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, 2005
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 Exchange 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, 2005
----- --------------
Common Stock, par value $0.01 9,954,512
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - March 31, 2005 and
December 31, 2004
Consolidated Statements of Income (Unaudited) - Three months ended
March 31, 2005 and 2004
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Three Months ended March 31,
2005 and 2004
Consolidated Statements of Cash Flows (Unaudited) - Three Months
ended March 31, 2005 and 2004
Notes to Consolidated Financial Statements
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. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
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," "may," "could"
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
PART I
ITEM 1. FINANCIAL STATEMENTS
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in thousands except share data)
March 31, December 31,
2005 2004
---- ----
<s> <c> <c>
ASSETS
Cash and due from banks $ 12,476 $ 13,961
Federal funds sold 29,521 31,964
Interest-bearing deposits and other short term
investments 5,152 5,122
--------- ---------
Cash and cash equivalents 47,149 51,047
--------- ---------
SECURITIES:
Available for sale - at estimated fair value 20,835 14,968
Held to maturity - at amortized cost (estimated fair value
of $69,694 in March 2005, and $71,654 in December 2004) 70,289 71,298
MORTGAGE-BACKED SECURITIES:
Available for sale - at estimated fair value 77,778 73,316
Held to maturity - at amortized cost (estimated fair value of
$166,843 in March 2005, and $174,051 in December 2004) 169,693 175,302
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,237 4,237
LOANS - Net of allowance for loan losses of $5,289 in March
2005 and $5,277 in December 2004 372,113 368,601
PREMISES AND EQUIPMENT - Net 11,361 11,505
ACCRUED INTEREST AND DIVIDENDS 3,590 3,551
BANK OWNED LIFE INSURANCE 17,425 17,248
OTHER ASSETS 5,217 5,830
--------- ---------
TOTAL ASSETS $ 799,687 $ 796,903
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 43,484 $ 48,305
Interest-bearing 572,359 564,316
--------- ---------
Total deposits 615,843 612,621
--------- ---------
CUSTOMER REPURCHASE AGREEMENTS 13,335 14,615
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 45,000 45,000
OTHER LIABILITIES 6,742 6,616
--------- ---------
TOTAL LIABILITIES 680,920 678,852
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at March 31, 2005 and December 31, 2004 - -
Common stock - $.01 par value, 25,000,000 shares authorized,
10,580,000 shares issued, 9,954,512 shares outstanding at
March 31, 2005 and December 31, 2004 106 106
Additional paid-in capital 47,684 47,659
Unallocated common stock of Employee Stock Ownership Plan (5,427) (5,427)
Restricted stock unearned compensation (1,430) (1,543)
Retained earnings 91,509 90,399
Accumulated other comprehensive income, net (654) (122)
Treasury stock, at cost (625,488 shares at March 31, 2005 and
December 31, 2004) (13,021) (13,021)
--------- ---------
Total stockholders' equity 118,767 118,051
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 799,687 $ 796,903
========= =========
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,
2005 2004
---- ----
<s> <c> <c>
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $3,794 $3,589
Securities and mortgage-backed securities 3,191 3,318
Consumer loans 195 396
Commercial and industrial loans 1,407 1,137
Federal funds sold 171 17
Marketable equity securities 90 112
Interest-bearing deposits and other short term investments 30 51
------ ------
Total interest and dividend income 8,878 8,620
------ ------
INTEREST EXPENSE:
Deposits 2,562 2,531
Customer repurchase agreements 51 51
Other borrowings 350 169
------ ------
Total interest expense 2,963 2,751
------ ------
Net interest and dividend income 5,915 5,869
PROVISION FOR LOAN LOSSES 140 150
------ ------
Net interest and dividend income after
provision for loan losses 5,775 5,719
------ ------
NONINTEREST INCOME:
Income from bank owned life insurance 177 177
Service charges and fees 571 409
Gain on sales of securities, net - 479
------ ------
Total noninterest income 748 1,065
------ ------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,728 2,637
Occupancy 471 449
Computer operations 393 422
Stationery, supplies and postage 144 123
Other 846 852
------ ------
Total noninterest expense 4,582 4,483
------ ------
INCOME BEFORE INCOME TAXES 1,941 2,301
INCOME TAXES 430 694
------ ------
NET INCOME $1,511 $1,607
====== ======
EARNINGS 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
(Dollars in thousands, except share amounts)
Common Stock Restricted Accumulated
--------------- Additional Unallo- Stock Other Treasury Stock
Par Paid-In cated Unearned Retained Comprehensive ----------------
Shares Value Capital ESOP Compensation Earnings (Loss) Income Shares Amount Total
------ ----- ---------- ------- ------------ -------- ------------- ------ ------ -----
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance, 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 - - - - - 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 of $138 - - - - - - (341) - - (341)
--------
Total 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, March 31, 2004 10,580,000 $106 $47,390 $(5,729) $ (1,956) $86,875 $ 781 (96,100) $ (2,032) $125,435
========== ==== ======= ======= ======== ======= ===== ======== ======== ========
Balance, December 31, 2004 10,580,000 $106 $47,659 $(5,427) $ (1,543) $90,399 $(122) (625,488) $(13,021) $118,051
Comprehensive income:
Net income - - - - - 1,511 - - - 1,511
Unrealized losses on
securities arising
during the year, net of
tax benefit of $337 - - - - - - (532) - - (532)
Total comprehensive income 979
Activity related to common
stock issued as employee
incentives - - 25 - 113 - - - - 138
Cash dividends declared - - - - - (401) - - - (401)
---------- ---- ------- ------- -------- ------- ----- -------- -------- --------
Balance, at March 31, 2005 10,580,000 $106 $47,684 $(5,427) $ (1,430) $91,509 $(654) (625,488) $(13,021) $118,767
========== ==== ======= ======= ======== ======= ===== ======== ======== ========
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,
2005 2004
---- ----
<s> <c> <c>
OPERATING ACTIVITIES:
Net income $ 1,511 $ 1,607
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 140 150
Depreciation of premises and equipment 237 277
Net amortization of premiums and discounts on
securities, mortgage backed securities and
mortgage loans 259 445
Amortization of deferred compensation 138 597
Net realized securities gains - (479)
Deferred income tax benefit (21) (250)
Increases in cash surrender value of bank
owned life insurance (177) (177)
Changes in assets and liabilities:
Accrued interest and dividends (39) 163
Other assets 356 1,277
Other liabilities 740 (512)
-------- --------
Net cash provided by operating activities 3,144 3,098
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (5,016) (1,445)
Proceeds from maturities and principal collections 6,000 -
Securities, available for sale:
Purchases (6,118) (5,050)
Proceeds from sales - 7,929
Proceeds from calls, maturities, and principal
collections 156 1,749
Mortgage-backed securities, held to maturity:
Purchases (5,113) (5,125)
Principal collections 10,568 12,465
Mortgage-backed securities, available for sale:
Purchases (10,072) (6,667)
Proceeds from sales - 16,514
Principal collections 4,769 5,833
Purchase of residential mortgages (719) (10,685)
Net other decrease (increase) in loans (2,945) 362
Net purchases of premise and equipment (93) (110)
-------- --------
Net cash (used in) provided by investing
activities (8,583) 15,770
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in deposits 3,222 (10,799)
(Decrease) increase in customer repurchase agreements (1,280) 2,952
Federal Home Loan Bank of Boston advances - 10,000
Purchase of common stock in connection with employee
benefit plan - (104)
Cash dividends paid (401) (526)
Treasury stock purchased - (936)
-------- --------
Net cash provided by financing activities 1,541 587
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS: (3,898) 19,455
Beginning of period 51,047 45,674
-------- --------
End of period $ 47,149 $ 65,129
======== ========
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 federally 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"). 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.
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. and Elm
Street Securities Corporation. 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, 2005, 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, 2005. 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, 2004.
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,
2005 2004
---- ----
<s> <c> <c>
Net income as reported $1,511 $1,607
Less: Compensation expense
determined under fair value
based method for all awards,
net of tax effect (68) (68)
------ ------
Pro forma net income $1,443 $1,539
====== ======
Net income per share
Basic as reported $ 0.16 $ 0.16
Pro forma 0.15 0.15
Diluted as reported 0.16 0.16
Pro forma 0.15 0.15
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. PENSION AND OTHER BENEFITS
The following table provides information regarding net benefit costs for
the periods shown:
Pension Benefits Other Benefits
---------------- --------------
Three months ended March 31,
- ----------------------------
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c>
Service cost 157 137 8 6
Interest cost 127 116 11 10
Expected return on assets (131) (113) - -
Transaction obligation (3) (3) 2 2
Actuarial (gain) loss 6 2 - -
---- ---- -- --
Net periodic pension cost 155 139 21 18
==== ==== == ==
The Company plans to contribute the amount required to meet the minimum
funding standards under Internal Revenue Code Section 412. Additional
contributions will be made as deemed appropriate by management in
conjunction with the plan's actuaries. For the year 2005, the preliminary
estimated contribution is approximately $509,000. As of March 31, 2005 no
contribution had been made.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R, "Share-based Payment (Revised
2004)" ("SFAS 123R"), which establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or services. This statement requires a public entity to measure the cost
of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. FAS 123R
eliminates the ability to account for share-based compensation transactions
using the intrinsic method and requires that such transactions be accounted
for using a fair-value-based method and recognized as expense in the
consolidated statement of income. SAFAS 123R allows the use of valuation
models other than the Black-Scholes model prescribed in SFAS 123.
Therefore, the pro forma costs of stock option expense estimated in Note 1
using the Black-Scholes option pricing model may not be representative of
the costs recognized by the Company upon adoption of SFAS 123R. The
Company is still in the process of analyzing the cost of stock options
under SFAS 123R. On April 14, 2005, the Securities and Exchange Commission
delayed the effective date for SFAS 123R, which allows companies to
implement the statement at the beginning of their first fiscal year
beginning after June 15, 2005, which would be January 1, 2006 for the
Company. On March 29, 2005, the Securities and Exchange Commission ("SEC")
Staff issued Staff Accounting Bulletin No. 107 ("SAB 107"). SAB 107
expresses the views of the SEC staff regarding the interaction of FAS 123R
and certain SEC rules and regulations and provides the SEC staff's view
regarding the valuation of share-based payment arrangements for public
companies. The provisions of FAS 123R and SAB 107 do not have an impact on
the Company's results of operations at the present time.
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, 2005
in the context of this strategy.
* Net income was $1.5 million, or $0.16 per basic and diluted share,
for the quarter ended March 31, 2005 as compared to $1.6 million, or
$0.16 per basic and diluted share for the same period in 2004. The
2004 results included net gains from the sale of securities of
$479,000 for the three months ended March 31, 2004. This was
primarily the result of the Company selling its common stock
portfolio in 2004. There were no net gains from sales of securities
for the three months ended March 31, 2005.
* Commercial real estate and commercial and industrial loans increased
$10.0 million, or 4.2%, from December 31, 2004 to March 31, 2005.
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 $4.8 million to $118.4
million at March 31, 2005 from $123.2 million at December 31, 2004.
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.
9
* Net interest and dividend income increased primarily as a result of a
higher yield on interest-earning assets. The net interest margin was
3.21% for the three months ended March 31, 2005 as compared to 3.14%
for the same period in 2004. Westfield Financial expects 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.
* Total deposits increased $3.2 million from $612.6 million at December
31, 2004 to $615.8 million at March 31, 2005. The increase in
deposits was primarily the result of an increase of $4.2 million in
term deposits, which were $317.3 million at March 31, 2005. The
rates paid on term deposits have increased over the past several
months. Some customers have shifted funds out of core deposits,
which generally pay lower rates, and into term deposits. Management
feels that in a period of rising rates, the more rate sensitive
customers will continue to move funds into term deposits, resulting
in a higher cost of deposits.
* Service charge and fee income for the three months ended March 31,
2005 was $571,000, compared to $409,000 for the three months ended
March 31, 2004. Net checking account processing fee income was
$390,000 for the three months ended March 31, 2005 as compared to
$284,000 for the same period in 2004. 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.
* Nonperforming loans were $2.2 million at March 31, 2005 and also
December 31, 2004.
* Charge-offs decreased by 13.5% for the three months ended March 31,
2005 as compared to the same period in 2004, primarily as a result of
the discontinuation of the indirect auto loan program.
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 judgment 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 base rate set
by Westfield Financial. The compensation is paid to an automobile dealer
shortly after the loan is originated. Westfield Financial 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
10
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 never 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 on a judgmental basis to assess
whether the decline in fair value is temporary or other than temporary.
Declines in the fair value of held to maturity and available for sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. In estimating other than
temporary impairment losses, management considers (1) the length of time
and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the corporation to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2005 AND DECEMBER 31, 2004
Total assets increased $2.8 million to $799.7 million at March 31, 2005
from $796.9 million at December 31, 2004. Securities increased $3.7
million to $338.6 million at March 31, 2005 from $334.9 million at December
31, 2004.
Net loans during the period increased by $3.5 million to $372.1 million at
March 31, 2005 from $368.6 million at December 31, 2004. Commercial real
estate and commercial and industrial loans increased $10.0 million, or
4.2%, to $249.1 million at March 31, 2005 from $239.1 million at December
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. Residential real estate loans decreased $4.8 million to $118.4
million at March 31, 2005 from $123.1 million at December 31, 2004.
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.
11
Total deposits increased $3.2 million from $612.6 million at December 31,
2004 to $615.8 million at March 31, 2005. The increase in deposits was
primarily the result of an increase of $4.2 million in term deposits, which
were $317.3 million at March 31, 2005. Core deposits, which include
checking, NOW, savings, and money market decreased $1.0 million from $299.5
million at December 31, 2004 to $298.5 million at March 31, 2005. The
rates paid on term deposits have increased over the past several months.
Some customers have shifted funds out of core deposits, which generally pay
lower rates, and into term deposits. Management feels that in a period of
rising rates, the more rate sensitive customers will continue to move funds
into term deposits, resulting in a higher cost of deposits.
Federal Home Loan Bank ("FHLB") borrowings were $45.0 million at both March
31, 2005 and December 31, 2004. Customer repurchase agreements decreased
$1.3 million to $13.3 million at March 31, 2005 from December 31, 2004. 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, 2005
were held by commercial customers.
Stockholders' equity at March 31, 2005 and December 31, 2004 was $118.8
million and $118.1 million, respectively, representing 14.9% and 14.8% of
total assets, respectively. The change is comprised of net income of $1.5
million for the three months ended March 31, 2005, an increase in net
unrealized losses on securities available for sale of $532,000, net of
taxes, and the declaration by the Board of Directors of a quarterly
dividend amounting to $401,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005
AND MARCH 31, 2004
General
Net income was $1.5 million, or $0.16 per basic and diluted share, for the
quarter ended March 31, 2005 as compared to $1.6 million, or $0.16 per
basic and diluted share, for the same period in 2004. The 2004 results
included net gains from the sale of securities of $479,000 for the three
months ended March 31, 2004. This was primarily the result of the Company
selling its common stock portfolio in 2004. There were no net gains from
sale of securities for the three months ended March 31, 2005.
Net interest and dividend income was $5.9 million for the three months
ended March 31, 2005 and also $5.9 million for the same period in 2004.
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,
2005 and 2004 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.
12
Three Months Ended March 31,
2005 2004
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 $ 201 $ 34,360 2.34% $ 17 $ 8,628 0.79%
Investment Securities 3,281 339,499 3.87 3,481 382,226 3.64
Loans 5,396 374,228 5.77 5,122 357,730 5.73
------ -------- ------ --------
Total Interest-Earning Assets $8,878 $748,087 4.75% $8,620 $748,584 4.61
====== ======== ====== ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 72 $ 57,809 0.50% $ 54 $ 40,810 0.53%
Savings Accounts 54 44,214 0.49 63 50,847 0.50
Money Market Accounts 451 147,106 1.23 374 154,272 0.97
Time Deposits 1,986 314,968 2.52 2,040 328,281 2.49
Customer Repurchase Agreements and
Borrowings 400 61,075 2.62 220 37,840 2.33
------ -------- ------ --------
Total Interest-Bearing Liabilities $2,963 $625,172 1.90% $2,751 $612,050 1.80
====== ======== ====== ========
Net Interest Income/Interest Rate Spread $5,915 2.85% $5,869 2.81%
====== ==== ====== ====
Net Interest Margin 3.21% 3.14%
==== ====
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.
13
Three Months Ended March 31, 2005 compared to
March 31, 2004
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
<s> <c> <c> <c>
Short Term Investments $ 51 $ 133 $ 184
Investment Securities (389) 189 (200)
Loans 236 38 274
----- ----- -----
Net Change in Income on
Interest-Earning Assets (102) 360 258
----- ----- -----
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 22 (4) 18
Savings Accounts (8) (1) (9)
Money Market Accounts (17) 94 77
Time Deposits (83) 29 (54)
Customer Repurchase Agreements and
Borrowings 135 45 180
----- ----- -----
Net Change in Expense on
Interest-Bearing Liabilities 49 163 212
----- ----- -----
Change in Net Interest Income $(151) $ 197 $ 46
===== ===== =====
Net interest and dividend income was $5.9 million for the three months
ended March 31, 2005 and also $5.9 million for the same period in 2004.
The net interest margin was 3.21% for the three months ended March 31, 2005
as compared to 3.14% for the same period in 2004.
The increase in the net interest margin was primarily the result of a
higher yield on interest-earning assets. The yield of interest-earning
assets increased 14 basis points to 4.75% for the three months ended March
31, 2005 from 4.61% for same period in 2004. Westfield Financial expects
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.
The average cost of interest-bearing liabilities increased 10 basis points
to 1.90% for the three months ended March 31, 2005 from 1.80% for same
period in 2004. The increase in the average cost of interest-bearing
liabilities was primarily due to an increase in the cost of money market
accounts resulting from the rising interest rate environment. Westfield
Bank continues to emphasize core deposits over time deposits. Management
believes however, that a percentage of the funds in core deposits is due to
what had been a historically 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.
14
Provision for Loan Losses
For the three months ended March 31, 2005, the Bank provided $140,000 for
loan losses, compared to $150,000 for the same period in 2004. The amount
that Westfield Bank provided for the provision for loan losses during the
three months ended March 31, 2005 was based upon the changes that occurred
in the loan portfolio during that same period. The provision for loan
losses brings the Bank's allowance for loan losses to a level determined
appropriate by management. The allowance was $5.3 million at both March
31, 2005 and at December 31, 2004. The allowance for loan losses was 1.40%
of total loans at March 31, 2005 and 1.41% at December 31, 2004.
At March 31, 2005 commercial real estate loans and commercial and
industrial loans increased $10.0 million as compared to December 31, 2004.
Commercial real estate loans and commercial and industrial loans comprised
66.0% of the Bank's loan portfolio as of March 31, 2005 as compared to
63.1% as of December 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 $4.8 million during the quarter ended March 31, 2005.
Consumer loans decreased by $1.8 million to $9.8 million at March 31, 2005,
resulting in a decrease in the allowance for loan losses requirement for
consumer loans. The decline in the allowance requirement for residential
real estate loans and consumer loans partially offset the increase in the
allowance requirement for commercial real estate loans and commercial and
industrial loans.
Nonperforming loans were $2.2 million March 31, 2005 and also December 31,
2004.
As a result of the above factors, management determined that a provision of
$140,000 was appropriate.
Noninterest Income
Noninterest income decreased $317,000 to $748,000 for the three months
ended March 31, 2005 from $1.1 million in the same period in 2004. The
2004 results included net gains on the sale of securities of $479,000 for
the quarter ended March 31, 2004. This was primarily the result of the
Company selling its common stock portfolio in 2004. There were no net
gains from sales of securities for the three months ended March 31, 2005.
Service charge and fee income for the three months ended March 31, 2005 was
$571,000, compared to $409,000 for the three months ended March 31, 2004.
Net checking account processing fee income was $390,000 for the three
months ended March 31, 2005 as compared to $284,000 for the same period in
2004. 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.
Noninterest Expense
Noninterest expense for the three months ended March 31, 2005 was $4.6
million as compared to $4.5 million for the same period in 2004. Salaries
and employee benefits were $2.7 million for the three months ended March
31, 2005 as compared to $2.6 million for the three months ended March 31,
2004. This was primarily the result of normal increases in salaries and
health care costs.
Income Taxes
For the three months ended March 31, 2005, the Company had a tax provision
of $430,000 as compared to $694,000 for the same period in 2004. This was
the result of a decrease in net income before taxes and an increase in
income from tax-exempt assets.
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, 2005 was approximately $31.5 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, 2005, the Company exceeded each of its applicable regulatory
capital requirements. As of March 31, 2005 the most recent notification
from the Federal Deposit Insurance Corporation categorized the Bank as
"well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must maintain
minimum total risk-based, Tier 1 risk based and Tier 1 leverage ratios as
set forth in the following table. There are no conditions or events since
that notification that management believes have changed the Bank's
category. The Company's and the Bank's actual capital ratios of March 31,
2005 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>
March 31, 2005
Total Capital (to Risk Weighted Assets):
Consolidated $124,538 26.84% $37,118 8.00% N/A -
Bank 89,399 19.53 36,626 8.00 45,783 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 119,249 25.70 18,559 4.00 N/A -
Bank 84,110 18.37 18,313 4.00 27,470 6.00
Tier 1 Capital (to Adjusted Assets):
Consolidated 119,249 14.87 32,084 4.00 N/A -
Bank 84,110 10.98 30,627 4.00 38,284 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, 2005 and March 31, 2004.
16
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, 2005 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 $ 149 $ 297 $ 150 $ 41 $ 637
======= ======= ======= ======= ========
BORROWINGS
Federal Home Loan Bank $ 5,000 $30,000 $10,000 $ - $ 45,000
======= ======= ======= ======= ========
CREDIT COMMITMENTS
Available lines of credit $40,116 $ - $ - $13,295 $ 53,411
Other loan commitments 34,005 - - 558 34,563
Letters of credit 4,268 - - 915 5,183
------- ------- ------- ------- --------
Total credit commitments $78,389 $ - $ - $14,768 $ 93,157
------- ------- ------- ------- --------
Grand total $83,538 $30,297 $10,150 $14,809 $138,794
======= ======= ======= ======= ========
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 Bank to maintain minimum amounts and ratios (set forth in the
table) of total and Tier I capital to risk weighted assets and to adjusted
total assets. Management believes, as of March 31, 2005, that the Bank met
all capital adequacy requirements to which they were subject. As of March
31, 2005, the most recent notification from the Office of Thrift
Supervision 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.
17
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 environments. Specifically, net interest income is
measured in one scenario that assumes no change in interest rates, and six
scenarios where interest rates increase 100, 200, 300, and 400 basis
points, and decrease 100 and 200 basis points, respectively, from current
rates over the one year time period following the current consolidated
financial statements. Income from tax-exempt assets is calculated on a
fully taxable equivalent basis.
The changes in interest income and interest expense due to changes in
interest rates reflect the rate 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 is likely to
increase depending on its repricing characteristics while the interest
income from a fixed rate loan would not increase until the funds were
repaid and 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 twelve month period.
For the Twelve Months Ending March 31, 2006
(Dollars in thousands)
-------------------------------------------
Net Interest
Changes in and
Interest Rates Dividend
(Basis Points) Income % Change
-------------- ------------ --------
<s> <c> <c>
400 27,019 0.2%
300 26,929 -0.2%
200 27,041 0.3%
100 27,109 0.5%
0 26,972 0.0%
-100 27,170 0.7%
-200 27,986 0.1%
Management believes that there have been no significant changes in market
risk since December 31, 2004.
The income simulation analysis was based upon a variety of assumptions.
These assumptions include but are not limited to balance sheet growth,
asset mix, prepayment speeds, the timing and level of interest rates, and
the shape of the yield curve. As market conditions vary from the
assumptions in the income simulation analysis, actual results will differ.
As a result, the income simulation analysis does not serve as a forecast of
net interest income, nor do the calculations represent any actions that
management may undertake in response to changes in interest rates.
18
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
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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,
2005.
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 2005 - - -
February 2005 - - -
March 2005 - - -
Total - - - 406,062
19
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. Repurchase Program 1 was
completed during the third quarter of 2004.
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. Repurchase Program 2
will continue until it is completed.
There were no sales by the Company of unregistered securities during the
three months ended March 31, 2005.
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
ITEM 6. EXHIBITS
The following exhibits are furnished with this report:
3.3 Amended and Restated Charter of Westfield Mutual Holding
Company
3.4 Amended and Restated Bylaws of Westfield Mutual Holding Company
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.
20
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 9, 2005
21