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 June 30, 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 August 2, 2004
----- --------------
Common 10,057,322
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - June 30, 2004 and
December 31, 2003
Consolidated Statements of Operations (Unaudited) - Three and six
months ended June 30, 2004 and 2003
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Six Months ended June 30, 2004
Consolidated Statements of Cash Flows (Unaudited) - Six Months
ended June 30, 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)
June 30, December 31,
2004 2003
-------- ------------
<s> <c> <c>
ASSETS
Cash and due from banks $ 13,911 $ 11,740
Federal funds sold 12,821 15,930
Interest-bearing deposits 27,316 18,004
-------- --------
Cash and cash equivalents 54,048 45,674
-------- --------
SECURITIES:
Available for sale - at estimated fair value 16,174 25,806
Held to maturity - at amortized cost (estimated
fair value of $76,136 and $71,003 in 2004 and
2003, respectively) 77,196 69,927
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 69,290 76,177
Held to maturity - at amortized cost (estimated
fair value of $173,470 and $191,511 in 2004
and 2003, respectively) 176,174 191,683
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,237 4,237
LOANS - Net of allowance for loan losses of
$4,797 and $4,642 in 2004 and 2003,
respectively 356,031 344,980
PREMISES AND EQUIPMENT - Net 11,561 11,774
ACCRUED INTEREST AND DIVIDENDS 3,580 3,555
BANK OWNED LIFE INSURANCE 16,873 16,507
OTHER ASSETS 4,345 4,896
-------- --------
TOTAL ASSETS $789,509 $795,216
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 57,150 $ 54,620
Interest-bearing 563,199 577,811
-------- --------
Total deposits 620,349 632,431
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 11,719 12,135
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 35,000 20,000
OTHER LIABILITIES 5,848 5,846
-------- --------
TOTAL LIABILITIES 672,916 670,412
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000
shares authorized, None outstanding at
June 30, 2004 and December 31, 2003 - -
Common stock - $.01 par value, 25,000,000
shares authorized, 10,580,000 shares
Issued, 10,057,322 and 10,522,300 shares
outstanding at June 30, 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 (1,818) (2,094)
Retained earnings 87,983 85,794
Accumulated other comprehensive income, net (641) 788
Treasury stock, at cost (522,678 and 57,700
shares at June 30, 2004 and December 31, 2003,
respectively) (10,698) (1,096)
-------- --------
Total stockholders' equity 116,593 124,804
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $789,509 $795,216
======== ========
See accompanying notes to consolidated financial statements.
3
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Operations - Unaudited
(Dollars in thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $ 3,577 $ 3,978 $ 7,166 $ 8,235
Securities and mortgage backed securities 3,103 3,033 6,421 6,583
Consumer loans 296 673 692 1,450
Commercial and industrial loans 1,233 1,042 2,370 1,931
Federal funds sold 29 53 46 110
Marketable equity securities 76 132 188 227
Interest-bearing deposits 58 80 108 128
------- ------- ------- -------
Total interest and dividend income 8,372 8,991 16,991 18,664
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 2,386 3,408 4,917 7,199
Customer repurchase agreements 48 55 98 110
Other borrowings 250 112 419 223
------- ------- ------- -------
Total interest expense 2,684 3,575 5,434 7,532
------- ------- ------- -------
Net interest and dividend income 5,688 5,416 11,557 11,132
PROVISION FOR LOAN LOSSES 125 150 275 350
------- ------- ------- -------
Net interest and dividend income after
Provision for loan losses 5,563 5,266 11,282 10,782
------- ------- ------- -------
NONINTEREST INCOME:
Income from bank owned life insurance 189 196 366 360
Service charges and fees 699 443 1,109 904
Gain on sales of securities, net 389 53 868 113
------- ------- ------- -------
Total noninterest income 1,277 692 2,343 1,377
------- ------- ------- -------
NONINTEREST EXPENSE:
Salaries and employees benefits 2,577 2,491 5,214 4,897
Occupancy 454 445 903 884
Computer operations 386 398 808 798
Stationery, supplies and postage 149 136 272 288
Other 914 1,008 1,766 2,240
------- ------- ------- -------
Total noninterest expense 4,480 4,478 8,963 9,107
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,360 1,480 4,662 3,052
INCOME TAXES (BENEFIT) 727 (1,253) 1,422 1,925
------- ------- ------- -------
NET INCOME $ 1,633 $ 2,733 $ 3,240 $ 1,127
======= ======= ======= =======
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.17 $ 0.27 $ 0.33 $ 0.11
Diluted earnings per share $ 0.16 $ 0.27 $ 0.32 $ 0.11
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)
Accumulated
Common Stock Restricted Other
---------------- Additional Unallo- Stock Compre- Treasury Stock
Par Paid-In cated Unearned Retained hensive -----------------
Shares Value Capital ESOP Compensation Earnings Income, Net Shares Amount Total
------ ----- ---------- ------- ------------ -------- ----------- ------ ------ -----
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance at
December 31, 2003 10,580,000 $ 106 $47,143 $(5,837) $(2,094) $ 85,794 $ 788 (57,700) $ (1,096) $124,804
Comprehensive income:
Net income - - - - - 3,240 - - - 3,240
Unrealized losses
on securities
arising during
the period, net
of tax benefit
of $362 - - - - - - (811) - - (811)
--------
Reclassification
for gains included
in net income,
net of tax
benefit of $250 - - - - - - (618) - - (618)
--------
Comprehensive income 1,811
Activity related to
common stock issued
as employee incentives - - 247 108 276 - - - - 631
Cash dividends declared - - - - - (1,051) - - - (1,051)
Treasury stock
purchased - - - - - - - (464,978) (9,602) (9,602)
---------- ----- ------- ------- ------- -------- ------ -------- -------- --------
Balance at
June 30, 2004 10,580,000 $ 106 $47,390 $(5,729) $(1,818) $ 87,983 $ (641) (522,678) $(10,698) $116,593
========== ===== ======= ======= ======= ======== ====== ======== ======== ========
Balance at
December 31, 2002 10,580,000 $ 106 $49,463 $(5,621) $(2,731) $ 84,264 $1,218 - $ - $126,699
Comprehensive income:
Net income - - - - - 1,127 - - - 1,127
Unrealized losses
on securities
arising during
the period, net
of tax benefit
of $181 - - - - - - (328) - - (328)
--------
Reclassification
for gains included
in net income,
net of tax
benefit $40 - - - - - - (73) - - (73)
--------
Comprehensive income 726
Activity related to
common stock issued
as employee incentives - - (1,990) 194 391 - - - - (1,405)
Cash dividends declared - - - - - (1,058) - - - (1,058)
Treasury stock
purchased - - - - - - - - - -
---------- ----- ------- ------- ------- -------- ------ -------- -------- --------
Balance at
June 30, 2003 10,580,000 $ 106 $47,473 $(5,427) $(2,340) $ 84,333 $ 817 - $ - $124,962
========== ===== ======= ======= ======= ======== ====== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Six Months
Ended June 30,
2004 2003
---- ----
<s> <c> <c>
OPERATING ACTIVITIES:
Net income $ 3,240 $ 1,127
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 125 350
Depreciation of premises and equipment 540 539
Net amortization of premiums and discounts on securities,
mortgage backed securities, and mortgage loans 876 1,793
Amortization of deferred compensation 484 -
Net realized securities gains (868) (113)
Deferred income tax benefit (484) (1,071)
Increase in cash surrender value of bank owned life insurance (366) (360)
Changes in assets and liabilities:
Accrued interest and dividends (25) 287
Other assets 1,700 281
Other liabilities 2 (2,113)
-------- --------
Net cash provided by operating activities 5,224 720
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (9,311) (21,685)
Proceeds from calls, maturities and principal collections 2,000 16,075
Securities, available for sale:
Purchases (5,091) (14,408)
Proceeds from sales 11,891 20,601
Proceeds from calls, maturities, and principal collections 2,671 24,250
Mortgage backed securities, held to maturity:
Purchases (15,096) (60,995)
Principal collections 30,045 44,267
Mortgage backed securities, available for sale:
Purchases (26,453) (14,408)
Proceeds from sales 20,325 3,114
Principal collections 11,763 24,637
Purchase of Federal Home Loan Bank of Boston and other stock - (304)
Purchase of residential mortgages (12,032) -
Net other increase (decrease) in loans 769 (10,323)
Net purchases of premises and equipment (327) (205)
Purchase of bank owned life insurance - (15,635)
-------- --------
Net cash provided by (used in) investing activities 11,154 (5,019)
-------- --------
FINANCING ACTIVITIES:
Decrease in deposits (12,082) (75)
(Decrease) increase in customer repurchase agreements (416) 865
Purchase of common stock in connection with employee
benefit program 147 (2,002)
Federal Home Loan Bank of Boston advances 15,000 -
Cash dividends paid (1,051) (1,058)
Other changes in equity associated with employee benefit plans - 597
Treasury stock purchased (9,602) -
-------- --------
Net cash used in financing activities (8,004) (1,673)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: 8,374 (5,972)
CASH AND CASH EQUIVALENTS
Beginning of period 45,674 56,575
-------- --------
End of period $ 54,048 $ 50,603
======== ========
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 wholly-owned bank
subsidiary called Westfield Bank (the "Bank") and is the majority-owned
subsidiary of Westfield Mutual Holding Company (the "MHC"). On July 23,
2004 the Bank and MHC completed their conversions from companies regulated
by the Massachusetts Division of Banks or the Federal Reserve Board to
federally-chartered companies regulated by the Office of Thrift Supervision
(the "OTS").
The Bank's deposits are insured to the limits specified by the Federal
Deposit Insurance Corporation ("FDIC"). 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.
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 June 30, 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 June 30, Six Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net income as reported $1,633 $2,733 $3,240 $1,126
Less: Compensation expense
determined under fair value
based method for all awards
net of tax effects (68) (54) (136) (108)
------ ------- ------ ------
Pro forma net income $1,565 $2,679 $3,104 $1,018
====== ====== ====== ======
Net income per share
Basic as reported $ 0.17 $ 0.27 $ 0.33 $ 0.11
Pro forma 0.16 0.27 0.31 0.10
Diluted as reported 0.16 0.27 0.32 0.11
Pro forma 0.16 0.26 0.31 0.10
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 per share represents income available to stockholders
divided by the weighted average number of common shares outstanding during
the period. Diluted earnings 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 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 June 30, 2004
in the context of this strategy.
* Net income was $1.6 million, or $0.16 per diluted share, for the
quarter ended June 30, 2004 as compared to $2.7 million, or $0.27 per
diluted share for the same period in 2003. For the six months ended
June 30, 2004, net income was $3.2 million, or $0.32 per diluted
share as compared to $1.1 million, or $0.11 per diluted share for the
same period in 2003. The results for the first quarter of 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. As a result of an agreement with
the Massachusetts Department of Revenue, the 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.
* Commercial real estate and commercial and industrial loans increased
$19.0 million, or 8.8% from December 31, 2003 to June 30, 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 $6.4 million, or 40.0% from $16.0
million at December 31, 2003 to $9.6 million at June 30, 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 decreased $0.7 million to $109.8
million at June 30, 2004 from $110.5 million at December 31, 2003.
The Bank purchased $10.7 million in adjustable rate mortgage loans,
which are serviced by the originating institution. This was 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 3.04% and 3.11% for
the three and six months ended June 30, 2004, respectively, as
compared to 2.87% and 2.95% for the same periods in 2003,
respectively. 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 June 30, 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 funds.
* Fees received from the third party mortgage company were $48,000 for
the six months ended June 30, 2004 as compared to $190,000 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.
* Checking account processing fees increased $268,000 for the three
months ended June 30, 2004 as compared to the same period in 2003.
This was as a result of new products and services provided by
Westfield Bank to its checking account customers.
* Nonperforming loans increased $813,000 to $2.6 million at June 30,
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. This was offset
primarily by payments in full received on other nonperforming loans.
* Charge-offs decreased by 34.4% for the six months ended June 30, 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.
10
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 loanbase 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 nonperforming 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.
11
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND DECEMBER 31, 2003
Total assets decreased $5.7 million to $789.5 million at June 30, 2004 from
$795.2 million at December 31, 2003. This is primarily the result of the
repurchase of 464,978 shares of common stock for $9.6 million.
Securities decreased $24.8 million, or 6.8%, to $338.8 million at June 30,
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.
Net loans during the period increased by $11.0 million to $356.0 million at
June 30, 2004 from $345.0 million at December 31, 2003. Commercial real
estate and commercial and industrial loans increased $19.0 million, or
8.8%, to $235.6 million at June 30, 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
economy. Residential real estate loans decreased $700,000 to $109.8
million at June 30, 2004 from $110.5 million at December 31, 2003. The
Bank purchased $10.7 million in adjustable rate mortgage loans, which are
serviced by the originating institution. This was 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.
Indirect auto loans decreased by $6.4 million, or 40.0%, from $16.0 million
at December 31, 2003 to $9.6 million at June 30, 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 decreased $12.1 million to $620.3 million at June 30, 2004
from $632.4 million at December 31, 2003. Time deposits decreased $17.0
million to $317.2 million at June 30, 2004. Core deposits which include
checking, NOW, savings, and money market accounts, increased by $4.9
million to $303.1 at June 30, 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 $15.0 million increase in Federal
Home Loan Bank borrowings, which totaled $35.0 million at June 30, 2004.
Borrowings increased in order to take advantage of the low interest rate
environment. Customer repurchase agreements decreased $400,000, to $11.7
million at June 30, 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 June 30, 2004 were held
by commercial customers.
Stockholders' equity at June 30, 2004 and December 31, 2003 was $116.6
million and $124.8 million, respectively, which represented 14.8% of total
assets as of June 30, 2004 and 15.7% of total assets as of December 31,
2003. The change is primarily comprised of net income of $3.2 million for
the six months ended June 30, 2004, the repurchase of 464,978 shares of
common stock for $9.6 million, and the declaration by the Board of
Directors of dividends of $0.05 per share on January 27, 2004 and April 26,
2004 which aggregated $1.1 million.
12
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004
AND JUNE 30, 2003
General
Net income was $1.6 million, or $0.16 per diluted share, for the quarter
ended June 30, 2004 as compared to $2.7 million, or $0.27 per diluted
share, for the same period in 2003. The results for the first quarter of
2003 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. As a result of an agreement with the Massachusetts
Department of Revenue, the 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.
Net interest and dividend income increased $300,000 to $5.7 million for the
three months ended June 30, 2004 as compared to $5.4 million for the same
period in 2003. Net gains on sales of securities were $389,000 for the
three months ended June 30, 2004 as compared to $53,000 for the same period
in 2003. The Company has sold essentially all its common stock portfolio as
of June 30, 2004.
Net Interest and Dividend Income
The following tables set forth the information relating to our average
balance at, and net interest income for, the three months ended June 30,
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 June 30,
2004 2003
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
<s> <c> <c> <c> <c> <c> <c>
Short Term Investments $ 29 $ 15,152 0.77% $ 53 $ 20,053 1.06%
Investment Securities 3,237 376,415 3.44 3,245 384,133 3.38
Loans 5,106 359,970 5.67 5,693 352,762 6.46
------ -------- ------ --------
Total Interest-Earning Assets $8,372 $751,537 4.46 $8,991 $756,948 4.75
====== ======== ====== ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 57 $ 42,807 0.53% $ 95 $ 42,322 0.90%
Savings Accounts 54 47,603 0.45 123 47,193 1.04
Money Market Accounts 373 153,754 0.97 498 152,357 1.31
Time Deposits 1,902 319,303 2.38 2,692 355,392 3.03
Customer Repurchase Agreements
and Borrowings 298 47,182 2.53 167 26,730 2.50
------ -------- ------ --------
Total Interest-Bearing
Liabilities $2,684 $610,649 1.76 $3,575 $623,994 2.29
====== ======== ====== ========
Net Interest Income/Interest
Rate Spread $5,688 2.70% $5,416 2.46%
====== ==== ====== ====
Net Interest Margin 3.04% 2.87%
==== ====
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 June 30, 2004 compared to
June 30, 2003
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
<s> <c> <c> <c>
Short Term Investments $ (13) $ (11) $ (24)
Investment Securities (65) 57 (8)
Loans 116 (703) (587)
----- ----- -----
Net Change in Income on
Interest-Earning Assets 38 (657) (619)
----- ----- -----
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 1 (39) (38)
Savings Accounts 1 (70) (69)
Money Market Accounts 5 (130) (125)
Time Deposits (273) (517) (790)
Customer Repurchase Agreements
and Borrowings 128 3 131
----- ----- -----
Net Change in Expense on
Interest-Bearing Liabilities (138) (753) (891)
----- ----- -----
Change in Net Interest Income $ 176 $ 96 $ 272
===== ===== =====
14
Net interest and dividend income increased $300,000 to $5.7 million for the
three months ended June 30, 2004 as compared to $5.4 million for the same
period in 2003. The net interest margin was 3.04% for the three months
ended June 30, 2004 as compared to 2.87% 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
53 basis points to 1.76% for the three months ended June 30, 2004 from
2.29% for same period in 2003. The yield of interest-earning assets
decreased only 29 basis points to 4.46% for the three months ended June 30,
2004 from 4.75% 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 $5.2 million to $301.7
million for the three months ended June 30, 2004 from $296.5 million for
the same period in 2003. The average balance of time deposits decreased
$36.1 million to $319.3 million for the three months ended June 30, 2004
from $355.4 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 June 30, 2004, the Bank provided $125,000 for
loan losses, compared to $150,000 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 $4.8 million
at June 30, 2004 and $4.7 million at March 31, 2004. The allowance for
loan losses was 1.33% of total loans at June 30, 2004 and 1.31% at March
31, 2004.
At June 30, 2004 commercial real estate loans and commercial and industrial
loans increased $10.4 million as compared to March 31, 2004. Commercial
real estate loans and commercial and industrial loans comprised 65.3% of
the Bank's loan portfolio as of June 30, 2004 as compared to 62.6% as of
March 31, 2004. 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 decreased
by $6.2 million during the quarter ended June 30, 2004. Consumer loans
decreased by $3.1 million to $15.4 million during the quarter ended June
30, 2004, resulting in a decrease in the allowance for loan losses
requirement for consumer loans. The decline in the allowance requirement
for residential and consumer loans partially offset the increase in the
allowance requirement for commercial real estate loans and commercial and
industrial loans.
Nonperforming loans decreased $356,000 to $2.6 million at June 30, 2004
compared to $2.9 million at March 31, 2004. This was primarily the result
of payments in full of $392,000 on nonperforming loans.
As a result of the above factors, management determined that a provision of
$125,000 was appropriate.
15
Noninterest Income
Noninterest income increased $585,000 to $1.3 million for the three months
ended June 30, 2004 from $692,000 in the same period in 2003. Net gains on
the sale of securities were $389,000 for the quarter ended June 30, 2004 as
compared to $53,000 for the same period in 2003. The Company has sold
essentially all its common stock portfolio as of June 30, 2004. Checking
account processing fees increased $268,000 to $523,000 for the three months
ended June 30, 2004 from $255,000 in the same period in 2003. The increase
is a result of new products and services provided to Westfield Bank's
checking account customers, commencing in the second quarter of 2004. Fees
received from the third party mortgage company decreased $68,000 to $37,000
for the three months ended June 30, 2004 from $105,000 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 was $4.5 million for the three months ended June 30,
2004 and June 30, 2003. The 2003 results include a reversal of $153,000 in
tax-related interest and penalties as a result of an agreement with the
Massachusetts Department of Revenue relating to the Commonwealth of
Massachusetts' REIT legislation, discussed above. Salaries and benefits
increased $86,000 for the three months ended June 30, 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.
Income Taxes
For the three months ended June 30, 2004, the Company had a tax provision
of $727,000 as compared to a tax benefit of $1.3 million for the same
period in 2003. The second quarter of 2003 included a credit of
approximately $1.45 million as the result of an agreement with the
Massachusetts Department of Revenue relating to the Commonwealth of
Massachusetts' REIT legislation, discussed above.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND
JUNE 30, 2003
General
Net income was $3.2 million, or $0.32 per diluted share, for the six months
ended June 30, 2004 as compared to $1.1 million, or $0.11 per diluted
share, for the same period in 2003. The results for the first quarter of
2003 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. As a result of an agreement with the Massachusetts
Department of Revenue, the 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 2003.
Net interest and dividend income increased $425,000 to $11.6 million for
the six months ended June 30, 2004 as compared to $11.1 million for the
same period in 2003. Net gains on sales of securities were $868,000 for
the six months ended June 30, 2004 as compared to $113,000 for the same
period in 2003.
16
Net Interest and Dividend Income
The following tables set forth the information relating to our average
balance at, and net interest income for, the six months ended June 30, 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.
Six Months Ended June 30,
2004 2003
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
<s> <c> <c> <c> <c> <c> <c>
Short Term Investments $ 46 $ 11,890 0.77% $ 110 $ 20,730 1.06%
Investment Securities 6,717 379,320 3.54 6,938 387,154 3.58
Loans 10,228 358,850 5.70 11,616 353,569 6.57
------- -------- ------- --------
Total Interest-Earning Assets $16,991 $750,060 4.53 $18,664 $761,453 4.90
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 111 $ 41,809 0.53% $ 198 $ 41,821 0.95%
Savings Accounts 116 49,225 0.47 240 46,450 1.03
Money Market Accounts 747 154,013 0.97 1,029 148,728 1.38
Time Deposits 3,943 323,792 2.44 5,732 361,615 3.17
Customer Repurchase Agreements
and Borrowings 517 42,510 2.43 333 26,166 2.55
------- -------- ------- --------
Total Interest-Bearing
Liabilities $ 5,434 $611,349 1.78 $ 7,532 $624,780 2.41
======= ======== ======= ========
Net Interest Income/Interest
Rate Spread $11,557 2.75% $11,132 2.49%
======= ==== ======= ====
Net Interest Margin 3.11% 2.95%
==== ====
17
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.
Six Months Ended June 30, 2004 compared to
June 30, 2003
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
<s> <c> <c> <c>
Short Term Investments $ (47) $ (17) $ (64)
Investment Securities (140) (81) (221)
Loans 173 (1,561) (1,388)
----- ------- -------
Net Change in Income on
Interest-Earning Assets (14) (1,659) (1,673)
----- ------- -------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts (0) (87) (87)
Savings Accounts 14 (138) (124)
Money Market Accounts 37 (319) (282)
Time Deposits (600) (1,189) (1,789)
Customer Repurchase Agreements
and Borrowings 208 (24) 184
----- ------- -------
Net Change in Expense on
Interest-Bearing Liabilities (341) (1,757) (2,098)
----- ------- -------
Change in Net Interest Income $ 327 $ 98 $ 425
===== ======= =======
18
Net interest and dividend income increased $425,000 to $11.6 million for
the six months ended June 30, 2004 as compared to $11.1 million for the
same period in 2003. The net interest margin was 3.11% for the six months
ended June 30, 2004 as compared to 2.95% 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
63 basis points to 1.78% for the six months ended June 30, 2004 from 2.41%
for same period in 2003. The yield of interest-earning assets decreased
only 37 basis points to 4.53% for the six months ended June 30, 2004 from
4.90% 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 $11.7 million to $301.1
million for the six months ended June 30, 2004 from $289.4 million for the
same period in 2003. The average balance of time deposits decreased $37.8
million to $323.8 million for the six months ended June 30, 2004 from
$361.6 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 six months ended June 30, 2004, the Bank provided $275,000 for loan
losses, compared to $350,000 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 $4.8 million at
June 30, 2004 and $4.6 million at December 31, 2003. The allowance for
loan losses was 1.33% of total loans at June 30, 2004 and December 31,
2003.
At June 30, 2004 commercial real estate loans and commercial and industrial
loans increased $19.0 million as compared to December 31, 2003. Commercial
real estate loans and commercial and industrial loans comprised 65.3% of
the Bank's loan portfolio as of June 30, 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 decreased
by $0.7 million during the six months ended June 30, 2004. Consumer loans
decreased by $7.0 million to $15.4 million at June 30, 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 $813,000 to $2.6 million at June 30, 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. This was partially
offset by receipt of payments in full of $576,000 on other nonperforming
loans.
As a result of the above factors, management determined that a provision of
$275,000 was appropriate.
19
Noninterest Income
Noninterest income increased $966,000 to $2.3 million for the six months
ended June 30, 2004 from $1.4 million in the same period in 2003. Net
gains on the sale of securities were $868,000 for the six months ended June
30, 2004 as compared to $113,000 for the same period in 2003. The Company
has sold essentially all its common stock portfolio as of June 30, 2004.
Checking account processing fees increased $309,000 to $807,000 for the six
months ended June 30, 2004 from $498,000 for the same period in 2003. The
increase was primarily the result of new products services provided to
Westfield Bank's checking account customers, commencing in the second
quarter of 2004. Fees received from the third party mortgage company
decreased $142,000 to $48,000 for the six months ended June 30, 2004 as
compared to $190,000 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 six months ended June 30, 2004 was $9.0 million
as compared to $9.1 million for the same period in 2003. The first quarter
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
$317,000 for the six months ended June 30, 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 $80,000.
Income Taxes
For the six months ended June 30, 2004, the Company had a tax provision of
$1.4 million as compared to $1.9 million for the same period in 2003. The
first quarter of 2003 included the establishment of a liability of $2.9
million for prior years' state taxes, net of federal tax effect, relating
to the Commonwealth of Massachusetts' REIT legislation as discussed above.
As a result of an agreement with the Massachusetts Department of Revenue,
the second quarter 2003 results include a credit of approximately $1.45
million, representing a reversal of 50% of the charge taken in the first
quarter of 2003.
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 June 30, 2004 was approximately $39.3 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.
20
At June 30, 2004, the Company exceeded each of the applicable regulatory
capital requirements. As of June 30, 2004 the most recent notification
from the Federal Deposit Insurance Corporation (the "FDIC") categorized the
Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk-based, Tier 1 risk based and Tier 1 leverage
ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
Bank's category. The Company's and the Bank's actual capital ratios as of
June 30, 2004 are also presented in the table.
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>
June 30, 2004
Total Capital (to Risk Weighted Assets):
Consolidated $121,985 27.89% $ 34,986 8.00% N/A -
Bank 85,617 20.07 34,134 8.00 42,668 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 117,110 26.78 17,493 4.00 N/A -
Bank 80,742 18.92 17,067 4.00 25,601 6.00
Tier 1 Capital (to Average Assets):
Consolidated 117,110 14.59 32,110 4.00 N/A -
Bank 80,742 10.72 30,125 4.00 37,657 5.00
On July 23, 2004 the Bank and MHC completed their conversions from
companies regulated by the Massachusetts Division of Banks or the Federal
Reserve Board to federally-chartered companies regulated by the Office of
Thrift Supervision (the "OTS"). Westfield Bank, as a federally-chartered
savings bank, is subject to OTS capital requirements rather than FDIC
capital requirements. The Bank is considered "well capitalized" under OTS
capital requirements.
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 six
months ended June 30, 2004 and June 30, 2003.
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.
21
The Bank is obligated under leases for certain of its branches and
equipment. A summary of lease obligations and credit commitments at June
30, 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 $ 187 $ 335 $ 187 $ - $ 709
======= ======= ======= ======= ========
BORROWINGS
Federal Home Loan Bank $ - $10,000 $25,000 $ - $ 35,000
======= ======= ======= ======= ========
CREDIT COMMITMENTS
Available lines of credit $38,379 $ - $ - $12,708 $ 51,087
Other loan commitments 24,883 - - 891 25,774
Letters of credit 4,283 - - 699 4,982
------- ------- ------- ------- --------
Total credit commitments $67,545 $ - $ - $14,298 $ 81,843
------- ------- ------- ------- --------
Grand total $67,732 $10,335 $25,187 $14,298 $117,552
======= ======= ======= ======= ========
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 June 30, 2004,
that the Company and the Bank met all capital adequacy requirements to
which they were subject. As of June 30, 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.
On July 23, 2004 the Bank and MHC completed their conversions from
companies regulated by the Massachusetts Division of Banks or the Federal
Reserve Board to federally-chartered companies regulated by the Office of
Thrift Supervision (the "OTS"). Westfield Bank, as a federally-chartered
savings bank, is subject to OTS capital requirements rather than FDIC
capital requirements. The Bank is considered "well capitalized" under OTS
capital requirements.
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.
22
Management uses a simulation model to monitor interest rate risk. This
model reports the net interest income at risk primarily under seven
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. These are compared to an analysis that
assumes no change in interest rates over the one-year period.
The simulation model was run in 2004, as of March 31, 2004, to project net
interest income for twelve months ending March 31, 2005. The results
derived from the simulation model are discussed below.
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.
The tables below set forth as of March 31, 2005 the estimated changes in
net interest and dividend income that would result from incremental changes
in interest rates over the applicable period.
For the Twelve Months Ending March 31, 2005
(Dollars in thousands)
-------------------------------------------------
Changes in Net Interest
Interest Rates (Basis and Dividend
Points) Income % Change
--------------------- ------------ --------
<s> <c> <c>
300 24,501 1.8%
200 24,284 0.9
100 24,571 2.1
0 24,068 N/A
-100 24,388 1.3
-200 23,550 (2.2)
-300 22,415 (6.9)
Market rates were assumed to increase and decrease 100 basis points, 200
basis points, and 300 basis points in even increments over the twelve month
period. The repricing and/or new rates of assets and liabilities moved in
tandem with market rates. However, in certain deposit products, the use of
data from a historical analysis indicated that the rates on these products
would move only a fraction of the rate change amount.
As interest rates declined during 2001 through 2003, Westfield Bank
experienced an increase in core deposits and a decrease in term deposits.
Banks nationwide have reported this trend as well. With term deposit rates
at such low levels, there is little incentive for bank customers to lock up
funds in term deposits. Management believes that in a rising rate
environment Westfield Bank will experience a shift, by some customers, out
of core deposits and back into term deposits. Based upon analysis,
management has estimated what is believed to be the rate sensitive portion
of the funds currently in core deposits. In scenarios that assume a rising
rate environment of 200 basis points or more, this shift is incorporated
into the balance sheet forecasts.
The Company developed consolidated balance sheet growth projections for the
twelve month period. The same product mix and growth strategy was used for
all rate change simulations, except for the shift into term deposits in
certain scenarios as described in the previous paragraph. Income from tax-
exempt assets is calculated on a fully taxable equivalent basis.
23
Pertinent data from each loan account, deposit account and investment
security was used to calculate future cash flows. The data included such
items as maturity date, payment amount, next repricing date, repricing
frequency, repricing index and spread. Prepayment speed assumptions were
based upon the difference between the account rate and the current market
rate.
Another circumstance that effects the results is that market rates as of
March 31, 2004, the date of the analysis, were near historical lows. In
the three declining rate scenarios, Westfield Bank forecasted that its
rates on some deposit products would not fall as sharply as market rates.
For example, because the rate on regular savings account is 0.50%, it is
not possible for the rate to decrease by 100 basis points or more.
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.
Part II - Other Information
Item 1. Legal Proceedings
None
24
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
In April 2003, the Company announced that the Board of Directors had
approved a share repurchase program ("Repurchase Program 1") which
authorized the repurchase of up to 529,000 shares. The repurchase program
will continue until it is completed. At December 31, 2003 the Company had
repurchased 57,700 shares of common stock and had 471,300 shares remaining
to be repurchased under Repurchase Program 1.
The following table sets forth information with respect to purchases made
by the Company of its common stock during the six months ended June 30,
2004.
Total number of
shares Maximum
purchased as number of shares
Total number part of publicly that may yet be
of 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
April 2004 1,450 20.90 1,450
May 2004 160,128 19.77 160,128
June 2004 265,000 20.56 265,000
Total 464,978 20.60 464,978 6,322
In July 2004, the Company announced that the Board of Directors had
approved a share repurchase program ("Repurchase Program 2") which
authorized the repurchase of up to 502,550 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
The Company held its annual meeting of shareholders on May 21, 2004 (the
"Meeting"). All of the proposal submitted to the shareholders at the
Meeting were approved. The proposals submitted to shareholders and the
tabulation of votes for each proposal is as follows:
Election of four candidates to the Board of Directors.
25
The number of votes cast with respect to this matter is as follows:
Nominee For Withheld
------- --- --------
Victor J. Carra 9,793,326 66,488
Richard C. Placek 9,798,669 61,145
Charles E. Sullivan 9,803,701 56,113
Thomas C. Sullivan 9,801,906 57,908
There was no broker non-votes or abstentions on this proposal. The
following directors' terms of office continued after the meeting:
David C. Colton, Jr. Mary C. O'Neil
Robert T. Crowley, Jr. Paul R. Pohl
Harry C. Lane Donald A. Williams
William H. McClure
Item 5. Other Information
a. None
b. None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Rule 13a - 14(a)/15d - 14(a) Certifications.
31.2 Rule 13a - 14(a)/15d - 14(a) Certifications.
32.1 Section 1350 Certifications.
32.2 Section 1350 Certifications.
(b) Reports on Form 8-K
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.
On June 15, 2004, the Company filed with the SEC a Current Report on
Form 8-K reporting under Items 4 and 7 a change in the Company's
independent auditors.
26
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)
August 9, 2004