10QSB 1 wbor10q2.txt BODY OF FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ---- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ---- SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ To ___________ Commission file number: 000-27997 Westborough Financial Services, Inc. (Exact name of small business issuer as specified in its charter) Massachusetts 04-3504121 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 100 E. Main Street Westborough, Massachusetts 01581 (508) 366-4111 (Address of principal executive offices) (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Class Outstanding as of May 11, 2001 ----- ------------------------------ Common Stock, par value $0.01 1,581,374 Transitional Small Business Disclosure Format (check one): YES NO X --- --- Forward Looking Statements Westborough Financial Services, Inc. (the "Company") and The Westborough Bank (the "Bank") may from time to time make written or oral "forward-looking statements." These forward-looking statements may be contained in this Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission (the "SEC"), other filings with the SEC, and in other communications by the Company and the Bank, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties. The following factors, many of which are subject to change based on various other factors beyond the Company's control, and other factors identified in the Company's filings with the SEC and those presented elsewhere by management from time to time, could cause its financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: * the strength of the United States economy in general and the strength of the local economies in which the Company and the Bank conduct operations; * the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; * inflation, interest rate, market and monetary fluctuations; * the timely development of and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; * the willingness of users to substitute competitors' products and services for the Company's and the Bank's products and services; * the Company's and the Bank's success in gaining regulatory approval of their products and services, when required; * the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); * the impact of technological changes; * acquisitions; * changes in consumer spending and saving habits; and * the Company's and the Bank's success at managing the risks involved in their business. This list of important factors is not exclusive. The Company or the Bank does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION 1 Item 1. Financial Statements 1 Consolidated Balance Sheets 1 March 31, 2001 and September 30, 2000 Consolidated Statements of Income 2 For Three and Six Months Ended March 31, 2001 and 2000 Consolidated Statements of Changes in Stockholders' Equity 3 For Six Months Ended March 31, 2001 and 2000 Consolidated Statements of Cash Flows 4 For Six Months Ended March 31, 2001 and 2000 Notes to Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II. OTHER INFORMATION 13 Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 3. Defaults upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements Westborough Financial Services, Inc. and Subsidiary Consolidated Balance Sheets (Dollars in thousands)
March 31, September 30, 2001 2000 --------- ------------- (Unaudited) Assets Cash and due from banks $ 6,346 $ 4,599 Federal funds sold 17,891 7,510 Short-term investments 2,419 2,351 ------------------------ Total cash and cash equivalents 26,656 14,460 Securities available for sale, at fair value 68,717 69,216 Federal Home Loan Bank stock, at cost 1,100 903 Loans, net 116,685 113,559 Banking premises and equipment, net 2,454 2,192 Accrued interest receivable 1,304 1,317 Deferred income taxes 580 881 Cash surrender value of life insurance 3,290 3,133 Other assets 769 315 ------------------------ Total assets $221,555 $205,976 ======================== Liabilities and Stockholders' Equity Deposits $177,472 $163,405 Federal Home Loan Bank advances 16,500 16,500 Mortgagors' escrow accounts 211 247 Accrued expenses and other liabilities 1,469 1,108 ------------------------ Total liabilities 195,652 181,260 ------------------------ Commitments and Contingencies Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding 0 0 Common stock, $.01 par value, 5,000,000 shares authorized, 1,581,374 shares issued and outstanding 16 16 Additional paid in capital 4,541 4,541 Retained earnings 21,454 20,931 Accumulated other comprehensive income (loss) 297 (352) Unearned compensation-employee stock ownership plan (405) (420) ------------------------ Total stockholders' equity 25,903 24,716 ------------------------ Total liabilities and stockholders' equity $221,555 $205,976 ========================
See accompanying notes to unaudited consolidated financial statements. Westborough Financial Services, Inc. and Subsidiary Consolidated Statements of Income (Dollars in Thousands, except per share data)
Three Months Ended Six Months Ended March 31, March 31, -------------------- -------------------- 2001 2000 2001 2000 ---------- ------ ---------- ------ (unaudited) (unaudited) Interest and dividend income: Interest and fees on loans $ 2,190 $1,741 $ 4,375 $3,440 Interest and dividends on investment securities 1,171 1,054 2,314 2,052 Interest on federal funds sold 115 66 242 152 Interest on short term investments 30 31 85 72 -------------------------------------------- Total interest and dividend income 3,506 2,892 7,016 5,716 -------------------------------------------- Interest expense: Interest on deposits 1,498 1,277 2,987 2,531 Interest on borrowings 265 53 537 105 -------------------------------------------- Total interest expense 1,763 1,330 3,524 2,636 -------------------------------------------- Net interest income 1,743 1,562 3,492 3,080 Provision for loan losses 12 0 24 0 -------------------------------------------- Net interest income, after provision for loan losses 1,731 1,562 3,468 3,080 -------------------------------------------- Other income: Customer service fees 166 74 351 161 Income from covered call options 0 51 16 180 Gain on sales of securities available for sale, net 264 21 315 179 Miscellaneous 33 29 66 58 -------------------------------------------- Total other income 463 175 748 578 -------------------------------------------- Operating expenses: Salaries and employee benefits 891 741 1,730 1,492 Occupancy and equipment expenses 260 216 487 414 Data processing expenses 111 81 206 153 Marketing expenses 61 63 127 120 Professional fees 104 40 180 64 Other general and administrative expenses 380 303 754 602 -------------------------------------------- Total operating expenses 1,807 1,444 3,484 2,845 -------------------------------------------- Income before income taxes 387 293 732 813 Provision for income taxes 106 76 198 227 -------------------------------------------- Income before cumulative effect of Change in accounting principle 281 217 534 586 Cumulative effect of change in accounting principle, net of $76 of related tax effect, for the adoption of a new accounting standard for covered call options 0 0 147 0 -------------------------------------------- Net income $ 281 $ 217 $ 681 $ 586 ============================================ Number of weighted average shares outstanding 1,540,489 N/A 1,540,121 N/A Earnings per share - Basic $ 0.18 N/A $ 0.44 N/A
See accompanying notes to unaudited consolidated financial statements. Westborough Financial Services, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Six Months Ended March 31, 2001 and 2000 (Dollars in Thousands)
Accumulated Additional Other Unearned Common Paid-in Retained Comprehensive Comp - Stock Capital Earnings Income (Loss) ESOP Total ------ ---------- -------- ------------- -------- ----- (Unaudited) Balance at September 30, 1999 $ 0 $ 0 $19,680 $(399) $ 0 $19,281 Comprehensive income: Net income 0 0 586 0 0 586 Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects 0 0 0 (482) 0 (482) ------- Total comprehensive income 104 Net proceeds from sale of common stock 16 4,542 0 0 0 4,558 Purchase of ESOP shares; 44,200 shares at $10 0 0 0 0 (442) (442) ESOP shares committed to be released 0 0 0 0 7 7 -------------------------------------------------------------------------- Balance at March 31, 2000 $16 $4,542 $20,266 $(881) $(435) $23,508 ========================================================================== Balance at September 30, 2000 $16 $4,541 $20,931 $(352) $(420) $24,716 ------- Comprehensive income: Net income 0 0 681 0 0 681 Change in net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects 0 0 0 649 0 649 ------- Total comprehensive income 1,330 ------- Dividends paid, $0.10 per share outstanding 0 0 (158) 0 0 (158) ESOP shares committed to be released 0 0 0 0 15 15 -------------------------------------------------------------------------- Balance at March 31, 2001 $16 $4,541 $21,454 $ 297 $(405) $25,903 ==========================================================================
See accompanying notes to unaudited consolidated financial statements. Westborough Financial Services, Inc. and Subsidiary Consolidated Statements of Cash Flows (Dollars in Thousands)
Six Months Ended -------------------------------- March 31, 2001 March 31, 2000 -------------- -------------- (Unaudited) Cash flows from operating activities: Net income $ 681 $ 586 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 24 0 Gain on sales of securities available for sale, net (315) (179) Recognition of income from covered call options (16) (180) (Accretion) amortization on securities, net (28) 1 Depreciation expense 200 168 Amortization of net deferred loan costs 30 10 Amortization of unearned compensation - ESOP 15 7 Decrease (increase) in accrued interest receivable 13 (20) Increase in cash surrender value of life insurance (157) (124) Other, net 85 242 ------------------------- Net cash provided by operating activities 532 511 ------------------------- Cash flows from investing activities: Purchase of securities available for sale (13,324) (12,103) Purchase of Federal Home Loan Bank stock (197) (53) Proceeds from sales and calls of securities available for sale 9,994 4,596 Proceeds from maturities of securities available for sale 3,811 1,001 Principal repayments received on mortgage and asset backed securities 1,149 1,659 Loans originated, net of payments received (3,180) (4,042) Purchase of banking premises and equipment (462) (114) ------------------------- Net cash used by investing activities (2,209) (9,056) ------------------------- Cash flows from financing activities: Net increase in deposits 14,067 4,738 Net decrease in mortgagors escrow accounts (36) (19) Net proceeds received from stock offering 0 4,559 Purchase of ESOP shares 0 (442) Dividends paid (158) 0 ------------------------- Net cash provided by financing activities 13,873 8,836 ------------------------- Net increase in cash and cash equivalents 12,196 291 Cash and cash equivalents at beginning of period 14,460 10,718 ------------------------- Cash and cash equivalents at end of period $26,656 $11,009 =========================
See accompanying notes to unaudited consolidated financial statements Westborough Financial Services, Inc. and Subsidiary Notes to Unaudited Consolidated Financial Statements 1) Basis of Presentation and Consolidation. The unaudited consolidated interim financial statements of Westborough Financial Services, Inc. and Subsidiary (the "Company") presented herein should be read in conjunction with the consolidated financial statements for the year ended September 30, 2000, included in the Annual Report on Form 10-KSB of the Company, the holding company for The Westborough Bank (the "Bank"). The unaudited consolidated interim financial statements herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the consolidated interim financial statements reflect all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of such information. Interim results are not necessarily indicative of results to be expected for the entire year. 2) Reorganization and Stock Offering. The Bank was 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 Company; (ii) the Bank converted from mutual to stock form, changing its name from "Westborough Savings Bank" to "The Westborough Bank," and issued 100% of its capital stock to the Company; and (iii) the Company issued shares of its common stock, $0.01 par value per share (the "Common Stock") to the public at a price of $10.00 per share (the "Stock Offering"). The Company issued 1,581,374 shares of the Common Stock in the Stock Offering, of which 35% of these shares, or 553,481 shares, were sold to the public, including depositors of the Bank and the Company's Employee Stock Ownership Plan, and 65% of these shares, or 1,027,893 shares, were issued to the MHC. 3) Contingencies. At March 31, 2001, the Bank had loan commitments to borrowers of $3.6 million, commitments of home equity loans of $685 thousand, available home equity lines of credit of $6.8 million, unadvanced funds on commercial lines of credit of $1.4 million, and personal overdraft lines of credit of approximately $364 thousand. The Bank had a commitment to purchase approximately $5.8 million of adjustable-rate loans from a local financial institution. The Bank had no commitments to purchase securities at March 31, 2001. 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 $1.8 million and it is scheduled to be completed in the Fall of 2001. The Bank also has a deposit on land in Shrewsbury where it plans to relocate 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 4) Earnings per Share. Earnings per share for the three and six-month periods ended March 31, 2001 is computed using 1,540,489 and 1,540,121 weighted average shares outstanding, respectively. Earnings per share data is not presented for the three and six-month periods ended March 31, 2000 because shares of common stock were not issued until February 15, 2000. 5) Adoption of New Accounting Pronouncement. On October 1, 2000 the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which required the Company to record the after-tax effects of changes in the fair value of covered call options through current income. Previously, such changes were included in accumulated comprehensive income (loss). By adopting this standard, the Bank recorded pre-tax earnings of $223 thousand for the six-month period ended March 31, 2001. After related taxes at the rate of 34%, or, $76 thousand, the standard resulted in additional income of $147 thousand. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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. Comparison of Financial Condition at March 31, 2001 and September 30, 2000 As a result of continued growth in deposits, the Bank's total assets increased by $15.6 million, or 7.6%, to $221.6 million at March 31, 2001 from $206.0 million at September 30, 2000. Short-term investments and federal funds sold during this period increased $10.4 million, to $20.3 million at March 31, 2001 from $9.9 million at September 30, 2000. Net loans during this period increased by $3.1 million, or 2.8%, to $116.7 million at March 31, 2001, from $113.6 million at September 30, 2000. The loan increase was primarily due to increased commercial loans. Asset quality remained strong, with non-performing assets as a percent of total assets of .03% at March 31, 2001. Total deposits increased by $14.1 million, or 8.6%, to $177.5 million at March 31, 2001 from $163.4 million at September 30, 2000. Most of this increase was attributable to increases in interest-bearing certificates of deposit with maturities greater than one-year and an increase in variable- rate tiered and regular savings deposits. Total stockholders' equity increased by $1.2 million to $25.9 million at March 31, 2001 from $24.7 million at September 30, 2000 primarily as a result of net income of $681 thousand and an increase of $649 thousand in accumulated other comprehensive income. Accumulated other comprehensive income, which measures the after-tax change in the value of securities considered available for sale, increased as a result of a relative decline in market interest rates at March 31, 2001 compared to market interest rates at September 30, 2000. Also, during the six-month period ended March 31, 2001, the Company declared and paid cash dividends of $.10 per common share, which reduced stockholders' equity by $158 thousand for the six- month period. Comparison of Operating Results for the Three Months Ended March 31, 2001 and 2000 Net Income: The Company reported earnings per share for the quarter ended March 31, 2001 of $0.18 on net income of $281 thousand. For the quarter ended March 31, 2001 net income increased by $64 thousand, or 29.5%, to $281 thousand as compared to $217 thousand for the quarter ended March 31, 2000. The increase was primarily due to an increase in net interest income, net gains from the sale of securities available for sale and income from customer service fees, offset, to a lesser extent, by an increase in operating expenses. The Bank's return on average assets for the quarter ended March 31, 2001 was 0.52% compared to 0.48% for the quarter ended March 31, 2000. Earnings per share data for the three-month period ended March 31, 2000 is not applicable since the Company's stock commenced trading on February 16, 2000. Interest and Dividend Income: The Bank's interest and dividend income increased by $614 thousand, or 21.2%, to $3.5 million for the quarter ended March 31, 2001, from $2.9 million for the quarter ended March 31, 2000. The increase was due mainly to a higher level of average interest-earning assets and to a lesser extent due to a higher average interest rate earned on such assets. The average volume of interest-earning assets for the quarter ended March 31, 2001 was $202.4 million earning an average rate of 6.93% as compared to an average volume of $170.1 million earning an average rate of 6.80% for the quarter ending March 31, 2000. The Bank experienced continued growth in real estate and commercial lending and deployed additional cash flows into investment securities. The real estate loan increase was primarily due to increased variable rate loans purchased which were secured by one-to-four family real estate. The average balance of loans for the quarter ended March 31, 2001 was $115.5 million earning 7.59% as compared to an average balance of $94.4 million earning 7.38% for the quarter ending March 31, 2000. The average balance of investment securities for the quarter ended March 31, 2001 was $74.3 million earning 6.31% as compared to an average balance of $68.2 million earning 6.19% for the quarter ending March 31, 2000. The average balance of short-term investments for the quarter ended March 31, 2001 was $12.7 million earning 4.58% as compared to an average balance of $7.5 million earning 5.15% for the quarter ending March 31, 2000. Interest Expense: Interest expense increased by $433 thousand, or 32.6%, to $1.8 million for the quarter ended March 31, 2001, from $1.3 million for the quarter ending March 31, 2000. Interest expense increased due to a higher average balance of such interest-bearing liabilities and to a lesser extent due to a higher average rate paid on interest-bearing liabilities. The average volume of all interest-bearing liabilities (which includes interest-bearing deposits and interest-bearing borrowing) was $171.8 million with a cost of 4.11% for the quarter ended March 31, 2001 as compared to $145.8 million with a cost of 3.65% for the quarter ending March 31, 2000. The average volume of interest-bearing deposits was $155.3 million with a cost of 3.86% for the quarter ending March 31, 2001 as compared to $141.7 million with a cost of 3.60% for quarter ending March 31, 2000. As a result of an increase in borrowing from the Federal Home Loan Bank of Boston to fund the purchase of variable-rate real estate loans, the average volume of interest-bearing borrowing was $16.5 million with a cost of 6.42% for the quarter ending March 31, 2001 as compared to $4.1 million with a cost of 5.17% for quarter ending March 31, 2000. Net Interest Income: The Bank's net interest income increased by $181 thousand for the quarter ended March 31, 2001, or 11.6%, to $1.7 million from $1.6 million for the quarter ending March 31, 2000. The increase was attributed to the combination of an increase in interest and dividend income of $614 thousand offset by an increase in interest expense of $433 thousand. The Bank's net interest rate spread, which represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, declined to 2.82% for the quarter ended March 31, 2001 as compared to 3.15% for the quarter ending March 31, 2000. Provision for Loan Losses: The Bank's provision for loan losses was $12 thousand for the quarter ended March 31, 2001 compared to $0 for the quarter ending March 31, 2000. As the Bank expands its commercial lending activities, management believes that increases in the provision are likely since commercial lending generally has a higher degree of risk compared to lending secured by residential, one-to-four family dwellings. Other Income: Other income consists primarily of fee income for Bank services, gains and losses from the sale of securities and income from the writing of covered call options on common stock held in the Bank's stock portfolio. Total other income increased by 164.6% to $463 thousand for the quarter ended March 31, 2001, as compared to $175 thousand for quarter ending March 31, 2000. The primary reason for the increase was due to a significantly higher level of net gains from the sale of securities available for sale. Such net gains increased to $264 thousand from $21 thousand for the three-month periods ended March 31, 2001 and 2000, respectively. Income from the writing of covered call option declined to $0 for the quarter ending March 31, 2001 from $51 thousand for the quarter ending March 31, 2000. At March 31, 2001, the Bank had no outstanding options written on common stock held in its portfolio. Customer service fees and miscellaneous income increased by $96 thousand, or 93.2%, to $199 thousand for the quarter ended March 31, 2001 from $103 thousand for the quarter ended March 31, 2000. This increase is primarily due to the increase in commissions earned from the sale of non-insured investment products and increases in the cash surrender value of Bank-owned life insurance. Operating Expenses: For the quarter ended March 31, 2001, operating expenses increased by $363 thousand, or 25.1%, to $1.8 million from $1.4 million for quarter ending March 31, 2000. The increase was primarily due to salary and benefit expenses associated with additional staff and incentive payments to support the sale of non-insured investment products, plus personnel to support training and information technology. The most recent quarter ending March 31, 2001 also reflects increased expenses relating to legal, accounting, transfer agent, publishing and other costs associated with the Company's first annual meeting of its stockholders. The increase in operating expenses is also a result of the Bank's efforts to update its computers along with the associated increases in data processing costs. 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. Other general and administrative services increased due to increases in directors' fees, expenses associated with the development and maintenance of the Bank's web site, the increased use of the telephone and postage and increased expenses for office supplies. Income Taxes. The provision for income taxes increased by $30 thousand to $106 thousand for the quarter ended March 31, 2001 as compared to $76 thousand for the quarter ended March 31, 2000, resulting in an effective tax rate of 27.4% and 25.9% for the quarter ended March 31, 2001 and 2000, 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 Six-Months Ended March 31, 2001 and 2000 Net Income: The Company reported earning per share for the six-month period ended March 31, 2001 of $0.44 on income of $681 thousand. For the six-month period ended March 31, 2001, net income increased by $95 thousand, or 16.2%, to $681 thousand as compared to $586 thousand for the six-month period ended March 31, 2000. The increase was primarily due to an increase in net interest income, customer service fees and the effect of a change in accounting principle offset, to a lesser extent, by an increase in operating expenses. The Bank's return on average assets was .64% for the six-month period ended March 31, 2001 as compared to .66% for the six-month period ended March 31, 2000. Interest and Dividend Income: The Bank's interest and dividend income increased $1.3 million, or 22.7%, to $7.0 million for the six-month period ended March 31, 2001, from $5.7 million for the six-month period ended March 31, 2000. The increase was due mainly to a higher level of average interest-earning assets, and, to a lesser extent, by an increase in the average rate earned on earning assets. The average volume of interest- earning assets for the six-month period ended March 31, 2001 was $199.1 million earning an average rate of 7.05% as compared to an average volume of $168.1 million earning an average rate of 6.80% for the six-month period ending March 31, 2000. The Bank experienced continued growth in real estate and commercial lending and deployed additional cash flows into investment securities and short-term investments. The real estate loan increase was primarily due to increased variable rate loans purchased in August 2000, which were secured by one-to-four family real estate. The average balance of loans for the six-month period ended March 31, 2001 was $114.8 million earning 7.62% as compared to an average balance of $93.3 million earning 7.38% for the six-month period ending March 31, 2000. The average balance of investment securities for the six-month period ended March 31, 2001 was $72.6 million earning 6.37% as compared to an average balance of $66.9 million earning 6.14% for the six-month period ending March 31, 2000. The average balance of short-term investments for the six-month period ended March 31, 2001 was $11.7 million earning 5.60% as compared to an average balance of $8.0 million earning 5.63% for the six-month period ending March 31, 2000. Interest Expense: Interest expense increased by $888 thousand, or 33.7%, to $3.5 million for the six-month period ended March 31, 2001, from $2.6 million for the six-month period ending March 31, 2000. Interest expense increased due to a higher average volume of interest-bearing liabilities and to a lesser extent to a higher average interest rate paid on such interest-bearing liabilities. The average volume of all interest- bearing liabilities (which includes interest-bearing deposits and interest- bearing borrowing) was $169.2 million with a cost of 4.17% for the six- month period ended March 31, 2001 as compared to $145.3 million with a cost of 3.63% for the six-month period ending March 31, 2000. The average volume of interest-bearing deposits was $152.7 million with a cost of 3.91% for the six-month period ending March 31, 2001 as compared to $141.2 million with a cost of 3.58% for six-month period ending March 31, 2000. As a result of an increase in borrowing from the Federal Home Loan Bank of Boston to fund the purchase of variable-rate real estate loans, the average volume of interest-bearing borrowing was $16.5 million with a cost of 6.51% for the six-month period ending March 31, 2001 as compared to $4.1 million with a cost of 5.19% for six-month period ending March 31, 2000. Net Interest Income: The Bank's net interest income increased by $412 thousand for the six-month period ended March 31, 2001, or 13.4%, to $3.5 million from $3.1 million for the six-month period ending March 31, 2000. The increase was attributed to the combination of an increase in interest and dividend income of $1.3 million offset to a lesser extent by an increase in interest expense of $0.9 million. The Bank's net interest rate spread, which represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest- bearing liabilities, declined to 2.88% for the six-month period ended March 31, 2001 as compared to 3.17% for the six-month period ending March 31, 2000. Provision for Loan Losses: The Bank's provision for loan losses was $24 thousand for the six-month period ended March 31, 2001 compared to $0 for the six-month period ending March 31, 2000. As the Bank expands its commercial lending activities, management believes that increases in the provision are likely since commercial lending generally has a higher degree of risk compared to lending secured by residential, one-to-four family dwellings. Other Income: Other income consists primarily of fee income for Bank services, gains and losses from the sale of securities and income from the writing of covered call options on common stock held in the Bank's stock portfolio. Total other income increased by 29.4% to $748 thousand for the six-month period ended March 31, 2001, as compared to $578 thousand for six-month period ending March 31, 2000. The primary reason for the increase was due to significantly higher levels of customer service fees earned from the sale of non-insured investment products. Net gains on the sale of securities available for sale increased by $136 thousand to $315 thousand for the six-months ended March 31, 2001 as compared to $179 thousand for the six-month period ended March 31, 2000. Income from covered call options declined by 91.1% to $16 thousand from $180 thousand for the six-month periods ended March 31, 2001 and 2000, respectively. At March 31, 2001, the Bank had no outstanding options written on common stock held in its portfolio. Operating Expenses: For the six month period ended March 31, 2001, operating expenses increased by $639 thousand, or 22.5%, to $3.5 million from $2.8 million for six month period ending March 31, 2000. The increase was primarily due to salary and benefit expenses associated with additional staff and incentive payments to support the sale of non-insured investment products, plus personnel to support training and information technology. The most recent six-month period ending March 31, 2001 also reflects increased expenses relating to legal, accounting, transfer agent, publishing and other costs associated with the Company's first annual meeting of its stockholders. The increase in operating expenses is also a result of the Bank's efforts to update its computers along with the associated increases in data processing costs. 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. Other general and administrative services increased due to increases in directors' fees, expenses associated with the development and maintenance of the Bank's web site, the increased use of the telephone and postage and increased expenses for office supplies. Income Taxes. The provision for income taxes declined by $29 thousand to $198 thousand for the six month period ended March 31, 2001 as compared to $227 thousand for the six month period ended March 31, 2000, resulting in an effective tax rate of 27.0% and 27.9% for the six-month periods ended March 31, 2001 and 2000, 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. Change in Accounting Principle. At October 1, 2000 the Bank adopted a new accounting standard for reporting covered call options. By adopting this standard, the Bank recorded pre-tax earnings of $223 thousand for the six-month period ended March 31, 2001. After related taxes at the rate of 34%, or, $76 thousand, the standard resulted in additional income of $147 thousand. In accordance with SFAS No. 133, the adoption of this statement was accounted for as a cumulative effect of a change in accounting principle. At March 31, 2001, the Bank had no outstanding options written on common stock held in its portfolio. Liquidity and Capital Resources The term "liquidity" refers to the Bank's ability to generate adequate amounts of cash to fund loan originations, deposit withdrawals and operating expenses. The Bank's primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage- backed securities, maturities and calls of investment securities and funds provided by the Bank's operations. The Bank also has expanded its use of borrowings from the Federal Home Loan Bank of Boston as part of its management of interest rate risk. At March 31, 2001, the Bank had $16.5 million in outstanding borrowings. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. The Bank's primary investing activities are the origination or purchase of one- to four-family real estate and other loans, the purchase of mortgage-backed securities and the purchase of investment securities. During the six months ended March 31, 2001, the Bank originated loans of $14.8 million, purchased mortgage-backed securities of $2.3 million and purchased investment securities of $11.0 million. These investing activities were funded by deposit growth, principal payments on mortgage loans and mortgage-backed securities, calls and maturities on investment securities and funds provided by the Bank's operating activities. Principal repayments on loans and mortgage-backed securities totaled $12.8 million for the six months ended March 31, 2001. Maturities of investment securities totaled $3.8 million during the six months ended March 31, 2001. Sales and calls of investment securities provided cash flows of $10.0 million during the six months ended March 31, 2001. Total deposits increased $14.1 million, during the six months ended March 31, 2001. The level of interest rates and products offered by competitors and other factors affects deposit flows. Certificate of deposit accounts scheduled to mature within one year were $52.6 million at March 31, 2001. Based on the Bank's deposit retention experience and current pricing strategy, the Bank anticipates that a significant portion of these certificates of deposit will remain with the Bank. The Bank is committed to maintaining a strong liquidity position; therefore, it monitors its liquidity position on a daily basis. The Bank also periodically reviews liquidity information prepared by the Depositors Insurance Fund, the Federal Deposit Insurance Corporation and other available reports, which compare the Bank's liquidity with banks in its peer group. The Bank anticipates that it will have sufficient funds to meet its current funding commitments. The Bank has begun an expansion of its facilities by constructing an addition to its existing executive office. The construction expenses for this addition are expected to total approximately $1.8 million. On December 16, 1999, the Bank entered into a purchase and sale agreement to acquire approximately 0.8 acres of land and buildings located at 23/25 Maple Avenue, Shrewsbury for the sum of $935 thousand, subject to adjustments and numerous conditions. The site is adjacent to the Bank's current leased branch office at 19 Maple Avenue, Shrewsbury. If the sale is completed, the Bank's plan is to relocate its 19 Maple Avenue branch to a newly constructed building located at 23/25 Maple Avenue. The Bank anticipates that it will have sufficient funds to meet these planned capital expenditures throughout 2001. At March 31, 2001, the Bank exceeded each of the applicable regulatory capital requirements. The Bank's leverage (tier 1) capital was approximately $24.1 million, or 11.30% of adjusted total average assets for the quarter. In order to be classified as "well-capitalized" by the FDIC, the Bank was required to have leverage (tier 1) capital of $10.7 million, or 5.0%. To obtain such classification, the Bank must also have a risk- based total capital ratio of 10.00% of total risk-weighted assets. At March 31, 2001, the Bank had a risk-based total capital ratio of 20.52%. Further, the Bank does not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above. PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None (b) Reports on 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Westborough Financial Services, Inc. Date: May 14, 2001 By: /s/ Joseph F. MacDonough ------------------------------------- President and Chief Executive Officer Date: May 14, 2001 By: /s/ John L. Casagrande ------------------------------------- Sr. Vice-President and Treasurer