.8 million earning 5.82% for
the quarter ending March 31, 1999.
Interest Expense: Interest expense increased by $121 thousand, or
10.0%, to $1.3 million for the quarter ended March 31, 2000, from $1.2
million for the quarter ending March 31, 1999. Interest expense increased
due to a higher volume of interest-bearing liabilities. The average volume
of interest-bearing liabilities was $145.8 million with a cost of 3.65% for
the quarter ended March 31, 2000 as compared to $132.8 million with a cost
of 3.64% for the quarter ending March 31, 1999. The average volume of
interest-bearing deposits was $141.7 million with a cost of 3.60% for the
quarter ending March 31, 2000 as compared to $130.0 million with a cost of
3.63% for quarter ending March 31, 1999. The average volume of borrowed
funds was $4.1 million with a cost of 5.17% for the quarter ending March
31, 2000 as compared to $2.8 million with a cost of 4.01% for quarter
ending March 31, 1999.
Net Interest Income: The Company's net interest income increased by
$198 thousand for the quarter ended March 31, 2000, or 14.5%, to $1.6
million from $1.4 million for the quarter ending March 31, 1999. The
increase was attributed to the combination of an increase in interest and
dividend income of $319 thousand offset by an increase in interest expense
of $121 thousand. The Bank's net interest rate spread increased to 3.15%
for the quarter ended March 31, 2000 as compared to 2.91% for the quarter
ending March 31, 1999.
Provision for Loan Losses: The Bank's provision for loan losses
declined to $0 for the quarter ended March 31, 2000 as compared to $10
thousand for quarter ending March 31, 1999. This decline reflects the
Bank's continued low level of non-performing loans. However, as the Bank
expands its commercial lending activities, increases in the provision are
likely.
Other Income: Other income consists primarily of fee income for bank
services, gains and losses from the sale of securities and income from the
writing of covered call options on common stock held in the Bank's stock
portfolio. Total other income declined 34.2% to $175 thousand for the
quarter ended March 31, 2000, as compared to $266 thousand for quarter
ending March 31, 1999. For the quarter ended March 31, 2000, gains from
the sale of securities declined by $157 thousand to $21 thousand, from $178
thousand for the quarter ending March 31, 1999. The primary reason for the
decline was due to a significantly lower level of gains from the sale of
common stock sold as a result of the exercise of a covered call option by
the buyer. Alternatively, income from expired options, where the buyer
allows the option to expire unexercised, increased by $35 thousand to $51
thousand for quarter ended March 31, 2000 from $16 thousand for quarter
ending March 31, 1999. Customer service fees, loan fees and miscellaneous
income increased by $31 thousand, or 43.0%, to $103 thousand for the
quarter ended March 31, 2000 from $72 thousand for the quarter ended March
31, 1999. This increase is primarily due to the increase in the number of
customer accounts held at the Bank, the sale of non-insured investment
products and increases in the cash surrender value of Bank-owned life
insurance.
Operating Expenses: For the quarter ended March 31, 2000, operating
expenses increased by $322 thousand, or 28.7%, to $1.4 million from $1.1
million for quarter ending March 31, 1999. The increase was primarily due
to salary and benefit expenses associated with the opening of a supermarket
branch in May 1999, additional staff in commercial lending, information
technology and financial reporting, plus staff incentive payments. Also,
occupancy and equipment, data processing, marketing, promotion, supplies,
and other expenses increased as a result of the Bank's recent branch
opening. Additional board and committee meeting fees and expenses, mostly
associated with strategic planning issues and meetings concerning the
formation of a mutual holding company increased the level of board expenses
which are included in other general and administrative expenses. Management
expects that accounting and legal fees will increase as a result of
financial reporting, legal and regulatory activities associated with the
Company's status as a public company.
Income Taxes: The provision for income taxes declined by $75
thousand to $76 thousand for the quarter ended March 31, 2000 as compared
to $151 thousand for the quarter ended March 31, 1999 resulting in
effective income tax rates of 25.9% and 30.3% for the quarters ended March
31, 2000 and 1999, respectively. The Bank utilizes investment securities
subsidiaries to substantially reduce state income taxes. The lower
effective tax rate is a result of tax-exempt income from the Bank-owned
life insurance purchased in June 1999 and a decrease in taxable income at
the Bank level, which is taxed at a higher rate than the securities
subsidiaries.
Comparison of the Operating Results for the Six Months Ended March 31, 2000
and 1999
Net Income: The Company's net income for the six months ended March
31, 2000 declined by $238 thousand, or 28.8%, to $586 thousand from $824
thousand for the six months ended March 31, 1999. This decline was
primarily the result of a decline in net gains on the sale of securities
available for sale, increases in operating expenses associated with branch
expansion, operational improvements and the addition of other personnel.
This was partially offset by an increase in net interest margin. The
Company's annual return on average assets for the six months ended March
31, 2000 was 0.66% as compared to 1.02% for the six months ended March 31,
1999.
Interest and Dividend Income: Interest and dividend income increased
by $537 thousand, or 10.4%, to $5.7 million for the six months ended March
31, 2000, from $5.2 million for the six months ended March 31, 1999. The
increase was due mainly to a higher level of average interest-earning
assets, and to a lesser extent by an increase in the average rate earned on
earning assets. The average volume of interest-earning assets for the six
months ended March 31, 2000 was $168.1 million earning an average rate of
6.80% as compared to an average volume of $155.0 million earning an average
rate of 6.68% for the six months ending March 31, 1999. The Bank
experienced continued growth in real estate and commercial lending and
deployed additional cash flows into investment securities. The average
balance of loans for the six months ended March 31, 2000 was $93.3 million
earning 7.38% as compared to an average balance of $84.1 million earning
7.42% for the six months ending March 31, 1999. The average balance of
investment securities for the six months ended March 31, 2000 was $66.9
million earning 6.14% as compared to an average balance of $62.0 million
earning 5.98% for the six months ending March 31, 1999.
Interest Expense: Interest expense increased by $207 thousand, or
8.5%, to $2.6 million for the six months ended March 31, 2000, from $2.4
million for the six months ending March 31, 1999. Interest expense
increased due to a higher volume of interest-bearing liabilities. The
average volume of interest-bearing liabilities was $145.3 million with a
cost of 3.63% for the six months ended March 31, 2000 as compared to $131.1
million with a cost of 3.71% for the six months ending March 31, 1999. The
average volume of interest-bearing deposits was $141.2 million with a cost
of 3.58% for the six months ending March 31, 2000 as compared to $128.7
million with a cost of 3.69% for six months ending March 31, 1999. The
average volume of borrowed funds was $4.1 million with a cost of 5.19% for
the six months ending March 31, 2000 as compared to $2.4 million with a
cost of 4.59% for six months ending March 31, 1999.
Net Interest Income: The Company's net interest income increased by
$330 thousand for the six months ended March 31, 2000, or 12.0%, to $3.1
million from $2.8 million for the six months ending March 31, 1999. The
increase was attributed to the combination of an increase in interest and
dividend income of $537 thousand offset by an increase in interest expense
of $207 thousand. The Bank's net interest rate spread increased to 3.17%
for the six months ended March 31, 2000 as compared to 2.97% for the six
months ending March 31, 1999.
Provision for Loan Losses: The Company's provision for loan losses
declined to $0 for the six months ended March 31, 2000 as compared to $25
thousand for six months ending March 31, 1999. This decline reflects the
Bank's continued low level of non-performing loans. However, as the Bank
expands its commercial lending activities, increases in the provision are
likely.
Other Income: Other income consists primarily of fee income for bank
services, gains and losses from the sale of securities and income from the
writing of covered call options on common stock held in the Bank's stock
portfolio. Total other income declined 8.3% to $578 thousand for the six
months ended March 31, 2000, as compared to $630 thousand for six months
ending March 31, 1999. For the six months ended March 31, 2000, gains from
the sale of securities declined by $111 thousand to $179 thousand, from
$290 thousand for the six months ending March 31, 1999. The primary reason
for the decline was due to a significantly lower level of gains from the
sale of common stock sold as a result of the exercise of a covered call
option by the buyer. Income from expired options, where the buyer allows
the option to expire unexercised, declined by $7 thousand to $180 thousand
for six months ended March 31, 2000 from $187 thousand for six months
ending March 31, 1999. Customer service fees, loan fees and miscellaneous
income increased by $66 thousand, or 43.1%, to $219 thousand for the six
months ended March 31, 2000 from $153 thousand for the six months ended
March 31, 1999. This increase is primarily due to the increase in the
number of customer accounts held at the Bank, the sale of non-insured
investment products and increases in the cash surrender value of Bank-owned
life insurance.
Operating Expenses: For the six months ended March 31, 2000,
operating expenses increased by $727 thousand, or 34.3%, to $2.8 million
from $2.1 million for six months ending March 31, 1999. The increase was
primarily due to salary and benefit expenses associated with the opening of
a supermarket branch in May 1999, additional staff in commercial lending,
information technology and financial reporting, plus staff incentive
payments. Also, occupancy and equipment, data processing, marketing,
promotion, supplies, and other expenses increased as a result of the Bank's
recent branch opening. Additional board and committee meeting fees and
expenses, mostly associated with strategic planning issues and meetings
concerning the formation of a mutual holding company, plus the payment of a
yearly retainer fee to board members in the most recent six months,
increased the level of board expenses which are included in other general
and administrative expenses. Management expects that accounting and legal
fees will increase as a result of financial reporting, legal and regulatory
activities associated with the Company's status as a public company.
Income Taxes: The provision for income taxes declined by $186
thousand to $227 thousand for the six months ended March 31, 2000 as
compared to $413 thousand for the six months ended March 31, 1999 resulting
in effective income tax rates of 27.9% and 33.4% for the six months ended
March 31, 2000 and 1999, respectively. The Bank utilizes investment
securities subsidiaries to substantially reduce state income taxes. The
lower effective tax rate is a result of tax-exempt income from the Bank-
owned life insurance purchased in June 1999 and a decrease in taxable
income at the Bank level, which is taxed at a higher rate than the
securities subsidiaries.
Liquidity and Capital Resources
The term "liquidity" refers to the Bank's ability to generate
adequate amounts of cash to fund loan originations, deposit withdrawals and
operating expenses. The Bank's primary sources of funds are deposits,
scheduled amortization and prepayments of loan principal and mortgage-
backed securities, maturities and calls of investment securities and funds
provided by the Bank's operations. The Bank also has expanded its use of
borrowings from the Federal Home Loan Bank of Boston as part of its
management of interest rate risk. At March 31, 2000, the Bank had $4.0
million in outstanding borrowings.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are
strongly influenced by interest rates, general and local economic
conditions and competition in the marketplace. These factors reduce the
predictability of the timing of these sources of funds.
The Bank's primary investing activities are the origination of one-
to four-family real estate and other loans, the purchase of mortgage-backed
securities and the purchase of investment securities. During the six
months ended March 31, 2000, the Bank originated loans of $12.3 million,
there were no purchases of mortgage-backed securities, and purchases of
investment securities of $12.1 million.
These investing activities were funded by deposit growth, principal
payments on mortgage loans and mortgage-backed securities, calls and
maturities on investment securities and funds provided by the Bank's
operating activities. Principal repayments on loans and mortgage-backed
securities totaled $9.9 million for the six months ended March 31, 2000.
Maturities of investment securities totaled $1.0 million during the six
months ended March 31, 2000. Sales and calls of investment securities
provided cash flows of $4.6 million during the six months ended March 31,
2000.
At March 31, 2000, the Bank had loan commitments to borrowers of $3.0
million, commitments of home equity loans of $209 thousand, available home
equity lines of credit of $5.3 million and unadvanced funds on commercial
lines of credit of $842 thousand. The Bank had no commitments to purchase
securities at March 31, 2000. Total deposits increased $4.7 million, during
the six months ended March 31, 2000. Deposit flows are affected by the
level of interest rates, the interest rates and products offered by
competitors and other factors. Certificate of deposit accounts scheduled
to mature within one year were $42.6 million at March 31, 2000. Based on
the Bank's deposit retention experience and current pricing strategy, the
Bank anticipates that a significant portion of these certificates of
deposit will remain with the Bank. The Bank is committed to maintaining a
strong liquidity position; therefore, it monitors its liquidity position on
a daily basis. The Bank also periodically reviews liquidity information
prepared by the Depositors Insurance Fund, the Federal Deposit Insurance
Corporation (the "FDIC"), and other available reports which compare the
Bank's liquidity with banks in its peer group. The Bank anticipates that
it will have sufficient funds to meet its current funding commitments.
In May 1999, the Bank expanded its retail banking franchise by
opening an additional branch location in the town of Shrewsbury. This
branch is located in the Shaw's supermarket, and start-up costs were
approximately $300 thousand. During the quarter ended June 30, the Bank
also plans to begin an expansion of its facilities by constructing an
addition to its existing executive office. The construction expenses for
this addition are expected to total approximately $2.5 million. On
December 16, 1999, the Bank entered into a purchase and sale agreement to
acquire approximately 0.8 acres of land and buildings located at 23/25
Maple Avenue, Shrewsbury for the sum of $935 thousand, subject to
adjustments and numerous conditions. The site is adjacent to the Bank's
current leased branch office at 19 Maple Avenue, Shrewsbury. If the sale
is completed, the Bank's plan is to relocate its 19 Maple Avenue branch to
a newly constructed building located at 23/25 Maple Avenue. The Bank
anticipates that it will have sufficient funds to meet these planned
capital expenditures throughout 2000.
At March 31, 2000, the Bank exceeded each of the applicable
regulatory capital requirements. The Bank's leverage (tier 1) capital was
approximately $23.5 million, or 13.1%. In order to be classified as "well-
capitalized" by the FDIC, the Bank was required to have leverage (tier 1)
capital of $9.0 million, or 5.0%. To obtain such classification, the Bank
must also have a risk-based total capital ratio of 10.0%. At March 31,
2000, the Bank had a risk-based total capital ratio of 28.8%.
Further, the Bank does not have any balloon or other payments due on
any long-term obligations or any off-balance sheet items other than the
commitments and unused lines of credit noted above.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the Gramm-
Leach-Bliley Financial Services Modernization Act of 1999 (the "Act"),
federal legislation 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: (a) 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; (b) provides a uniform framework for the
functional regulation of the activities of banks, savings institutions and
their holding companies; (c) broadens the activities that may be conducted
by national banks, banking subsidiaries of bank holding companies and their
financial subsidiaries; (d) provides an enhanced framework for protecting
the privacy of consumer information; (e) adopts a number of provisions
related to the capitalization, membership, corporate governance and other
measures designed to modernize the Federal Home Loan Bank system; (f)
modifies the laws governing the implementation of the Community
Reinvestment Act and (g) addresses a variety of other legal and regulatory
issues affecting both day-to-day operations and long-term activities of
financial institutions.
Bank holding companies will be permitted to engage in a wider variety
of financial activities than permitted under prior law, particularly with
respect to insurance and securities activities. In addition, in a change
from prior law, bank holding companies will be in a position to be owned,
controlled or acquired by any company engaged in financially-related
activities.
The Bank does not believe that the Act will have a material adverse
effect on its operations in the near-term. However, to the extent that the
Act permits banks, securities firms and insurance companies to affiliate,
the financial services industry may experience further consolidation. This
could result in a growing number of larger financial institutions that
offer a wider variety of financial services than the Bank currently offers
and that can aggressively compete in the markets the Bank currently serves.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule (submitted only with filing in
electronic format).
(b) Reports on 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: May 12, 2000 By: /s/ Joseph F. MacDonough
-------------------------------
President and Chief Executive
Officer
Date: May 12, 2000 By: /s/ John L. Casagrande
-------------------------------
Sr. Vice-President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of income of Westborough
Financial Services, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,850
<INT-BEARING-DEPOSITS> 267
<FED-FUNDS-SOLD> 4,776
<TRADING-ASSETS> 0
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<LOANS> 97,000
<ALLOWANCE> 876
<TOTAL-ASSETS> 183,605
<DEPOSITS> 154,849
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<LONG-TERM> 4,000
0
0
<COMMON> 16
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<NET-INCOME> 586
<EPS-BASIC> 0
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