EXHIBIT 13
Annual Report 2000
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Westborough Financial Services, Inc.
Our Vision
We will be the value leader of financial service providers in central
Massachusetts.
Our Mission
Build Relationships
At Westborough Bank, we are committed to building strong, long-term
customer and community relationships.
Provide Solutions
We achieve this by providing superior customer service and a broad range of
financial products and services - responding to the needs of our customers
- today and tomorrow.
Support Our Communities
As an independent fiscally sound community bank, our goal is to create
customer loyalty, enhance shareholder value, promote employee satisfaction
and continue to support the communities we serve.
<TABLE>
<CAPTION>
2000 1999 1998
($ in Thousands)
<S> <C> <C> <C>
Total Assets 205,976 174,594 158,523
Total Loans 113,559 92,092 82,348
Total Deposits 163,405 150,111 135,962
Total Shareholders' Equity 24,716 19,281 19,367
</TABLE>
Westborough Financial Services, Inc.
Selected Consolidated Financial and Other Data:
<TABLE>
<CAPTION>
At September 30, 2000 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data ($ in thousands)
Total assets $205,976 $174,594 $158,523
Loans, net 113,559 92,092 82,348
Investment securities 70,119 64,457 60,107
Total deposits 163,405 150,111 135,962
Federal Home Loan Bank advances 16,500 4,000 2,000
Stockholders' Equity 24,716 19,281 19,367
Allowance for loan losses 874 879 827
Non-accrual loans -- -- --
Non-performing assets -- -- --
<CAPTION>
Twelve Months Ended September 30, 2000 1999 1998
------------------------------------------------------------------------------------------------
Consolidated Statement of Operations ($ in thousands)
Total interest and dividend income $ 11,991 $ 10,606 $ 9,933
Total interest expense 5,525 4,976 4,557
------------------------------------
Net Interest Income 6,466 5,630 5,376
Provision for loan losses 0 45 39
------------------------------------
Net interest income, after provision for loan losses 6,466 5,585 5,337
------------------------------------
Customer service fees 344 277 259
Loan fees 11 17 20
Income from covered call options 425 352 0
Gain on securities, net 177 558 90
Miscellaneous 138 43 14
------------------------------------
Total other income 1,095 1,247 383
------------------------------------
Operating Expenses 5,830 4,663 3,657
------------------------------------
Income before income taxes 1,731 2,169 2,063
Income taxes 480 696 750
------------------------------------
Net Income $ 1,251 $ 1,473 $ 1,313
====================================
Number of weighted average shares outstanding #N/A #N/A #N/A
Earnings per share: stock trading commenced on
February 16, 2000 #N/A #N/A #N/A
<CAPTION>
Twelve Months Ended September 30, 2000 1999 1998
------------------------------------------------------------------------------------------------
Performance Ratios (1)
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%
Average interest rate spread 3.19% 3.01% 3.20%
Net interest margin (2) 3.73% 3.54% 3.76%
Operating expenses as a percent of average assets 3.16% 2.81% 2.46%
Average interest-bearing assets to average interest
bearing liabilities 116.88% 117.12% 117.84%
Efficiency ratio (3) 77.11% 67.81% 63.50%
<FN>
<F1> Ratios have been annualized, where applicable.
<F2> Net interest income divided by average interest-earning assets.
<F3> Total operating expenses divided by the sum of net interest income and
other income.
</FN>
<CAPTION>
At September 30, 2000 1999 1998
------------------------------------------------------------------------------------------------
Asset Quality Ratios:
Non-performing loans as a percent of loans 0.00% 0.00% 0.00%
Non-performing assets as a percent of total assets 0.00% 0.00% 0.05%
Allowance for loan losses as a percent of total loans
before the allowance for loan losses 0.76% 0.95% 0.99%
Capital Ratio and data:
Equity to assets at end of period 12.00% 11.04% 12.22%
Number of shares outstanding at end of period 1,581,374 0 0
Number of:
Full-service offices (1) 5 5 4
Full-time equivalent employees 69 60 53
<FN>
<F1> The number of full service offices does not include our branch at the
Willows or our Operations Center.
</FN>
</TABLE>
Growth and Expansion
President's Letter
The year 2000 was one of growth and expansion for The Westborough Bank. Our
goal of increasing our customer base required the enhancement of our
product and service lines, expanded technological capabilities and the
addition of new staff positions. A new corporate structure provided the
additional capital and flexibility necessary to remain competitive in the
ever-changing financial services industry.
The consolidated financial statements for the year ended September 30, 2000
included in this report reflect total asset growth of $31.4 million
(17.9%), including net loan growth of $21.5 million (23.3%) and deposit and
borrowing increases of $25.8 million (16.7%). These changes have been made
via capital realized from our reorganization from a mutual savings bank to
a mutual holding company structure, completed on February 15, 2000. During
this reorganization Westborough Financial Services, Inc. (WFSI), a stock
holding company, and our wholly owned subsidiary, The Westborough Bank,
were formed. Our initial stock offering, coupled with our earnings,
increased capital to $24.7 million.
There were two key factors to our asset growth and overall success this
year. First, the dedication of our officers and staff, who worked
tirelessly throughout the year providing the high level of service that our
customers have always expected. At the same time, they accepted new
challenges caused by the constant changes in our industry. New technology
was introduced by our professional team of community bankers in order to
deliver the products and services desired by our customers, both current
and future. Strategically enhancing our management and staff allowed us to
keep our focus on outstanding service while implementing these changes.
This increase in human and technological resources caused an anticipated
increase in operating expenses and decrease in earnings, which fell
$200,000 from the previous year to $1.3 million.
By increasing our staff and capabilities, we were able to respond to the
second key factor in our success. The Fleet/BankBoston merger and the entry
of Sovereign Bank into our marketplace created opportunities for us as a
positive alternative for their customers, many of whom experienced
disruption of their financial services. Our ability to offer comparable
products and services allowed us to prove ourselves in an unusual and
difficult circumstance for consumers.
Consolidation within the financial services industry will continue, but the
problems and opportunities experienced in our local market will not likely
be repeated any time soon.
One constant in this year of change has been our commitment to our
customers and our community. On a corporate level, WFSI and Westborough
Bank continue to support America's Promise and the Westborough Savings
Charitable Foundation, as well as many other groups local to our area. Many
of our employees have formed partnerships with local community agencies,
affirming the neighbor-to-neighbor assistance concept that we have
established. In addition, individual members of our staff give of their own
time and money to aid many agencies in the communities that we serve. We
are proud of our long-standing local roots and strive to support the
communities that support us.
On behalf of the Board of Directors, management and staff, we pledge our
continued commitment to our customers, community and shareholders.
/s/ Joseph F. MacDonough
Joseph F. MacDonough
President & CEO
[Photo of Joe MacDonough]
Groundbreaking took place in the Fall for our new Operations facility. The
13,000 square foot building will be located next to our Main Office.
Completion is expected in April, 2001.
[Photo]
From left: Joseph F. MacDonough, President and CEO; Vickie A. Bouvier,
Vice President/Operations; Nancy Carlson, President of Suburban Staffing
and First Vice President of the Westborough/Northborough Chamber of
Commerce; Walter A. Kinell, Jr., Chairman of the Board of Directors;
Richard Loughlin, President of Wellington Properties; and Steve Wilson,
Engineer of Wellington Properties.
Service and Attention
Customer Focus
What better way to understand what our customers want and need than a
Customer Advisory Council? We created one this year as part of our focused
commitment to making Westborough Bank as current and customer-friendly as
any bank you will ever have occasion to use.
Customer input has been especially helpful in a year in which so many new
and sophisticated services have been added. We have even repackaged
existing products and services to take advantage of new
techniques and technologies.
Our hard work has paid off! Many of our customers now use Internet banking
routinely and have signed up for Westborough Bank's electronic Bill Pay
system. Our full range of electronic services gives customers much easier
access to the bank than ever before. The feedback on these services has
been very positive.
We've been listening in other areas, as well - and that has led to many
advancements in the Commercial Services and Investment areas. Here are some
of the most important changes and additions for the year.
Internet Banking Now customers can access their accounts 24 hours a day,
7 days a week, 365 days a year. Internet Banking provides customers the
ability to transfer funds between all of their Westborough Bank accounts
without ever leaving home. They can also check their account balances and
see what funds are available and what funds are on hold.
Telephone Banking With FingerTip Banking,SM customers can bank anywhere a
touch-tone telephone is available. Customers have account information at
their fingertips totally free of charge any time of the day or night.
Bill Pay Customers can schedule monthly bill payments in advance and add
new payments without ever writing a check. With our on-line bill payment
system, customers have the convenience of scheduling their payments to
anyone in the United States.
Informative Website Customers can view branch office hours, check out
current CD rates, and calculate mortgage payments by visiting our website
at www.westboroughbank.com. In keeping with our old-fashioned values and
dedication to providing our customers the best technology available, we
have added several new features to our website. Customers can now view
information on Internet Banking, Savings and Investments, Personal Banking,
Commercial Services, Current Loan Rates, and even Career Opportunities.
Expanded Business Offerings Local businesses are the backbone of our
community, and Westborough Bank is committed to providing innovative
financial solutions and excellent access to commercial credit. This year,
we introduced a Tiered Commercial Savings Account and Commercial Debit
Cards. We also expanded our services by adding Commercial Teller Windows.
It would be hard to find a more supportive business banking team than ours.
In addition to convenient business checking, local businesses are offered a
free lending needs assessment, personal advice and consultation, and access
to loans from $50,000 to $39 million. Products include ample lines of
credit, term loans, real estate loans, SBA loans, and other types of
commercial credit.
Investment Services Also new this year is Peter Panagiotou, Director of
Retail Investment Services. His addition to Westborough Bank has expanded
our Investment capabilities to include full financial planning, retirement
& estate planning, plus investments and portfolio analysis. These services
are valuable to our customers and represent an important area of future
growth for the bank.
Commercial Services
When it comes to business banking, you won't find a more supportive team
than ours. In fact, you can expect a full-service team approach with
experienced lenders willing to help you reach your goals. You'll have
access to convenient business checking, lines of credit, term loans,
commercial real estate and SBA loans. The team shown from left to right:
Jane Michaud, Commercial Loan Administrator, Bob McCann, Vice President and
Department Head/ Commercial Lending, and Al Tautkas, Vice President and
Senior Lender.
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Electronic Banking
Our full range of electronic services gives customers much easier access to
the bank than ever before. Access to account information and transfers over
the phone, on-line banking, a multi-purpose debit card, and ATM access from
anywhere in the country. The feedback on these services has been very
positive.
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Charity and Promise
Community Involvement
If giving is better than receiving, then the bank has had a better year
than ever. This year, both our corporate and staff contributions to the
community were strong.
Much of this dedication is long-standing for the bank, but this year, due
to our commitment to America's Promise, we have placed a special emphasis
on supporting the needs of children. Our affiliation with this program was
initiated by the American Banker's Association's partnership. If you're not
familiar with America's Promise, you can read more about it at
www.americaspromise.org.
Westborough Bank encourages community involvement and applauds the generous
contributions of our employees. Here are just a few of their many
activities and community services.
Toys for Tots Our employees collect toys each year to donate to children.
Walk for a Cure Participants raise funds for breast cancer research.
Christmas for Westborough State Hospital Each year, our employees hold
a party for the patients and bring gifts.
Bay Path Home and Community Services As certified representatives of Bay
Path, several Westborough Bank employees donate their time to handle money
management for seniors - one of many important services provided for older
adults by Bay Path.
Movie Time The bank donated a large-screen television to the Shrewsbury
Senior Center. Now the seniors there pick a movie to watch each month,
and our employees bring them snacks, popcorn and beverages.
Senior Center in Westborough The current treasurer of this center is a
Westborough Bank employee.
Westborough Savings Charitable Foundation This foundation was established
specifically to give back to the community through grants for important
community causes, projects and organizations. Those who have been supported
through this program include the YMCA Youth Support Campaign, the YWCA of
Central Massachusetts, Family Services of Central Massachusetts,
Westborough High School's Charlotte Spinney Vision Scholarship, the
Shrewsbury Education Foundation, the Northborough Education Foundation, the
Westborough Educational Foundation, The Hillside School, the Shrewsbury
Housing Authority, the Worcester County Food Bank, Abby's House, the
Montachusett Girl Scout Council, the Knox Trail Boy Scout Council, and the
United Way of Central Massachusetts.
America's Promise
Founded in 1997, the mission of America's Promise -- The Alliance for Youth
is to build the character and competence of young people in an effort to
help them lead successful lives and become contributing members of society.
Led by General Colin L. Powell, USA (Ret.), America's Promise has
identified and strives to fulfill five components necessary
for all children to become successful adults: ongoing relationships with a
caring adult; safe places with structured activities during non-school
hours; a healthy start; marketable skills through effective education; and
opportunities to give back through community service.
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Savings Makes Sense
Savings Makes Sense is a state-run program set up to teach children in
grades K-8 to save money as a life skill. Currently, Westborough Bank is
active in six schools and will begin working with two additional schools in
2001. Children in Westborough, Shrewsbury, Northborough, and Boylston are
encouraged to make weekly or bi-weekly deposits into passbook accounts with
no fees. To open the account, the bank gives each child a $5 gift, then
provides rewards for consistent banking. All rewards, of course, are based
on the number of deposits, never on the amount of the deposit. Currently,
children receive a commemorative state quarter for every third deposit they
make.
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Officers of Westborough Financial Services, Inc. and Westborough Bank
---------------------------------------------------------------------
President & CEO
Joseph F. MacDonough
Senior Vice President & Treasurer
John L. Casagrande
Vice President,
Operations Officer
Vickie A. Bouvier
Vice President,
Senior Loan Officer
Alexander P. Tautkas
Vice President, Director of Marketing/Retail Sales
Sharyn L. Tomasso
Vice President, Director of Human Resources
Margaret I. Duquette
Vice President,
Commercial Lending
Robert K. McCann
Vice President
Robert G. Daniel
Vice President
Roger B. Leland
Clerk of Corporation
Nelson P. Ball
Assistant Vice President,
Mortgage Loan Officer
Paul M. Gleason, Jr.
Assistant Vice President, Branch Manager
Lois M. Brennan
Assistant Vice President,
Business Development Officer
William L. Martin
Assistant Vice President,
Loan Servicing Officer
Lois J. Murphy
Information Technology Officer
Philip A. Maio
Controller
Deborah A. Callahan
Board of Directors
------------------
Chairman of the Board
Walter A. Kinell, Jr.
Nelson P. Ball
Edward S. Bilzarian
David E. Carlstrom
John L. Casagrande
William W. Cotting, Jr.
Robert G. Daniel
Earl H. Hutt
Robert A. Klugman
Roger B. Leland
Joseph F. MacDonough
Paul F. McGrath
Charlotte C. Spinney
Phyllis A. Stone
James E. Tashjian
Daniel G. Tear
Director Emeritus
Joseph G. Nason
Executive Committee
-------------------
David E. Carlstrom
Roger B. Leland
Robert G. Daniel
Joseph F. MacDonough Robert A. Klugman
James E. Tashjian
Auditing Committee
Earl H. Hutt, Chairman
Edward S. Bilzerian
Paul F. McGrath
Corporators
-----------
Anthony A. Abu
Jean Anderson
Michael J. Antonio
James N. Ball
Nelson P. Ball
John A. Bartolini, Jr.
Edward S. Bilzerian
Dexter P. Blois
Jean M. Borgatti
Richard J. Boutilier
Vickie A. Bouvier
Janice A. Brown
Nancy Carlson
David E. Carlstrom
John L. Casagrande
Benjamin Colonero
William W. Cotting, Jr.
Donald F. Cowles
Donna Cox
Donald B. Cutone
Robert G. Daniel
Joyce M. Danielson
Paulette E. Davis
Michael A. DiPierro
Margaret I. Duquette
Robert J. Gallagher
Donald M. Gillis
James A. Harvey
Thomas A. Hays
Stephen L. Hero
Maria G. Hopkins
Kenneth Housmen
Paulyn Howard
Earl H. Hutt
James W. Igoe
Jeffrey W. Kinell
Walter A. Kinell, Jr.
Robert A. Klugman
John I. Lebeaux
Jeffrey B. Leland
Roger B. Leland
Richard J. Loughlin
Joseph F. MacDonough
Joseph MacDougall
Paul F. McGrath
Helen F. Miller
Richard B. Noyes
Janet M. Ordway
George E. Pember
Robert B. Percy
Charlotte C. Spinney
Phyllis A. Stone
Thomas J. Sweeney
James E. Tashjian
Alexander P. Tautkas
Daniel G. Tear
J. Kelly Thomas
Hugh K. Tufts, Jr.
Lawrence L. Ware
Francis P. Zarette
Staff
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Maxine Anders
Karissa Ayeni
Myrtle Beauregard
Kathleen Bianchi
Jean Breidenbach
Karen Brooks
Kathleen Campanale
Mary-Jane Chase
Michelle Chesley
Emily Cibula
Amy Cowan
Brigitta Dagnese
Janet Daniels
Marcia Depeau
Stacy Derosier
Regina Desmarais
Charlotte Donovan
Ann Dussault
Maureen Ekblom
Astrid Essex
Cheryl Fedorczuk
Dean Figarsky
Melissa Fiske
Jamie Flagg
Sharon Flanigan
Robert Fontaine
Mary Gaudet
Mary Gillis
Kellieann Giorgio
Claire Hart
Mary Lynn Hart
Marion Hartshorn
Melissa Havalotti
Beth Hayden
Theresa Hopkins
Colleen Horne
Christine Howe
Janet Jankowski
Laura Knowles
Jane LaFlamme
Mathew Lafountain
Suzanne Laperle
Marites MacArthur
Richard Mara
Jill Martin
Winifred Mason
Carol McIntyre
Jane Michaud
Jeannette Michaud
Donald Painchaud
Peter Panagiotou
Kimberly Perkins
Diane Rawson
Linda Richard
Lisa Roberts
Elizabeth Rocco
Nilda Rodriguez
Annette Sangkhum
Linda Tumeinski
Jean Wamback
Toni Wilson
Years of Service - Longstanding Employees
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20-25 years
Vickie A. Bouvier
Lois M. Brennan
Alexander P. Tautkas
Linda M. Richard
15-19 years
Joseph F. MacDonough
Jean A. Breidenbach
Janet L. Jankowski
Patricia L. Loiseau
Mary K. Gillis
Beth E. Hayden
10-14 years
Kimberly S. Perkins
Carol K. McIntyre
Suzanne T. Laperle
Ann Dussault
Paul Gleason (pictured with his daughter) is founder of Spencer Theatre
Company - a true community theater producing original and established work.
All comers welcome! Often, productions are modified and roles added to
include extra players. For example, the original Annie had seven orphans;
the Spencer production included 25. Participants are 50/50 children/adults.
The Company produces three to four productions a year plus workshops. This
past year, in conjunction with the South County Teen Network, the Company
featured a workshop focusing on teen issues including stress, pregnancy,
and suicide.
[Photo]
Sharyn L. Tomasso is a six-year volunteer with the Montachusetts Girl
Scouts. She's also in her fifth year as Brownie leader in Holden and serves
on the Corporate Gift Board of the Montachusetts Girl Scout Council.
[Photo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, that 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.
General
The Bank completed its reorganization into a "two-tiered" mutual
holding company structure on February 15, 2000. In connection with this
reorganization: (1) the Bank formed Westborough Bancorp, MHC (the "MHC"), a
Massachusetts-chartered mutual holding company, which is the majority owner
of the Company, a Massachusetts-chartered stock holding company; (2) the
Bank converted from a Massachusetts-chartered mutual savings bank to a
Massachusetts-chartered stock savings bank and issued 100% of its capital
stock to the Company; and (3) the Company issued shares of its common
stock, $0.01 per share, to the public at a price of $10.00 per share in a
subscription, community and syndicated offering (the "Stock Offering").
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes that are
included within this report.
The business of the Bank consists of attracting deposits from the
general public and using these funds to originate various types of loans
primarily in the towns of Westborough, Northborough and Shrewsbury,
Massachusetts, including residential and commercial real estate mortgage
loans and, to a lesser extent, consumer and commercial loans.
The Bank's results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income
the Bank earns on its interest-earning assets and the interest it pays on
its interest-bearing liabilities. Interest-earning assets primarily consist
of mortgage loans, mortgage-backed securities and investment securities.
Interest-bearing liabilities consist primarily of certificates of deposit,
savings accounts and borrowings. The Bank's results of operations are also
affected by its provision for loan losses, income from security
transactions, other income and operating expenses. Operating expenses
consist primarily of salaries and employee benefits, occupancy, data
processing, marketing, professional fees and other general and
administrative expenses. Other income consists mainly of service fees and
charges, income from writing covered call options, gains on sales of
securities and fees from the sale of non-insured investment products.
The Bank's results of operations may also be affected significantly
by general and local economic and competitive conditions, particularly
those with respect to changes in market interest rates, government policies
and actions of regulatory authorities. Future changes in applicable law,
regulations or government policies may materially impact 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.
Business Strategy
In past years, 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. 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 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 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. 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
Asset/Liability Management; Market Risk Analysis
A primary component of the Bank's market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both the
Bank's level of income and expense recorded on a large portion of its
assets and liabilities. Fluctuations in interest rates will also affect the
market value of all interest-earning assets, other than those, which
possess a short term to maturity.
The primary objective of the Bank's interest rate management strategy
is to optimize the Bank's economic value and net income under likely market
rate scenarios. To achieve this objective, the Bank has developed policies
and procedures to assist senior management in evaluating and maintaining
acceptable levels of interest rate risk, liquidity risk and capital. In
particular, the Bank seeks to coordinate asset and liability decisions so
that, under changing interest rate scenarios, earnings will remain within
an acceptable range.
During fiscal year 2000, the Bank operated under a generally rising
interest rate environment. A significant amount of the Bank's short-term
investments and other investment securities matured and re-priced at higher
rates of interest during the 2000 fiscal year. To a lesser extent, the
Bank's interest expense from interest-bearing liabilities also increased
during the year ended September 30, 2000. The rising interest rate
environment during fiscal year 2000 increased the Bank's interest rate
spread to 3.19% compared to 3.01% the prior year.
Due to the nature of the Bank's operations, it is not subject to
foreign currency exchange or commodity price risk. The Bank's real estate
loan portfolio, concentrated in the towns of Westborough, Northborough,
Shrewsbury and Grafton, Massachusetts, is, however, subject to risks
associated with the local economy. Historically, the Bank's lending
activities have emphasized one- to four-family residential mortgage loans,
and the Bank's primary source of funds has been deposits. In recent years,
the Bank has attempted to employ certain strategies to manage the interest
rate risk inherent in this asset/liability mix, including: (a) investing in
securities with relatively short maturities or call dates; (b) maintaining
through tiered-rate savings accounts and other programs with a
concentration of less interest rate sensitive "core deposits;" (c)
emphasizing the origination or purchase and retention of adjustable-rate
one- to four-family loans; (d) emphasizing the origination of commercial
loans with short-term maturities; and (e) borrowing funds from the Federal
Home Loan Bank of Boston, which may be used to originate or purchase loans
with similar anticipated cash flow characteristics.
The Bank believes that the frequent repricing of its adjustable-rate
mortgage loans and short term securities, which reduces the exposure to
interest rate fluctuations, will stabilize the Bank's net interest margin.
Accordingly, the Bank emphasizes the origination or purchase of variable-
rate mortgage products.
The actual amount of time before mortgage loans and mortgage-backed
securities are repaid can be significantly impacted by changes in mortgage
prepayment rates and market interest rates. Mortgage prepayment rates will
vary due to a number of factors, including the regional economy in the area
where the underlying mortgages were originated, seasonal factors,
demographic variables and the assumability of the underlying mortgages.
However, the major factors affecting prepayment rates are prevailing
interest rates, related mortgage refinancing opportunities and competition.
The Bank monitors interest rate sensitivity so that it can make adjustments
to its asset and liability mix on a timely basis.
Gap Analysis. The matching of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are "interest
rate sensitive" and by monitoring a bank's interest rate sensitivity "gap."
An asset or liability is deemed to be interest rate sensitive within a
specific time period if it will mature or reprice within that time period.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period.
At September 30, 2000, the Bank's cumulative one year gap position,
the difference between the amount of interest-earning assets maturing or
repricing within one year, and interest-bearing liabilities maturing or
repricing within one year, was a negative 13.6% of total assets. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the
amount of interest rate sensitive liabilities. Accordingly, during a period
of rising interest rates, an institution with a negative gap position
generally would not be in as favorable a position, compared to an
institution with a positive gap, to invest in higher yielding assets. The
resulting yield on the institution's assets generally would increase at a
slower rate than the increase in its cost of interest-bearing liabilities.
Conversely, during a period of falling interest rates, an institution with
a negative gap would tend to experience a repricing of its assets at a
slower rate than its interest-bearing liabilities which, consequently,
would generally result in its net interest income growing at a faster rate
than an institution with a positive gap position.
The following table sets forth the amortized cost of interest-earning
assets and interest-bearing liabilities outstanding at September 30, 2000,
which is anticipated by the Bank, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. Except as
stated below, the amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
earlier term to repricing/call date or the contractual maturity of the
asset or liability. The table sets forth an approximation of the projected
repricing of assets and liabilities at September 30, 2000, on the basis of
contractual maturities, anticipated prepayments and scheduled rate
adjustments within a three month period and subsequent projected time
intervals. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and as a result of contractual rate adjustments on adjustable-
rate loans.
<TABLE>
<CAPTION>
Amounts Maturing or Re-pricing as of September 30, 2000
-------------------------------------------------------
GAP Table ($ in thousands)
less than 3 3 to 6 months to 1 to 3 to 5 to over
months 6 months 1 year 3 years 5 years 10 years 10 years Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets(1)
Short-term investments(2) $ 9,861 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 9,861
Investment securities(3) 12,713 1,747 6,497 16,107 14,456 7,870 162 59,552
Mortgage and asset
backed securities 0 117 0 212 311 1,591 8,336 10,567
Loans(4) 7,949 3,904 5,790 12,653 11,048 25,558 47,531 114,433
----------------------------------------------------------------------------------------------
Total interest-earning assets $30,523 $ 5,768 $ 12,287 $ 28,972 $ 25,815 $35,019 $56,029 $194,413
----------------------------------------------------------------------------------------------
Interest-bearing Liabilities:
NOW accounts(5) $ 1,528 $ 1,528 $ 1,528 $ 1,528 $ 0 $ 0 $ 9,169 $ 15,281
Regular and other savings
accounts(5) 7,115 7,114 7,115 7,115 0 0 42,688 71,147
Money market deposit accounts(5) 587 587 587 587 0 0 3,520 5,868
Certificate of deposit accounts 20,592 9,660 13,797 11,578 7 0 0 55,634
Federal Home Loan Bank
borrowings(6) 0 0 4,500 5,000 5,000 2,000 0 16,500
Mortgage escrow deposits 247 0 0 0 0 0 0 247
----------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $30,069 $ 18,889 $ 27,527 $ 25,808 $ 5,007 $ 2,000 $55,377 $164,677
----------------------------------------------------------------------------------------------
Interest sensitivity gap $ 454 $(13,121) $(15,240) $ 3,164 $ 20,808 $33,019 $ 652 $ 29,736
Cumulative interest
sensitivity gap $ 454 $(12,667) $(27,907) $(24,743) $ (3,935) $29,084 $29,736
Cumulative interest sensitivity
gap as a percent of total assets 0.22% -6.15% -13.55% -12.01% -1.91% 14.12% 14.44%
Cumulative interest sensitivity
gap as a percent of total
interest-earning assets 0.23% -6.52% -14.35% -12.73% -2.02% 14.96% 15.30%
Cumulative interest sensitivity
gap as a percent of total
interest-bearing liabilities 0.28% -7.69% -16.95% -15.02% -2.39% 17.66% 18.06%
<FN>
--------------------
<F1> Interest-earning assets are included in the period in which the
balances are expected to be redeployed and/or re-priced as a result
of anticipated prepayments, scheduled rate adjustments, call dates
and contractual maturities.
<F2> Short-term Investments include federal funds, Bank Investment Fund
and interest -earning amounts in the Federal Home Loan Bank of Boston.
<F3> Investment securities are at market value. Common stock and stock in
the Federal Home Loan Bank is included in the less than 3 month column.
<F4> Loans are principal balances, net of deferred loan costs, discounts
on purchased loans and unadvanced funds.
<F5> 60% of NOW, regular and other savings and money market deposit
accounts are included in the over ten year period and the remaining
allocated evenly within the four intervals up to and including one
to three years.
<F6> Federal Home Loan Bank borrowings are categorized by contractual
maturity date.
</FN>
</TABLE>
Certain shortcomings are inherent in the method of analysis presented
in the Gap Table. For example, although certain assets and liabilities may
have similar maturities or periods to reprice, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets such as
adjustable-rate loans have features, which restrict changes in interest
rates both on a short-term basis and over the life of the asset. Further,
in the event of changes in interest rates, prepayment and early withdrawal,
levels would likely deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their
adjustable-rate loans may decrease in the event of an interest rate
increase.
The following table sets forth certain information relating to the
Bank's financial condition and net interest income at and for the years
ended September 30, 2000, 1999, and 1998, and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown.
Average balances are derived from average daily balances. The yields
include fees, which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the Year Ended September 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- -------------------------------- -------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
-----------------------------------------------------------------------------------------------------
($ In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments(1) $ 7,898 $ 471 5.96% $ 9,138 $ 425 4.65% $ 5,358 $ 306 5.71%
Investment securities(2) 67,911 4,247 6.25 62,894 3,759 5.98 61,307 3,743 6.11
Loans(3) 97,410 7,273 7.47 86,887 6,422 7.39 76,357 5,884 7.71
------------------- ------------------ -----------------
Total interest-earning
assets 173,219 11,991 6.92 158,919 10,606 6.67 143,022 9,933 6.95
Noninterest-earning
assets 11,524 7,193 5,857
-------- -------- --------
Total assets $184,743 $166,112 $148,879
======== ======== ========
Liabilities and Equity:
Interest-bearing
liabilities:
NOW accounts $ 14,514 $ 73 0.50% $ 13,270 $ 67 0.50% $ 11,743 $ 73 0.62%
Savings accounts(4) 69,239 2,324 3.36 63,320 2,100 3.32 55,403 1,848 3.34
Money market deposit
accounts 6,346 138 2.17 6,814 181 2.66 8,082 238 2.94
Certificate of deposit
accounts 52,765 2,691 5.10 49,091 2,461 5.01 46,105 2,396 5.20
------------------- ------------------ -----------------
Total interest-bearing
deposits 142,864 5,226 3.66 132,495 4,809 3.63 121,333 4,555 3.75
Borrowed funds 5,335 299 5.60 3,198 167 5.22 33 2 6.06
------------------- ------------------ -----------------
Total interest-bearing
liabilities 148,199 5,525 3.73 135,693 4,976 3.66 121,366 4,557 3.75
Non-interest-bearing
deposits 12,546 10,123 8,480
Other non-interest-bearing
liabilities 2,059 804 923
-------- -------- --------
Total non-interest-
bearing liabilities 14,605 10,927 9,403
Total liabilities 162,804 146,620 130,769
Total stockholders'
equity 21,939 19,492 18,110
-------- -------- --------
Total liabilities and
surplus $184,743 $166,112 $148,879
======== ======== ========
Net interest income $ 6,466 $ 5,630 $5,376
======= ======= ======
Net interest rate spread(5) 3.19% 3.01% 3.20%
====== ====== ======
Net interest margin(6) 3.73% 3.54% 3.76%
====== ====== ======
Ratio of interest-earning
assets to interest-bearing
liabilities 116.88% 117.12% 117.84%
====== ====== ======
<FN>
--------------------
<F1> Short-term investments include federal funds sold.
<F2> All investment securities are considered available for sale.
<F3> Loans are net of deferred loan origination costs (fees), allowance
for loan losses, discount on purchased loans and unadvanced funds.
<F4> Savings accounts include the balance in mortgagors' escrow accounts.
<F5> Net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
<F6> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
</TABLE>
The following table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-
bearing liabilities have affected our interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to:
* changes attributable to changes in volume (changes in volume
multiplied by prior rate);
* changes attributable to changes in rate (changes in rate
multiplied by prior volume); and
* the net change.
The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes
due to rate.
<TABLE>
<CAPTION>
Year Ended September 30, 2000 Year Ended September 30, 1999
Compared to Year Ended Compared to Year Ended
September 30, 1999 September 30, 1998
Increase/Decrease Increase/Decrease
----------------------------- -----------------------------
Due to Due to
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
($ In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments(1) $ (63) $ 109 $ 46 $ 184 $ (65) $ 119
Investment securities(2) 309 179 488 96 (80) 16
Loans(3) 785 66 851 789 (251) 538
-------------------------------------------------------------
Total interest-earning assets 1,031 354 1,385 1,069 (396) 673
-------------------------------------------------------------
Interest-bearing liabilities:
NOW accounts 6 0 6 9 (15) (6)
Savings accounts(4) 198 26 224 263 (11) 252
Money market deposit accounts (12) (31) (43) (35) (22) (57)
Certificate of deposit accounts 187 43 230 154 (89) 65
-------------------------------------------------------------
Total interest-bearing deposits 379 38 417 391 (137) 254
Borrowed funds 119 13 132 165 0 165
-------------------------------------------------------------
Total interest-bearing liabilities 498 51 549 556 (137) 419
-------------------------------------------------------------
Net change in net interest income $ 533 $ 303 $ 836 $ 513 $(259) $ 254
=============================================================
<FN>
--------------------
<F1> Short-term investments include federal funds sold.
<F2> All investment securities are considered available for sale.
<F3> Loans are net of deferred loan origination costs (fees), allowance
for loan losses, discount on purchased loans and unadvanced loan
funds.
<F4> Savings accounts include the balance in mortgagors' escrow accounts.
</FN>
</TABLE>
Comparison of Financial Condition at September 30, 2000 and September 30,
1999
The Bank's total assets increased by $31.4 million, or 18.0%, to
$206.0 million at September 30, 2000 from $174.6 million at September 30,
1999. Net loans during this period increased by $21.5 million, or 23.3%, to
$113.6 million at September 30, 2000, from $92.1 million at September 30,
1999. The loan increase was primarily due to increased variable rate loans
purchased or originated, which were secured by real estate. Investments
increased by $5.7 million to $70.1 million at September 30, 2000 from $64.5
million at September 30, 1999. This increase was mainly attributable to an
increase in banking and finance obligations and other bonds and
obligations.
Total deposits increased by $13.3 million, or 8.9%, to $163.4 million
at September 30, 2000 from $150.1 million at September 30, 1999. Most of
this increase was attributable to increases in non-interest bearing
checking accounts and interest-bearing certificates of deposits. Federal
Home Loan Bank of Boston advances increased by $12.5 million, to $16.5
million at September 30, 2000 from $4.0 million at September 30, 1999.
During the 2000 year, the Bank purchased $12.8 million variable rate,
residential loans from a local bank and funded the purchase from Federal
Home Loan Bank advances.
Total stockholders' equity increased by $5.4 million to $24.7 million
at September 30, 2000 from $19.3 million at September 30, 1999 as a result
of proceeds received from the Stock Offering of $4.5 million and net income
of $1.3 million for the year ending September 30, 2000. 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.
Comparison of Financial Condition at September 30, 1999 and September 30,
1998
The Bank's total assets increased by $16.1 million, or 10.1%, to
$174.6 million September 30, 1999 from $158.5 million at September 30,
1998. Net loans at September 30, 1999 increased by $9.7 million, or 11.8%,
to $92.1 million at September 30, 1999, from $82.3 million at September 30,
1998. The loan increase was primarily due to increased loan originations
for loans secured by real estate. Investments increased by $4.4 million to
$64.5 million at September 30, 1999 from $60.1 million at September 30,
1998. This increase was mainly attributable to an increase in equity
investments in preferred and common stocks. At September 30, 1999, an
investment in life insurance utilized to finance a deferred compensation
plan for Bank trustees increased by $2.2 million.
Total deposits increased by $14.1 million, or 10.4%, to $150.1
million at September 30, 1999 from $136.0 million at September 30, 1998.
Most of this increase was attributable to increases in short-term,
interest-bearing tiered-rate and certificate of deposit accounts.
Total stockholders' equity declined by $86,000 to $19.3 million at
September 30, 1999 from $19.4 million at September 30, 1998 as a result of
net income of $1.5 million for the year ending September 30, 1999, which
was more than offset by a decline of $1.6 million in the value of
investments considered available for sale. Rising market interest rates
during this period contributed to the decline in the value of the Bank's
interest-sensitive investments.
Comparison of Operating Results for the Years Ended September 30, 2000 and
September 30, 1999
Net Income. The Bank's net income for the year ended September 30,
2000 decreased $222,000, or 15.1%, to $1.3 million as compared to $1.5
million for the year ended September 30, 1999. This decrease was primarily
the result of increases in operating expenses of $1.2 million and a
decrease in net gains on securities of $0.4 million, which were offset to a
lesser extent by an increase in net interest income of $0.8 million. The
Bank's return on average assets for the year ended September 30, 2000 was
0.68% compared to 0.89% for the year ended September 30, 1999.
Interest and Dividend Income. Interest and dividend income increased
by $1.4 million or 13.1%, to $12.0 million for the year ended September 30,
2000 from $10.6 million for the year ended September 30, 1999. The increase
in interest and dividend income was mainly the result of a higher average
volume of interest-earning assets and, to a lesser extent, by an increase
in the average rate earned on interest earning assets. The average volume
of interest-earning assets for the year ended September 30, 2000 was $173.2
million earning a rate of 6.92% as compared to $158.9 million earning a
rate of 6.67% for the year ended September 30, 1999. The Bank experienced
continued growth in real estate lending and invested additional cash flows
into short-term investments. The average balance of loans for the year
ended September 30, 2000 was $97.4 million, earning 7.47% for the year.
This compares to an average balance of loans for the year ended September
30, 1999 of $86.9 million, earning 7.39% for the year. The average balance
of investment securities for the year ended September 30, 2000 was $67.9
million, earning 6.25% for the year. This compares to an average balance of
investments for the year ended September 30, 1999 of $62.9 million, earning
5.98% for the year. Finally, the average balance of short-term investments
for the year ended September 30, 2000 was $7.9 million, earning 5.96% for
the year. This compares to an average balance of short-term investments for
the year ended September 30, 1999 of $9.1 million, earning 4.65% for the
year.
Interest Expense. Interest expense increased by $549,000 or 11.0%, to
$5.5 million for the year ended September 30, 2000 from $5.0 million for
the year ended September 30, 1999. Interest expense increased due to a
higher volume of interest-bearing liabilities and, to a lesser extent, by
an increase in the average rate of interest paid on such interest-bearing
liabilities. The average volume of interest-bearing liabilities was $148.2
million with a cost of 3.73% for the year ended September 30, 2000 as
compared to $135.7 million with a cost of 3.66% for the year ended
September 30, 1999. The average volume of borrowed funds from the Federal
Home Loan Bank of Boston increased during the year ended September 30, 2000
to $5.3 million with a cost of 5.6%, up from an average balance of $3.2
million with a cost of 5.22% for the year ended September 30, 1999. The
average volume of interest-bearing deposits increased to $142.9 million
with a cost of 3.66% for the year ended September 30, 2000 as compared to
$132.5 million with a cost of 3.63% for the year ended September 30, 1999.
Net Interest Income. The Bank's net interest and dividend income
increased by $0.8 million for the year ended September 30, 2000, or 14.8%,
to $6.5 million from $5.6 million for the year ended September 30, 1999.
The increase is attributed to the combination of an increase in interest
and dividend income of $1.4 million and an increase in interest expense of
$0.5 million. The Bank's net interest rate spread increased to 3.19% for
the year ended September 30, 2000 from 3.01% for the comparative year ended
September 30, 1999.
The average yield on interest-earning assets increased to 6.92% for
the year ended September 30, 2000 as compared to 6.67% for the year ended
September 30, 1999 and the average volume of interest-earning assets
increased to $173.2 million for the year ended September 30, 2000 as
compared to $158.9 million for the year ended September 30, 1999. The
average cost of interest-bearing liabilities increased to 3.73% for the
year ended September 30, 2000, from 3.66% for the year ended September 30,
1999. The average volume of interest-bearing liabilities increased to
$148.2 million for the year ended September 30, 2000 as compared to $135.7
million for the year ended September 30, 1999.
Provision for Loan Losses. The Bank's recorded no provision for loan
losses for the year ended September 30, 2000 as compared to $45,000 for the
year ended September 30, 1999. This decline reflects the Bank's 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 to buy common stock held in the Bank's
stock portfolio. Total other income declined by $152,000 to $1.1 million
for the year ended September 30, 2000 compared to $1.2 million for the year
ended September 30, 1999. The primary reason for the decline in other
income was a reduction of net gains on securities of $381,000 for the year
ended September 30, 2000 as compared to $558,000 for the year ended
September 30, 1999. For the year ended September 30, 2000, income from
writing covered options increased by $73,000, to $425,000 as compared to
$352,000 for the year ended September 30, 1999. Income from customer
service and loan fees, plus income from the sale of non-insured investment
products through Linsco/Private Ledger, Corp., increased to $493,000 for
the year ended September 30, 2000, as compared to $337,000 for the year
ended September 30, 1999.
Operating Expense. For the year ended September 30, 2000, operating
expenses increased $1.2 million, or 25.0%, to $5.8 million from $4.7
million for the year ended September 30, 1999. The increase was primarily
due to a $412,000 increase in salary and benefits, reflecting expenses
associated with the May 1999 opening of a supermarket branch, additional
staff in financial reporting, information technology, non-insured
investment products and commercial services. The increase in operating
expenses is also a result of the bank's efforts to update its computers.
The Bank replaced many older computers with newer equipment in order to
allow for the migration to more efficient transaction processing systems,
use of electronic mail and Internet services and to provide enhanced
customer services. Occupancy and equipment, marketing, supplies and other
expenses increased as a result of the Bank's supermarket branch and
promotion of enhanced customer services. Professional services, which
includes legal and accounting services, increased due to additional
services required of a public company. Other general and administrative
services increased due to additional expenses associated with the
development and maintenance of the Bank's web site, telephone and postage,
the write-off of obsolete computer equipment and increased expenses for
office supplies.
Income Taxes. The provision for income taxes declined by $216,000 to
$480,000 for the year ended September 30, 2000 as compared to $696,000 for
the year ended September 30, 1999, resulting in an effective tax rate of
27.7% and 32.1% for the years ended September 30, 2000 and 1999,
respectively. The Bank utilizes security investment subsidiaries to
substantially reduce state income taxes and receives the benefit of a
dividends received deduction on common stock. Additionally, the Bank
receives favorable tax treatment from the increase in the cash surrender
value of bank-owned life insurance.
Comparison of Operating Results for the Years Ended September 30, 1999 and
September 30, 1998
Net Income. The Bank's net income for the year ended September 30,
1999 increased $160,000, or 12.2%, to $1.5 million as compared to $1.3
million for the year ended September 30, 1998. This increase was a result
of increases in interest income of $673,000, other income of $864,000 and a
decline in the provision for income taxes of $54,000. These amounts were
offset by increases in operating expenses of $1.0 million and interest
expenses of $419,000. The Bank's return on average assets for the year
ended September 30, 1999 was 0.89% compared to 0.88% for the year ended
September 30, 1998.
Interest and Dividend Income. Interest and dividend income increased
by $673,000, or 6.8%, to $10.6 million for the year ended September 30,
1999 from $9.9 million for the year ended September 30, 1998. The increase
in interest and dividend income was mainly the result of a higher average
volume of interest-earning assets reduced, to a lesser extent, by a decline
in the average rate earned on interest earning assets. The average volume
of interest-earning assets for the year ended September 30, 1999 was $158.9
million earning a rate of 6.67% as compared to $143.0 million earning a
rate of 6.95% for the year ended September 30, 1998. The Bank experienced
continued growth in real estate lending and invested additional cash flows
into stocks and short-term investments. The average balance of loans for
the year ended September 30, 1999 was $86.9 million, earning 7.39% for the
year. This compares to an average balance of loans for the year ended
September 30, 1998 of $76.4 million, earning 7.71% for the year. The
average balance of investment securities for the year ended September 30,
1999 was $62.9 million, earning 5.98% for the year. This compares to an
average balance of investments for the year ended September 30, 1998 of
$61.3 million, earning 6.11% for the year. Finally, the average balance of
short-term investments for the year ended September 30, 1999 was $9.1
million, earning 4.65% for the year. This compares to an average balance of
short-term investments for the year ended September 30, 1998 of $5.4
million, earning 5.71% for the year.
Interest Expense. Interest expense increased by $419,000, or 9.2%, to
$5.0 million for the year ended September 30, 1999 from $4.6 million for
the year ended September 30, 1998. Interest expense increased due to a
higher volume of interest-bearing liabilities, offset to a lesser extent by
a declining average rate of interest paid on such interest-bearing
liabilities. The average volume of interest-bearing liabilities was $135.7
million with a cost of 3.66% for the year ended September 30, 1999 as
compared to $121.4 million with a cost of 3.75% for the year ended
September 30, 1998. The average volume of borrowed funds from the Federal
Home Loan Bank of Boston increased during the year ended September 30, 1999
to $3.2 million, up from an average balance of $33,000 for the year ended
September 30, 1998. The average volume of interest-bearing deposits
increased to $132.5 million with a cost of 3.63% for the year ended
September 30, 1999 as compared to $121.3 million with a cost of 3.75% for
the year ended September 30, 1998.
Net Interest Income. The Bank's net interest and dividend income
increased by $254,000 for the year ended September 30, 1999, or 4.7%, to
$5.6 million from $5.4 million for the year ended September 30, 1998. The
increase was attributed to the combination of an increase in interest and
dividend income of $673,000 and an increase in interest expense of
$419,000. The Bank's net interest rate spread declined to 3.01% for the
year ended September 30, 1999 from 3.20% for the comparative year ended
September 30, 1998.
While the average yield on interest-earning assets declined to 6.67%
for the year ended September 30, 1999 as compared to 6.95% for the year
ended September 30, 1998, the average volume of interest-earning assets
increased to $158.9 million for the year ended September 30, 1999 as
compared to $143.0 million for the year ended September 30, 1998. The
average cost of interest-bearing liabilities declined to 3.66% for the year
ended September 30, 1999, from 3.75% for the year ended September 30, 1998,
while the average volume of interest-bearing liabilities increased to
$135.7 million for the year ended September 30, 1999 as compared to $121.4
million for the year ended September 30, 1998.
Provision for Loan Losses. The Bank's provision for loan losses
increased by $6,000 to $45,000 for the year ended September 30, 1999 as
compared to $39,000 for the year ended September 30, 1998. This moderate
increase reflects the Bank's continued loan portfolio growth, including
commercial and commercial real estate loans.
Other Income. Other income consists primarily of fee income for bank
services, gains and losses from the sale of securities and income from the
writing of options to buy common stock held in the Bank's stock portfolio.
Total other income increased 226% to $1.2 million for the year ended
September 30, 1999 from $383,000 for the comparative year ended September
30, 1998. The primary reason for the increase in other income was security
gains and income from the writing of options to buy common stock held in
the Bank's portfolio. Net gains on securities increased to $558,000 for the
year ended September 30, 1999, as compared to $90,000 for the year ended
September 30, 1998. For the year ended September 30, 1999, income from
options increased by $352,000, from $0 for the year ended September 30,
1998. Income from customer deposit and loan fees, plus income from the sale
of non-insured investment products through FISCO Equity, Inc., increased to
$337,000 for the year ended September 30, 1999, as compared to $293,000 for
the year ended September 30, 1998.
Operating Expense. For the year ended September 30, 1999, operating
expenses increased $1.0 million, or 27.5%, to $4.7 million from $3.7
million for the year ended September 30, 1998. The increase was primarily
due to $554,000 increase in salary and benefits, reflecting the opening of
a new supermarket branch, senior management bonuses, additional staff in
marketing and commercial services, retail staff incentive payments and
general increases in salary based upon merit. Also, occupancy and
equipment, data processing, marketing, promotion, supplies and other
expenses increased as a result of the Bank's opening of its supermarket
branch. Additional board and committee meetings, mostly associated with
strategic planning issues and meetings concerning the formation of a mutual
holding company, plus the payment of a yearly retainer fee during the 1999
year, increased the level of trustee fees expense.
Income Taxes. The provision for income taxes declined by $54,000 to
$696,000 for the year ended September 30, 1999 as compared to $750,000 for
the year ended September 30, 1998, resulting in an effective tax rate of
32.1% and 36.4% for the years ended September 30, 1999 and 1998,
respectively. The lower effective tax rate was a result of a slight
increase from 1998 to 1999 in state taxes, net of the federal tax benefit,
and a larger increase in the dividends received deduction. The Bank
utilizes security investment subsidiaries to substantially reduce state
income taxes.
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 September 30, 2000, the Bank had $16.5
million in outstanding borrowings.
At September 30, 2000, the Bank had loan commitments to borrowers of
$3.5 million, and available home equity and commercial lines of credit of
$6.1 million. Total deposits increased $13.3 million, $14.2 million, and
$10.8 million during the years ended September 30, 2000, 1999 and 1998,
respectively. Deposit flows are affected by the level of interest rates,
the interest rates and products offered by competitors and other factors.
Certificate of deposit accounts scheduled to mature within one year were
$44.0 million at September 30, 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 Federal
Deposit Insurance Corporation (the "FDIC"), Depositors Insurance Fund and
other available reports that 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. 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.
At September 30, 2000, the Bank exceeded each of the applicable
regulatory capital requirements. The Bank's leverage (tier 1) capital was
approximately $20.9 million, or 10.82% of average assets. In order to be
classified as "well-capitalized" by the FDIC, the Bank was required to have
leverage (tier 1) capital of $9.7 million, or 5.0%. To be classified as a
well-capitalized bank by the FDIC, the Bank must also have a risk-based
total capital ratio of 10.0%. At September 30, 2000, the Bank had a risk-
based total capital ratio of 18.26%.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and accompanying notes have
been prepared in accordance with generally accepted accounting principles
("GAAP"). GAAP generally requires the measurement of financial position and
operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to
inflation. The impact of inflation is reflected in the increased cost of
the Bank's operations. Unlike industrial companies, the Bank's assets and
liabilities are primarily monetary in nature. As a result, changes in
market interest rates have a greater impact on performance than do the
effects of inflation.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which, as
amended by SFAS amended by SFAS Nos. 137 and 138, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. These
statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Bank will adopt these new
accounting standards on October 1, 2000 and, had it adopted the standards
on September 30, 2000 the bank would have recognized pre-tax earnings of
$223,000.
DIRECTORS OF THE COMPANY AND THE BANK
Nelson P. Ball is the owner of Ball Financial Services, Co., located
in Westborough, Massachusetts. He has served as a financial services
consultant for over 35 years and is a member of the National Association of
Securities Dealers, Inc.
Edward S. Bilzerian is president of Bilzerian Consulting Group, Inc.,
a privately held company located in Worcester, Massachusetts, specializing
in small business turnarounds. He has been self-employed for over 14 years.
David E. Carlstrom has served as President of Carlstrom Pressed Metal
Co., Inc. for over 25 years. Carlstrom Pressed Metal is located in
Westborough, Massachusetts.
John L. Casagrande has served as the Senior Vice President and
Treasurer of the Bank since 1993. He joined the Bank after having been
employed as a senior bank officer and certified public accountant for over
15 years at various times by several financial institutions (including
mutual and stock institutions) and the accounting firm of Peat Marwick.
William W. Cotting, Jr. has been an attorney in private practice for
over 20 years. His practice is located in Northborough, Massachusetts.
Robert G. Daniel was employed in various capacities, including
President and Treasurer, at Carlson Daniel Insurance Agency, Inc., located
in Westborough, Massachusetts from 1958 to 1994. Mr. Daniel sold insurance
from 1994 to 1996 for Allied American Agency following its acquisition of
Carlson Daniel Insurance. From 1996 to 1999, Mr. Daniel served as President
and Treasurer of Westborough Insurance Agency, Inc., a non-active
corporation used as a vehicle for payments from Allied American as
negotiated in connection with the acquisition of Carlson Daniel.
Westborough Insurance Agency Inc. dissolved in 1999.
Earl H. Hutt has served as an investment advisor and portfolio
manager for private industry for over 20 years.
Walter A. Kinell, Jr. has served as Chairman of the Board for the
Bank since 1994 and for the Company since its inception in 2000. Mr. Kinell
joined Westborough Bank in 1949 as an assistant treasurer, became President
and Chief Executive Officer in 1969 and retired from this position in 1994.
Robert A. Klugman, M.D., F.A.C.P. has practiced general medicine in
Westborough, Massachusetts for over 20 years. Dr. Klugman is currently an
Associate Professor of Clinical Medicine at the University of Massachusetts
Medical School as well as Division Chief of Community Internal Medicine at
the UMASS/ Memorial.
Robert B. Leland has practiced estate, tax and real estate law at
Leland Law Associates for over 30 years. During that time, he also served
as an insurance broker, selling life and casualty insurance products,
through Leland Insurance Agency, Inc. Leland Law Associates and Leland
Insurance Agency are located in Northborough, Massachusetts.
Joseph F. MacDonough has served as President and Chief Executive
Officer of the Bank since 1994 and of the Company since its inception in
2000. He joined the Bank in 1981 and served as Vice President and Treasurer
until his appointment as President. Mr. MacDonough serves on the Board of
Trustees of The Savings Bank Employees' Retirement Association and is a
certified public accountant.
Paul F. McGrath is a certified public accountant and has served as
President of Mottle McGrath Braney & Flynn, P.C. for over five years.
Mottle McGrath is a certified public accounting firm, located in Worcester,
Massachusetts, that provides accounting, tax and business advisory services
throughout central New England.
Charlotte C. Spinney is a retired social studies teacher. She taught
at Westborough High School for 41 years and, during that time, she created
the curriculum for the community service component of the school's
Sociology course.
Phyllis A. Stone has served as Vice President and Treasurer of Comey
Oil Co., Inc., located in Westborough, Massachusetts, for the past 13
years. Prior to her appointment as Vice President, she served in various
other capacities within Comey Oil for over 30 years. She is past Treasurer
of the Regatta Point Community Sailing Inc. of Worcester, Massachusetts.
James E. Tashjian is a partner in the law firm of Tashjian, Simsarian
& Wickstrom, located in Worcester, Massachusetts. He has engaged in the
general practice of law for over 30 years.
Daniel G. Tear has served as a consultant to businesses in the area
of management psychology for the past 30 years.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTBOROUGH FINANCIAL SERVICES, INC.
Independent Auditors' Report F-1
Consolidated Balance Sheets as of September 30, 2000
and 1999 F-2
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-F-6
Notes to Consolidated Financial Statements F-7-F-35
[WOLF & COMPANY, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Westborough Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of Westborough
Financial Services, Inc. and subsidiary as of September 30, 2000 and 1999,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Westborough Financial Services, Inc. and subsidiary as of September 30, 2000
and 1999, and the results of their operations and their cash flows for each
of the years in the three-year period ended September 30, 2000, in
conformity with generally accepted accounting principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
October 27, 2000
WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and 1999
(Dollars In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
ASSETS
2000 1999
---- ----
<S> <C> <C>
Cash and due from banks $ 4,599 $ 4,157
Federal funds sold 7,510 4,632
Short-term investments 2,351 1,929
-------- -------
Total cash and cash equivalents 14,460 10,718
Securities available for sale, at fair value 69,216 63,607
Federal Home Loan Bank stock, at cost 903 850
Loans, net 113,559 92,092
Banking premises and equipment, net 2,192 1,724
Accrued interest receivable 1,317 1,130
Deferred income taxes 881 833
Cash surrender value of life insurance 3,133 2,906
Other assets 315 734
-------- --------
$205,976 $174,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $163,405 $150,111
Federal Home Loan Bank advances 16,500 4,000
Mortgagors' escrow accounts 247 231
Accrued taxes and expenses 975 865
Other liabilities 133 106
-------- --------
Total liabilities 181,260 155,313
-------- --------
Commitments and contingencies (Notes 5 and 11)
Preferred stock - $.01 par value, 1,000,000 shares
authorized, none outstanding
Common stock - $.01 par value, 5,000,000 shares
authorized, 1,581,374 shares issued and outstanding 16 -
Additional paid-in capital 4,541 -
Retained earnings 20,931 19,680
Accumulated other comprehensive loss (352) (399)
Unearned compensation - employee stock
ownership plan (420) -
-------- -------
Total stockholders' equity 24,716 19,281
-------- --------
$205,976 $174,594
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 7,273 $ 6,422 $5,884
Interest and dividends on securities:
Taxable interest 3,787 3,338 3,580
Non-taxable interest 64 59 11
Dividends 396 362 152
Interest on federal funds sold 309 240 228
Interest on short-term investments 162 185 78
------- ------- ------
Total interest and dividend income 11,991 10,606 9,933
------- ------- ------
Interest expense:
Interest expense on deposits 5,226 4,809 4,555
Interest expense on borrowings 299 167 2
------- ------- ------
Total interest expense 5,525 4,976 4,557
------- ------- ------
Net interest income 6,466 5,630 5,376
Provision for loan losses - 45 39
------- ------- ------
Net interest income, after provision
for loan losses 6,466 5,585 5,337
------- ------- ------
Other income:
Customer service fees 344 277 259
Income from covered call options 425 352 -
Gain on securities, net 177 558 90
Miscellaneous 149 60 34
------- ------- ------
Total other income 1,095 1,247 383
------- ------- ------
Operating expenses:
Salaries and employee benefits 2,961 2,549 1,995
Occupancy and equipment expenses 854 664 519
Data processing expenses 319 239 183
Advertising 300 221 144
Professional fees 219 81 89
Other general and administrative expenses 1,177 909 727
------- ------- ------
Total operating expenses 5,830 4,663 3,657
------- ------- ------
Income before income taxes 1,731 2,169 2,063
Provision for income taxes 480 696 750
------- ------- ------
Net income $ 1,251 $ 1,473 $1,313
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended September 30, 2000, 1999, and 1998
(Dollars In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Total
Common Paid-in Retained Comprehensive Compensation- Stockholders'
Stock Capital Earnings Income (Loss) ESOP Equity
------ ---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $ - $ - $16,894 $ 553 $ - $17,447
-------
Comprehensive income:
Net income - - 1,313 - - 1,313
Change in net unrealized gain on securities
available for sale, after reclassification
adjustment and tax effects - - - 607 - 607
-------
Total comprehensive income 1,920
--- ------ ------- ------- ----- -------
Balance at September 30, 1998 - - 18,207 1,160 - 19,367
-------
Comprehensive loss:
Net income - - 1,473 - - 1,473
Change in net unrealized gain (loss) on securities
available for sale, after reclassification
adjustment and tax effects - - - (1,559) - (1,559)
-------
Total comprehensive loss (86)
--- ------ ------- ------- ----- -------
Balance at September 30, 1999 - - 19,680 (399) - 19,281
-------
Comprehensive income:
Net income - - 1,251 - - 1,251
Change in net unrealized gain (loss) on securities
available for sale, after reclassification
adjustment and tax effects - - - 47 - 47
-------
Total comprehensive income 1,298
-------
Net proceeds from sale of common stock 16 4,542 - - - 4,558
Purchase of ESOP shares; 44,200 shares - - - - (442) (442)
ESOP shares committed to be released - (1) - - 22 21
--- ------ ------- ------- ----- -------
Balance at September 30, 2000 $16 $4,541 $20,931 $ (352) $(420) $24,716
=== ====== ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,251 $ 1,473 $ 1,313
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 45 39
Credit for losses on foreclosed real estate - - (22)
Amortization of premiums on securities (29) 79 88
Amortization of net deferred loan costs (fees) 26 34 (31)
Depreciation and amortization expense 361 294 228
Gain on sales and calls of securities, net (279) (558) (90)
Write-down of securities 102 - -
Recognition of expired covered call options (425) (352) -
Loans originated for sale - - (269)
Proceeds from loan sales - - 269
Decrease (increase) in accrued interest receivable (187) (14) 54
Deferred income tax provision (benefit) (62) (27) 59
Amortization of unearned compensation - ESOP 21 - -
Increase in cash surrender value of life insurance (140) - -
Other, net 556 (355) (411)
-------- -------- --------
Net cash provided by operating activities 1,195 619 1,227
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales and calls of securities available
for sale 5,725 12,049 17,976
Proceeds from maturities of securities available for sale 5,102 3,750 1,250
Purchase of securities available for sale (19,048) (26,780) (20,835)
Principal payments received on mortgage and
asset-backed securities 3,304 5,012 4,214
Purchase of Federal Home Loan Bank stock (53) (88) (45)
Loans originated, net of principal payments (8,702) (9,823) (11,850)
Loans purchased (12,791) - -
Proceeds from sales of foreclosed real estate - 74 57
Capitalized costs associated with foreclosed real
estate - - (16)
Purchase of banking premises and equipment (829) (496) (277)
Purchase of life insurance policies (87) (2,202) -
-------- -------- --------
Net cash used by investing activities (27,379) (18,504) (9,526)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 13,294 14,149 10,792
Proceeds from Federal Home Loan Bank advances 12,500 2,000 2,000
Net increase in mortgagors' escrow accounts 16 13 38
Net proceeds received from stock offering 4,558 - -
Purchase of ESOP shares (442) - -
-------- -------- --------
Net cash provided by financing activities 29,926 16,162 12,830
-------- -------- --------
Net change in cash and cash equivalents 3,742 (1,723) 4,531
Cash and cash equivalents at beginning of year 10,718 12,441 7,910
-------- -------- --------
Cash and cash equivalents at end of year $ 14,460 $ 10,718 $ 12,441
======== ======== ========
Supplemental cash flow information:
Interest paid on deposits $ 5,225 $ 4,808 $ 4,556
Interest paid on Federal Home Loan Bank
advances 214 169 -
Income taxes paid 513 720 835
Transfer from loans to foreclosed
real estate - - 74
</TABLE>
See accompanying notes to consolidated financial statements.
WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
(Dollars in Thousands)
1. REORGANIZATION AND STOCK OFFERING
Westborough Savings Bank (the "Bank") was founded in 1869 as a
Massachusetts chartered mutual savings bank. On February 15, 2000,
the Bank reorganized into a two-tiered mutual holding company
structure 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, 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.
As part of the Reorganization, the Bank has established a liquidation
account for the benefit of eligible and supplemental eligible account
holders. The liquidation account will be reduced annually to the
extent that such account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not
restore an account holder's interest in the liquidation account. In
the event of a complete liquidation, each eligible account holder will
be entitled to receive balances for accounts held by them.
In addition, the Company intends to establish a Stock Option Plan and
a Management Recognition Plan.
Subsequent to the Reorganization, the Company and the Bank may not
declare or pay dividends on, and the Company may not purchase any of
its shares of, its common stock if the effect thereof would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration, payment or repurchase
would otherwise violate regulatory requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation and presentation
The consolidated financial statements include the accounts of
Westborough Financial Services, Inc. (the "Company") and its wholly-
owned subsidiary, the Westborough Bank (the "Bank"). The Bank's
active wholly-owned subsidiaries are: The Hundredth Corporation, which
was formed to own foreclosed real estate and the One Hundredth
Security Corporation and Eli Whitney Security Corporation, which are
Massachusetts security corporations. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of estimates
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated balance
sheet and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The determination of the allowance for losses on loans is a material
estimate that is particularly susceptible to significant change in the
near term.
Business
The Bank provides a variety of financial services to individuals and
small businesses through its offices in Westborough, Northborough and
Shrewsbury, Massachusetts. Its primary deposit products are checking,
savings and term certificate accounts and its primary lending products
are residential mortgage loans.
Reclassifications
Certain amounts have been reclassified in the 1999 and 1998
consolidated financial statements to conform to the 2000 presentation.
Cash equivalents
Cash equivalents include amounts due from banks, federal funds sold on
a daily basis and short-term investments.
Securities available for sale
Securities classified as "available for sale" are reflected on the
consolidated balance sheet at fair value, with unrealized gains and
losses excluded from earnings and reported in accumulated other
comprehensive income (loss).
Purchase premiums and discounts are recognized in interest income
using the interest method over the terms of the securities. Declines
in the value of securities that are deemed to be other than temporary
are reflected in earnings when identified. Gains and losses on
disposition of securities are computed by the specific identification
method.
Loans
The Bank grants mortgage, commercial and consumer loans to its
customers. A substantial portion of the loan portfolio consists of
mortgage loans in Westborough and the surrounding communities. The
ability of the Bank's debtors to honor their contracts is dependent
upon the local economy and the local real estate market.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported
at their outstanding unpaid principal balances adjusted for the
allowance for loan losses and deferred costs on originated loans.
Interest income is accrued on the unpaid principal balance. Net loan
origination costs are deferred and recognized as an adjustment of the
related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is
discontinued when in the judgment of management the collection of
principal or interest is doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The
interest on these loans is accounted for on the cash-basis until
qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
Allowance for loan losses
The allowance for loan losses is established as losses are estimated
to have occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Impairment is measured on a
loan by loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer loans for impairment disclosures.
Banking premises and equipment
Land is carried at cost. Buildings, leasehold improvements and
equipment are stated at cost, less accumulated depreciation and
amortization, computed on the straight-line method over the estimated
useful lives of the assets.
Transfers of financial assets
Transfers of financial assets are accounted for as sales, when control
over the assets has been surrendered. Control over transferred assets
is deemed to be surrendered when (1) the assets have been isolated
from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets, and (3) the Company does
not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Retirement plan
The Bank accounts for pension benefits on the net periodic pension
cost method for financial reporting purposes. This method recognizes
the compensation cost of an employee's pension benefit over the
employee's approximate service period. Pension costs are funded in
the year of accrual using the aggregate cost method.
Employee stock ownership plan ("ESOP")
Compensation expense is recognized as ESOP shares are committed to be
released. Allocated and committed to be released ESOP shares are
considered outstanding for earnings per share calculations based on
debt service payments. Other ESOP shares are excluded from earnings
per share calculations. The value of unearned shares to be allocated
to ESOP participants for future services not yet performed is
reflected as a reduction of stockholders' equity.
Advertising costs
All advertising costs are expensed as incurred.
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted accordingly through the provision for income
taxes. The Bank's base amount of its federal income tax reserve for
loan losses that arose before 1987 is a permanent difference for which
there is no recognition of a deferred tax liability. However, the
allowance for loan losses maintained for financial reporting purposes
is treated as a temporary difference with allowable recognition of a
related deferred tax asset, if it is deemed realizable.
Earnings per common share
Earnings per share data is not presented for the years ended September
30, 2000, 1999 and 1998 since shares of the Company's common stock
were not issued until February 15, 2000. Quarterly earnings per share
data is presented in Note 15.
Comprehensive income (loss)
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains
and losses on securities available for sale are reported in
accumulated comprehensive income (loss) in the consolidated balance
sheet, such items, along with net income, are components of
comprehensive income (loss).
The components of the change in accumulated other comprehensive income
(loss) and related tax effects are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Change in net unrealized holding gains
(losses) on securities available for sale $238 $(1,980) $1,101
Reclassification adjustment for gains
realized in income (279) (558) (90)
Write-down of securities 102 - -
---- ------- ------
61 (2,538) 1,011
Tax effect (14) 979 (404)
---- ------- ------
Net-of-tax amount $ 47 $(1,559) $ 607
==== ======= ======
</TABLE>
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which,
as amended by SFAS Nos. 137 and 138, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. These
Statements standardize the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
by requiring that an entity recognize those items as assets or
liabilities in the balance sheet and measure them at fair value. If
certain conditions are met, an entity may elect to designate a
derivative as follows: a hedge of the exposure to changes in the fair
value of a recognized asset or liability, or of an unrecognized firm
commitment that are attributable to a particular risk. A hedge of the
exposure to variability in the cash flows of a recognized asset or
liability, or of a forecasted transaction, that is attributable to a
particular risk. Or, a hedge of the foreign currency exposure of an
unrecognized firm commitment, an available-for-sale security, a
forecasted transaction, or a net investment in a foreign operation.
These Statements generally provide for matching the timing of the
recognition of the gain or loss on the hedging instrument with the
recognition of the changes in the fair value of the item being hedged.
Depending on the type of hedge, such recognition will be in either net
income or other comprehensive income. For a derivative not designated
as a hedging instrument, changes in fair value are recognized in net
income in the period of change. Adoption of these Statements by the
Company will require that changes in fair value of covered call
options be recognized in net income. Currently, such changes are
included in accumulated comprehensive income (loss) and would result
in pre-tax earnings in the amount of $223 as of September 30, 2000.
The Company will adopt these new accounting standards on October 1,
2000.
3. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available
for sale, at September 30, 2000 and 1999, with gross unrealized gains
and losses, is as follows:
<TABLE>
<CAPTION>
September 30, 2000
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government obligations $10,574 $ 21 $ (10) $10,585
Federal agency obligations 12,622 13 (384) 12,251
Banking and finance obligations 10,982 56 (108) 10,930
Mortgage-backed securities 10,422 16 (182) 10,256
Asset-backed securities 314 - (3) 311
Other bonds and obligations 16,203 72 (212) 16,063
------- ------ ------- -------
Total debt securities 61,117 178 (899) 60,396
Marketable equity securities 8,680 1,727 (1,587) 8,820
------- ------ ------- -------
Total securities
available for sale $69,797 $1,905 $(2,486) $69,216
======= ====== ======= =======
<CAPTION>
September 30, 1999
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government obligations $12,084 $ 102 $ (8) $12,178
Federal agency obligations 10,632 - (318) 10,314
Banking and finance obligations 6,501 4 (72) 6,433
Mortgage-backed securities 12,113 17 (177) 11,953
Asset-backed securities 630 - (4) 626
Other bonds and obligations 13,649 23 (203) 13,469
------- ------ ------- -------
Total debt securities 55,609 146 (782) 54,973
Marketable equity securities 8,640 1,005 (1,011) 8,634
------- ------ ------- -------
Total securities
available for sale $64,249 $1,151 $(1,793) $63,607
======= ====== ======= =======
</TABLE>
Proceeds from sales and calls of investment securities amounted to
$5,725, $12,049 and $17,976 for the years ended September 30, 2000,
1999 and 1998, respectively. Gross realized gains amounted to $290,
$573 and $122, respectively. Gross realized losses amounted to $11,
$15 and $32, respectively.
At September 30, 2000, the Bank has pledged U.S. Government
obligations with an amortized cost of $499 and a fair value of $500 as
collateral against the Bank's treasury, tax and loan account.
The amortized cost and estimated fair value of debt securities by
contractual maturity are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 2000 September 30,1999
------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Within 1 year $10,249 $10,240 $ 7,122 $ 7,145
Over 1 year through 5 years 27,295 27,256 23,521 23,501
Over 5 years through 10 years 12,175 11,679 10,357 9,921
Over 10 years 662 654 1,866 1,827
------- ------- ------- -------
50,381 49,829 42,866 42,394
Mortgage and asset-backed securities 10,736 10,567 12,743 12,579
------- ------- ------- -------
$61,117 $60,396 $55,609 $54,973
======= ======= ======= =======
</TABLE>
4. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
September 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Mortgage loans on real estate:
Fixed rate $ 47,964 $52,674
Variable rate 52,233 30,485
Commercial 6,309 3,198
Home equity lines-of-credit 4,027 3,598
-------- -------
Total mortgage loans 110,533 89,955
-------- -------
Personal loans 911 571
Deposit secured loans 676 651
Home improvement loans 118 199
Commercial lines-of-credit 1,403 1,029
Commercial installment 1,450 1,457
-------- -------
Total other loans 4,558 3,907
-------- -------
Total loans 115,091 93,862
Due to borrowers on incomplete loans (543) (1,013)
Net deferred loan costs 120 122
Discount on purchased loans (235) -
Allowance for loan losses (874) (879)
-------- -------
Loans, net $113,559 $92,092
======== =======
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $879 $827 $786
Provision for loan losses - 45 39
Charge-offs (6) (6) -
Recoveries 1 13 2
---- ---- ----
Balance at end of year $874 $879 $827
==== ==== ====
</TABLE>
The Bank has sold mortgage loans in the secondary mortgage market and
has retained the servicing responsibility and receives fees for the
services provided. Total loans serviced for others at September 30,
2000 and 1999 amounted to $860 and $997, respectively. Total loans
sold during the years ended September 30, 2000, 1999 and 1998 amounted
to $0, $0 and $269 respectively. Mortgage loans serviced for others
are not included in the accompanying consolidated balance sheets.
There were no impaired loans as of September 30, 2000 and 1999. The
average balance of impaired loans for the year ended September 30,
1998 was $283. For the year ended September 30, 1998, interest income
recognized on impaired loans on the accrual method amounted to $19.
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives
follows:
<TABLE>
<CAPTION>
September 30,
-------------- Estimated
2000 1999 Useful Lives
---- ---- ------------
<S> <C> <C> <C>
Banking premises:
Land $ 222 $ 222
Buildings 1,158 1,158 10-50 years
Leasehold improvements 256 256 5 years
Equipment 2,496 2,174 4-25 years
Construction in progress 411 -
------ -------
4,543 3,810
Less accumulated depreciation
and amortization (2,351) (2,086)
------ -------
$2,192 $ 1,724
====== =======
</TABLE>
Depreciation and amortization expense for the years ended September
30, 2000, 1999 and 1998 amounted to $361, $294 and $228, respectively.
Construction in progress represents additions to the Main Office
Building on East Main Street. Estimated costs for completion of these
additions are $1.9 million and are scheduled to be finished in April
of 2001. Also included in construction in progress is a deposit for
land in Shrewsbury for the construction of a new branch. No formal
estimates or contracts have been made for this new branch.
6. DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Non-interest bearing accounts $ 15,475 $ 11,236
NOW accounts 15,281 13,132
Regular and other savings accounts 71,147 67,152
Money market deposit accounts 5,868 6,619
-------- --------
Total non-certificate accounts 107,771 98,139
-------- --------
Term certificates $100,000 and over 12,951 12,126
Term certificates less than $100,000 42,683 39,846
-------- --------
Total certificate accounts 55,634 51,972
-------- --------
Total deposits $163,405 $150,111
======== ========
</TABLE>
A summary of certificates, by maturity, is as follows:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
<S> <C> <C> <C> <C>
Within 1 year $44,049 5.47% $42,905 4.89%
Over 1 year through 3 years 11,578 5.84 9,043 5.20
Over 3 years 7 4.91 24 4.88
------- -------
$55,634 5.55% $51,972 4.94%
======= =======
</TABLE>
7. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances are as follows:
<TABLE>
<CAPTION>
Maturing During Average
the Year Ending Interest September 30,
------------------
September 30, Rate 2000 1999
--------------- -------- ---- ----
<S> <C> <C> <C>
2001 6.11% $ 4,500 $2,000
2002 6.82 2,500 -
2003 6.88 2,500 -
2004 6.92 2,500 -
2005 6.95 2,500 -
2009 4.88 2,000 2,000
------- ------
$16,500 $4,000
======= ======
</TABLE>
The Bank also has an available line of credit with the Federal Home
Loan Bank of Boston ("FHLB") at an interest rate the adjusts daily.
Borrowings under the line are limited to 2% of the Bank's total
assets. All borrowings from the Federal Home Loan Bank of Boston are
secured by a blanket lien on qualified collateral, defined principally
as 75% of the carrying value of first mortgage loans on owner-occupied
residential property and 90% of the market value of U.S. Government
and federal agency securities. As of September 30, 2000 and 1999,
there were no advances outstanding on the line of credit.
8. INCOME TAXES
Allocation of federal and state income taxes between current and
deferred portions is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current income tax provision:
Federal $510 $661 $661
State 32 62 30
---- ---- ----
542 723 691
---- ---- ----
Deferred income tax provision (benefit):
Federal (54) (20) 44
State (8) (7) 15
---- ---- ----
(62) (27) 59
---- ---- ----
Total provision for income taxes $480 $696 $750
==== ==== ====
</TABLE>
The reasons for the differences between the statutory corporate
federal income tax rate and the effective tax rates are summarized as
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 0.9 1.7 1.4
Dividends received deduction (4.6) (3.9) (1.2)
Officers' life insurance (2.4) - -
Other, net (0.2) 0.3 2.2
---- ---- ----
Effective tax rates 27.7% 32.1% 36.4%
==== ==== ====
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
2000 1999
------ ------
<S> <C> <C>
Deferred tax asset:
Federal $ 805 $ 787
State 242 239
------ ------
1,047 1,026
------ ------
Deferred tax liability:
Federal (126) (146)
State (40) (47)
------ ------
(166) (193)
------ ------
Net deferred tax asset $ 881 $ 833
====== ======
</TABLE>
The tax effects of each type of income and expense item that give rise
to deferred taxes are:
<TABLE>
<CAPTION>
September 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
Employee benefit plans $352 $ 346
Allowance for loan losses 424 420
Net unrealized loss on securities
available for sale 229 243
Depreciation and amortization (97) (116)
Net deferred loan costs (49) (50)
Other, net 22 (10)
---- ----
Net deferred tax asset $881 $ 833
==== =====
</TABLE>
A summary of the change in the net deferred tax asset (liability) is
as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $833 $(173) $ 290
Deferred tax (provision) benefit 62 27 (59)
Deferred tax effect on net unrealized
(gain) loss on securities available
for sale (14) 979 (404)
---- ----- ----
Balance at end of year $881 $ 833 $(173)
==== ===== =====
</TABLE>
There was no valuation reserve as of September 30, 2000 and 1999.
The federal income tax reserve for loan losses at the Bank's base year
amounted to approximately $2,420. If any portion of the reserve is
used for purposes other than to absorb loan losses, approximately 150%
of the amount actually used (limited to the amount of the reserve)
would be subject to taxation in the fiscal year in which used. As the
Bank intends to use the reserve to only absorb loan losses, a deferred
income tax liability of approximately $990 has not been provided.
9. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table to follow) of total and Tier 1
capital (as defined) to risk-weighted assets (as defined) and of Tier
1 capital (as defined) to average assets (as defined). Management
believes, as of September 30, 2000, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
The most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized the Bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
following table. There are no conditions or events since that
notification that management believes have changed the Bank's
category.
The Company's and the Bank's actual and minimum required capital
amounts and ratios as of September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
September 30, 2000:
Total capital (to risk
weighted assets)
Consolidated $25,942 21.73% $9,552 8.00% N/A N/A
Bank 21,805 18.26 9,554 8.00 $11,942 10.00%
Tier 1 capital (to risk
weighted assets)
Consolidated 25,068 20.99 4,776 4.00 N/A N/A
Bank 20,931 17.53 4,777 4.00 7,165 6.00
Tier 1 capital (to average
assets)
Consolidated 25,068 12.82 7,820 4.00 N/A N/A
Bank 20,931 10.82 7,735 4.00 9,669 5.00
September 30, 1999:
Total capital (to risk
weighted assets)
Bank $20,553 21.15% $7,776 8.00% $ 9,720 10.00%
Tier 1 capital (to risk
weighted assets)
Bank 19,674 20.24 3,888 4.00 5,832 6.00
Tier 1 capital (to average
assets)
Bank 19,674 11.40 6,906 4.00 8,633 5.00
</TABLE>
10. EMPLOYEE BENEFIT PLANS
Pension plan
The Bank provides pension benefits for eligible employees through a
defined benefit pension plan. Substantially all employees participate
in the retirement plan on a non-contributing basis, and are fully
vested after three years of service. Information pertaining to the
activity in the plan is as follows:
<TABLE>
<CAPTION>
Plan Years Ended October 31,
----------------------------
2000 1999
---- ----
(Projected) (Actual)
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $ 2,288 $ 1,808
Actual return on plan assets 361 352
Employer contribution 105 146
Benefits paid (12) (18)
------- -------
Fair value of plan assets at end of year 2,742 2,288
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year 1,984 1,951
Service cost 145 149
Interest cost 153 132
Actuarial gain (1) (230)
Benefits paid (12) (18)
------- -------
Benefit obligation at end of year 2,269 1,984
------- -------
Funded status 473 304
Unrecognized net actuarial gain (937) (803)
Transition liability 31 34
------- -------
Accrued pension cost $ (433) $ (465)
======= =======
</TABLE>
The components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Plan Years Ended October 31,
-------------------------------------
2000 1999 1998
---- ---- ----
(Projected) (Actual) (Actual)
<S> <C> <C> <C>
Service cost $ 145 $ 149 $ 136
Interest cost 153 132 125
Expected return on plan assets (183) (145) (127)
Transition obligation 3 3 3
Recognized net actuarial loss (45) (19) (20)
----- ----- -----
$ 73 $ 120 $ 117
===== ===== =====
</TABLE>
Total pension expense for the years ended September 30, 2000, 1999 and
1998 amounted to $98, $131 and $105, respectively.
For the plan years ended October 31, 2000 and 1999, actuarial
assumptions used in accounting were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
(Projected) (Actual)
<S> <C> <C>
Discount rate on benefit obligations 7.75% 6.75%
Expected long-term rate of return on plan assets 8.00 8.00
Annual salary increases 5.50 5.50
</TABLE>
Incentive compensation plan
Management and employees of the Bank participate in an annual
incentive compensation plan which is based on a percentage of the
Bank's annual net profits (as defined) and other factors and
objectives set forth and administered by the Bank's Executive
Committee. Incentive compensation expense for the years ended
September 30, 2000, 1999 and 1998 amounted to $94, $158 and $113,
respectively.
401(k) Plan
The Bank has a 401(k) Plan whereby each employee reaching the age of
21 and having completed at least 1,000 hours of service in a twelve-
month period, beginning with date of employment, automatically becomes
a participant in the Plan. Employees may contribute up to 15% of
their compensation subject to certain limits based on federal tax
laws. The Bank makes matching contributions equal to 25% of the first
4% of an employee's compensation contributed to the Plan. All
participants are fully vested. For the years ended September 30,
2000, 1999 and 1998, expense attributable to the Plan amounted to $14,
$13 and $12, respectively.
Supplemental retirement plans
The Bank provides supplemental retirement benefits to certain
executive officers and Directors. In connection with the supplemental
retirement plans, the Bank has purchased life insurance contracts and
has entered into split-dollar life insurance agreements with certain
participants.
Employees' stock ownership plan
The Company established an Employees Stock Ownership Plan (the "ESOP")
for the benefit of each eligible employee that has reached the age of
21 and has completed at least 1,000 hours of service in the previous
twelve-month period. As part of the Reorganization, the Company
provided a loan to the ESOP which was used to purchase 8%, or 44,200
shares, of the shares sold to the public in the Company's stock
offering. The loan bears interest equal to 8% and provides for annual
payments of principal and interest for 15 years.
At September 30, 2000, the remaining principal balance is payable as
follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
2001 $ 20
2002 17
2003 19
2004 20
2005 22
----
Thereafter 344
$442
====
</TABLE>
The Bank has committed to make contributions to the ESOP sufficient to
support the debt service of the loan. The loan is secured by the
shares purchased by the ESOP which are held in a suspense account for
allocation among the members as the loans are paid. Total compensation
expense applicable to the ESOP amounted to $21 for the year ended
September 30, 2000.
Shares held by the ESOP include the following:
<TABLE>
<CAPTION>
September 30,
2000
-------------
<S> <C>
Allocated -
Committed to be released 2,210
Unallocated 41,990
------
44,200
======
</TABLE>
The fair market value of unallocated shares at September 30, 2000 was
$409.
11. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments
and contingencies which are not reflected in the accompanying
consolidated balance sheets.
Loan commitments
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit, which involve elements of credit and interest rate risk
in excess of the amount recognized in the accompanying consolidated
balance sheets. The contract amount of these instruments reflects the
extent of involvement the Bank has in these particular classes of
financial instruments.
The Bank's exposure to credit loss is represented by the contractual
amount of the instruments. The Bank uses the same credit policies in
making commitments as it does for on-balance sheet instruments.
At September 30, 2000 and 1999, financial instruments whose contract
amounts represent credit risk consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Commitments to grant residential mortgage loans $2,888 $1,619
Commitments to grant construction loans 240 350
Commitments to grant commercial mortgage loans 325 -
Unadvanced funds on home equity
lines-of-credit 5,518 5,437
Unadvanced funds on commercial
lines-of-credit 582 1,393
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Unadvanced funds on lines-of-credit have fixed expiration
dates and may expire without being drawn upon. Therefore, the total
commitment amount does not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. Except for commercial lines-of-credit, these
financial instruments are secured by mortgage liens on real estate.
Operating lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at
September 30, 2000, pertaining to banking premises and equipment,
future minimum rent commitments are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
2001 $ 76
2002 50
2003 50
2004 25
----
$201
====
</TABLE>
The leases contain options to extend for periods from two to ten
years. The cost of such rentals is not included above. Total rent
expense for years ended September 30, 2000, 1999 and 1998 amounted to
$148, $120 and $73, respectively.
Employment and change in control agreements
The Company and the Bank have entered into employment agreements with
its President and Chief Financial Officer which generally provide for
a base salary and the continuation of certain benefits currently
received. The employment agreements have initial terms of three and
two years, respectively. The employment agreements require payments
for the remaining base salary due to the employee for the remaining
term of the agreement and the contributions that would have been made
on the employee's behalf to any employee benefit plans of the Company
and the Bank for certain reasons other than cause, including a "change
in control" as defined in the agreement. However, such employment may
be terminated for cause, as defined, without incurring any continuing
obligations.
Contingencies
Various legal claims may arise from time to time and, in the opinion
of management, these claims will have no material effect on the
Company's consolidated financial statements.
12. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to its
Directors. At September 30, 2000 and 1999, the amount of such loans,
which exceeded $60,000 in the aggregate to each related party, was
approximately $129 and $144, respectively. Such loans are made in the
ordinary course of business at the Bank's normal credit terms,
including interest rate and collateral requirements, and do not
represent more than a normal risk of collection.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" requires disclosure of
estimated fair values of all financial instruments where it is
practicable to estimate such values. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Accordingly, the derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and due
from banks, federal funds sold and short-term investments
approximate fair value.
Securities available for sale: Fair values for securities
available for sale are based on quoted market prices, where
available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable
instruments.
Federal Home Loan Bank Stock: The carrying amount approximates
fair value.
Loans: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on
carrying values. Fair values for other types of loans are
estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for non-
performing loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
Deposits: The fair values for non-certificate accounts are, by
definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for
certificate accounts are estimated using a discounted cash flow
calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Federal Home Loan Bank advances: The fair value is based upon
the Company's current incremental borrowing rate for a similar
advance.
Accrued interest: The carrying amounts of accrued interest
approximate fair value.
Off-balance sheet instruments: Fair values for off-balance
sheet lending com-mitments are based on fees currently charged
to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit
standing. The estimated fair value of off-balance sheet
financial instruments at September 30, 2000 and 1999, was
immaterial.
The carrying amounts and related estimated fair values of the
Company's financial instruments are as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
2000 1999
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 14,460 $ 14,460 $ 10,718 $ 10,718
Securities available for sale 69,216 69,216 63,607 63,607
Federal Home Loan Bank stock 903 903 850 850
Loans, net 113,559 109,725 92,092 90,482
Accrued interest receivable 1,317 1,317 1,130 1,130
Financial liabilities:
Deposits 163,405 163,208 150,111 150,196
Federal Home Loan
Bank advances 16,500 16,370 4,000 3,800
</TABLE>
14. CONDENSED FINANCIAL STATEMENTS OF WESTBOROUGH FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
September 30,
BALANCE SHEET 2000
------------- -------------
<S> <C>
Assets
------
Cash and due from bank $ 1,442
Short-term investments 82
-------
Total cash and cash equivalents 1,524
Investment in subsidiary 22,750
Loan receivable - ESOP 442
-------
Total assets $24,716
=======
Liabilities and Stockholders' Equity
------------------------------------
Stockholders' equity $24,716
-------
Total liabilities and stockholders' equity $24,716
=======
<CAPTION>
Year Ended
September 30,
STATEMENT OF INCOME 2000
------------------- -------------
<S> <C>
Income:
Interest on short-term investments $ 12
Interest on loan - ESOP 22
-------
Total income 34
Operating expenses 3
-------
Income before income taxes and equity in
undistributed net income of subsidiary 31
Income tax expense 5
-------
Income before undistributed net income of subsidiary 26
Equity in undistributed net income of subsidiary 1,225
-------
Net income $ 1,251
=======
<CAPTION>
Year Ended
September 30,
STATEMENT OF CASH FLOWS 2000
----------------------- -------------
<S> <C>
Cash flows from operating activities:
Net income $ 1,251
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (1,225)
-------
Net cash provided by operating activities 26
-------
Cash flows from investing activities:
Capital contribution to subsidiary (2,618)
Loan to ESOP (442)
-------
Net cash used in investing activities (3,060)
Cash flows from financing activities:
Proceeds from issuance of common stock 4,558
-------
Net cash provided by financing activities 4,558
-------
Net change in cash and cash equivalents 1,524
Cash and cash equivalents at beginning of year -
-------
Cash and cash equivalents at end of year $ 1,524
=======
</TABLE>
15. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following table presents the quarterly financial information for
the Company for the year ended September 30, 2000:
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest and dividend income $3,217 $3,058 $2,892 $2,824
Interest expense 1,530 1,358 1,330 1,307
------ ------ ------ ------
Net interest income 1,687 1,700 1,562 1,517
Gain (loss) on securities, net (151) 149 21 158
All other income 346 172 154 246
Operating expenses 1,471 1,514 1,444 1,401
------ ------ ------ ------
Income before income taxes 411 507 293 520
Provision for income taxes 111 142 76 151
------ ------ ------ ------
Net income $ 300 $ 365 $ 217 $ 369
====== ====== ====== ======
Basic earnings per share $ 0.19 $ 0.24 N/A N/A
</TABLE>
Note: The Company's reorganization and stock offering occurred on
February 15, 2000. Basic earnings per share represents
income available to common stockholders divided by the
weighted-average number of common shares outstanding during
the quarter.
Westborough Financial Services, Inc.
Stockholders Information
------------------------------------
Annual Meeting
The annual meeting of shareholders will be held on Thursday, January 25,
2001 at 4:00 p.m., local time. The meeting will take place at Wyndham
Westborough Hotel located at 5400 Computer Drive, Westborough,
Massachusetts 01581.
Common Stock Information
On September 30, 2000, there were 1,581,374 shares of common stock issued
and outstanding and approximately 935 stockholders of record, not including
persons or entities holding stock in nominee or street name through brokers
or banks. The Company's stock is not actively traded, although the stock is
quoted on the OTC Electronic Bulletin Board under the symbol "WFSM."
The table below reflects the stock trading and dividend payment frequency
of the Company's stock since becoming a public company on February 15,
2000. The information set forth below was provided to management of the
Company by certain securities firms effecting transactions in the Company's
stock on an agency basis. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent
actual transactions.
Stock Price by Quarter
High Low
First Quarter (since February 15, 2000) 10.25 8.50
Second Quarter 9.50 8.25
Third Quarter 9.75 8.375
Dividend payment decisions are made with consideration of a variety of
factors, including earnings, financial condition, market considerations and
regulatory restrictions. At September 30, 2000, the Company had not paid
any dividends to date. On November 27, 2000, the Company declared a $.05
cash dividend payable on December 18, 2000 to shareholders of record on
December 7, 2000.
10-KSB Report
A copy of the Form 10-KSB as filed with the Securities and Exchange
Commission will be furnished without charge to stockholders upon written
request. Please write to: Nelson P. Ball, Clerk, Westborough Financial
Services, Inc., 100 East Main Street, Westborough, Massachusetts 01581.
Transfer Agent Independent Auditors
Registrar and Transfer Company Wolf & Company, P.C.
10 Commerce Drive One International Place
Cranford, NJ 07016 Boston, MA 02110
Shareholder Inquires: (800) 368-5948 (617) 439-9700
Counsel Investor Relations
Thacher Proffitt & Wood John L. Casagrande
1700 Pennsylvania Avenue, NW Senior Vice President and Treasurer
Suite 800 Westborough Financial Services, Inc.
Washington, DC 20006 100 East Main Street
(202) 347-8400 Westborough, MA 01581
(508) 366-4111
Westborough Financial Services, Inc.
100 E. Main Street
Westborough, MA 01581-0670
Tel (508) 366-4111
Fax (508) 366-4001
33 W. Main Street
Westborough, MA 01581
Tel. (508) 366-4236
Fax (508) 616-9115
53 W. Main Street
Northborough, MA 01532
Tel. (508) 393-2434
Fax (508) 393-8395
19 Maple Avenue
Shrewsbury, MA 01545
Tel. (508) 845-6244
Fax (508) 845-6208
Shaw's Supermarket
White City (Rte. 9)
Shrewsbury, MA 01545
Tel. (508) 755-2015
Fax (508) 752-9331
www.westboroughbank.com
Member FDIC
Member DIF Equal Housing Lender
