COMPETITION
We face intense competition both in making loans and attracting deposits.
Central Massachusetts has a high concentration of financial institutions, many
of which are branches of large money center and regional banks which have
resulted from the consolidation of the banking industry in Massachusetts and
surrounding states. Some of these competitors have greater resources than we do
and may offer services that we do not provide.
Our competition for loans comes principally from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms. Our most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations and credit unions. We face
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from brokerage firms and insurance
companies. As of June 30, 1998, our market share of deposits in Westborough was
26.3%.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. Our loan portfolio primarily consists of one-
to four-family residential first mortgage loans. To a lesser degree, the loan
portfolio includes commercial real estate loans, consumer loans and commercial
loans.
At March 31, 1999, we had total loans of $88.6 million, of which $78.6
million, or 88.7%, were residential first mortgage loans. Of residential first
mortgage loans outstanding at that date, 31.0% were adjustable-rate mortgage, or
ARM loans, and 69.0% were fixed-rate loans. The remainder of our loans at March
31, 1999, amounting to $10.0 million, or 11.3% of total loans, consisted
primarily of commercial real estate and consumer loans, including home equity
credit lines. Commercial real estate loans outstanding at March 31, 1999 totaled
approximately $3.1 million, or 3.5% of total loans. Commercial loans outstanding
at March 31, 1999 totaled $2.1 million, or 2.4% of total loans. Consumer loans
outstanding at March 31, 1999 totaled approximately $1.4 million, or 1.6% of
total loans.
Our loans are subject to federal and state law and regulations. The interest
rates we charge on loans are affected principally by the demand for loans, the
supply of money available for lending purposes and the interest rates offered by
our competitors. These factors are, in turn, affected by general and local
economic conditions, monetary policies of the federal government, including the
Federal Reserve Board, legislative tax policies and governmental budgetary
matters.
48
The following table presents the composition of our loan portfolio in dollar
amounts and in percentages of the total portfolio at the dates indicated.
AT MARCH 31, AT SEPTEMBER 30,
------------------------ --------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
REAL ESTATE LOANS:
Fixed rate mortgage............................ $ 54,207 61.15% $ 47,239 55.81% $ 29,450 40.64%
Variable rate mortgage......................... 24,354 27.48 27,384 32.36 33,812 46.66
Commercial..................................... 3,084 3.48 2,743 3.24 2,915 4.02
Home equity lines of credit.................... 3,503 3.95 3,918 4.63 3,859 5.33
----------- ----------- ----------- ----------- ----------- -----------
Total real estate loans.................... 85,148 96.06 81,284 96.04 70,036 96.65
----------- ----------- ----------- ----------- ----------- -----------
CONSUMER LOANS:
Personal....................................... 666 0.75 858 1.01 1,069 1.48
Deposit secured................................ 586 0.66 676 0.80 557 0.77
Home improvement............................... 129 0.15 132 0.16 73 0.10
----------- ----------- ----------- ----------- ----------- -----------
Total consumer loans....................... 1,381 1.56 1,666 1.97 1,699 2.35
----------- ----------- ----------- ----------- ----------- -----------
COMMERCIAL LOANS:
Commercial lines of credit..................... 705 0.80 599 0.71 293 0.40
Commercial installment......................... 1,401 1.58 1,087 1.28 437 0.60
----------- ----------- ----------- ----------- ----------- -----------
Total commercial loans..................... 2,106 2.38 1,686 1.99 730 1.00
----------- ----------- ----------- ----------- ----------- -----------
Total loans...................................... 88,635 100.00% 84,636 100.00% 72,465 100.00%
----------- ----------- -----------
----------- ----------- -----------
ADJUSTED BY:
Unadvanced loan funds.......................... (1,538) (1,570) (1,177)
Net deferred loan origination costs (fees)..... 112 109 78
----------- ----------- -----------
Total loans before allowance for loan loss..... 87,209 83,175 71,366
LESS:
Allowance for loan loss........................ (857) (827) (786)
----------- ----------- -----------
Net loans.................................... $ 86,352 $ 82,348 $ 70,580
----------- ----------- -----------
----------- ----------- -----------
1996
------------------------
PERCENT
OF
AMOUNT TOTAL
----------- -----------
REAL ESTATE LOANS:
Fixed rate mortgage............................ $ 27,599 41.35%
Variable rate mortgage......................... 30,674 45.96
Commercial..................................... 3,071 4.60
Home equity lines of credit.................... 3,221 4.83
----------- -----------
Total real estate loans.................... 64,565 96.74
----------- -----------
CONSUMER LOANS:
Personal....................................... 986 1.48
Deposit secured................................ 724 1.08
Home improvement............................... 83 0.12
----------- -----------
Total consumer loans....................... 1,793 2.68
----------- -----------
COMMERCIAL LOANS:
Commercial lines of credit..................... 227 0.34
Commercial installment......................... 160 0.24
----------- -----------
Total commercial loans..................... 387 0.58
----------- -----------
Total loans...................................... 66,745 100.00%
-----------
-----------
ADJUSTED BY:
Unadvanced loan funds.......................... (878)
Net deferred loan origination costs (fees)..... 66
-----------
Total loans before allowance for loan loss..... 65,933
LESS:
Allowance for loan loss........................ (690)
-----------
Net loans.................................... $ 65,243
-----------
-----------
LOAN MATURITY AND REPRICING. The following table sets forth certain
information as of March 31, 1999, regarding the dollar amount of loans maturing
in our portfolio based on their contractual terms to maturity. Demand loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they
49
contractually mature, and fixed-rate loans are included in the period in which
the final contractual repayment is due. This table does not include prepayments
on scheduled principal amortization.
AT MARCH 31, 1999
---------------------------------------------------------------
FIRST HOME EQUITY
MORTGAGE LINES OF COMMERCIAL CONSUMER TOTAL
LOANS CREDIT LOANS LOANS LOANS
----------- ------------- ----------- ----------- ---------
(IN THOUSANDS)
AMOUNTS DUE:
Within one year..................................... $ 10,568 $ 3,336 $ 2,094 $ 738 $ 16,736
After one year:
One to three years................................ 9,733 40 765 428 10,966
Three to five years............................... 3,284 -- 810 196 4,290
Five to ten years................................. 9,399 127 1,044 19 10,589
Ten to twenty years............................... 42,988 -- 477 -- 43,465
Over twenty years................................. 1,051 -- -- -- 1,051
----------- ------ ----------- ----------- ---------
Total amount due................................ $ 77,023 $ 3,503 $ 5,190 $ 1,381 $ 87,097
----------- ------ ----------- ----------- ---------
----------- ------ ----------- ----------- ---------
LESS:
Net deferred loan origination costs............... 112
Allowance for loan losses......................... (857)
---------
---------
Loans, net...................................... $ 86,352
---------
---------
The following table presents, as of March 31, 1999, the dollar amount of all
loans due after March 31, 2000, and whether these loans have fixed interest
rates or adjustable interest rates.
DUE AFTER MARCH 31, 2000
---------------------------------
FIXED ADJUSTABLE TOTAL
--------- ----------- ---------
(IN THOUSANDS)
First mortgage loans............................................................ $ 52,430 $ 14,025 $ 66,455
Home equity lines of credit..................................................... 167 -- 167
Commercial...................................................................... 2,063 1,033 3,096
Consumer........................................................................ 643 -- 643
--------- ----------- ---------
Total loans................................................................. $ 55,303 $ 15,058 $ 70,361
--------- ----------- ---------
--------- ----------- ---------
50
The following table presents our loan originations, sales and principal
payments for the periods indicated.
FOR THE SIX MONTHS FOR THE YEAR ENDED SEPTEMBER
ENDED MARCH 31, 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
LOANS, NET:
Balance outstanding at beginning of period............... $ 82,348 $ 70,580 $ 70,580 $ 65,243 $ 57,779
ORIGINATIONS:
Mortgage loans:
Residential............................................ 18,245 11,785 32,346 25,928 19,630
Commercial............................................. 755 326 476 3,217 --
Home equity lines of credit............................ 1,554 1,382 3,397 3,187 2,173
--------- --------- --------- --------- ---------
Total mortgage originations.......................... 20,554 13,493 36,219 32,332 21,803
Commercial loans......................................... 940 526 1,438 865 334
Consumer loans........................................... 496 599 1,275 904 1,820
--------- --------- --------- --------- ---------
Total originations................................... 21,990 14,618 38,932 34,101 23,957
--------- --------- --------- --------- ---------
LESS:
Principal repayments, unadvanced funds and other, net:... (17,956) (9,775) (26,780) (28,548) (16,388)
Sale of mortgage loans, principal balance................ -- (87) (269) (120) --
Provision for loan losses................................ (25) (20) (39) (96) (105)
Net loan charge-offs..................................... (5) (1) (2) -- --
Transfers to foreclosed real estate...................... -- -- (74) -- --
--------- --------- --------- --------- ---------
Total deductions..................................... (17,986) (9,883) (27,164) (28,764) (16,493)
--------- --------- --------- --------- ---------
Net loan activity........................................ 4,004 4,735 11,768 5,337 7,464
--------- --------- --------- --------- ---------
Loans, net, end of period.............................. $ 86,352 $ 75,315 $ 82,348 $ 70,580 $ 65,243
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RESIDENTIAL MORTGAGE LOANS. Our primary lending emphasis is the origination
of first mortgage loans secured by one- to four-family properties that serve as
the primary or secondary residence of the owner. As of March 31, 1999, loans on
one- to four-family residential properties accounted for 88.7% our total loan
portfolio.
Most of our loan originations are from existing or past customers, members
of our local communities or referrals from local real estate agents, attorneys
and builders. We believe that our branch network, particularly as it expands, is
a significant source of new loan generation. We also have a call program to real
estate agents in our market area to develop referral relationships between
agents and Westborough Savings.
We currently offer loans that conform to underwriting standards specified by
FannieMae ("conforming loans") and also originate non-conforming loans, as
described below. These loans may be fixed-rate one- to four- family mortgage
loans or adjustable-rate one- to four-family mortgage loans with maturities of
between 5 and 30 years. The non-conforming loans generally follow FannieMae
guidelines except that the loan amount exceeds FannieMae guidelines' maximum
limit of $240 thousand. The average size of our first mortgage loans originated
during the six months ended March 31, 1999 and the year ended September 30, 1998
was $151 thousand and $163 thousand, respectively. The average size of our first
mortgage loans was $103 thousand at March 31, 1999. We are an approved
seller/servicer for FannieMae. From time to time, we have sold loans in the
secondary
51
market although such sales have been infrequent. The loans that we sell are all
fixed-rate mortgage loans with terms of 30 years. Such loans, however, continue
to be serviced by Westborough Savings.
Our originations of first mortgage loans amounted to $18.2 million in the
six months ended March 31, 1999, $32.3 million in fiscal year 1998, $25.9
million in fiscal year 1997 and $19.6 million in fiscal year 1996. A significant
number of our first mortgage loan originations have been the result of
refinancing of our existing loans due to the relatively low interest rate levels
over the past three years.
We offer a variety of ARMs and fixed-rate one- to four-family mortgage loans
with maximum loan-to-value ratios that depend on the type of property and the
size of loan involved. The loan-to-value ratio is the loan amount divided by the
appraised value of the property. The loan-to-value ratio is a measure commonly
used by financial institutions to determine exposure to risk. The majority of
our loans on owner-occupied one- to four-family homes are originated with a
loan-to-value ratio of 80% or less. On occasion, under limited circumstances, we
have made loans on owner-occupied one- to four-family homes with a loan-to-value
ratio of up to 95%. In such cases, the borrower is required to obtain mortgage
insurance.
We currently offer fixed-rate mortgage loans with terms of 15, 20, 25 and 30
years secured by one- to four-family residences. We price our interest rates on
fixed rate loans to be competitive in light of market conditions.
We currently offer a variety of ARM loans secured by one- to four-family
residential properties that initially adjust after one year, three years, five
years or seven years. After the initial adjustment period, ARM loans adjust on
an annual basis. The ARM loans that we currently originate have a maximum 30
year amortization period and are subject to the same loan-to-value ratios
applicable to fixed-rate mortgage loans described above. The interest rates on
ARM loans fluctuate based upon a fixed spread above the average yield on United
States treasury securities and generally are subject to a maximum increase of 2%
per adjustment period and a limitation on the aggregate adjustment of 6% over
the life of the loan. We originated $6.1 million and $11.7 million of one- to
four-family ARM loans in the six months ended March 31, 1999 and the year ended
September 30, 1998, respectively. At March 31, 1999, 27.5% of our total loans
consisted of ARM loans.
The volume and types of ARM loans we originate have been affected by the
level of market interest rates, competition, consumer preferences and the
availability of funds. During 1998, we experienced a decreased demand for ARM
loans due to the continued low interest rate environment. Although we will
continue to offer ARM loans, we cannot guarantee that we will be able to
originate a sufficient volume of ARM loans to increase or maintain the
proportion that these loans bear to our total loans.
The retention of ARM loans in our loan portfolio helps reduce our exposure
to increases in interest rates. However, ARM loans can pose credit risks
different from the risks inherent in fixed-rate loans, primarily because as
interest rates rise, the underlying payments of the borrower may rise. This
increases the potential for default.
Our home equity credit line loans, which totaled $3.5 million, or 4.0% of
total loans at March 31, 1999, are fixed and adjustable-rate loans secured by a
first or second mortgage on owner-occupied one- to four-family residences
located in our market area. Interest rates on home equity credit lines are based
upon the "prime rate" as published in the "Money Rates" section of the WALL
STREET JOURNAL (the "index") with a minimum monthly principal payment of
one-half of 1% of the outstanding principal balance of the loan. The maximum
credit line available is equal to the lesser of $100 thousand and 80% of
Westborough Savings' appraisal of the property or 50% of the tax assessment on
the property, in each case less the first mortgage balance. Such loans also have
a maximum term of 15 years. The underwriting standards applicable to these loans
generally are the same as one- to four-family first
52
mortgage loans, except that the combined loan-to-value ratio, including the
balance of the first mortgage, cannot exceed 80% of the appraised value of the
property.
In conjunction with our residential mortgage lending, we offer construction
loans to the future occupants of single family homes. At March 31, 1999, $2.0
million, or 2.3% of our total loan portfolio consisted of gross residential
construction loans. Unadvanced funds on these loans amounted to $479 thousand at
March 31, 1999, resulting in a net balance of $1.5 million. These loans
typically have a term of twelve months and are structured to become permanent
loans upon the completion of construction. All such loans are secured by first
liens on the property and are subject to a maximum loan-to-value ratio of 80%,
which is based upon the anticipated value of the property. During the
construction period, the interest rate for construction loans to individuals is
50 basis points below the index. Loans involving construction financing present
a greater risk than loans for the purchase of existing homes since collateral
values and construction costs can only be estimated at the time the loan is
approved.
COMMERCIAL REAL ESTATE LOANS. Origination of loans secured by commercial
real estate is a growing area of lending for Westborough Savings. At March 31,
1999, commercial real estate mortgage loans totaled $3.1 million, or 3.5% of
total loans. These loans are generally secured by office buildings,
condominiums, retail establishments and churches located within our market area.
Our commercial real estate loans are offered on a fixed- and adjustable-rate
basis. Typical terms for such loans provide for a maximum seven-year repricing
term with a 20 year amortization and a balloon payment in five to seven years,
and an interest rate based upon the index. Loans on commercial properties are
also subject to a maximum loan-to-value ratio of 80% for the acquisition of the
property and 75% for refinancing of the property.
Pursuant to our underwriting standards, a number of factors are considered
before a commercial real estate loan is made. We evaluate qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property.
Factors that we consider in evaluating the underlying property include the net
operating income of the mortgaged property before debt service and depreciation,
the debt service coverage ratio (the ratio of operating income to debt service)
and, as noted above, the ratio of the loan amount to the appraised value of the
property.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Such loans typically involve large balances to single borrowers
or groups of related borrowers. Because payments on loans secured by commercial
real estate properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the
project decreases, or if leases are not obtained or renewed, the borrower's
ability to repay the loan may be impaired.
Our real estate loan portfolio also includes construction loans to builders
and developers of residential properties within our market area. At March 31,
1999, $2.1 million, or 2.4% of our total loan portfolio, consisted of gross
commercial construction loans. Unadvanced funds on these loans amounted to $1.1
million at March 31, 1999, resulting in a net balance of $1.0 million.
Construction loans to builders typically are in amounts equal to 70% of the
value of the property upon completion. Construction loans generally have twelve
month terms with a floating interest rate based upon the index. In addition to
securing the loan with the property under construction, we generally obtain
personal guarantees from the borrower. The proceeds of such loans are disbursed
after certification by in-house personnel that specified stages of construction
have been completed.
Construction lending is generally considered to carry a higher level of risk
than permanent mortgage financing because of the uncertainty of the value of the
collateral upon completion.
53
Repayment of such loans are also dependent upon the successful completion of the
project and can be adversely affected by market conditions and other factors not
within the control of Westborough Savings or the borrower. We seek to control
such risks by tying the amount of the loan advanced to the completion of
construction and monitoring subcontractors to ensure that loan proceeds are
applied appropriately.
CONSUMER LOANS. At March 31, 1999, $1.4 million, or 1.6% of our total
loans, consisted of consumer loans such as personal, deposit secured and
fixed-rate home improvement loans. Consumer loans generally have shorter terms
to maturity, which reduces our exposure to changes in interest rates. Consumer
loans also carry higher rates of interest than do one- to four-family
residential mortgage loans. In addition, we believe that offering consumer loan
products helps to expand and create stronger ties to our existing customer base
by increasing the number of customer relationships and providing cross-marketing
opportunities.
Our personal loans consist of unsecured loans to individuals and secured
loans for the purchase of new and used automobiles. Our unsecured loans have a
maximum term of 48 months. The terms of our automobile loans generally are
determined by the age and condition of the vehicle. At March 31, 1999, our
personal loans totaled $666 thousand, or 0.75% of total loans.
We also make loans secured by deposit accounts up to 90% of the amount of
the depositor's savings account balance. The rate for such loans is 2.0% higher
than the rate paid on regular savings accounts and 3.0% higher than the rate
paid on term deposits. Deposit secured loans totaled $586 thousand, or 0.66% of
total loans at March 31, 1999.
We offer fixed-rate home improvement loans in amounts equal to that
available for home equity credit line loans as discussed above. These loans are
secured by owner-occupied one- to four-family residences for terms of up to 10
years. At March 31, 1999, these loans totaled $129 thousand, or 0.15% of total
loans. Interest rates on fixed-rate home improvement loans are periodically set
by our Loan Committee, consisting of our President, Treasurer and Senior Loan
Officer, after consultation with the Board of Investment and are based on market
conditions. The underwriting terms and procedures applicable to these loans are
substantially the same as for our home equity credit line loans.
COMMERCIAL LOANS. Westborough Savings recently has made a commitment to
small business lending by developing certain products and services for the small
and medium sized businesses located in our market area. Such services are
designed to give business owners borrowing opportunities for, among other
things, modernization, inventory, equipment, consolidation and working capital.
In addition, we have tailored certain products and services, such as our
business checking accounts and treasury and tax loan service, to better serve
the needs of local businesses. We have also become an approved lender of the
Small Business Administration. At March 31, 1999, $2.1 million, or 2.4%, of our
total loans consisted of commercial loans. We expect that commercial loans will
comprise a growing portion of our total loan portfolio in the future.
Commercial loans generally are limited to terms of five years or less.
Substantially all commercial loans have variable interest rates tied to the
prime rate. Whenever possible, we collateralize these loans with a lien on
commercial real estate or alternatively, with a lien on business assets and
equipment and the personal guarantees of the borrower's principal officers.
Our commercial services are administered by our loan department. Recently,
we hired an experienced commercial loan officer with considerable commercial
lending expertise, including 13 years of banking experience in Massachusetts and
personal ties to Westborough. We also intend to add additional qualified
employees as market conditions warrant.
Commercial loans generally are considered to involve a higher degree of risk
than residential mortgage loans because the primary collateral may be in the
form of intangible assets and/or inventory subject to market obsolescence.
Commercial loans also may involve relatively large loan balances to
54
single borrowers or groups of related borrowers, with the repayment of such
loans typically dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, commercial lending ordinarily requires substantially greater oversight
efforts compared to residential real estate lending. To minimize these risks, we
conduct periodic reviews of the commercial loan portfolio to ensure adherence to
underwriting standards and policy requirements.
LOAN APPROVAL PROCEDURES AND AUTHORITY. Our lending policies provide that
our Loan Committee has authority to approve one- to four-family mortgage loans
in amounts up to $250 thousand. One- to four-family mortgage loans in excess of
$250 thousand require the approval of our Board of Investment. Commercial real
estate loans in amounts up to $300 thousand must be approved by the Loan
Committee. All other commercial real estate loans must be approved by the Board
of Investment. Commercial and consumer loans in amounts up to $100 thousand may
be approved by our President, Treasurer or Senior Loan Officer. Together, these
individuals also may approve commercial and consumer loans in amounts up to $300
thousand.
The following generally describes our current lending procedures. Upon
receipt of a completed loan application from a prospective borrower, we order a
credit report and verify certain other information. If necessary, we obtain
additional financial or credit related information. We require an appraisal for
all mortgage loans, except for some loans made to refinance existing mortgage
loans. Appraisals are performed by a licensed or certified third-party appraisal
firms and are reviewed by our lending department. We require title insurance on
all mortgage loans, except for home equity credit lines and fixed-rate home
improvement loans. For these loans, we require evidence of previous title
insurance. We require borrowers to obtain hazard insurance and we may require
borrowers to obtain flood insurance prior to closing. For properties with a
private sewage disposal system, we also require evidence of compliance with
applicable law. Further, we require borrowers to advance funds on a monthly
basis together with each payment of principal and interest to a mortgage escrow
account from which we make disbursements for items such as real estate taxes,
flood insurance and private mortgage insurance premiums, if required.
ASSET QUALITY
One of our key operating objectives has been and continues to be to maintain
a high level of asset quality. Our concentration on one- to four-family mortgage
lending, our maintenance of sound credit standards for new loan originations and
relatively favorable economic and real estate market conditions have resulted in
historically low delinquency ratios and, in recent years, a low level of
non-performing assets. These factors have helped strengthen our financial
condition.
DELINQUENT LOANS AND FORECLOSED ASSETS. Management and the Loan Committee
perform a monthly review of all delinquent loans. One of the primary tools we
use to manage and control problem loans is our "Watch List." This list
identifies all of the loans or commitments that are considered to have
characteristics that could result in loss to us if not properly supervised. The
list is managed by the Loan Committee which, together with the Board of
Investment, meets periodically to discuss the status of the loans on the Watch
List and to add or delete loans from the list. At March 31, 1999, we had no
loans more than 90 days past due and had $279 thousand and $431 thousand in
assets classified as pass and substandard, respectively. No assets were
classified as special mention, doubtful or loss.
Westborough Savings had no non-performing assets at March 31, 1999 and 1998.
55
The following table presents information regarding non-accrual mortgage and
consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated. At March 31, 1999 and
September 30, 1998, 1997, and 1996, we have no non-accrual loans.
AT MARCH 31, AT SEPTEMBER 30,
------------- -------------------------------
1999 1998 1997 1996
------------- --------- --------- ---------
(IN THOUSANDS)
Non-accrual first mortgage loans............................................. $ -- $ -- $ -- $ --
Non-accrual consumer and other loans......................................... -- -- -- --
Accruing loans delinquent 90 days or more.................................... -- 55 -- 9
------------- --------- --- ---------
Total non-performing and delinquent loans.................................... -- 55 -- 9
Foreclosed real estate, net.................................................. -- 74 19 144
------------- --------- --- ---------
Total non-performing assets and delinquent loans............................. $ -0- $ 129 $ 19 $ 153
------------- --------- --- ---------
------------- --------- --- ---------
Non-performing and delinquent loans to total loans........................... -- 0.06% -- 0.01%
Non-performing assets and delinquent loans to total assets................... -- 0.08% 0.01% 0.11%
At March 31, 1999, we were aware of seven loans in an aggregate amount of
$710 thousand that are not currently classified as nonaccrual or 90 days past
due but which may be so classified in the near future because of concerns over
the borrowers' ability to comply with repayment terms.
Loans are placed on nonaccrual status when they are 90 days past due or, in
the opinion of management, the collection of principal and interest is doubtful.
When we designate loans as non-accrual loans, we reverse outstanding interest
that we previously credited. We may recognize income in the period that we
collect it when the ultimate collectibility of principal is no longer in doubt.
We return a non-accrual loan to accrual status when none of its principal or
interest is due and unpaid or when it otherwise becomes well secured and in the
process of collection.
Impaired loans generally are individually assessed to determine whether a
loan's carrying value is not in excess of the fair value of the collateral or
the present value of the loan's cash flows. Groups of smaller balance loans,
however, are collectively evaluated for impairment. Accordingly, Westborough
Savings does not separately identify individual consumer loans for impairment
disclosures. We had no loans classified as impaired at March 31, 1999 and $269
thousand and $352 thousand loans classified as impaired at September 30, 1998
and September 30 1997, respectively. In addition at September 30, 1998 and 1997,
we had no loans classified as troubled debt restructurings, as defined in SFAS
No. 15.
Foreclosed real estate consists of property we acquired through foreclosure
or deed in lieu of foreclosure. Foreclosed real estate properties are initially
recorded at the lower of the investment in the loan or fair value. Thereafter,
we carry foreclosed real estate at fair value less estimated selling costs, net
of a valuation allowance account established through provisions charged to
income, which result from the ongoing periodic valuations of foreclosed real
estate properties.
56
ALLOWANCE FOR LOAN LOSSES. The following table presents the activity in our
allowance for loan losses at or for the periods indicated.
AT OR FOR THE SIX
MONTHS AT OR FOR
ENDED MARCH 31, THE YEAR ENDED SEPTEMBER 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Balance at beginning of period............................... $ 827 $ 786 $ 786 $ 690 $ 585
--------- --------- --------- --------- ---------
Provision for loan losses.................................... 25 20 39 96 105
--------- --------- --------- --------- ---------
Charge-offs:
Mortgage loans............................................. -- -- -- -- --
Commercial loans........................................... -- -- -- -- --
Consumer loans............................................. (6) -- -- (2) (8)
--------- --------- --------- --------- ---------
Total charge-offs........................................ (6) -- -- (2) (8)
Recoveries................................................... 11 1 2 2 8
--------- --------- --------- --------- ---------
Balance at end of period..................................... $ 857 $ 807 $ 827 $ 786 $ 690
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs to average loans outstanding during
the period(1).............................................. (0.012)% (0.003)% (0.003)% 0.000% 0.000%
Allowance for loan losses as a percent of total loans before
the allowance for loan losses.............................. 0.98% 1.06% 0.99% 1.10% 1.05%
Allowance for loan losses as a percent of non-performing
loans...................................................... -- -- -- -- --
(1) Ratio is annualized for the six month periods.
The allowance for loan losses is a valuation account that reflects our
evaluation of the losses inherent in our loan portfolio. We maintain the
allowance through provisions for loan losses that we charge to income. We charge
losses on loans against the allowance for loan losses when we believe the
collection of loan principal is unlikely.
We establish the provision for loan losses after considering the results of
our review of delinquency and charge-off trends, the amount of the allowance for
loan losses in relation to the total loan balance, loan portfolio growth by type
of loan, generally accepted accounting principles and regulatory guidance. We
have applied this process consistently, and we have made minimal changes in the
assumptions used.
As part of our analysis, each month we prepare an allowance for loan loss
worksheet. This worksheet categorizes the entire loan portfolio by certain risk
characteristics such as loan type, guarantees associated with a group of loans
and payment status. Loans with known potential losses are categorized
separately. We assign potential loss factors to the categories on the basis of
our assessment of each category's status and the potential risk inherent in that
type of lending. We use this worksheet, together with loan portfolio balances
and delinquency reports, to evaluate the adequacy of the allowance for loan
losses. Other key factors we consider in this process are national, state and
local economic considerations, history of loan loss experience for major
credits, trends in charge-off recovery, past and current trends in delinquency,
trends in watch list activity, and trends in loan concentration.
Although we believe that we have established and maintained the allowance
for loan losses at adequate levels, future additions may be necessary if
economic and other conditions in the future differ substantially from the
current operating environment.
57
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our loan and foreclosed real estate
portfolios and the related allowance for loan losses and valuation allowance for
foreclosed real estate. These agencies, including the FDIC and the Massachusetts
Division of Banks, may require us to increase the allowance for loan losses or
the valuation allowance for foreclosed real estate based on their judgments of
information available to them at the time of their examination, thereby
adversely affecting our results of operations.
The following table presents our allocation of the allowance for loan losses
by loan category and the percentage of loans in each category to total loans at
the dates indicated.
AT
MARCH 31, AT SEPTEMBER 30,
------------------------------------------------------ ------------------------------------------------------
1999 1998 1998 1997
-------------------------- -------------------------- -------------------------- --------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
LOAN CATEGORY AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------------------- ----------- ------------- ----------- ------------- ----------- ------------- ----------- -------------
(IN THOUSANDS)
Real estate--
mortgage:
Residential(1).... $ 279 92.58% $ 281 92.40% $ 309 92.80% $ 253 92.63%
Commercial........ 208 3.48 190 4.00 184 3.24 289 4.02
Commercial loans
(2)............... 124 2.38 52 1.27 103 1.99 39 1.00
Consumer............ 17 1.56 25 2.33 24 1.97 27 2.35
Unallocated......... 229 -- 259 -- 207 -- 178 --
----- ------ ----- ------ ----- ------ ----- ------
Total allowance
for loan
losses........ $ 857 100.00% $ 807 100.00% $ 827 100.00% $ 786 100.00%
----- ------ ----- ------ ----- ------ ----- ------
----- ------ ----- ------ ----- ------ ----- ------
1996
--------------------------
PERCENT OF
LOANS IN
CATEGORY TO
LOAN CATEGORY AMOUNT TOTAL LOANS
-------------------- ----------- -------------
Real estate--
mortgage:
Residential(1).... $ 265 92.14%
Commercial........ 272 4.60
Commercial loans
(2)............... -- 0.58
Consumer............ 50 2.68
Unallocated......... 103 --
----- ------
Total allowance
for loan
losses........ $ 690 100.00%
----- ------
----- ------
(1) Includes home equity lines of credit and construction loans.
(2) Prior to September 30, 1997, the allowance for loan losses for commercial
loans was included in consumer loans.
58
INVESTMENT ACTIVITIES
The Board of Trustees reviews and approves our investment policy on an
annual basis. The President and Treasurer, as authorized by the Board, implement
this policy. Management reports securities transactions to the Board of
Investment for review and approval on a monthly basis.
Our investment policy is designed primarily to manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our lending
activities and to provide and maintain liquidity within established guidelines.
In establishing our investment strategies, we consider our interest rate
sensitivity, the types of securities to be held, liquidity and other factors.
Massachusetts chartered savings banks have authority to invest in various types
of assets, including U.S. Treasury obligations, securities of various federal
agencies, mortgage-backed securities, certain certificates of deposit of insured
banks and savings institutions, certain bankers' acceptances, repurchase
agreements, loans of federal funds, and, subject to certain limits, corporate
debt and equity securities, commercial paper and mutual funds.
As part of our investment strategy, we also engage in a "covered call"
program in which we write options on securities we hold. The sale of a covered
call conveys the right, but not the obligation, to the buyer to buy a particular
security held by us at a particular price up to a certain expiration date. The
sale is "covered" because we hold the security in our portfolio. Under this
program, we write options only on publicly traded securities we own. However, we
are willing to have the securities called if an option is written and exercised.
At March 31, 1999 and September 30, 1998, our liquidity ratio was 78.13% and
90.05%, respectively. For information regarding the carrying values, yields and
maturities of our investment securities and mortgage-backed securities, see
"--Carrying Values, Yields and Maturities."
At March 31, 1999, our U.S. Government and federal agency securities
portfolio totaled $20.9 million. This portfolio consists primarily of securities
with maturities of one to five years. Our agency debentures are callable on a
semi-annual basis following a holding period of twelve months. We generally do
not purchase structured notes, and at March 31, 1999, there were no structured
notes in our portfolio.
At March 31, 1999, our portfolio of other debt obligations totaled $19.8
million. Our policy generally requires that investment in corporate debt
obligations be limited to corporate bonds with an "A" rating or better by at
least one nationally recognized rating service at the time of purchase.
The fair market value of our marketable equity securities portfolio totaled
$8.0 million at March 31, 1999. These securities consisted of $4.6 million of
common stock, $208 thousand of preferred stock and $3.2 million of rated trust
preferred securities issued by financial institutions. Under our investment
policy, the aggregate amount of marketable equitable securities that we may
purchase may not exceed 10% of our total investment portfolio. Our policy also
has limitations against acquiring concentrations of such securities in any one
issuer or industry. We purchase marketable equity securities as growth
investments that can provide the opportunity for capital appreciation that is
taxed on a more favorable basis than operating income. There can be no assurance
that investment in marketable equity securities will appreciate in value and,
therefore, such investments involve higher risk than U.S. Government or federal
agency securities. Aggregate purchases of marketable equity securities totaled
$5.1 million for the six months ended March 31, 1999 and $3.9 million and $276
thousand for the years ended September 30, 1998 and 1997. At March 31, 1999,
pre-tax net unrealized gains on marketable equity securities amounted to $654
thousand.
Unless otherwise noted with respect to certain securities or required by
regulators or accounting standards, we classify securities available for sale at
the date of purchase. Available for sale securities are reported at fair market
value. We currently have no securities classified as trading. During fiscal
59
year 1998 and during the six months ended March 31, 1999, we sold investment
securities in the aggregate amounts of $17.9 million and $3.3 million,
respectively.
At March 31, 1999, our mortgage-backed securities, all of which were
classified as available for sale, totaled $13.6 million, or 8.1% of total
assets. We generally purchase mortgage-backed securities as a means to deploy
excess liquidity at more favorable yields than other investment alternatives. In
addition, mortgage-backed securities generate positive interest rate spreads
with minimal administrative expense and lower our overall credit risk due to the
fact that they are directly or indirectly insured or guaranteed.
At March 31, 1999, the mortgage-backed securities portfolio had a weighted
average yield of 6.29% and a market value of $13.6 million. Purchases of
mortgage-backed securities may decline in the future if we experience an
increase in demand for one- to four-family mortgage loans. We did not sell any
of our mortgage-backed securities during fiscal year 1998 or during the six
months ended March 31, 1999.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit enhancements
that reduce credit risk. However, mortgage-backed securities are more liquid
than individual mortgage loans and may be used to collateralize our borrowings.
In general, mortgage-backed securities issued or guaranteed by GNMA, FannieMae
and FreddieMac are weighted at no more than 20% for risk-based capital purposes,
compared to the 50% risk weighting assigned to most non-securitized residential
mortgage loans.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, they remain subject to the risk of a fluctuating interest rate
environment. Along with other factors, such as the geographic distribution of
the underlying mortgage loans, changes in interest rates may alter the
prepayment rate of those mortgage loans and affect both the prepayment rates and
value of mortgage-backed securities.
During the year ended September 30, 1997, we established a private
charitable foundation to provide grants to charitable organizations in the
Westborough area. The foundation is not a subsidiary of Westborough Savings, but
was funded by a donation from Westborough Savings of marketable equity
securities. These securities had a cost basis and fair value of $21 thousand and
$110 thousand, respectively, at the date of transfer. Such securities had been
classified as available for sale and, accordingly the transfer resulted in
Westborough Savings recognizing the unrealized appreciation of the securities of
$89 thousand in its consolidated statement of income.
The following table presents activity in our investment securities portfolio
(including Federal Home Loan Bank stock) for the periods indicated:
FOR THE SIX FOR THE YEAR ENDED SEPTEMBER
MONTHS ENDED 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Beginning balance....................................................... $ 60,107 $ 61,654 $ 61,654 $ 62,743 $ 57,371
Purchases............................................................. 14,302 10,407 20,880 12,517 28,705
Maturities............................................................ (4,000) (1,549) (1,250) (3,520) (3,550)
Sales and calls....................................................... (3,348) (5,275) (17,886) (7,653) (16,118)
Principal repayments.................................................. (2,305) (1,781) (4,214) (2,777) (3,300)
Premium and discount amortization, net................................ (47) (51) (88) (93) (200)
Charitable contributions in the form of equity securities............. -- -- -- (110) --
Recognition of expired options........................................ 187 -- -- -- --
Change in net unrealized gains........................................ (929) 211 1,011 547 (165)
--------- --------- --------- --------- ---------
Ending balance.......................................................... $ 63,967 $ 63,616 $ 60,107 $ 61,654 $ 62,743
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
60
The following table sets forth certain information regarding the amortized
cost and fair value of our securities at the dates indicated.
AT MARCH 31, AT SEPTEMBER 30,
---------------------- ----------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS)
Debt securities:
U. S. Government obligations...................... $ 12,089 $ 12,347 $ 13,091 $ 13,579 $ 22,661 $ 22,867
Federal agency obligations........................ 8,506 8,513 9,504 9,660 10,428 10,427
Banking and finance obligations................... 5,531 5,525 5,534 5,624 4,539 4,564
Other bonds and obligations....................... 14,224 14,306 13,412 13,762 10,518 10,588
----------- --------- ----------- --------- ----------- ---------
Total debt securities......................... 40,350 40,691 41,541 42,625 48,146 48,446
----------- --------- ----------- --------- ----------- ---------
Mortgage-backed and mortgage-related securities:
FHLMC............................................. 1,582 1,598 2,079 2,139 3,233 3,234
FNMA.............................................. 5,781 5,773 4,021 4,063 2,912 2,889
GNMA.............................................. 3,292 3,277 4,185 4,192 4,044 4,077
Other............................................. 3,013 2,990 1,190 1,219 306 307
----------- --------- ----------- --------- ----------- ---------
Total mortgage-backed and mortgage-related
securities.................................. 13,668 13,638 11,475 11,613 10,495 10,507
----------- --------- ----------- --------- ----------- ---------
Asset-backed securities........................... 851 853 -- -- 243 330
Marketable equity securities...................... 7,369 8,023 4,433 5,107 1,168 1,654
Federal Home Loan Bank stock...................... 762 762 762 762 717 717
----------- --------- ----------- --------- ----------- ---------
Total securities.............................. $ 63,000 $ 63,967 $ 58,211 $ 60,107 $ 60,769 $ 61,654
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
1996
----------------------
AMORTIZED FAIR
COST VALUE
----------- ---------
Debt securities:
U. S. Government obligations...................... $ 22,211 $ 22,196
Federal agency obligations........................ 10,407 10,335
Banking and finance obligations................... 3,289 3,293
Other bonds and obligations....................... 12,362 12,278
----------- ---------
Total debt securities......................... 48,269 48,102
----------- ---------
Mortgage-backed and mortgage-related securities:
FHLMC............................................. 3,916 3,843
FNMA.............................................. 3,697 3,661
GNMA.............................................. 3,477 3,462
Other............................................. 353 359
----------- ---------
Total mortgage-backed and mortgage-related
securities.................................. 11,443 11,325
----------- ---------
Asset-backed securities........................... 911 1,012
Marketable equity securities...................... 1,139 1,661
Federal Home Loan Bank stock...................... 643 643
----------- ---------
Total securities.............................. $ 62,405 $ 62,743
----------- ---------
----------- ---------
The following table sets forth the amortized cost and fair value of our
mortgage-backed and mortgage-related securities, all of which were classified as
available for sale at the dates indicated.
AT MARCH 31, AT SEPTEMBER 30,
----------------------------------- -------------------------------------------------------------
1999 1998 1997
----------------------------------- ----------------------------------- ------------------------
PERCENT PERCENT PERCENT
AMORTIZED OF FAIR AMORTIZED OF FAIR AMORTIZED OF
COST TOTAL(1) VALUE COST TOTAL(1) VALUE COST TOTAL(1)
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
Mortgage-backed and
mortgage-related
securities:
FHLMC............... $ 1,582 11.57% $ 1,598 $ 2,079 18.12% $ 2,139 $ 3,233 30.80%
FNMA................ 5,781 42.30 5,773 4,021 35.04 4,063 2,912 27.75
GNMA................ 3,292 24.09 3,277 4,185 36.47 4,192 4,044 38.53
Other............... 3,013 22.04 2,990 1,190 10.37 1,219 306 2.92
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
Total mortgage-backed
and mortgage related
securities.......... $ 13,668 100.00% $ 13,638 $ 11,475 100.00% $ 11,613 $ 10,495 100.00%
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1996
-----------------------------------
PERCENT
FAIR AMORTIZED OF FAIR
VALUE COST TOTAL(1) VALUE
--------- ----------- ----------- ---------
Mortgage-backed and
mortgage-related
securities:
FHLMC............... $ 3,234 $ 3,916 34.22% $ 3,843
FNMA................ 2,889 3,697 32.31 3,661
GNMA................ 4,077 3,477 30.39 3,462
Other............... 307 353 3.08 359
--------- ----------- ----------- ---------
Total mortgage-backed
and mortgage related
securities.......... $ 10,507 $ 11,443 100.00% $ 11,325
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
(1) Based on amortized cost.
CARRYING VALUES, YIELDS AND MATURITIES. The table below presents
information regarding the carrying values, weighted average yields and
contractual maturities of our investment securities and
61
mortgage-backed securities at March 31, 1999. Mortgage-backed securities are
presented by issuer. Yields on tax exempt obligations were not computed on a tax
equivalent basis.
AT MARCH 31, 1999
-----------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
MORE THAN
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS TEN YEARS
------------------------ ------------------------ ------------------------ -----------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Debt securities:
U.S. Government obligations........ $ 2,041 6.59% $ 10,306 6.29% $ -- --% $ --
Federal agency obligations......... -- -- 4,544 6.62 3,969 6.21 --
Banking and finance obligations.... 1,509 6.24 3,531 6.30 485 6.01 --
Other bonds and obligations........ 2,263 6.35 9,242 6.49 937 4.95 1,864
----------- ----------- ----------- -----------
Total debt securities.............. 5,813 6.41 27,623 6.41 5,391 5.97 1,864
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Mortgage-backed and mortgage related
securities:
FHLMC.............................. 96 7.62 480 6.34 -- -- 1,022
FNMA............................... -- -- 835 6.45 274 6 4,664
GNMA............................... -- -- -- -- -- -- 3,277
Other.............................. -- -- -- -- -- -- 2,990
----------- ----------- ----------- -----------
Total mortgage backed and
mortgage related
securities:.................. 96 7.62 1,315 6.41 274 6 11,953
----------- ----------- ----------- -----------
Asset-backed securities............ -- -- -- -- 853 5.47 --
Marketable equity securities....... 8,023 -- -- -- -- -- --
Federal Home Loan Bank stock....... 762 -- -- -- -- -- --
----------- ----------- ----------- -----------
Total securities............... $ 14,694 6.43% $ 28,938 6.41% $ 6,518 5.91% $ 13,817
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL
------------------------
WEIGHTED WEIGHTED
AVERAGE CARRYING AVERAGE
YIELD AMOUNT YIELD
----------- ----------- -----------
Debt securities:
U.S. Government obligations........ --% $ 12,347 6.34%
Federal agency obligations......... -- 8,513 6.43
Banking and finance obligations.... -- 5,525 6.26
Other bonds and obligations........ 5.86 14,306 6.28
-----------
Total debt securities.............. 5.86 40,691 6.33
-----------
-----------
Mortgage-backed and mortgage related
securities:
FHLMC.............................. 6.56 1,598 6.56
FNMA............................... 6.32 5,773 6.32
GNMA............................... 5.96 3,277 5.96
Other.............................. 6.45 2,990 6.45
-----------
Total mortgage backed and
mortgage related
securities:.................. 6.27 13,638 6.29
-----------
Asset-backed securities............ -- 853 5.47
Marketable equity securities....... -- 8,023 4.23
Federal Home Loan Bank stock....... -- 762 3.15
-----------
Total securities............... 6.22% $ 63,967 6.01%
-----------
-----------
62
SOURCES OF FUNDS
GENERAL. Deposits, scheduled amortization and prepayments of loan principal
and mortgage-backed securities, maturities and calls of investments securities
and funds provided by operations are our primary sources of funds for use in
lending, investing and for other general purposes. We also utilize borrowed
funds from the Federal Home Loan Bank of Boston to fund certain loans in
connection with our management of the interest rate sensitivity of our assets
and liabilities, as well as for other general purposes.
DEPOSITS. We offer a variety of deposit accounts having a range of interest
rates and terms. We currently offer regular savings deposits, NOW accounts,
personal and business demand accounts, money market accounts and certificates of
deposit. We also offer Individual Retirement Accounts ("IRAs"), which at March
31, 1999 totaled $9.8 million.
Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from areas surrounding our
offices, and we rely primarily on paying competitive rates, service and
long-standing relationships with customers to attract and retain these deposits.
We also have developed deposit products to attract and retain individual and
commercial depositors. One such product is a tiered-rate savings account in
which deposits over certain amounts earn interest at higher rates. Other
programs involve the introduction of commercial deposit products tailored to
small and medium sized businesses, such as our business and commercial checking
accounts. We do not use brokers to obtain deposits.
When we determine our deposit rates, we consider local competition, U.S.
Treasury securities offerings and the rates charged on other sources of funds.
Core deposits (defined as regular savings deposits, NOW accounts, money market
accounts and demand accounts) represented 66.06% of total deposits on March 31,
1999. At March 31, 1999, certificates of deposit with remaining terms to
maturity of less than one year amounted to $39.3 million. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Analysis of Net Interest Income" for information relating to the
average balances and costs of our deposit accounts for the six months ended
March 31, 1999 and 1998 and for the years ended September 30, 1998 and 1997.
The following table presents our deposit activity for the periods indicated.
FOR THE SIX
MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------
1999 1998 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Beginning balance.................................... $ 135,962 $ 125,170 $ 125,170 $ 120,282 $ 109,549
Net deposits......................................... 4,679 2,926 6,321 710 6,824
Interest credited on deposit accounts................ 2,330 2,230 4,471 4,178 3,909
---------- ---------- ---------- ---------- ----------
Ending balance....................................... $ 142,971 $ 130,326 $ 135,962 $ 125,170 $ 120,282
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total increase in deposit accounts................... $ 7,009 $ 5,156 $ 10,792 $ 4,888 $ 10,733
Percentage increase.................................. 5.16% 4.12% 8.62% 4.06% 9.80%
63
At March 31, 1999, we had $9.8 million in certificates of deposit with
balances of $100,000 and over maturing as follows:
WEIGHTED
AVERAGE
AMOUNT RATE
--------- -----------
(IN THOUSANDS)
Maturity Period:
Three months or less.................................................... $ 2,228 4.87%
Over three months through six months.................................... 3,184 5.06
Over six months through 12 months....................................... 2,686 5.08
Over 12 months.......................................................... 1,749 5.51
--------- ---
Total..................................................................... $ 9,847 5.10%
--------- ---
--------- ---
64
The following table presents the distribution of our deposit accounts at the
dates indicated by dollar amount and percent of portfolio, and the weighted
average interest rate on each category of deposits.
AT MARCH 31, AT SEPTEMBER 30,
------------------------------------- ------------------------------------------------
1999 1998 1997
------------------------------------- ------------------------------------- ---------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT
--------- ----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS)
Non-interest bearing accounts.... $ 10,261 7.18% --% $ 8,592 6.32% --% $ 6,910
Now accounts..................... 13,527 9.46 0.50 15,221 11.19 0.50 11,310
Savings accounts:
Regular........................ 28,128 19.67 2.60 28,239 20.77 2.60 31,001
Tiered rate.................... 35,615 24.91 4.11 29,733 21.87 4.33 20,729
--------- ----------- --- --------- ----------- --- ---------
Total savings accounts....... 63,743 44.58 3.44 57,972 42.64 3.49 51,730
Money market deposit accounts.... 6,916 4.84 2.95 7,218 5.31 2.95 9,003
--------- ----------- --- --------- ----------- --- ---------
Total non-certificate
accounts................... 94,447 66.06 2.61 89,003 65.46 2.60 78,953
--------- ----------- --- --------- ----------- --- ---------
Certificates of deposit
Due within 1 year.............. 39,250 27.45% 4.96 37,005 27.22 5.06 37,119
Over 1 year through 3 years.... 9,262 6.48 5.31 9,954 7.32 5.45 9,094
Over 3 years................... 12 0.01 5.12 -- -- -- 4
--------- ----------- --- --------- ----------- --- ---------
Total certificate accounts... 48,524 33.94 5.03 46,959 34.54 5.14 46,217
--------- ----------- --- --------- ----------- --- ---------
Total deposits............... $ 142,971 100.00% 3.43% $ 135,962 100.00% 3.48% $ 125,170
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
1996
-------------------------------------
WEIGHTED WEIGHTED
PERCENT OF AVERAGE PERCENT AVERAGE
TOTAL NOMINAL OF TOTAL NOMINAL
DEPOSITS RATE AMOUNT DEPOSITS RATE
----------- ------------- --------- ----------- -------------
Non-interest bearing accounts.... 5.52% --% $ 6,941 5.77% --%
Now accounts..................... 9.04 1.01 11,604 9.65 1.10
Savings accounts:
Regular........................ 24.77 2.60 34,423 28.62 2.60
Tiered rate.................... 16.56 4.47 8,126 6.75 4.56
----------- --- --------- ----------- ---
Total savings accounts....... 41.33 3.35 42.549 35.37 2.97
Money market deposit accounts.... 7.19 2.95 11,140 9.26 2.95
----------- --- --------- ----------- ---
Total non-certificate
accounts................... 63.08 2.68 72,234 60.05 2.38
----------- --- --------- ----------- ---
Certificates of deposit
Due within 1 year.............. 29.65 5.24 39,811 33.10 5.11
Over 1 year through 3 years.... 7.27 5.40 8,192 6.81 5.88
Over 3 years................... -- 5.50 45 0.04 5.35
----------- --- --------- ----------- ---
Total certificate accounts... 36.92 5.27 48,048 39.95 5.24
----------- --- --------- ----------- ---
Total deposits............... 100.00% 3.63% $ 120,282 100.00% 3.52%
----------- --------- -----------
----------- --------- -----------
65
BORROWINGS. We borrow funds from the Federal Home Loan Bank of Boston for
use in connection with our management of the interest rate sensitivity of our
assets and liabilities, as well as for other general purposes. These advances
are collateralized by certain of our mortgage loans and by our investment in the
stock of the Federal Home Loan Bank. The maximum amount that the Federal Home
Loan Bank will advance to its members, including Westborough Savings, fluctuates
from time to time in accordance with the Federal Home Loan Bank's policies. At
March 31, 1999, Westborough Savings had $4.0 million in outstanding advances
from the Federal Home Loan Bank and had the capacity to increase that amount to
$81.3 million based on the Westborough Savings' available qualified collateral.
We expect to continue to borrow from the Federal Home Loan Bank of Boston.
The following table presents certain information regarding our borrowed
funds at or for the periods ended on the dates indicated.
AT OR FOR THE SIX
MONTHS AT OR FOR THE
ENDED MARCH 31, YEAR ENDED SEPTEMBER 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Federal Home Loan Bank advances:
Average balance outstanding.................................... $ 2,395 -- $ 33 $ 2,330 $ 42
Maximum amount outstanding at any month-end during the
period....................................................... 4,000 -- 2,000 3,000 3,000
Balance outstanding at end of period........................... 4,000 -- 2,000 -- 3,000
Weighted average interest rate during the period............... 4.59% -- 6.06% 6.05% --
Weighted average interest rate at end of period................ 5.09% -- 5.29% -- 5.50%
SUBSIDIARY ACTIVITIES
ELI WHITNEY SECURITY CORPORATION. Eli Whitney Security Corporation is a
wholly-owned subsidiary of Westborough Savings. Eli Whitney was established in
1995 as a Massachusetts security corporation for the purpose of buying, selling
and holding investment securities on its own behalf and not as a broker. The
income earned on Eli Whitney's investment securities is subject to a
significantly lower rate of state tax than that assessed on income earned on
investment securities maintained by us. At March 31, 1999, Eli Whitney had total
assets of $12.1 million, virtually all of which were in investment securities.
ONE HUNDREDTH SECURITY CORPORATION. One Hundredth Security Corporation is a
wholly-owned subsidiary of Westborough Savings established in 1993. One
Hundredth is also a Massachusetts security corporation that was formed for the
purpose of buying, selling and holding investment securities on its own behalf
and not as a broker. The income earned on One Hundredth investment securities is
subject to a significantly lower rate of state tax than that assessed on income
earned on investment securities maintained by us. At March 31, 1999, One
Hundredth had total assets of $19.3 million, virtually all of which were in
investment securities.
THE HUNDREDTH CORPORATION. The Hundredth Corporation is a wholly-owned
subsidiary of Westborough Savings. The Hundredth Corporation was established in
1991 for the disposal of interests in real or personal property acquired by
Westborough Savings through foreclosure, deed in lieu of foreclosure or
otherwise. At March 31, 1999, The Hundredth Corporation had total assets of $75
thousand.
66
PROPERTIES
We currently conduct our business through our executive and administrative
offices and our six retail banking offices, five of which are full service
branches. As of March 31, 1999, the properties and leasehold improvements owned
by us had an aggregate net book value of $1.5 million.
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION OWNED ACQUIRED EXPIRATION DEPOSITS
--------------------------------------------------------- --------- ------------- ------------- --------------
(IN THOUSANDS)
EXECUTIVE OFFICE:
100 E. Main Street..................................... Owned 06/10/75 -- $ 55,756
Westborough, MA
BRANCH OFFICES:(1)
33 W. Main Street...................................... Owned 05/01/54 -- $ 31,052
Westborough, MA
53 W. Main Street...................................... Owned 07/01/81 -- $ 39,533
Northborough, MA
19 Maple Avenue........................................ Leased 12/01/95 11/30/00 $ 10,616
Shrewsbury, MA
OTHER OFFICES:
The Willows(2)......................................... Leased 08/01/87 07/31/00 $ 6,014
One Lyman Street
Westborough, MA
Operations Center...................................... Leased 01/01/98 12/31/99 --
176 E. Main Street
Westborough, MA
(1) This listing does not include our new Shrewsbury branch which opened in May
1999 at Shaw's supermarket. The property in which this branch is located is
leased for a term beginning on May 1, 1999 and ending on April 30, 2004. The
aggregate amount of deposits held by this branch totaled $236 thousand at
June 1, 1999.
(2) This office provides limited retail banking services to the residents of the
Willows. It is not open to the general public and maintains restricted
operating hours.
LEGAL PROCEEDINGS
We are not involved in any pending legal proceeding other than routine legal
proceedings occurring in the ordinary course of business. We believe that these
routine legal proceedings, in the aggregate, are immaterial to our financial
condition and results of operation.
PERSONNEL
As of March 31, 1999, we had 45 full-time employees and 26 part-time
employees. The employees are not represented by a collective bargaining unit,
and we consider our relationship with our employees to be excellent.
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BUSINESS OF WESTBOROUGH FINANCIAL SERVICES, INC.
Westborough Financial Services has not engaged in any business to date. Upon
completion of the reorganization, Westborough Financial Services will own The
Westborough Bank. Westborough Financial Services will retain up to 50% of the
net proceeds from the offering. We will invest our initial capital as discussed
in "How We Intend to Use the Proceeds from the Offering."
In the future, Westborough Financial Services may pursue other business
activities, including the acquisition of other financial institutions or other
entities, borrowing funds for investment in Westborough Bank and diversification
of Westborough Financial Services' operations. Westborough Financial Services
has no current plans for such activities. Our cash flow will depend upon
earnings from the investment of the portion of net proceeds we retain and any
dividends Westborough Financial Services receives from Westborough Bank.
Initially, Westborough Financial Services will neither own nor lease any
property, but will instead use the premises, equipment and furniture of
Westborough Bank. At the present time, we intend to employ only persons who are
officers of Westborough Bank to serve as officers of Westborough Financial
Services. However, we will use the support staff of Westborough Bank from time
to time. These persons will not be separately compensated by Westborough
Financial Services. Westborough Financial Services will hire additional
employees, as appropriate, to the extent it expands its business in the future.
See "How We Intend to Use the Proceeds from the Offering."
REGULATION OF WESTBOROUGH SAVINGS AND
WESTBOROUGH FINANCIAL SERVICES, INC.
GENERAL
Westborough Savings is a Massachusetts-chartered savings bank, and its
deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation by the Bank Insurance Fund. Westborough Savings is subject
to extensive regulation, examination and supervision by the Commonwealth of
Massachusetts Division of Banks (the "Division") as its primary corporate
regulator, and by the FDIC as the deposit insurer. Westborough Savings must file
reports with the Division and the FDIC concerning its activities and financial
condition, and it must obtain regulatory approval prior to entering into certain
transactions, such as mergers with, or acquisitions of, other depository
institutions and opening or acquiring branch offices. The Division and the FDIC
conduct periodic examinations to assess our compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings bank can engage and is intended
primarily for the protection of the deposit insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
Westborough Bancorp, MHC and Westborough Financial Services, as bank holding
companies controlling Westborough Bank, will be subject to the Bank Holding
Company Act of 1956, as amended, (the "BHCA") and the rules and regulations of
the Federal Reserve Board (the "FRB") under the BHCA and to the provisions of
the Massachusetts General Laws applicable to savings banks and other depository
institutions and their holding companies (the "Massachusetts banking laws") and
the regulations of the Division under the Massachusetts banking laws applicable
to bank holding companies. Westborough Bancorp, MHC and Westborough Financial
Services will be required to file reports with, and otherwise comply with the
rules and regulations of the FRB and the Division. Westborough Financial
Services will be required to file certain reports with, and otherwise comply
with, the rules and regulations of the Securities and Exchange Commission under
the federal securities laws.
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Any change in such laws and regulations, whether by the Division, the FDIC,
or the FRB, or through legislation, could have a material adverse impact on
Westborough Bancorp, MHC, Westborough Financial Services and Westborough Savings
and their operations and stockholders.
CERTAIN OF THE LAWS AND REGULATIONS APPLICABLE TO WESTBOROUGH BANCORP, MHC,
WESTBOROUGH FINANCIAL SERVICES AND WESTBOROUGH SAVINGS ARE SUMMARIZED BELOW OR
ELSEWHERE IN THIS PROSPECTUS. THESE SUMMARIES DO NOT PURPORT TO BE COMPLETE AND
ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH LAWS AND REGULATIONS.
MASSACHUSETTS BANKING REGULATION
ACTIVITY POWERS. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the Massachusetts
banking laws and its related regulations. Under these laws and regulations,
savings banks, including Westborough Savings, generally may, invest in:
(1) real estate mortgages;
(2) consumer and commercial loans;
(3) specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and
agencies;
(4) certain types of corporate equity securities; and
(5) certain other assets.
A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the Massachusetts banking laws. "Leeway"
investments must comply with a number of limitations on the individual and
aggregate amounts of "leeway" investments. A savings bank may also exercise
trust powers upon approval of the Division. Massachusetts savings banks may also
exercise any power and engage in any activity permissible for national banks in
accordance with regulations adopted by the Division with respect to such power
or activity. The exercise of these lending, investment and activity powers are
limited by federal law and the related regulations. See "--Federal Banking
Regulation--Activity Restrictions on State-Chartered Banks" below.
COMMUNITY REINVESTMENT ACT. Westborough Savings is also subject to
provisions of the Massachusetts banking laws that, like the provisions of the
federal Community Reinvestment Act ("CRA"), impose continuing and affirmative
obligations upon a banking institution organized in Massachusetts to serve the
credit needs of its local communities ("Massachusetts CRA"). The obligations of
the Massachusetts CRA are similar to those imposed by the CRA, and the Division
has adopted regulations to implement the Massachusetts CRA that are based on the
CRA. See "Federal Banking Regulation--Community Reinvestment Act." The Division
is required to consider a bank's Massachusetts CRA rating when reviewing the
bank's application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application. The Massachusetts CRA requires the Division to assess a bank's
compliance with the Massachusetts CRA and to make such assessment available to
the public. The latest Massachusetts CRA rating, received by letter, dated March
22, 1999, from the Division was a rating of "Satisfactory."
LOANS-TO-ONE-BORROWER LIMITATIONS. With specified exceptions, the total
obligations of a single borrower to a Massachusetts chartered savings bank may
not exceed 20% of the savings bank's surplus account. A savings bank may lend
additional amounts up to 100% of the bank's surplus account if secured by
collateral meeting the requirements of the Massachusetts banking laws.
Westborough Savings currently complies with applicable loans-to-one-borrower
limitations.
LOANS TO A BANK'S INSIDERS. Provisions of the Massachusetts banking laws
prohibit a savings bank from making a loan or otherwise extending credit to any
of its officers and directors or trustees and
69
prohibits any such officer, director or trustee from borrowing, otherwise
becoming indebted, or becoming liable for a loan or other extension of credit by
such bank to any other person except for any of the following loans after
approval by a majority of the all of the members of the bank's board of
investment, excluding any member involved in such loan or extension of credit:
(a) loan or extension of credit, secured or unsecured, to an officer of the
bank in an amount not exceeding $20,000;
(b) loan or extension of credit intended or secured for educational purposes
to an officer of the bank in an amount not exceeding $75,000;
(c) loan or extension of credit secured by a mortgage on residential real
estate to be occupied in whole or in part by the officer to whom the loan
or extension of credit is made, in an amount not exceeding $275,000;
(d) loan or extension of credit to a director or trustee of the bank who is
not also an officer of the bank in an amount permissible under the bank's
loan-to-one borrower limit. See "Massachusetts Banking
Regulation--Loans-to-One Borrower Limitations" above.
No such loan may be granted on with an interest rate or other terms that are
preferential in comparison to loans granted to persons not affiliated with the
savings bank.
DIVIDENDS. Under the Massachusetts banking laws, a stock savings bank may,
subject to several limitations, declare and pay a dividend on its capital stock,
which is the bank's common stock and any preferred stock, out of the bank's net
profits. A dividend may not be declared if the payment of the dividend would
impair the capital stock and surplus account of the savings bank. No dividend on
the bank's common stock may be paid unless dividends and any required payment
with respect to any preferred stock have been paid. No dividend may be paid from
net profits that are required to be added to the surplus account of the stock
savings bank. A stock savings bank is required to transfer net profits to its
surplus account to the extent necessary to
(a) increase the total of the capital stock and surplus account of the bank
to an amount equal to 10% of its deposit liabilities;
(b) increase the amount of the surplus account to an amount to equal to 50%
of the bank's common stock; and
(c) if the surplus account already amounts to 50% of the bank's common
stock, such amount of the net profits, not exceeding 50% of such net
profits, as necessary to increase the amount of the surplus account to an
amount equal to 50% of the bank's capital stock.
In addition, Federal law may also limit the amount of dividends that may be
paid by Westborough Savings. See "--Federal Banking Regulation--Prompt
Corrective Action" below.
EXAMINATION AND ENFORCEMENT. The Division is required to periodically
examine savings banks at least once every calendar year or at least one each 18
month period if the savings bank qualifies as well capitalized under the prompt
corrective action provisions of the Federal Deposit Insurance Act. See
"--Federal Banking Regulation--Prompt Corrective Action" below. The Division may
also examine a savings bank whenever the Division deems an examination
expedient. If the Division finds, after an inquiry, that any trustee, director
or officer of a savings bank has, among other things, violated any law related
to such bank or has conducted the business of such bank in an unsafe or unsound
manner, the Division may take various actions that could result in the
suspension or removal of such person as an officer, director or trustee of the
savings bank. If the Division determines that, among other things, a savings
bank has violated its charter or any Massachusetts law or is conducting its
business in an unsafe or unsound manner or is in an unsafe or unsound condition
to transact is banking business, the
70
Division may take possession of the property and business of the savings bank
and may, if the facts warrant, initiate the liquidation of the bank.
FEDERAL BANKING REGULATION
CAPITAL REQUIREMENTS. FDIC regulations require BIF-insured banks, such as
Westborough Savings, to maintain minimum levels of capital. The FDIC regulations
define two tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of common stockholders' equity
(excluding the unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying servicing
rights), and any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan losses. Allowance
for possible loan losses includible in Tier 2 capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be
included in total capital can not exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other banks, the minimum leverage capital
requirement is 4.0%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution.
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2
capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
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The following table shows Westborough Savings' leverage ratio, its Tier 1
risk-based capital ratio, and its total risk-based capital ratio, at March 31,
1999:
AS OF MARCH 31, 1999
-----------------------------------------------------------------------------------
HISTORICAL PRO PRO FORMA
CAPITAL PERCENT OF FORMA PERCENT OF CAPITAL PERCENT OF
(IN THOUSANDS) ASSETS(2) CAPITA1(1) ASSETS(2) REQUIREMENTS ASSETS(2)
-------------- ----------- ----------- ----------- ------------- -------------
Regulatory Tier 1 leverage capital............ $ 19,031 11.67% $ 21,330 12.90% $ 4,961 3.00%
Tier 1 risk-based capital..................... $ 19,031 21.52% $ 21,330 23.99% $ 3,556 4.00%
Total risk-based capital...................... $ 19,888 22.48% $ 22,187 24.95% $ 7,113 8.00%
(1) Based on the midpoint of the Current Valuation Range.
(2) For purposes of calculating Regulatory Tier 1 leverage capital, assets are
based on adjusted total leverage assets. In calculating Tier 1 risk based
capital and total risk-based capital, assets are based on total
risk-weighted assets.
As the table shows, Westborough Savings exceeded the minimum capital
adequacy requirements at the date indicated.
ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. Section 24 of the Federal
Deposit Insurance Act, as amended (the "FDIA"), which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), generally
limits the activities and investments of state-chartered FDIC insured banks and
their subsidiaries to those permissible for federally chartered national banks
and their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if
(1) the bank held such types of investments during the 14-month period from
September 30, 1990 through November 26, 1991;
(2) the state in which the bank is chartered permitted such investments as of
September 30, 1991; and
(3) the bank notifies the FDIC and obtains approval from the FDIC to make or
retain such investments. Upon receiving such FDIC approval, an institution's
investment in such equity securities will be subject to an aggregate limit
up to the amount of its Tier 1 capital.
Westborough Savings received approval from the FDIC to retain and acquire such
equity investments subject to a maximum permissible investment equal to the
lesser of 100% of Westborough Savings' Tier 1 capital or the maximum permissible
amount specified by the Massachusetts banking laws. Section 24 also provides an
exception for majority owned subsidiaries of a bank, but Section 24 limits the
activities of such subsidiaries are limited to those permissible for a national
bank, permissible under Section 24 of the FDIA and the FDIC regulations issued
pursuant thereto, or as approved by the FDIC.
Before making a new investment or engaging in a new activity not permissible
for a national bank or otherwise permissible under Section 24 of the FDIC
regulations thereunder, an insured bank must seek approval from the FDIC to make
such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
ENFORCEMENT. The FDIC has extensive enforcement authority over insured
savings banks, including Westborough Savings. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In
72
general, these enforcement actions may be initiated in response to violations of
laws and regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
(1) insolvency (whereby the assets of the bank are less than its liabilities to
depositors and others);
(2) substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices;
(3) existence of an unsafe or unsound condition to transact business;
(4) likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and
(5) insufficient capital, or the incurring or likely incurring of losses that
will deplete substantially all of the institution's capital with no
reasonable prospect of replenishment of capital without federal assistance.
DEPOSIT INSURANCE. Pursuant to FDICIA, the FDIC established a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending six months before the assessment period. The three
capital categories are (1) well capitalized, (2) adequately capitalized and (3)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital
ratios, institutions are classified as well capitalized, adequately capitalized
or under capitalization using ratios that are substantially similar to the
prompt corrective action capital ratios discussed below. The FDIC also assigns
an institution to supervisory subgroup based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds (which may
include, if applicable, information provided by the institution's state
supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (I.E.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including Westborough Savings.
Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the bonds (the "FICO bonds") issued in the
late 1980's by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation was expanded to include, beginning
January 1, 1997, the deposits of BIF-insured institutions, such as Westborough
Savings. Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
will be one-fifth of the rate imposed on deposits insured by the Savings
Association Insurance Fund (the "SAIF"). The annual rate of assessments for the
payments on
73
the FICO bonds for the quarterly period beginning on January 1, 1999 was 0.0122%
for BIF-assessable deposits and 0.0610% for SAIF-assessable deposits.
Under the FDIA, the FDIC may terminate the insurance of an institution's
deposits upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC. The management of Westborough Savings does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
TRANSACTIONS WITH AFFILIATES OF WESTBOROUGH SAVINGS. Transactions between
an insured bank, such as Westborough Savings, and any of its affiliates is
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a
bank is any company or entity that controls, is controlled by or is under common
control with the bank. Currently, a subsidiary of a bank that is not also a
depository institution is not treated as an affiliate of the bank for purposes
of Sections 23A and 23B, but the FRB has proposed treating any subsidiary of a
bank that is engaged in activities not permissible for bank holding companies
under the Bank Holding Company Act of 1956, as amended, as an affiliate for
purposes of Sections 23A and 23B. Sections 23A and 23B (1) limit the extent to
which the bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such bank's capital stock and
surplus, and limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (2) require that all such
transactions be on terms that are consistent with safe and sound banking
practices. The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and other similar types of transactions.
Further, most loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amounts. In
addition, any covered transaction by a bank with an affiliate and any purchase
of assets or services by a bank from an affiliate must be on terms that are
substantially the same, or at least as favorable, to the bank as those that
would be provided to a non-affiliate.
PROHIBITIONS AGAINST TYING ARRANGEMENTS. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A
depository institution is prohibited, subject to certain exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution.
UNIFORM REAL ESTATE LENDING STANDARDS. Pursuant to FDICIA, the federal
banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the federal
banking agencies, all insured depository institutions must adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
74
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
(1) for loans secured by raw land, the supervisory loan-to-value limit is 65% of
the value of the collateral;
(2) for land development loans (I.E., loans for the purpose of improving
unimproved property prior to the erection of structures), the supervisory
limit is 75%;
(3) for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
(4) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
(5) for loans secured by other improved property (E.G., farmland, completed
commercial property and other income-producing property including non-owner
occupied, one- to four-family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act (the
"CRA"), any insured depository institution, including Westborough Savings, has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the FDIC,
in connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for additional branches and acquisitions.
Among other things, the current CRA regulations replace the prior
process-based assessment factors with a new evaluation system that rates an
institution based on its actual performance in meeting community needs. In
particular, the current evaluation system focuses on three tests:
(1) a lending test, to evaluate the institution's record of making loans in its
service areas;
(2) an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefitting
low or moderate income individuals and businesses; and
(3) a service test, to evaluate the institution's delivery of services through
its branches, ATMs and other offices.
For a small bank, which is a bank with less than $250 million in assets in
the year prior to the CRA examination, such as Westborough Savings, the CRA
assessment will be based on
(1) the bank's loan-to-deposit ratio;
(2) the percentage of the bank's loans and any other appropriate lending related
activities located in the bank's assessment areas;
(3) the bank's record of lending to, and other appropriate lending related
activities for borrowers of different income levels and businesses and farms
of different sizes;
75
(4) the geographic distribution of the bank's loans; and
(5) the bank's record in acting in response to written complaints about the
bank's performance in helping to meet the credit needs of its assessment
areas.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. Westborough
Savings received a "satisfactory" rating in its CRA examination conducted by the
FDIC on March 1, 1999
SAFETY AND SOUNDNESS STANDARDS. Pursuant to the requirements of FDICIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. If a bank fails to comply with such an order, the FDIC may
seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
PROMPT CORRECTIVE ACTION. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
defines the five capital categories as follows: Generally, an institution will
be treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the bank receives the highest rating under
the Uniform Financial Institutions Rating System) and it is not a |