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, 2005
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, 2005
- ------------ --------------
Common 9,954,512
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - June 30, 2005 and
December 31, 2004
Consolidated Statements of Operations (Unaudited) - Three and six
months ended June 30, 2005 and 2004
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Six Months ended June 30, 2005
Consolidated Statements of Cash Flows (Unaudited) - Six Months
ended June 30, 2005 and 2004
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," 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,
2005 2004
---- ----
<s> <c> <c>
ASSETS
Cash and due from banks $ 13,708 $ 13,961
Federal funds sold 18,139 31,964
Interest-bearing deposits 5,125 5,122
-------- --------
Cash and cash equivalents 36,972 51,047
-------- --------
SECURITIES:
Available for sale - at estimated fair value 16,943 14,968
Held to maturity - at amortized cost (estimated fair value
of $73,810 in June 2005, and $71,654 in December 2004) 73,266 71,298
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 73,079 73,316
Held to maturity - at amortized cost (estimated fair value
of $167,839 in June 2005, and $174,051 in December 2004) 169,278 175,302
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,237 4,237
LOANS - Net of allowance for loan losses of $5,341 in
June 2005 and $5,277 in December 2004 388,489 368,601
PREMISES AND EQUIPMENT - Net 11,276 11,505
ACCRUED INTEREST AND DIVIDENDS 3,713 3,551
BANK OWNED LIFE INSURANCE 19,407 17,248
OTHER ASSETS 5,623 5,830
-------- --------
TOTAL ASSETS $802,283 $796,903
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 42,821 $ 48,305
Interest-bearing 574,861 564,316
-------- --------
Total deposits 617,682 612,621
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 13,655 14,615
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 45,000 45,000
OTHER LIABILITIES 6,326 6,616
-------- --------
TOTAL LIABILITIES 682,663 678,852
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at June 30, 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
June 30, 2005, and December 31, 2004 106 106
Additional paid-in capital 47,766 47,659
Unallocated Common Stock of Employee Stock Ownership Plan (5,277) (5,427)
Restricted stock unearned compensation (1,292) (1,543)
Retained earnings 91,720 90,399
Accumulated other comprehensive income, net (382) (122)
Treasury stock, at cost (625,488 shares at June 30, 2005, and
December 31, 2004) (13,021) (13,021)
-------- --------
Total stockholders' equity 119,620 118,051
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $802,283 $796,903
======== ========
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
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c>
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $ 3,929 $ 3,577 $ 7,723 $ 7,166
Securities and mortgage backed securities 3,214 3,103 6,405 6,421
Consumer loans 165 296 360 692
Commercial and industrial loans 1,563 1,233 2,970 2,370
Federal funds sold 181 29 352 46
Marketable equity securities 102 76 191 188
Interest-bearing deposits and other short term investments 22 58 52 108
---------- ----------- ---------- -----------
Total interest and dividend income 9,176 8,372 18,053 16,991
---------- ----------- ---------- -----------
INTEREST EXPENSE:
Deposits 2,836 2,386 5,398 4,917
Customer repurchase agreements 80 48 130 98
Other borrowings 363 250 713 419
---------- ----------- ---------- -----------
Total interest expense 3,279 2,684 6,241 5,434
---------- ----------- ---------- -----------
Net interest and dividend income 5,897 5,688 11,812 11,557
PROVISION FOR LOAN LOSSES 125 125 265 275
---------- ----------- ---------- -----------
Net interest and dividend income after
provision for loan losses 5,772 5,563 11,547 11,282
---------- ----------- ---------- -----------
NONINTEREST INCOME:
Income from bank owned life insurance 168 189 346 366
Service charges and fees 625 699 1,194 1,109
Gain on sales of securities, net 18 389 19 868
---------- ----------- ---------- -----------
Total noninterest income 811 1,277 1,559 2,343
---------- ----------- ---------- -----------
NONINTEREST EXPENSE:
Salaries and employees benefits 2,747 2,577 5,475 5,214
Occupancy 485 454 956 903
Computer operations 401 386 794 808
Stationery, supplies and postage 121 149 265 272
Other 1,044 914 1,891 1,766
---------- ----------- ---------- -----------
Total noninterest expense 4,798 4,480 9,381 8,963
---------- ----------- ---------- -----------
INCOME BEFORE INCOME TAXES 1,785 2,360 3,725 4,662
INCOME TAXES 373 727 802 1,422
---------- ----------- ---------- -----------
NET INCOME $ 1,412 $ 1,633 $ 2,923 $ 3,240
========== =========== ========== ===========
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.15 $ 0.17 $ 0.31 $ 0.33
Average shares outstanding 9,503,801 9,826,377 9,501,441 9,903,953
Diluted earnings per share $ 0.15 $ 0.16 $ 0.30 $ 0.32
Diluted average shares outstanding 9,720,266 10,016,749 9,719,148 10,119,972
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 Comprehensive Treasury Stock
Par Paid-In cated Unearned Retained Income (Loss), ------------------
Shares Value Capital ESOP Compensation Earnings Net Shares Amount Total
------ ----- ---------- ------- ------------ -------- -------------- ------ ------ -----
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance at 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 - - - - - 2,923 - - - 2,923
Unrealized losses on
securities arising
during the year, net of
tax benefit of $181 - - - - - - (260) - - (260)
--------
Total comprehensive income 2,663
--------
Activity related to common
stock issued as employee
incentives - - 107 150 251 - - - - 508
Cash dividends declared - - - - - (1,602) - - - 1,602
---------- ---- ------- ------- ------- ------- ----- -------- -------- --------
Balance at June 30, 2005 10,580,000 $106 $47,766 $(5,277) $(1,292) $91,720 $(382) (625,488) $(13,021) $119,620
========== ==== ======= ======= ======= ======= ===== ======== ======== ========
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)
--------
Total 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
========== ==== ======= ======= ======= ======= ===== ======== ======== ========
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,
2005 2004
---- ----
<s> <c> <c>
OPERATING ACTIVITIES:
Net income $ 2,923 $ 3,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 265 275
Depreciation of premises and equipment 488 540
Net amortization of premiums and discounts on
securities, mortgage backed securities, and
mortgage loans 526 876
Amortization of unearned compensation 590 735
Net realized securities gains (19) (868)
Deferred income tax benefit - (484)
Increase in cash surrender value of bank
owned life insurance (346) (366)
Changes in assets and liabilities:
Accrued interest and dividends (162) (25)
Other assets (227) 1,700
Other liabilities 325 2
-------- --------
Net cash provided by operating activities 4,363 5,625
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (10,015) (9,311)
Proceeds from maturities and principal collections 8,000 2,000
Securities, available for sale:
Purchases (6,161) (5,091)
Proceeds from sales 3,833 11,891
Proceeds from calls, maturities, and principal collections 365 2,671
Mortgage backed securities, held to maturity:
Purchases (17,165) (15,096)
Principal collections 22,897 30,045
Mortgage backed securities, available for sale:
Purchases (28,944) (26,453)
Proceeds from sales 16,941 20,325
Principal collections 11,641 11,763
Purchase of residential mortgages (807) (12,032)
Net other decrease (increase) in loans (19,368) 619
Purchases of premise and equipment (259) (327)
Purchase of bank owned life insurance (1,813) 0
-------- --------
Net cash (used in) provided by investing
activities (20,855) 11,004
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in deposits 5,061 (12,082)
Decrease in customer repurchase agreements (960) (416)
Federal Home Loan Bank of Boston advances - 15,000
Purchase of common stock in connection with employee
benefit program (82) (104)
Cash dividends paid (1,602) (1,051)
Treasury stock purchased - (9,602)
-------- --------
Net cash provided by (used in) financing activities 2,417 (8,255)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS: (14,075) 8,374
Beginning of period 51,047 45,674
-------- --------
End of period $ 36,972 $ 54,048
======== ========
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 June 2005, the Company's Board of
Directors voted to dissolve Westfield Securities Corp. in order to
streamline operations. This dissolution of Westfield Securities Corp. is
expected to be completed in the third quarter 2005.
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, 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 and income 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,
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net income as reported $1,412 $1,633 $2,923 $3,240
Less: Compensation expense
determined under fair value
based method for all awards
net of tax effects (68) (68) (136) (136)
------ ------ ------ ------
Pro forma net income $1,344 $1,565 $2,787 $3,104
====== ====== ====== ======
Net income per share
Basic as reported $ 0.15 $ 0.17 $ 0.31 $ 0.33
Pro forma 0.14 0.16 0.29 0.31
Diluted as reported $ 0.15 0.16 $ 0.30 0.32
Pro forma 0.14 0.16 0.29 0.31
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 period shown:
Pension Benefits Other Benefits
---------------- --------------
Three months ended June 30,
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 loss 6 2 - -
----- ----- --- ---
Net periodic pension cost $ 156 $ 139 $21 $18
===== ===== === ===
8
Pension Benefits Other Benefits
---------------- --------------
Six months ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c>
Service cost $313 $274 $15 $12
Interest cost 253 232 21 19
Expected return on assets (262) (226) - -
Transaction obligation (6) (6) 5 5
Actuarial loss 11 4 - -
---- ---- --- ---
Net periodic pension cost $309 $278 $41 $36
==== ==== === ===
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 June 30, 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. SFAS 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.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
The Company 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, the 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. The Bank
meets the needs of its local community through a community-based and
service-oriented approach to banking.
9
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, the 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, 2005
in the context of this strategy.
* Net income was $1.4 million, or $0.15 per diluted share, for the
quarter ended June 30, 2005 as compared to $1.6 million, or $0.16 per
diluted share for the same period in 2004. The second quarter results
included net gains from the sale of securities of $389,000 for the
three months ended June 30, 2004. This was primarily the result of the
Company selling its common stock portfolio in 2004. Net gains from
sales of securities for the three months ended June 30, 2005 were
$18,000.
* For the six months ended June 30, 2005, net income was $2.9 million, or
$0.30 per diluted share as compared to $3.2 million, or $0.32 per
diluted share for the same period in 2004. The 2004 results included
net gains from the sale of securities of $868,000 for the six months
ended June 30, 2004. This was primarily the result of the Company
selling its common stock portfolio in 2004. Net gains from sales of
securities for the six months ended June 30, 2005 were $19,000.
* Commercial real estate and commercial and industrial loans increased
$30.3 million, or 12.7% from December 31, 2004 to June 30, 2005. This
is consistent with the Bank's strategic plan, which emphasizes
commercial lending. The continued success of the Bank's commercial
lending is primarily dependent on the local and national economy.
* Residential real estate loans decreased $7.7 million to $115.5 million
at June 30, 2005 from $123.2 million at December 31, 2004. The Bank
refers its residential real estate borrowers to a third party mortgage
company and substantially all of the Bank's residential real estate
loans are underwritten, originated and serviced by a third party
mortgage company. The Bank receives a fee from each of these loans
originated. The 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 a
higher yield on interest-earning assets. The net interest margin was
3.13% and 3.17% for the three and six months ended June 30, 2005,
respectively, as compared to 3.04% and 3.11% for the same periods in
2004, respectively. The Company 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.
10
* Total deposits increased $5.1 million from $612.6 million at December
31, 2004 to $617.7 million at June 30, 2005. The increase in deposits
was primarily the result of an increase of $12.7 term deposits, which
were $325.8 million at June 30, 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.
* Nonperforming loans were $2.1 million at June 30, 2005 and $2.2 million
December 31, 2004.
* Charge-offs increased by $138,000 from $273,000 for the six months
ended June 30, 2004 to $411,000 for the six months ended June 30, 2005.
This was primarily the result of an increase of $289,000 in charge offs
of commercial and industrial loans, which was partially offset by a
decrease of $151,000 in consumer loans. The decrease in charge offs of
consumer loans is mainly the 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 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.
11
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. The Company 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 JUNE 30, 2005 AND DECEMBER 31, 2004
Total assets increased $5.4 million to $802.3 million at June 30, 2005 from
$796.9 million at December 31, 2004. Securities decreased $2.3 million to
$332.6 million at June 30, 2005 from $334.9 million at December 31, 2004.
Net loans during the period increased by $19.9 million to $388.5 million at
June 30, 2005 from $368.6 million at December 31, 2004. Commercial real
estate and commercial and industrial loans increased $30.3 million, or
12.7%, to $269.4 million at June 30, 2005 from $239.1 million at December
31, 2004. This is consistent with the Bank's strategic plan, which
emphasizes commercial lending. The continued success of the Bank's
commercial lending is primarily dependent on the local and national
economy. Residential real estate loans decreased $7.7 million to $115.5
million at June 30, 2005 from $123.2 million at December 31, 2004. The Bank
refers its residential real estate borrowers to a third party mortgage
company and substantially all of the Bank's residential real estate loans
are underwritten, originated and serviced by a third party mortgage
company. The Bank receives a fee from each of these loans originated. The
Bank believes that this program has diversified its loan portfolio and
continues to reduce interest rate risk.
Total deposits increased $5.1 million to $617.7 million at June 30, 2005
from $612.6 million at December 31, 2004. Time deposits increased $12.7
million to $325.8 million at June 30, 2005. Core deposits which include
checking, NOW, savings, and money market accounts, decreased by $7.6
million to $291.9 at June 30, 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 borrowings totaled $45.0 million at June 30, 2005
and December 31, 2004. Customer repurchase agreements decreased $0.9
million, to $13.7 million at June 30, 2005 from December 31, 2004. A
customer repurchase agreement is an agreement by the 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 the Bank's customer repurchase agreements at June 30, 2005 were held
by commercial customers.
12
Stockholders' equity at June 30, 2005 and December 31, 2004 was $119.6
million and $118.1 million, respectively, which represented 14.9% of total
assets as of June 30, 2005 and 14.8% of total assets as of December 31,
2004. The change is primarily comprised of net income of $2.9 million for
the six months ended June 30, 2005, and the declaration by the Board of
Directors of dividends of $0.10 per share on January 27, 2005 and April 26,
2005, as well as the declaration of a special dividend of $0.20 per share
on April 26, 2005, all of which aggregated $1.6 million.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2005
AND JUNE 30, 2004
General
Net income was $1.4 million, or $0.15 per diluted share, for the quarter
ended June 30, 2005 as compared to $1.6 million, or $0.16 per diluted
share, for the same period in 2004. The second quarter 2004 results
included net gains from the sale of securities of $389,000 for the three
months ended June 30, 2004. This was primarily the result of the Company
selling its common stock portfolio in 2004. Net gains from sale of
securities for the three months ended June 30, 2005 were $18,000.
Net interest and dividend income increased $209,000 to $5.8 million for the
three months ended June 30, 2005 as compared to $5.6 million for the same
period in 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,
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.
13
Three Months Ended June 30,
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 $ 203 $ 28,361 2.86% $ 29 $ 15,152 0.77%
Investment Securities 3,316 343,307 3.86 3,237 376,415 3.44
Loans 5,657 384,696 5.88 5,106 359,970 5.67
------ -------- ------ --------
Total Interest-Earning Assets $9,176 $756,364 4.85 $8,372 $751,537 4.46
====== ======== ====== ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 75 $ 60,421 0.50% $ 57 $ 42,807 0.53%
Savings Accounts 55 43,902 0.50 54 47,603 0.45
Money Market Accounts 553 147,834 1.50 373 153,754 0.97
Time Deposits 2,153 318,568 2.70 1,902 319,303 2.38
Customer Repurchase Agreements and
Borrowings 443 62,720 2.83 298 47,182 2.53
------ -------- ------ --------
Total Interest-Bearing Liabilities $3,279 $633,445 2.07 $2,684 $610,649 1.76
====== ======== ====== ========
Net Interest Income/Interest Rate Spread $5,897 2.78% $5,688 2.70%
====== ==== ====== ====
Net Interest Margin 3.13% 3.04%
==== ====
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.
14
Three Months Ended June 30, 2005 compared to
June 30, 2004
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
<s> <c> <c> <c>
Short Term Investments $ 25 $ 149 $174
Investment Securities (285) 364 79
Loans 351 200 551
----- ----- ----
Net Change in Income on
Interest-Earning Assets 91 713 804
----- ----- ----
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 23 (5) 18
Savings Accounts (4) 5 1
Money Market Accounts (14) 194 180
Time Deposits (4) 255 251
Customer Repurchase Agreements and
Borrowings 98 47 145
----- ----- ----
Net Change in Expense on
Interest-Bearing Liabilities 99 496 595
----- ----- ----
Change in Net Interest Income $ (8) $ 217 $209
===== ===== ====
Net interest and dividend income increased $209,000 to $5.8 million for the
three months ended June 30, 2005 as compared to $5.6 million for the same
period in 2004. The net interest margin was 3.13% for the three months
ended June 30, 2005 as compared to 3.04% 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 39 basis points to 4.85% for the three months ended June
30, 2005 from 4.46% for same period in 2004. 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.
The average cost of interest-bearing liabilities increased 31 basis points
to 2.07% for the three months ended June 30, 2005 from 1.76% 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 and term deposits resulting from the rising interest rate
environment. As the rates 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. In a period of
rising interest rates, the more rate sensitive customers will continue to
shift funds back into time deposits, resulting in a higher cost of
deposits.
15
Provision for Loan Losses
The Bank provided $125,000 for loan losses for the three months ended June
30, 2005 and also the three months ended June 30, 2004. The amount that the
Bank provided for the provision for loan losses during the three months
ended June 30, 2005 was based upon the changes that occurred in the loan
portfolio during the 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 June 30, 2005 and March
31, 2005. The allowance for loan losses was 1.36% of total loans at June
30, 2005 and 1.40% at March 31, 2005.
At June 30, 2005 commercial real estate loans and commercial and industrial
loans increased $20.3 million as compared to March 31, 2005. Commercial
real estate loans and commercial and industrial loans comprised 68.4% of
the Bank's loan portfolio as of June 30, 2005 as compared to 66.0% as of
March 31, 2005. 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 $2.9 million during the quarter ended June 30, 2005. Consumer loans
decreased $1.0 million to $8.8 million at June 30, 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.
In addition, nonperforming loans decreased $89,000 to $2.1 million at June
30, 2005 compared to $2.2 million at March 31, 2005. This was primarily the
result of payments in full on nonperforming loans.
As a result of the above factors, management determined that a provision of
$125,000 was appropriate.
Noninterest Income
Noninterest income decreased $466,000 to $811,000 for the three months
ended June 30, 2005 from $1.3 million in the same period in 2004. Net gains
on the sale of securities were $18,000 for the quarter ended June 30, 2005
as compared to $389,000 for the same period in 2004. The Company had sold
essentially all its common stock portfolio as of June 30, 2004.
Checking account processing fees decreased $93,000 to $430,000 for the
three months ended June 30, 2005 from $523,000 in the same period in 2004.
The decrease in the 2005 period is primarily the result of reduced activity
in this program. Fee income from commercial letters of credit was $41,000
for the three months ended June 30, 2005, as compared to none for the same
period in 2004.
Noninterest Expense
Noninterest expense was $4.8 million for the three months ended June 30,
2005 and $4.5 million for the three months ended June 30, 2005. Salaries
and benefits increased $170,000 for the three months ended June 30, 2005 as
compared to the same period in 2004. 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, 2005, the Company had a tax provision
of $373,000 as compared to $727,000 for the same period in 2004. This was
the result of lower income before taxes and an increase from tax-exempt
assets.
16
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND
JUNE 30, 2004
General
Net income was $2.9 million, or $0.30 per diluted share, for the six months
ended June 30, 2005 as compared to $3.2 million, or $0.32 per diluted
share, for the same period in 2004. The 2004 results included net gains
from the sale of securities of $868,000 for the six months ended June 30,
2004. This was primarily the result of the Company selling its common stock
portfolio in 2004. Net gains from the sale of securities for the six months
ended June 30, 2005 were $19,000.
Net interest and dividend income increased $255,000 to $11.8 million for
the six months ended June 30, 2005 as compared to $11.6 million for the
same period in 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 six months ended June 30, 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.
Six Months Ended June 30,
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 $ 404 $ 31,344 2.58% $ 46 $ 11,890 0.77%
Investment Securities 6,596 341,414 3.86 6,717 379,320 3.54
Loans 11,053 379,491 5.83 10,228 358,850 5.70
------- -------- ------- --------
Total Interest-Earning Assets $18,053 $752,249 4.80 $16,991 $750,060 4.53
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 146 $ 59,122 0.49% $ 111 $ 41,809 0.53%
Savings Accounts 109 44,057 0.49 116 49,225 0.47
Money Market Accounts 1,003 147,472 1.36 747 154,013 0.97
Time Deposits 4,139 316,778 2.61 3,943 323,792 2.44
Customer Repurchase Agreements and
Borrowings 844 61,902 2.73 517 42,510 2.43
------- -------- ------- --------
Total Interest-Bearing Liabilities $ 6,241 $629,331 1.98 $ 5,434 $611,349 1.78
======= ======== ======= ========
Net Interest Income/Interest Rate Spread $11,812 2.82% $11,557 2.75%
======= ==== ======= ====
Net Interest Margin 3.17% 3.11%
==== ====
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, 2005 compared to
June 30, 2004
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
<s> <c> <c> <c>
Short Term Investments $ 75 $ 283 $ 358
Investment Securities (671) 550 (121)
Loans 588 237 825
----- ------ ------
Net Change in Income on
Interest-Earning Assets (8) 1,070 1,062
----- ------ ------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 46 (11) 35
Savings Accounts (12) 5 (7)
Money Market Accounts (32) 288 256
Time Deposits (85) 281 196
Customer Repurchase Agreements and
Borrowings 236 91 327
----- ------ ------
Net Change in Expense on
Interest-Bearing Liabilities 153 654 807
----- ------ ------
Change in Net Interest Income $(161) $ 416 $ 255
===== ====== ======
18
Net interest and dividend income increased $255,000 to $11.8 million for
the six months ended June 30, 2005 as compared to $11.6 million for the
same period in 2004. The net interest margin was 3.17% for the six months
ended June 30, 2005 as compared to 3.11% 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 27 basis points to 4.80% for the six months ended June 30,
2005 from 4.53% for same period in 2004. 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.
The average cost of interest-bearing liabilities increased 20 basis points
to 1.98% for the six months ended June 30, 2005 from 1.78% 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 and
term deposits resulting from the rising interest rate environment. As the
rates 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. In a period of rising interest rates,
the more rate sensitive customers will continue to shift funds back into
time deposits, resulting in a higher cost of deposits.
Provision for Loan Losses
The Bank provided $265,000 for loan losses for the six months ended June
30, 2005 and $275,000 for the six months ended June 30, 2004. The amount
that Westfield Bank provided for the provision for loan losses during the
six months ended June 30, 2005 was based upon the changes that occurred in
the loan portfolio during the 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 June 30,
2005 and December 31, 2004. The allowance for loan losses was 1.36% of
total loans at June 30, 2005 and 1.40% at December 31, 2004.
At June 30, 2005 commercial real estate loans and commercial and industrial
loans increased $30.3 million as compared to December 31, 2004. Commercial
real estate loans and commercial and industrial loans comprised 68.4% of
the Bank's loan portfolio as of June 30, 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 $7.7 million during the quarter ended June 30, 2005. Consumer loans
decreased $2.8 million to $8.8 million at June 30, 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 decreased $56,000 to $2.1 million at June 30, 2005
compared to $2.2 million at December 31, 2004. This was primarily the
result of payments in full on nonperforming loans.
As a result of the above factors, management determined that a provision of
$265,000 was appropriate.
Noninterest Income
Noninterest income decreased $784,000 to $1.6 million for the six months
ended June 30, 2005 from $2.3 million in the same period in 2004. Net gains
on the sale of securities were $19,000 for the six months ended June 30,
2005 as compared to $868,000 for the same period in 2004. The Company had
sold essentially all its common stock portfolio as of June 30, 2004.
19
Checking account processing fees increased $4,000 to $820,000 for the six
months ended June 30, 2005 from $816,000 for the same period in 2004. Fee
income from commercial letters of credit was $41,000 for the six months
ended June 30, 2005, as compared to none for the six months ended June 30,
2004. Fees received from the third party mortgage company decreased $12,000
to $36,000 for the six months ended June 30, 2004 as compared to $48,000
for the same period in 2004. 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, 2005 was $9.4 million
as compared to $9.0 million for the same period in 2004. Salaries and
benefits increased $261,000 for the six months ended June 30, 2005 as
compared to the same period in 2004. This was primarily the result of
normal increases in salaries and health care costs along with an increase
in stock based benefit plan expenses. Advertising expenses increased
$197,000 to $297,000 for the six months ended June 30, 2005 as compared to
$100,000 for the comparable 2004 period.
Income Taxes
For the six months ended June 30, 2005, the Company had a tax provision of
$802,000 as compared to $1.4 million for the same period in 2004. This was
the result of a decrease in income before taxes and an increase in income
from the 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
Federal Home Loan Bank ("FHLB") of Boston based on eligible collateral of
loans and securities. The Bank's maximum additional borrowing capacity from
the FHLB at June 30, 2005 was approximately $27.5 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.
20
At June 30, 2005, the Company exceeded each of the applicable regulatory
capital requirements. As of June 30, 2005 the most recent notification from
the Office of Thrift Supervision (the "OTS") 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 tables. 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, 2005 and
December 31, 2004 are also presented in the tables.
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, 2005
Total Capital (to Risk Weighted Assets):
Consolidated $125,185 26.21% $38,212 8.00% N/A -
Bank 90,644 19.25 37,665 8.00 47,081 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 119,844 25.09 19,106 4.00 N/A -
Bank 85,430 18.15 18,832 4.00 28,249 6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated 119,844 14.93 32,109 4.00 N/A -
Bank 85,430 11.11 30,748 4.00 38,435 5.00
December 31, 2004
Total Capital (to Risk Weighted Assets):
Consolidated $123,222 26.90% $36,650 8.00% N/A -
Bank 87,916 19.49 36,091 8.00 45,114 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 117,945 25.75 18,325 4.00 N/A -
Bank 82,639 18.32 18,046 4.00 27,069 6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated 117,945 14.69 32,125 4.00 N/A -
Bank 82,639 10.85 30,452 4.00 38,065 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"). The 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, 2005 and June 30, 2004.
21
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 branches and equipment. A
summary of lease obligations and credit commitments at June 30, 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 $ 197 $ 247 $ 109 $ 37 $ 590
======= ======= ======= ======= ========
BORROWINGS
Federal Home Loan Bank $10,000 $25,000 $10,000 $ - $ 45,000
======= ======= ======= ======= ========
CREDIT COMMITMENTS
Available lines of credit $35,510 $ - $ - $12,765 $ 48,275
Other loan commitments 17,884 8,932 - - 26,816
Letters of credit 4,278 - - 904 5,182
------- ------- ------- ------- --------
Total credit commitments $57,672 $ 8,932 $ - $13,669 $ 80,273
------- ------- ------- ------- --------
Grand total $67,869 $34,179 $10,109 $13,706 $125,863
======= ======= ======= ======= ========
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, 2005,
that the Company and the Bank met all capital adequacy requirements to
which they were subject. As of June 30, 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.
Specifically, net interest income is measured in one scenario that assumed
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 statement. Income from
tax-exempt assets is calculated on a fully taxable equivalent basis.
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.
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 June 30, 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 June 30, 2006
(Dollars in thousands)
------------------------------------------
Net Interest
Changes in and
Interest Rates Dividend
(Basis Points) Income % Change
------------- ------------ --------
<s> <c> <c>
400 26,798 -1.5%
300 26,811 -1.5%
200 27,064 -0.6%
100 27,213 0.0%
0 27,219 0.0%
-100 27,567 1.3%
-200 26,972 -0.9%
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.
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 to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange
Act is (i) recorded, processed, summarized and reported as and when
required and (ii) accumulated and communicated to the Company's management,
including the Company's principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.
23
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 June 30,
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>
April 2005 - - -
- ------------------------------------------------------------------------------------------
May 2005 - - -
- ------------------------------------------------------------------------------------------
June 2005 - - -
- ------------------------------------------------------------------------------------------
Total - - - 406,062
- ------------------------------------------------------------------------------------------
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.
There were no sales by the Company of unregistered securities during the
three months ended June 30, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 20, 2005 (the
"Meeting"). The sole proposal submitted to the shareholders of the meeting
was the election of four candidates to the Board of Directors.
The number of votes cast with respect to this matter is as follows:
Nominee For Withheld
------- --- --------
Robert T. Crowley, Jr. 9,114,947 7,193
Harry C. Lane 9,114,772 7,368
William H. McClure 9,113,432 8,708
Paul R. Pohl 9,115,432 6,708
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. Charles E. Sullivan
Victor J. Carra Thomas C. Sullivan
Mary C. O'Neil Donald A. Williams
Richard C. Placek
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are furnished with this report:
2.1 Plan of Reorganization and Minority Stock Issuance of Westfield
Mutual Holding Company, as amended. *
3.1 Articles of Organization of Westfield Financial, Inc.*
3.2 Bylaws of Westfield Financial, Inc. *
3.3 Amended and Restated Charter of Westfield Mutual Holding Company*
3.4 Amended and Restated Bylaws of Westfield Mutual Holding Company*
4.1 Articles of Organization of Westfield Financial, Inc. (See
Exhibit 3.1)*
4.2 Bylaws of Westfield Financial, Inc. (See Exhibit 3.2)*
4.3 Form of Stock Certificate of Westfield Financial, Inc.*
10.1 Form of Employee Stock Ownership Plan of Westfield Financial, Inc.*
10.2 Form of the Benefit Restoration Plan of Westfield Financial, Inc.*
25
10.3 Form of Employment Agreement between Donald A. Williams and Westfield
Financial, Inc.*
10.4 Form of Employment Agreement between Victor J. Carra and Westfield
Financial, Inc.*
10.5 Form of Employment Agreement between Michael J. Janosco, Jr. and
Westfield Financial, Inc.*
10.6 Form of One Year Change in Control Agreement by and among certain
officers and Westfield Financial, Inc. and Westfield Bank*
10.7 Form of Directors' Deferred Compensation Plan*
10.8 The SBERA 401(k) Plan adopted by Westfield Bank**
10.9 Amendments to the Employee Stock Ownership Plan of Westfield
Financial, Inc.***
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.
<FN>
* Incorporated herein by reference to the Registration Statement No.
333-68550 on Form S-1 filed with the SEC on August 28, 2001, as
amended.
** Incorporated herein by reference to the Registration Statement No.
333-73132 on Form S-8 filed with the SEC on November 9, 2001, as
amended.
*** Incorporated by reference to the Annual Report on Form 10-K for the
year ended December 31, 2002 filed with the SEC on March 31, 2003.
</FN>
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.
By: /s/ Donald A. Williams
--------------------------------
Donald A. Williams
Chairman/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, 2005
27