UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-16767
Westfield Financial, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 73-1627673
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
141 Elm Street, Westfield, Massachusetts 01086
(Address of principal executive offices)
(Zip Code)
(413) 568-1911
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Outstanding at
Class May 3, 2004
----- --------------
Common 10,483,550
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - March 31, 2004 and
December 31, 2003
Consolidated Statements of Operations (Unaudited) - Three months
ended March 31, 2004 and 2003
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Three Months ended March 31, 2004
Consolidated Statements of Cash Flows (Unaudited) - Three Months
ended March 31, 2004 and 2003
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
1
FORWARD - LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking
statements" which may be identified by the use of such words as "believe,"
"expect," "anticipate," "should," "planned," "estimated," and "potential."
Examples of forward-looking statements include, but are not limited to,
estimates with respect to our financial condition and results of operation
and business that are subject to various factors which could cause actual
results to differ materially from these estimates. These factors include,
but are not limited to:
* general and local economic conditions;
* changes in interest rates, deposit flows, demand for mortgages and
other loans, real estate values, and competition;
* changes in loan default and charge-off rates;
* changes in accounting principles, policies, or guidelines;
* changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products,
and services.
Any or all of our forward-looking statements in this Quarterly Report
on Form 10-Q and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or
unknown risks and uncertainties. Consequently, no forward-looking
statements can be guaranteed. We disclaim any obligation to subsequently
revise any forward-looking statements to reflect events or circumstances
after the date of such statements, or to reflect the occurrence of
anticipated or unanticipated events.
2
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in thousands except share data)
March 31, December 31,
2004 2003
--------- ------------
<s> <c> <c>
ASSETS
Cash and due from banks $ 14,642 $ 11,740
Federal funds sold 15,693 15,930
Interest-bearing deposits 34,793 18,004
-------- --------
Cash and cash equivalents 65,128 45,674
-------- --------
SECURITIES:
Available for sale - at estimated fair value 21,425 25,806
Held to maturity - at amortized cost (estimated fair value
of $72,837 and $71,003 in 2004 and 2003, respectively 71,353 69,927
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 60,625 76,177
Held to maturity - at amortized cost (estimated fair value
of $185,085 and $191,511 in 2004 and 2003, respectively 184,127 191,683
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,237 4,237
LOANS - Net of allowance for loan losses of $4,699 and
$4,642 in 2004 and 2003, respectively 355,039 344,980
PREMISES AND EQUIPMENT - Net 11,607 11,774
ACCRUED INTEREST AND DIVIDENDS 3,392 3,555
BANK OWNED LIFE INSURANCE 16,684 16,507
OTHER ASSETS 3,871 4,896
-------- --------
TOTAL ASSETS $797,488 $795,216
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 55,060 $ 54,620
Interest-bearing 566,572 577,811
-------- --------
Total deposits 621,632 632,431
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 15,087 12,135
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 30,000 20,000
OTHER LIABILITIES 5,334 5,846
-------- --------
TOTAL LIABILITIES 672,053 670,412
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at March 31, 2004 and December 31, 2003 - -
Common stock - $.01 par value, 25,000,000 shares authorized,
10,580,000 shares issued, 10,483,900 and 10,522,300 shares
outstanding at March 31, 2004 and December 31, 2003, respectively 106 106
Additional paid-in capital 47,390 47,143
Unallocated Common Stock of Employee Stock Ownership Plan (5,729) (5,837)
Restricted stock unearned compensation (1,956) (2,094)
Retained earnings 86,875 85,794
Accumulated other comprehensive income, net 781 788
Treasury stock, at cost (96,100 and 57,700 shares
at March 31, 2004 and December 31, 2003, respectively) (2,032) (1,096)
-------- --------
Total stockholders' equity 125,435 124,804
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $797,488 $795,216
======== ========
See accompanying notes to consolidated financial statements.
3
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Income - Unaudited
(Dollars in thousands, except per share data)
Three Months
Ended March 31,
2004 2003
---- ----
<s> <c> <c>
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $3,589 $ 4,257
Securities and mortgage backed securities 3,318 3,551
Consumer loans 396 777
Commercial and industrial loans 1,137 888
Federal funds sold 17 56
Marketable equity securities 112 95
Interest-bearing deposits 51 49
------ -------
Total interest and dividend income 8,620 9,673
------ -------
INTEREST EXPENSE:
Deposits 2,531 3,791
Customer repurchase agreements 51 55
Other borrowings 169 111
------ -------
Total interest expense 2,751 3,957
------ -------
Net interest and dividend income 5,869 5,716
PROVISION FOR LOAN LOSSES 150 200
------ -------
Net interest and dividend income after
provision for loan losses 5,719 5,516
------ -------
NONINTEREST INCOME:
Income from bank owned life insurance 177 164
Service charges and fees 409 460
Gain on sales of securities, net 479 60
------ -------
Total noninterest income 1,065 684
------ -------
NONINTEREST EXPENSE:
Salaries and employees benefits 2,637 2,406
Occupancy 449 439
Computer operations 422 400
Stationery, supplies and postage 123 151
Other 852 1,233
------ -------
Total noninterest expense 4,483 4,629
------ -------
INCOME BEFORE INCOME TAXES 2,301 1,571
INCOME TAXES 694 3,177
------ -------
NET INCOME (LOSS) $1,607 $(1,606)
====== =======
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.16 $ (0.16)
Diluted 0.16 (0.16)
See accompanying notes to consolidated financial statements.
4
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - UNAUDITED
(Dollars in thousands, except share data)
Common Stock Restricted Accumulated
----------------- Additional Stock Other Treasury Stock
Par Paid-In Unallocated Unearned Retained Comprehensive ------------------
Shares Value Capital ESOP Compensation Earnings Income, Net Shares Amount Total
------ ----- ---------- ----------- ------------ -------- ------------- ------ ------ -----
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance at
January 1, 2004 10,580,000 $106 $47,143 $(5,837) $(2,094) $85,794 $788 (57,700) $(1,096) $124,804
Comprehensive
income:
Net income - - - - - 1,607 - - - 1,607
Change in
unrealized gain
on securities
arising during
the period,
net of tax
benefit of $149 - - - - - - 334 - - 334
Reclassification
for gains
included in
net income, net
of taxes $(138) - - - - - - (341) - - (341)
--------
Comprehensive
income 1,600
Activity related
to common stock
issued as employee
incentives - - 247 108 138 - - - - 493
Cash dividends
declared - - - - (526) - - - (526)
Treasury stock
purchased - - - - - - (38,400) (936) (936)
---------- ----- ------- ------- ------- ------- ---- ------- ------- --------
Balance at
March 31, 2004 10,580,000 $106 $47,390 $(5,729) $(1,956) $86,875 $781 (96,100) $(2,032) $125,435
========== ==== ======= ======= ======= ======= ==== ======= ======= ========
See accompanying notes to consolidated financial statements.
5
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Three Months
Ended March,
2004 2003
---- ----
<s> <c> <c>
OPERATING ACTIVITIES:
Net income (loss) $ 1,607 $ (1,606)
Adjustments to reconcile net income (loss) to net cash provided
By operating activities
Provision for loan losses 150 200
Depreciation of premises and equipment 277 270
Net amortization of premiums and discounts on securities, mortgage
Backed securities, and mortgage loans 445 544
Activity related to common stock in connection with employee benefit plan 493 (1,555)
Gain on sales of securities, net (479) (60)
Deferred income tax benefit (251) (1,064)
Changes in assets and liabilities:
Accrued interest and dividends 163 (417)
Other assets 1,277 (3,353)
Other liabilities (512) 1,560
------- --------
Net cash provided by (used in) operating activities 3,170 (5,481)
------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (1,445) (14,496)
Proceeds from maturities and principal collections - 4,005
Securities, available for sale:
Purchases (5,050) (4,221)
Proceeds from sales 7,929 20,565
Proceeds from calls, maturities, and principal collections 1,749 10,882
Mortgage backed securities, held to maturity:
Purchases (5,125) (33,626)
Principal collections 12,465 19,333
Mortgage backed securities, available for sale:
Purchases (6,667) (8,230)
Proceeds from sales 16,514 2,992
Principal collections 5,833 10,050
Purchase of Federal Home Loan Bank of Boston and other stock - (304)
Purchase of residential mortgages (10,685) (597)
Net other decrease in loans 362 10,843
Net purchases of premise and equipment (110) (115)
Purchase of bank owned life insurance (177) (15,701)
------- --------
Net cash provided by investing activities 15,593 1,380
------- --------
FINANCING ACTIVITIES:
(Decrease) increase in deposits (10,799) 2,620
Increase in customer repurchase agreements 2,952 2,342
Federal Home Loan Bank of Boston advances, net 10,000 -
Cash dividends paid (526) (528)
Treasury stock purchased (936) -
------- --------
Net cash provided by financing activities 691 4,434
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS: 19,454 333
CASH AND CASH EQUIVALENTS
Beginning of period 45,674 56,575
------- --------
End of period $65,128 $ 56,908
======= ========
See accompanying notes to consolidated financial statements.
6
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Westfield Financial, Inc. (the "Company") is a
Massachusetts chartered corporation. The Company has a state chartered
stock savings bank subsidiary called Westfield Bank (the "Bank"). The
Bank's deposits are insured to the limits specified by the Federal Deposit
Insurance Corporation ("FDIC") and the Depositors Insurance Fund ("DIF"), a
corporation formed by the Massachusetts legislature. The Bank operates ten
branches in Western Massachusetts. The Bank's primary source of revenue is
earnings on loans to small and middle-market businesses and to residential
property homeowners.
On September 23, 2003 the Company adopted an Amended Plan of Charter
Conversion (the "Plan") pursuant to which the Bank, and Westfield Mutual
Holding Company (the "MHC") will convert to federal charters. The Plan has
received regulatory approval from the Office of Thrift Supervision, however
it is still subject to the approval of the Massachusetts Board of Bank
Incorporation.
The Bank formed a subsidiary, Elm Street Real Estate Investments Inc. (the
"REIT"). The REIT was 99.9% owned by the Bank. In December 2003, the Bank
dissolved the REIT. Westfield Securities Corp., a Massachusetts chartered
security corporation, was formed in 2001 by the Company for the primary
purpose of holding qualified investment securities. In 2003, the Bank
formed another subsidiary which is wholly-owned, Elm Street Securities
Corporation, a Massachusetts chartered security corporation for the primary
purpose of holding qualified investment securities.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company, the Bank, Westfield Securities Corp., Elm
Street Securities Corporation, and the REIT. All material intercompany
balances and transactions have been eliminated in consolidation.
Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of income and
expenses for each. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the fair value of financial
instruments and the allowance for loan losses.
Basis of Presentation - In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial condition as of March 31, 2004, and
the results of operations, changes in stockholders' equity and
comprehensive income and cash flows for the interim periods presented. The
results of operations for the three months ended are not necessarily
indicative of the results of operations for the remainder of the year
ending December 31, 2004. Certain information and disclosures normally
included in financial statements prepared in accordance with U.S. GAAP have
been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements as of and
for the year ended December 31, 2003.
Reclassifications - Certain amounts in the prior year financial statements
have been reclassified to conform to the current year presentation.
7
Stock Based Compensation -The Company applies APB Opinion No. 25 and
related Interpretations in accounting for stock based compensation options.
Accordingly, no compensation cost has been recognized. Had compensation
cost for the Company's stock options been determined based on the fair
value at the grant dates for awards under the plans consistent with the
method prescribed by SFAS No. 123, as amended by SFAS No. 148, the
Company's net income (loss) and income (loss) per share would have been
adjusted to the pro forma amounts indicated below (in thousands, except per
share amounts):
Three Months Ended
March 31,
------------------
<s> <c> <c>
Net income (loss) as reported $1,607 $(1,606)
Less: Compensation expense
determined under fair value
based method for all awards,
net of tax effects (68) (56)
------ -------
Pro forma net income (loss) $1,539 $(1,662)
====== =======
Net income (loss) per share
Basic as reported $ 0.16 $ (0.16)
Pro forma 0.15 (0.16)
Diluted as reported 0.16 (0.16)
Pro forma 0.15 (0.16)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model.
2. EARNINGS PER SHARE
Basic earnings (loss) per share represents income available to stockholders
divided by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share reflects additional common
shares that would have been outstanding if dilutive potential shares had
been issued or earned.
3. MASSACHUSETTS TAX LEGISLATION
As a result of Massachusetts legislation signed on March 5, 2003 amending
the corporate tax law affecting the treatment of dividends received from
real estate investment trusts, dividends from the REIT subsidiary are no
longer eligible for a dividends-received deduction. As a result of the
enactment of this legislation, the Company ceased recording the tax
benefits associated with the dividend received deduction effective for the
2003 tax year.
In addition to the effect on 2003, the legislation included a retroactive
effective date that covered 1999 through 2002. During the first quarter of
2003, the Company accrued an amount of $2.9 million, net of federal benefit
related to the estimated liability at the end of the first quarter related
to the REIT. As a result of an agreement with the Massachusetts Department
of Revenue, the Company paid 50% of the amount including interest that
would have been owed. The payment is deductible for federal tax purposes.
Accordingly, the Company's second quarter 2003 financial results include a
credit of approximately $1.45 million, representing a reversal of 50% of
the charge taken in the first quarter of 2003.
8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
Westfield Financial strives to remain a leader in meeting the financial
service needs of the local community and to provide quality service to the
individuals and businesses in the market areas that it has served since
1853. Historically, Westfield Bank has been a community-oriented provider
of traditional banking products and services to business organizations and
individuals, including products such as residential and commercial real
estate loans, consumer loans and a variety of deposit products. Westfield
Bank meets the needs of its local community through a community-based and
service-oriented approach to banking.
In recent years, in addition to real estate lending, we have adopted a
growth-oriented strategy that has focused on increased emphasis on
commercial lending. Our strategy also calls for increasing deposit
relationships and broadening our product lines and services. We believe
that this business strategy is best for our long term success and
viability, and complements our existing commitment to high quality customer
service. In connection with our overall growth strategy, Westfield Bank
seeks to:
* continue to grow its commercial loan portfolio as a means to
increase the yield on and diversify its loan portfolio and build
transactional deposit account relationships;
* focus on expanding its retail banking franchise, and increasing
the number of households served within its market area; and
* depending on market conditions, refer substantially all of the
fixed-rate residential real estate loans to a third party mortgage
company which underwrites, originates and services these loans in
order to diversify its loan portfolio, increase fee income and
reduce interest rate risk.
You should read our financial results for the quarter ended March 31, 2004
in the context of this strategy.
* Net income was $1.6 million, or $0.16 per basic and diluted share, for
the quarter ended March 31, 2004 as compared to a net loss of $1.6
million, or $0.16 per basic and diluted share for the same period in
2003. The results for the 2003 period included an expense of $2.9
million representing an estimate of the additional state tax liability,
including interest, relating to the deduction for dividends received
from the Bank's REIT subsidiary for 1999 through 2002.
* Commercial real estate and commercial and industrial loans increased
$8.6 million, or 4.0% from December 31, 2003 to March 31, 2004. This is
consistent with Westfield Bank's strategic plan, which emphasizes
commercial lending. The continued success of Westfield Bank's commercial
lending is primarily dependent on the local and national economy.
* Indirect automobile loans decreased $3.6 million, or 22.5% from $16.0
million at December 31, 2003 to $12.4 million at March 31, 2004.
Management curtailed its indirect automobile lending beginning in fiscal
year 2000 due to credit quality concerns, and in the fourth quarter of
2003, Westfield Bank ceased writing indirect automobile loans. Although
indirect auto loans had higher yields, they also had higher costs,
therefore Westfield Bank expects minimal impact on earnings as a result
of the discontinuation of the program.
9
* Residential real estate loans increased $5.5 million to $116.0 million
at March 31, 2004 from $110.5 million at December 31, 2003. This was
primarily due to the purchase of $10.7 in adjustable rate mortgage
loans, which are serviced by the originating institution. This was
partially offset by principal payments and payoffs of other residential
real estate loans. Westfield Bank refers its residential real estate
borrowers to a third party mortgage company and substantially all of
Westfield Bank's residential real estate loans are underwritten,
originated and serviced by a third party mortgage company. Westfield
Bank receives a fee from each of these loans originated. Westfield Bank
believes that this program has diversified its loan portfolio and
continues to reduce interest rate risk.
* Net interest and dividend income increased primarily as a result of
lower funding costs. The net interest margin was 3.14% for the three
months ended March 31, 2004 as compared to 3.03% for the same period in
2003. Westfield Financial expects net interest and dividend income to
increase in future periods as it continues to emphasize higher yielding
commercial real estate loans and commercial and industrial loans, while
referring residential mortgage loans to a third party mortgage company.
In addition, Westfield Bank continues to emphasize core deposits over
time deposits.
* Core deposits, which include checking, NOW, savings and money market
accounts, increased while time deposits decreased from December 31, 2003
to March 31, 2004. This is consistent with Westfield Bank's strategy for
growing core deposits in order to maintain long-term relationships with
customers and to reduce the cost of funds. Management believes, however,
that a percentage of the growth in core deposits is due to the low rate
environment, i.e. no incentive for customers to lock up funds in time
deposits. In a period of rising interest rates, the more rate sensitive
customers may shift funds back into time deposits, resulting in a higher
cost of deposits.
* Fees received from the third party mortgage company were $11,000 for the
three months ended March 31, 2004 as compared to $85,000 for the same
period in 2003. Higher interest rates resulted in fewer referrals to the
third party mortgage company. Fee income from the third party mortgage
company in the future will be affected by borrower activity, which
generally decreases in a rising interest rate environment.
* Nonperforming loans increased $1.1 million to $2.9 million at March 31,
2004. This was primarily due to a single commercial real estate loan
relationship of $1.4 million. The loan is fully collateralized based on
the estimated fair market value of the property.
* Charge-offs decreased by 52% for the three months ended March 31, 2004
as compared to the same period in 2003, primarily as a result of the
curtailment of indirect auto loans and the improved local and national
economy.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies given its current business
strategy and asset/liability structure are revenue recognition on loans,
the accounting for allowance for loan losses and provision for loan losses,
the classification of securities as either held to maturity or available
for sale, and the evaluation of securities for other than temporary
impairment.
The Company's general policy is to discontinue the accrual of interest when
principal or interest payments are delinquent 90 days or more, or earlier
if the loan is considered impaired. Any unpaid amounts previously accrued
on these loans are reversed from income. Subsequent cash receipts are
applied to the outstanding principal balance or to interest income if, in
the judgement of management, collection of principal balance is not in
question. Loans are returned to accrual status when they become current as
to both principal and interest and when subsequent performance reduces the
concern as to the collectibility of principal and interest. Loan fees and
certain direct loan origination costs are deferred, and the net fee or cost
is recognized as an adjustment to interest income over the estimated
average lives of the related loans. Compensation to an auto dealer is
normally based upon a spread that a dealer adds on the loan
10
base rate set by the Company. The compensation is paid to an automobile
dealer shortly after the loan is originated. The Company records the amount
as a deferred cost that is amortized over the life of the loans in relation
to the interest paid by the consumer.
The Company's methodology for assessing the appropriateness of the
allowance consists of two key components, which are a specific allowance
for identified problem or impaired loans and a formula allowance for the
remainder of the portfolio. Measurement of impairment can be based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent. This
evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change. The appropriateness of the
allowance is also reviewed by management based upon its evaluation of then-
existing economic and business conditions affecting the key lending areas
of the Company and other conditions, such as new loan products, credit
quality trends (including trends in non performing loans expected to result
from existing conditions), collateral values, loan volumes and
concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions
were believed to have had on the collectibility of the loan portfolio.
Although management believes it has established and maintained the
allowance for loan losses at appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ
substantially from the current operating environment.
Securities, including mortgage backed securities, which management has the
positive intent and ability to hold until maturity, are classified as held
to maturity and are carried at amortized cost. Securities, including
mortgage-backed securities, which have been identified as assets for which
there is not a positive intent to hold to maturity are classified as
available for sale and are carried at fair value with unrealized gains and
losses, net of income taxes, reported as a separate component of equity.
Accordingly, a misclassification would have a direct effect on
stockholders' equity. Sales or reclassification as available for sale
(except for certain permitted reasons) of held to maturity securities may
result in the reclassification of all such securities to available for
sale. The Company has not sold held to maturity securities or reclassified
such securities to available for sale other than in specifically permitted
circumstances. Westfield Financial does not acquire securities or mortgage
backed securities for purposes of engaging in trading activities.
On a quarterly basis, the Company reviews available for sale investment
securities with unrealized depreciation to assess whether the decline in
fair value is temporary or other than temporary. The Company evaluates
whether the decline in value is from company-specific events, industry
developments, general economic conditions or other reasons. Once the
estimated reasons for the decline are identified, further judgements are
required as to whether those conditions are likely to reverse and, if so,
whether that reversal is likely to result in a recovery of the fair value
of the investment in the near term. Unrealized losses which are determined
to be other than temporary are charged to operations.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND DECEMBER 31, 2003
Total assets increased $2.3 million to $797.5 million at March 31, 2004
from $795.2 million at December 31, 2003. Securities decreased $26.1
million, or 7.2%, to $337.5 million at March 31, 2004 from $363.6 million
at December 31, 2003. The decrease was primarily the result of the sale of
certain mortgage backed securities with significant paydowns. Cash and cash
equivalents increased $19.4 million to $65.1 million at March 31, 2004 from
$45.7 million at December 31, 2003. This was primarily the result of the
cash proceeds from the sale of the aforementioned mortgage backed
securities, which were sold late in the first quarter. Management intends
to invest the cash during the second quarter of 2004.
Net loans during the period increased by $10.0 million to $355.0 million at
March 31, 2004 from $345.0 million at December 31, 2003. Commercial real
estate and commercial and industrial loans increased $8.6 million, or 4.0%
to $225.2 million at March 31, 2004 from $216.6 million at December 31,
2003. This is consistent with Westfield Bank's strategic plan, which
emphasizes commercial lending. The continued success of Westfield Bank's
commercial lending is primarily dependent on the local and national
11
economy. Residential real estate loans increased $5.5 million to $116.0
million at March 31, 2004 from $110.5 million at December 31, 2003. This
was primarily due to the purchase of $10.7 in adjustable rate mortgage
loans, which are serviced by the originating institution. This was
partially offset by principal payments and payoffs of other residential
real estate loans. Westfield Bank refers its residential real estate
borrowers to a third party mortgage company and substantially all of
Westfield Bank's residential real estate loans are underwritten, originated
and serviced by a third party mortgage company. Westfield Bank receives a
fee from each of these loans originated. Westfield Bank believes that this
program has diversified its loan portfolio and continues to reduce interest
rate risk.
The increases in loans were offset by a decrease in indirect auto loans of
$3.6 million, or 22.5% from $16.0 million at December 31, 2003 to $12.4
million at March 31, 2004. Management curtailed its indirect automobile
lending beginning in fiscal year 2000 due to credit quality concerns, and
in the fourth quarter of 2003, Westfield Bank ceased writing indirect
automobile loans. Although indirect auto loans had higher yields, they also
had higher costs, therefore Westfield Bank expects minimal impact on
earnings as a result of the discontinuation of the program.
Total deposits showed a decrease of $10.8 million to $621.6 million at
March 31, 2004 from $632.4 million at December 31, 2003. Time deposits
decreased $11.8 million to $322.4 million at March 31, 2004. Core deposits
which include checking, NOW, savings, and money market accounts, increased
by $1.0 million to $299.2 at March 31, 2004. The Bank's strategic plan
calls for a lesser reliance on time deposit accounts in order to decrease
the Bank's cost of funds.
The decrease in deposits was offset by a $10 million increase in Federal
Home Loan Bank borrowings, which totaled $30.0 million at March 31, 2004.
Borrowings increased in order to take advantage of the low interest rate
environment. Customer repurchase agreements increased $3.0 million, or
24.8%, to $15.1 million at March 31, 2004 from December 31, 2003. A
customer repurchase agreement is an agreement by Westfield Bank to sell to
and repurchase from the customer an interest in specific securities issued
by or guaranteed by the United States Government. This transaction settles
immediately on a same day basis in immediately available funds. Interest
paid is commensurate with other products of equal interest and credit risk.
All of Westfield Bank's customer repurchase agreements at March 31, 2004
were held by commercial customers.
Stockholders' equity at March 31, 2004 and December 31, 2003 was $125.4
million and $124.8 million, respectively, which represented 15.7% of total
assets in both periods. The change is primarily comprised of net income of
$1.6 million for the quarter ended March 31, 2004, the repurchase of 38,400
shares of common stock for $936,000, and the declaration by the Board of
Directors of a dividend of $0.05 per share, or $526,000, on January 27,
2004.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004
AND MARCH 31, 2003
General
Net income was $1.6 million, or $0.16 per basic and diluted share, for the
quarter ended March 31, 2004 as compared to a net loss of $1.6 million, or
$0.16 per basic and diluted share, for the same period in 2003. The results
for the 2003 period included an expense of $2.9 million representing an
estimate of the additional state tax liability, including interest,
relating to the deduction for dividends received from the Bank's REIT
subsidiary for 1999 through 2002.
Net interest and dividend income increased $200,000 to $5.9 million for the
three months ended March 31, 2004 as compared to $5.7 million for the same
period in 2003. Net gains on sales of securities were $479,000 for the
three months ended March 31, 2004 as compared to $60,000 for the same
period in 2003.
12
Net Interest and Dividend Income
The following tables set forth the information relating to our average
balance and net interest income at and for the three months ended March 31,
2004 and 2003 and reflect the average yield on assets and average cost of
liabilities for the periods indicated. Yields and costs are derived by
dividing interest income by the average balance of interest-earning assets
and interest expense by the average balance of interest-bearing liabilities
for the periods shown. Average balances are derived from actual daily
balances over the periods indicated. Interest income includes fees earned
from making changes in loan rates and terms and fees earned when real
estate loans are prepaid or refinanced.
Three Months Ended March 31,
2004 2003
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Interest-Earning Assets
- -----------------------
Short Term Investments $ 17 $ 8,628 0.79% $ 56 $ 21,415 1.05%
Investment Securities 3,481 382,226 3.64 3,695 389,976 3.79
Loans 5,122 357,730 5.73 5,922 354,414 6.68
------ -------- ------ --------
Total Interest-Earning Assets $8,620 $748,584 4.61 $9,673 $765,805 5.05
====== ======== ==== ====== ======== ====
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 54 $ 40,810 0.53% $ 103 $ 41,315 1.00%
Savings Accounts 63 50,847 0.50 118 46,698 1.01
Money Market Accounts 374 154,272 0.97 530 145,059 1.46
Time Deposits 2,040 328,281 2.49 3,040 367,907 3.31
Customer Repurchase Agreements and
Borrowings 220 37,840 2.33 166 25,596 2.59
------ -------- ------ --------
Total Interest-Bearing
Liabilities $2,751 $612,050 1.80 $3,957 $626,575 2.53
====== ======== ====== ========
Net Interest Income/Interest
Rate Spread $5,869 2.81% $5,716 2.53%
====== ==== ====== ====
Net Interest Margin 3.14% 3.03%
==== ====
13
The following table shows how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected the Company's interest income and interest expense during the
periods indicated. Information is provided in each category with respect
to:
* Interest income changes attributable to changes in volume (changes in
volume multiplied by prior rate);
* Interest income changes attributable to changes in rate (changes in
rate multiplied by current volume); and
* The net change.
The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes
due to rate.
Three Months Ended March 31, 2004 compared to
March 31, 2003
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
<s> <c> <c> <c>
Short Term Investments $ (33) $ (6) $ (39)
Investment Securities (73) (141) (214)
Loans 55 (855) (800)
----- ------ -------
Net Change in Income on
Interest-Earning Assets (51) (1,002) (1,053)
----- ------- -------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts (1) (48) (49)
Savings Accounts 10 (65) (55)
Money Market Accounts 34 (190) (156)
Time Deposits (327) (673) (1,000)
Customer Repurchase Agreements
and Borrowings 79 (25) 54
----- ------- -------
Net Change in Expense on
Interest-Bearing Liabilities (205) (1,001) (1,206)
----- ------- -------
Change in Net Interest Income $ 154 $ (1) $ 153
===== ======= =======
14
Net interest and dividend income increased $200,000 to $5.9 million for the
three months ended March 31, 3004 as compared to $5.7 million for the same
period in 2003. The net interest margin was 3.14% for the three months
ended March 31, 2004 as compared to 3.03% for the same period in 2003.
The increase in the net interest margin was primarily the result of lower
funding costs. The average cost of interest-bearing liabilities decreased
73 basis points to 1.80% for the three months ended March 31, 2004 from
2.53% for same period in 2003. The yield of interest-earning assets
decreased only 44 basis points to 4.61% for the three months ended March
31, 2004 from 5.05% for same period in 2003. Westfield Financial expects
net interest and dividend income to generally increase in future periods as
it continues to emphasize higher yielding commercial real estate loans and
commercial and industrial loans, while referring residential mortgage loans
to a third party mortgage company.
In addition, Westfield Bank continues to emphasize core deposits over time
deposits. The average balance of core deposits, which are checking, NOW,
savings, and money market accounts, increased $18.3 million to $300.6
million for the three months ended March 31, 2004 from $282.3 million for
the same period in 2003. The average balance of time deposits decreased
$39.6 million to $328.3 million for the three months ended March 31, 2004
from $367.9 million for the same period in 2003. The declining interest
rate environment and the shift in the Bank's deposit mix contributed to the
decrease in funding costs. Management believes however, that a percentage
of the growth in core deposits is due to the low rate environment, (i.e. no
incentive for customers to lock up funds in time deposits). In a period of
rising interest rates, the more rate sensitive customers may shift funds
back into time deposits, resulting in a higher cost of deposits.
Provision for Loan Losses
For the three months ended March 31, 2004, the Bank provided $150,000 for
loan losses, compared to $200,000 for the same period in 2003. The
provision for loan losses brings the Bank's allowance for loan losses to a
level determined appropriate by management. The allowance was $4.7 million
at March 31, 2004 and $4.6 million at December 31, 2003. The allowance for
loan losses was 1.31% of total loans at March 31, 2004 as compared to 1.33%
at December 31, 2003.
At March 31, 2004 commercial real estate loans and commercial and
industrial loans increased $8.6 million as compared to December 31, 2003.
Commercial real estate loans and commercial and industrial loans comprised
62.6% of the Bank's loan portfolio as of March 31, 2004 as compared to
61.9% as of December 31, 2003. This has resulted in an increase in the
allowance for loan losses requirement for commercial real estate loans and
commercial and industrial loans. The Bank considers these types of loans
to contain more risk than conventional residential real estate mortgages,
which increased by $5.4 million during the quarter ended March 31, 2004.
Consumer loans decreased by $3.9 million to $18.5 million at March 31,
2004, resulting in a decrease in the allowance for loan losses requirement
for consumer loans. The decline in the allowance requirement for consumer
loans partially offset the increase in the allowance requirement for
commercial real estate loans and commercial and industrial loans.
Nonperforming loans increased $1.1 million to $2.9 million at March 31,
2004 compared to $1.8 million at December 31, 2003. The increase in
nonperforming loans was primarily due to a single commercial real estate
loan relationship of $1.4 million. The loan is fully collateralized based
on the estimated fair market value of the property.
As a result of the above factors, management determined that a provision of
$150,000 was appropriate.
15
Noninterest Income
Noninterest income increased $381,000 to $1.1 million for the three months
ended March 31, 2004 from $684,000 in the same period in 2003. Net gains
on the sale of securities were $479,000 for the quarter ended March 31,
2004 as compared to $60,000 for the same period in 2003. Fees received
from the third party mortgage company were $11,000 for the three months
ended March 31, 2004 as compared to $85,000 for the same period in 2003.
Higher interest rates resulted in fewer referrals to the third party
mortgage company. Fee income from the third party mortgage company in the
future will be affected by borrower activity, which generally decreases in
a rising interest rate environment.
Noninterest Expense
Noninterest expense for the three months ended March 31, 2004 was $4.5
million as compared to $4.6 million for the same period in 2003. The 2003
results included a $328,000 charge for tax-related interest and penalties
regarding the Commonwealth of Massachusetts REIT legislation. The tax
matter was settled in the second quarter of 2003 resulting in a reversal of
$153,000 of the expense. Salaries and benefits increased $231,000 for the
three months ended March 31, 2004 as compared to the same period in 2003.
This was primarily the result of normal increases in salaries and health
care costs along with an increase in stock based benefit plan expenses of
$50,000.
Income Taxes
For the three months ended March 31, 2004, the Company had a tax provision
of $694,000 as compared to $3.2 million for the same period in 2003. The
first quarter of 2003 included the establishment of a liability for prior
years' state taxes, net of federal tax effect, relating to the Commonwealth
of Massachusetts' REIT legislation as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to the Company's ability to generate adequate
amounts of cash to fund loan originations, loan purchases, withdrawals of
deposits and operating expenses. The Company's primary sources of
liquidity are deposits, scheduled amortization and prepayments of loan
principal and mortgage backed securities, maturities and calls of
investment securities and funds provided by operations. The Bank also can
borrow funds from the FHLB based on eligible collateral of loans and
securities. The Bank's maximum additional borrowing capacity from the FHLB
at March 31, 2004 was approximately $62.9 million.
Liquidity management is both a daily and long term function of business
management. The measure of a company's liquidity is its ability to meet
its cash commitments at all times with available cash or by conversion of
other assets to cash at a reasonable price. Loan repayments and maturing
investment securities are a relatively predictable source of funds.
However, deposit flow, calls of investment securities and repayments of
loans and mortgage-backed securities are strongly influenced by interest
rates, general and local economic conditions and competition in the
marketplace. These factors reduce the predictability of the timing of
these sources of funds. Management believes that the Company has
sufficient liquidity to meet its current operating needs.
At March 31, 2004, the Company exceeded each of the applicable regulatory
capital requirements. As of March 31, 2004 the most recent notification
from the Federal Deposit Insurance Corporation categorized the Bank as
"well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must maintain
minimum total risk-based, Tier 1 risk based and Tier 1 leverage ratios as
set forth in the following. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company's and the Bank's actual capital ratios of March 31, 2004 are
also presented in the table.
16
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c>
March 31, 2004
Total Capital (to Risk Weighted Assets):
Consolidated $129,705 29.56% $ 35,097 8.00% N/A -
Bank 84,205 19.75 34,115 8.00 42,644 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 124,646 28.41 17,549 4.00 N/A -
Bank 79,146 18.56 17,057 4.00 25,586 6.00
Tier 1 Capital (to Average Assets):
Consolidated 124,646 15.55 32,067 4.00 N/A -
Bank 79,146 10.57 29,962 4.00 37,452 5.00
See the "Consolidated Statements of Cash Flows" in the Consolidated
Financial Statements included in this Form 10-Q for the sources and uses of
cash flows for operating, investing, and financing activities for the three
months ended March 31, 2004 and March 31, 2003.
17
The Bank also has outstanding, at any time, a significant number of
commitments to extend credit and provide financial guarantees to third
parties. These arrangements are subject to strict credit control
assessments. Guarantees specify limits to the Bank's obligations. Because
many commitments and almost all guarantees expire without being funded in
whole or in part, the contract amounts are not estimates of future cash
flows. The Bank is obligated under leases for certain of its branches and
equipment. A summary of lease obligations and credit commitments at March
31, 2004 is shown below:
After 1 Year After 3 Years
Within but Within but Within After
1 Year 3 Years 5 Years 5 Years Total
(In thousands)
<s> <c> <c> <c> <c> <c>
LEASE OBLIGATIONS
Operating lease obligations $ 184 $ 358 $ 189 $ 22 $ 753
======= ======= ======= ======= ========
BORROWINGS
Federal Home Loan Bank $ - $10,000 $20,000 $ - $ 30,000
======= ======= ======= ======= ========
CREDIT COMMITMENTS
Available lines of credit $41,228 $ - $ - $12,875 $ 54,103
Other loan commitments 23,927 - - 794 24,721
Letters of credit 6,077 - - 669 6,746
------- ------- ------- ------- --------
Total credit commitments $71,232 $ - $ - $14,338 $ 85,570
------- ------- ------- ------- --------
Grand total $71,416 $10,358 $20,189 $14,360 $116,323
======= ======= ======= ======= ========
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table above) of total and Tier I capital to risk weighted
assets and to average assets. Management believes, as of March 31, 2004,
that the Company and the Bank met all capital adequacy requirements to
which they were subject. As of March 31, 2004, the most recent
notification from the Federal Deposit Insurance Corporation categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action.
To be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Management uses a simulation model to monitor interest rate risk. This
model reports the net interest income at risk primarily under six different
interest rate change environments. Specifically, an analysis is performed
of changes in net interest income assuming changes in interest rates, both
up and down 100, 200 and 300 basis points from current rates over the one-
year time period.
18
The changes in interest income and interest expense due to changes in
interest rates reflect the interest sensitivity of our interest earning
assets and interest bearing liabilities. For example, in a rising interest
rate environment, the interest income from an adjustable rate loan will
increase depending on its repricing characteristics while the interest
income from a fixed loan would not increase until the loan was repaid and
reinvested or loaned out at a higher interest rate.
Management believes that there have been no significant changes in market
risk since December 31, 2003.
ITEM 4:
CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this
report. Based upon the evaluation, the President and Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls
and procedures were effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during
the Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
19
Part II - Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
The following table sets forth information with respect to purchases made
by the Company of its common stock during the three months ended March 31,
2004.
Total number of
shares Maximum
purchased as number of shares
Total number of part of publicly that may yet be
shares Average price announced purchased under
Period purchased paid per share($) programs the program
------ --------------- ----------------- ---------------- ----------------
<s> <c> <c> <c> <c>
January 2004 - - -
February 2004 12,350 24.15 12,350
March 2004 26,050 24.45 26,050
Total 38,400 24.36 38,400 432,900
In April 2003, the Company announced that the Board of Directors had
approved a share repurchase program ("Repurchase Program") which authorized
the repurchase of up to 529,000 shares. The Repurchase Program will
continue until it is completed.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
a. None
b. None
20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K
On January 29, 2004, the Company filed a current report on Form
8-K, dated January 28, 2004 furnishing to the SEC a press
release announcing earnings for the fourth quarter of fiscal
year 2003.
On April 27, 2004, the Company filed a current report on Form
8-K, dated April 27, 2004, furnishing to the SEC a press
release announcing earnings for the first fiscal quarter of
2004.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Westfield Financial, Inc.
(Registrant)
By: /s/ Donald A. Williams
_______________________________
Donald A. Williams
President/Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Michael J. Janosco, Jr.
_______________________________
Michael J. Janosco, Jr.
Vice President/Chief Financial
Officer
(Principal Accounting Officer)
May 10, 2004
22