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 September 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 by check mark whether the registrant is a shell holding
company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
----- ---
- --
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 November 4, 2005
- ------------ ----------------
Common 9,839,457
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - September 30, 2005 and
December 31, 2004
Consolidated Statements of Operations (Unaudited) - Three and nine
months ended September 30, 2005 and 2004
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Nine months ended September 30,
2005
Consolidated Statements of Cash Flows (Unaudited) - Nine months
ended September 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
ITEM 1: FINANCIAL STATEMENTS
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in thousands except share data)
September 30, December 31,
2005 2004
---- ----
<s> <c> <c>
ASSETS
Cash and due from banks $ 14,109 $ 13,961
Federal funds sold 25,625 31,964
Interest-bearing deposits 5,056 5,122
-------- --------
Cash and cash equivalents 44,790 51,047
-------- --------
SECURITIES:
Available for sale - at estimated fair value 19,829 14,968
Held to maturity - at amortized cost (estimated fair value
of $73,168 in September 2005, and $71,654 in December 2004) 73,352 71,298
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 93,978 73,316
Held to maturity - at amortized cost (estimated fair value
of $153,759 in September 2005, and $174,051 in December 2004) 155,938 175,302
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,237 4,237
LOANS - Net of allowance for loan losses of $5,452 in
September 2005 and $5,277 in December 2004 380,529 368,601
PREMISES AND EQUIPMENT, Net 11,108 11,505
ACCRUED INTEREST AND DIVIDENDS 3,689 3,551
BANK OWNED LIFE INSURANCE 19,613 17,248
OTHER ASSETS 5,408 5,830
-------- --------
TOTAL ASSETS $812,471 $796,903
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 42,891 $ 48,305
Interest-bearing 583,010 564,316
-------- --------
Total deposits 625,901 612,621
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 16,637 14,615
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 45,000 45,000
OTHER LIABILITIES 7,193 6,616
-------- --------
TOTAL LIABILITIES 694,731 678,852
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at September 30, 2005, December 31, 2004 - -
Common stock - $.01 par value, 25,000,000 shares authorized,
10,580,000 shares issued, 9,839,457 shares outstanding at
September 30, 2005 and 9,954,512 December 31, 2004 106 106
Additional paid-in capital 47,806 47,659
Unallocated Common Stock of Employee Stock Ownership Plan (5,202) (5,427)
Restricted stock unearned compensation (978) (1,543)
Retained earnings 92,646 90,399
Accumulated other comprehensive income, net (771) (122)
Treasury stock, at cost (740,543 shares at September 30, 2005
and 625,488 December 31, 2004) (15,867) (13,021)
-------- --------
Total stockholders' equity 117,740 118,051
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $812,471 $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 Nine Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c>
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $4,085 $3,641 $11,809 $10,808
Securities and mortgage backed securities 3,206 3,147 9,610 9,568
Consumer loans 143 284 503 976
Commercial and industrial loans 1,714 1,337 4,683 3,707
Federal funds sold 216 87 568 133
Marketable equity securities 97 74 288 262
Interest-bearing deposits 43 7 95 115
------ ------ ------- -------
Total interest and dividend income 9,504 8,577 27,556 25,569
------ ------ ------- -------
INTEREST EXPENSE:
Deposits 3,098 2,328 8,496 7,245
Customer repurchase agreements 82 43 212 142
Other borrowings 374 317 1,086 736
------ ------ ------- -------
Total interest expense 3,554 2,688 9,794 8,123
------ ------ ------- -------
Net interest and dividend income 5,950 5,889 17,762 17,446
PROVISION FOR LOAN LOSSES 100 200 365 475
------ ------ ------- -------
Net interest and dividend income after
provision for loan losses 5,850 5,689 17,397 16,971
------ ------ ------- -------
NONINTEREST INCOME:
Income from bank owned life insurance 206 187 552 553
Service charges and fees 709 591 1,903 1,699
Gain on sales of securities, net - - 19 868
------ ------ ------- -------
Total noninterest income 915 778 2,474 3,120
------ ------ ------- -------
NONINTEREST EXPENSE:
Salaries and employees benefits 2,940 2,614 8,415 7,828
Occupancy 485 447 1,441 1,350
Computer operations 391 400 1,185 1,208
Stationery, supplies and postage 138 122 403 394
Other 663 703 2,554 2,469
------ ------ ------- -------
Total noninterest expense 4,617 4,286 13,998 13,249
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 2,148 2,181 5,873 6,842
INCOME TAXES 553 627 1,355 2,048
------ ------ ------- -------
NET INCOME $1,595 $1,554 $ 4,518 $ 4,794
====== ====== ======= =======
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.17 $ 0.16 $ 0.48 $ 0.49
Diluted earnings per share $ 0.16 $ 0.16 $ 0.46 $ 0.48
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 - - - - - 4,518 - - - 4,518
Unrealized losses on
securities arising
during the year, net of
tax benefit of $401 - - - - - - (649) - - (649)
--------
Comprehensive income 3,869
--------
Activity related to common
stock issued as employee
incentives - - 147 225 565 - - - - 937
--------
Treasury stock purchased - - - - - - - (152,400) $ (3,651) (3,651)
Reissuance of treasury
shares in connection with
stock option exercises - - - - - (268) - 37,345 $ 805 537
Cash dividends declared - - - - - (2,003) - - - (2,003)
---------- ---- ------- ------- ------- ------- ----- -------- --------- --------
Balance, September 30, 2005 10,580,000 $106 $47,806 $(5,202) $ (978) $92,646 $(771) (740,543) $(15,867) $117,740
========== ==== ======= ======= ======= ======= ===== ======== ========= ========
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 - - - - - 4,794 - - - 4,794
Unrealized losses on
securities arising
during the period, net of
tax benefit of $89 - - - - - - (199) - - (199)
Reclassification for gains
included in net income,
net of tax benefit of $250 - - - - - - (618) - - (618)
--------
Comprehensive income 3,977
--------
Activity related to common
stock issued as employee
incentives - - 247 108 413 - - - - 768
Treasury stock purchased - - - - - - - (546,378) (11,388) (11,388)
Cash dividends declared - - - - - (1,495) - - - (1,495)
---------- ---- ------- ------- ------- ------- ----- -------- --------- --------
Balance at September 30, 2004 10,580,000 $106 $47,390 $(5,729) $(1,681) $89,093 $ (29) (604,078) $(12,484) $116,666
========== ==== ======= ======= ======= ======= ===== ======== ========= ========
See accompanying notes to consolidated financial statements.
5
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Nine Months
Ended September 30,
2005 2004
---- ----
<s> <c> <c>
OPERATING ACTIVITIES:
Net income $ 4,518 $ 4,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 365 475
Depreciation of premises and equipment 720 771
Net amortization of premiums and discounts on
securities, mortgage backed securities, and
mortgage loans 833 1,145
Amortization of unearned compensation 1,058 872
Net realized securities gains (19) (868)
Deferred income tax provision - 417
Increase in cash surrender value of bank
owned life insurance (552) (553)
Changes in assets and liabilities:
Accrued interest and dividends (138) (36)
Other assets 823 762
Other liabilities 577 (411)
-------- --------
Net cash provided by operating activities 8,185 7,368
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (11,130) (15,209)
Proceeds from calls, maturities, and principal collections 9,000 3,000
Securities, available for sale:
Purchases (9,206) (5,287)
Proceeds from sales 3,833 11,891
Proceeds from calls, maturities, and principal collections 365 3,899
Mortgage backed securities, held to maturity:
Purchases (17,165) (19,663)
Principal collections 36,035 42,690
Mortgage backed securities, available for sale:
Purchases (56,833) (36,515)
Proceeds from sales 16,962 20,325
Principal collections 18,112 17,463
Purchase of residential mortgages (1,284) (34,127)
Net other (increase) decrease in loans (11,059) 4,827
Purchases of premise and equipment (323) (391)
Purchase of bank owned life insurance (1,813) -
-------- --------
Net cash used in investing activities (24,506) (7,097)
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in deposits 13,280 (21,783)
Increase in customer repurchase agreements 2,022 4,304
Federal Home Loan Bank of Boston advances - 25,000
Purchase of common stock in connection with employee
benefit program (121) (104)
Cash dividends paid (2,003) (1,495)
Treasury stock purchased (3,651) (11,388)
Reissuance of treasury shares in connection with
employee benefit program 537 -
-------- --------
Net cash provided (used in) by financing activities 10,064 (5,466)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS: (6,257) (5,195)
CASH AND CASH EQUIVALENTS
Beginning of period 51,047 45,674
-------- --------
End of period $ 44,790 $ 40,479
======== ========
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 the third quarter of 2005, the Company
dissolved Westfield Securities Corp. in order to streamline operations.
In 2003, the Bank formed another wholly-owned subsidiary, Elm Street
Securities Corporation, a Massachusetts-chartered security corporation, for
the primary purpose of holding 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 September 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 and nine 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 Nine Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net income as reported $1,595 $1,554 $4,518 $4,794
Less: Compensation expense
determined under fair value
based method for all awards
net of tax effects (135) (68) (271) (204)
------ ------ ------ ------
Pro forma net income $1,460 $1,486 $4,247 $4,590
====== ====== ====== ======
Net income per share
Basic as reported $ 0.17 $ 0.16 $ 0.48 $ 0.49
Pro forma 0.15 0.16 0.45 0.47
Diluted as reported 0.16 0.16 0.46 0.48
Pro forma 0.15 0.15 0.44 0.46
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.
8
3. PENSION AND OTHER BENEFITS
The following provides information regarding net benefit costs for the
period shown:
Pension Benefits Other Benefits
---------------- --------------
Three months ended September 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
===== ===== === ===
Pension Benefits Other Benefits
---------------- --------------
Nine months ended September 30,
2005 2004 2005 2004
---- ---- ---- ----
<s> <c> <c> <c> <c>
Service cost $ 470 $ 411 $23 $18
Interest cost 380 347 32 29
Expected return on assets (392) (339) - -
Transaction obligation (9) (9) 7 7
Actuarial loss 17 5 - -
----- ----- --- ---
Net periodic pension cost $ 466 $ 415 $62 $54
===== ===== === ===
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. On September 30, 2005, the Company
made a contribution in the amount of $474,283.
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. SFAS 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
9
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.
The Company intends to recognize compensation expense under the fair value
based method beginning January 1, 2006. While the Company is still in the
process of analyzing the cost of stock options under SFAS 123R, the
preliminary estimate of the expense, using the Black-Scholes model for the
year ended December 31, 2006 is approximately $234,000, net of taxes.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
Westfield Financial (the "Company") strives to remain a leader in meeting
the financial service needs of the local community primarily in Hampden
County, Massachusetts, and to provide quality service to the individuals
and businesses in the market areas that it has served since 1853.
Historically, Westfield Bank (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. 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 September 30,
2005 in the context of this strategy.
* Net income was $1.6 million, or $0.16 per diluted share, for the
quarter ended September 30, 2005 as compared to $1.6 million, or
$0.16 per diluted share for the same period in 2004.
* For the nine months ended September 30, 2005, net income was $4.5
million, or $0.46 per diluted share as compared to $4.8 million, or
$0.48 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
nine months ended September 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 nine months ended September 30, 2005
were $19,000.
10
* Commercial real estate and commercial and industrial loans increased
$28.4 million, or 11.9% from $239.1 million at December 31, 2004 to
$267.5 million at September 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 $12.8 million to $110.4
million at September 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
higher balances in interest-earning assets, along with a higher yield
on interest-earning assets. 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. The net interest margin was 3.09% and
3.14% for the three and nine months ended September 30, 2005,
respectively, as compared to 3.14% and 3.11% for the same periods in
2004, respectively.
* Total deposits increased $13.3 million from $612.6 million at
December 31, 2004 to $625.9 million at September 30, 2005. The
increase in deposits was primarily the result of an increase of $22.5
million in term deposits, which were $335.6 million at September 30,
2005. The increase in term deposits was partially offset by a
decrease in core deposits which totaled $9.3 million. 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 $2.0 million at September 30, 2005 and $2.2
million December 31, 2004.
* Charge-offs increased by $91,000 from $351,000 for the nine months
ended September 30, 2004 to $442,000 for the nine months ended
September 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 $198,000 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 judgement of management, collection of principal balance is not in
question. Loans are returned to accrual status when they become current as
to both principal and interest and when subsequent performance reduces the
concern as to the collectibility of principal and interest. Loan fees and
certain direct loan origination costs are deferred, and the net fee or cost
is recognized as an
11
adjustment to interest income over the estimated average lives of the
related loans. Compensation to an auto dealer is normally based upon a
spread that a dealer adds on the loanbase rate set by the Company. The
compensation is paid to an automobile dealer shortly after the loan is
originated. The Company records the amount as a deferred cost that is
amortized over the life of the loans in relation to the interest paid by
the consumer.
The Company's methodology for assessing the appropriateness of the
allowance consists of two key components, which are a specific allowance
for identified problem or impaired loans and a formula allowance for the
remainder of the portfolio. Measurement of impairment can be based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent. This
evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change. The appropriateness of the
allowance is also reviewed by management based upon its evaluation of then-
existing economic and business conditions affecting the key lending areas
of the Company and other conditions, such as new loan products, credit
quality trends (including trends in nonperforming loans expected to result
from existing conditions), collateral values, loan volumes and
concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions
were believed to have had on the collectibility of the loan portfolio.
Although management believes it has established and maintained the
allowance for loan losses at appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ
substantially from the current operating environment.
Securities, including mortgage backed securities, which management has the
positive intent and ability to hold until maturity, are classified as held
to maturity and are carried at amortized cost. Securities, including
mortgage-backed securities, which have been identified as assets for which
there is not a positive intent to hold to maturity, are classified as
available for sale and are carried at fair value with unrealized gains and
losses, net of income taxes, reported as a separate component of equity.
Accordingly, a misclassification would have a direct effect on
stockholders' equity. Sales or reclassification as available for sale
(except for certain permitted reasons) of held to maturity securities may
result in the reclassification of all such securities to available for
sale. The Company has not sold held to maturity securities or reclassified
such securities to available for sale other than in specifically permitted
circumstances. 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 to assess whether the decline in
fair value is temporary or other than temporary. The Company evaluates
whether the decline in value is from company-specific events, industry
developments, general economic conditions or other reasons. Once the
estimated reasons for the decline are identified, further judgements are
required as to whether those conditions are likely to reverse and, if so,
whether that reversal is likely to result in a recovery of the fair value
of the investment in the near term. Unrealized losses which are determined
to be other than temporary are charged to operations.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
Total assets increased $15.6 million to $812.5 million at September 30,
2005 from $796.9 million at December 31, 2004. Securities increased $8.2
million to $343.1 million at September 30, 2005 from $334.9 million at
December 31, 2004.
Net loans during the period increased by $11.9 million to $380.5 million at
September 30, 2005 from $368.6 million at December 31, 2004. Commercial
real estate and commercial and industrial loans increased $28.4 million, or
11.9%, to $267.5 million at September 30, 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 $12.8 million to $110.4
million at September 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.
Westfield Bank believes that this program has diversified its loan
portfolio and continues to reduce interest rate risk.
12
Total deposits increased $13.3 million to $625.9 million at September 30,
2005 from $612.6 million at December 31, 2004. Time deposits increased
$22.5 million to $335.6 million at September 30, 2005. Core deposits, which
include checking, NOW, savings, and money market accounts, decreased by
$9.3 million to $290.2 million at September 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 September 30,
2005 and December 31, 2004. Customer repurchase agreements increased 2.0
million, to $16.6 million at September 30, 2005 from $14.6 million at
December 31, 2004. A customer repurchase agreement is an agreement by the
Bank to sell to and repurchase form 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 September 30, 2005 were held by commercial customers.
Stockholders' equity at September 30, 2005 and December 31, 2004 was $117.7
million and $118.1 million, respectively, which represented 14.5% of total
assets as of September 30, 2005 and 14.8% of total assets as of December
31, 2004. The change is primarily attributable to net income of $4.5
million for the nine months ended September 30, 2005, offset by the
repurchase of 152,400 shares of common stock for $3.7 million, and the
declaration by the Board of Directors of dividends of $0.10 per share on
January 27, 2005 and April 26, 2005, and July 26, 2005 as well as the
declaration of a special dividend of $0.20 per share on April 26, 2005, all
of which aggregated $2.0 million.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2005 AND SEPTEMBER 30, 2004
General
Net income was $1.6 million, or $0.16 per diluted share, for the quarter
ended September 30, 2005 as compared to $1.6 million, or $0.16 per diluted
share, for the same period in 2004. Net interest and dividend income
increased $61,000 to $5.9 million for the three months ended September 30,
2005.
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 September
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 September 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 $ 216 $ 30,547 2.83% $ 87 $ 26,353 1.32%
Investment Securities 3,346 341,924 3.91 3,228 343,792 3.76
Loans 5,942 390,626 6.08 5,262 373,082 5.64
------ -------- ------ --------
Total Interest-Earning Assets $9,504 $763,097 4.98 $8,577 $743,227 4.62
====== ======== ====== ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 77 $ 60,556 0.51 $ 68 $ 53,488 0.51
Savings Accounts 54 42,715 0.51 59 47,068 0.50
Money Market Accounts 544 144,235 1.51 330 150,952 0.87
Time Deposits 2,423 332,271 2.92 1,871 312,130 2.40
Customer Repurchase Agreements and
Borrowings 456 61,716 2.95 360 53,807 2.68
------ -------- ------ --------
Total Interest-Bearing Liabilities $3,554 $641,493 2.22 $2,688 $617,445 1.74
====== ======== ====== ========
Net Interest Income/Interest Rate Spread $5,950 2.76% $5,889 2.88%
====== ==== ====== ====
Net Interest Margin 3.09% 3.14%
==== ====
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.
Three Months Ended September 30, 2005
Compared to September 30, 2004
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
<s> <c> <c> <c>
Short Term Investments $ 14 $115 $129
Investment Securities (18) 136 118
Loans 247 433 680
---- ---- ----
Net Change in Income on
Interest-Earning Assets 243 684 927
---- ---- ----
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 9 0 9
Savings Accounts (5) 0 (5)
Money Market Accounts (15) 229 214
Time Deposits 121 431 552
Customer Repurchase Agreements and
Borrowings 53 43 96
---- ---- ----
Net Change in Expense on
Interest-Bearing Liabilities 163 703 866
---- ---- ----
Net Change in Interest Income $ 80 $(19) $ 61
==== ==== ====
15
Net interest and dividend income increased $61,000 to $5.9 million for the
three months ended September 30, 2005. The increase in net interest income
was primarily the result of higher balances in interest-earning assets. The
average balance of interest-earning assets increased $19.9 million to
$763.1 million for the three months ended September 30, 2005 as compared to
$743.2 million for the same period in 2004. Westfield Financial expects net
interest and dividend income to generally increase in future periods as the
Company 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 net interest margin was 3.09% for the three months ended September 30,
2005 as compared to 3.14% for the same period in 2004. The decrease in the
net interest margin was primarily the result of higher funding costs. The
average cost of interest-bearing liabilities increased 48 basis points to
2.22% for the three months ended September 30, 2005 from 1.74% for same
period in 2004. The yield of interest-earning assets increased 36 basis
points to 4.98% for the three months ended September 30, 2005 from 4.62%
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
For the three months ended September 30, 2005, Westfield Bank provided
$100,000 for loan losses, compared to $200,000 for the same period in 2004.
The amount Westfield Bank provided for the provision for loan losses during
the three months ended September 30, 2005 was based upon changes that
occurred in the loan portfolio during that same period. The provision for
loan losses brings Westfield Bank's allowance for loan losses to a level
determined appropriate by management. The allowance was $5.5 million at
September 30, 2005 and $5.3 million at June 30, 2005. The allowance for
loan losses was 1.41% of total loans at September 30, 2005 and 1.36% at
June 30, 2005.
Commercial real estate loans and commercial and industrial loans comprised
69.3% of the Bank's loan portfolio as of September 30, 2005 compared to
68.4% as of June 30, 2005. This has resulted in an increase in the
allowance for loan losses requirement for commercial real estate loans and
commercial and industrial loans. Westfield Bank considers these types of
loans to contain more risk than conventional residential real estate
mortgages. Residential real estate mortgages decreased by $5.1 million
during the quarter ended September 30, 2005, resulting in a decrease in the
allowance requirements for residential real estate loans. Consumer loans
decreased by $0.8 million to $8.0 million during the quarter ended
September 30, 2005, resulting in a decrease in the allowance for loan
losses requirement for consumer loans. The decline in the allowance
requirements 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 $126,000 to $2.0 million at September 30,
2005 compared to $2.1 million at June 30, 2005.
As a result of the above factors, management determined that a provision of
$100,000 was appropriate.
16
Noninterest Income
Noninterest income increased $137,000 to $915,000 for the three months
ended September 30, 2005 from $778,000 in the same period in 2004. Checking
account processing fees increased $63,000 to $500,000 for the three months
ended September 30, 2005 from $437,000 in the same period in 2004. Fees
received from the third party mortgage company increased $23,000 to $39,000
for the three months ended September 30, 2005 from $16,000 for the same
period in 2004. Fee income from the third party mortgage company in the
future may be affected by borrower activity, which generally decreases in a
rising interest rate environment. Income from Bank Owned Life Insurance
("BOLI") increased $19,000 to $206,000 for the three months ended September
30, 2005 from $187,000 in the same period in 2004.
Noninterest Expense
Noninterest expense was $4.6 million for the three months ended September
30, 2005 and $4.3 million for September 30, 2004. Salaries and benefits
increased $326,000 for the three months ended September 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 September 30, 2005, the Company had a tax
provision of $553,000 as compared to $627,000 for the same period in 2004.
This was a result of an increase in income from tax exempt assets.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2005 AND SEPTEMBER 30, 2004
General
Net income was $4.5 million, or $0.46 per diluted share, for the nine
months ended September 30, 2005 as compared to $4.8 million, or $0.48 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 nine months ended
September 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 nine months ended September 30, 2005 were $19,000.
Net interest and dividend income increased $316,000 to $17.8 million for
the nine months ended September 30, 2005 as compared to $17.4 million for
the same period in 2004.
17
Net Interest and Dividend Income
The following tables set forth the information relating to our average
balance at, and net interest income for, the nine months ended September
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.
Nine Months Ended September 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 $ 568 $ 31,075 2.44% $ 133 $ 16,746 1.06%
Investment Securities 9,993 341,576 3.90 9,945 367,418 3.61
Loans 16,995 383,243 5.91 15,491 363,629 5.68
------- -------- ------- --------
Total Interest-Earning Assets $27,556 $755,894 4.86 $25,569 $747,793 4.56
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 223 $ 60,004 0.50 $ 180 $ 55,618 0.43
Savings Accounts 162 43,605 0.50 175 48,500 0.48
Money Market Accounts 1,547 146,381 1.41 1,076 152,985 0.94
Time Deposits 6,564 321,999 2.72 5,814 319,876 2.42
Customer Repurchase Agreements and
borrowings 1,298 61,839 2.80 878 46,304 2.53
------- -------- ------- --------
Total Interest-Bearing Liabilities $ 9,794 $633,828 2.06 $ 8,123 $623,283 1.74
======= ======== ======= ========
Net Interest Income/Interest Rate Spread $17,762 2.80% $17,446 2.82%
======= ==== ======= ====
Net Interest Margin 3.14% 3.11%
==== ====
18
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.
Nine Months Ended September 30, 2005
Compared to September 30, 2004
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
<s> <c> <c> <c>
Short Term Investments $ 114 $ 321 $ 435
Investment Securities (699) 747 48
Loans 836 668 1,504
----- ------ ------
Net Change in Income on
interest-Earning Assets 251 1,736 1,987
----- ------ ------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 14 29 43
Savings Accounts (18) 5 (13)
Money Market Accounts (46) 517 471
Time Deposits 39 711 750
Customer Repurchase Agreements and
borrowings 295 125 420
----- ------ ------
Net Change in Expense on
interest-Bearing Liabilities 284 1,387 1,671
----- ------ ------
Net Change in Interest Income $ (33) $ 349 $ 316
===== ====== ======
19
Net interest and dividend income increased $316,000 to $17.8 million for
the nine months ended September 30, 2005 as compared to $17.4 million for
the same period in 2004. The increase in net interest income was primarily
the result of higher balances in interest-earning assets. The average
balance of interest-earning assets increased $8.1 million to $755.9 million
for the nine months ended September 30, 2005 as compared to $747.8 million
for the 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 net interest margin was 3.14% for the nine months ended September 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 30 basis
points to 4.86% for the nine months ended September 30, 2005 from 4.56% for
the same period in 2004. The average cost of interest-bearing liabilities
increased 32 basis points to 2.06% for the nine months ended September 30,
2005 from 1.74% for the 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
For the nine months ended September 30, 2005, Westfield Bank provided
$365,000 for loan losses, compared to $475,000 for the same period in 2004.
The amount Westfield Bank provided for the provision for loan losses during
the nine months ended September 30, 2005 was based upon changes that
occurred in the loan portfolio during that same period. The provision for
loan losses brings Westfield Bank's allowance for loan losses to a level
determined appropriate by management. The allowance was $5.5 million at
September 30, 2005 and $5.3 million at December 31, 2004. The allowance for
loan losses was 1.41% of total loans at September 30, 2005 and 1.41% at
December 31, 2004.
At September 30, 2005 commercial real estate loans and commercial and
industrial loans increased $28.4 million as compared to December 31, 2004.
Commercial real estate loans and commercial and industrial loans comprised
69.3% of Westfield Bank's loan portfolio as of September 30, 2005 as
compared to 63.9% 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. Westfield Bank considers these
types of loans to contain more risk than conventional residential real
estate mortgages, which decreased by $12.8 million during the nine months
ended September 30, 2005. This resulted in a decrease in the allowance
requirement for residential real estate loans. Consumer loans decreased by
$3.6 million to $8.0 million at September 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 $182,000 to $2.0 million at September 30,
2005 compared to $2.2 million at December 31, 2004.
As a result of the above factors, management determined that a provision of
$365,000 was appropriate.
20
Noninterest Income
Noninterest income decreased $646,000 to $2.5 million for the nine months
ended September 30, 2005 from $3.1 million in the same period in 2004. Net
gains on the sale of securities were $19,000 for the nine months ended
September 30, 2005 as compared to $868,000 for the same period in 2004. The
Company sold essentially all its common stock portfolio in 2004.
Checking account processing fees increased $76,000 to $1.3 million for the
nine months ended September 30, 2005 from $1.2 million for the same period
in 2004. Fee income from commercial letters of credit was $41,000 for the
nine months ended September 30, 2005 compared to none for the same period
in 2004. Fees received from the third party mortgage company increased
$10,000 to $75,000 for the nine months ended September 30, 2005 as compared
to $65,000 for the same period in 2004. Fee income from the third party
mortgage company in the future may be affected by borrower activity, which
generally decreases in a rising interest rate environment.
Noninterest Expense
Noninterest expense for the nine months ended September 30, 2005 was $14.0
million as compared to $13.2 million for the same period in 2004. Salaries
and benefits increased $587,000 for the nine months ended September 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 $217,000 to $403,000 for the nine months ended September 30, 2005
as compared to $186,000 for the same period in 2004.
Income Taxes
For the nine months ended September 30, 2005, the Company had a tax
provision of $1.4 million as compared to $2.0 million for the same period
in 2004. This was the result in a decrease in 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. Westfield Bank also can borrow funds from
the Federal Home Loan Bank based on eligible collateral of loans and
securities. Westfield Bank's maximum additional borrowing capacity from the
Federal Home Loan Bank at September 30, 2005 was approximately $22 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.
21
At September 30, 2005, the Company exceeded each of the applicable
regulatory capital requirements. As of September 30, 2005, the most recent
notification from the Office of Thrift Supervision (the "OTS") categorized
Westfield Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized,"
Westfield 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 Westfield Bank's category. The Company's and Westfield Bank's
actual capital ratios as of September 30, 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>
September 30, 2005
Total Capital (to Risk Weighted Assets):
Consolidated $123,783 26.07% $37,989 8.00% N/A -
Bank 103,795 22.03 37,685 8.00 $47,106 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 118,331 24.92 18,995 4.00 N/A -
Bank 98,470 20.90 18,842 4.00 28,263 6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated 118,331 14.54 32,545 4.00 N/A -
Bank 98,470 12.40 31,771 4.00 39,713 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, Westfield Bank and the Company's mutual holding company
completed their conversions from companies regulated by the Massachusetts
Division of Banks or the Federal Reserve Board to federally-chartered
companies regulated by the OTS. Westfield Bank, as a federally-chartered
savings bank, is subject to OTS capital requirements rather than Federal
Deposit Insurance Corporation capital requirements. Westfield 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 nine
months ended September 30, 2005 and September 30, 2004.
22
Westfield 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 Westfield 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.
Westfield Bank is obligated under leases for certain of its branches and
equipment. A summary of lease obligations and credit commitments at
September 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 $ 238 $ 334 $ 198 $ 330 $ 1,100
======= ======= ====== ======= ========
BORROWINGS
Federal Home Loan Bank $ 5,000 $35,000 $5,000 $ - $ 45,000
======= ======= ====== ======= ========
CREDIT COMMITMENTS
Available lines of credit $40,452 $ - $ - $12,978 $ 53,430
Other loan commitments 34,973 7,046 - - 42,019
Letters of credit 4,722 - - 904 5,626
------- ------- ------ ------- --------
Total credit commitments $80,147 $ 7,046 $ - $13,882 $101,075
======= ======= ====== ======= ========
Grand total $85,385 $42,380 $5,198 $14,212 $147,175
======= ======= ====== ======= ========
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 Westfield 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 September
30, 2004, that the Company and Westfield Bank met all capital adequacy
requirements to which they were subject. As of September 30, 2004, the most
recent notification from the OTS categorized Westfield Bank as well
capitalized under the regulatory framework for prompt corrective action.
23
To be categorized as well capitalized, Westfield 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 Westfield Bank's category.
Management uses a simulation model to monitor interest rate risk. This
model reports the net interest income at risk primarily under seven
different interest rate change environments. Specifically, 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.
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 for the twelve months ended September 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 September 30, 2005
(Dollars in thousands)
-----------------------------------------------
Changes in Net Interest
Interest Rates and Dividend
(Basis Points) Income % Change
-------------- ------------ --------
<s> <c> <c>
400 $26,673 -1.8%
300 26,750 -1.5
200 27,016 -0.5
100 27,241 0.3
0 27,153 N/A
-100 27,884 2.7
-200 27,561 1.5
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.
24
ITEM 4:
CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer
and the Company's 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 Company's
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 accounting officer, as appropriate to allow timely decisions
regarding required disclosure.
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 USE OF PROCEEDS
The following table sets forth information with respect to purchases made
by the Company of its common stock during the nine months ended September
30, 2005.
Total number
of shares Maximum number
purchased as of shares that
Total number part of publicly may yet be
of shares Average price announced purchased under
Period purchased paid per share($) programs the program
- --------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
July 1 - 31, 2005 - - -
- --------------------------------------------------------------------------------------------------
August 1 - 31, 2005 152,400 23.96 152,400
- --------------------------------------------------------------------------------------------------
September 1 - 30, 2005 - - -
- --------------------------------------------------------------------------------------------------
Total 152,400 23.96 152,400 291,007
- --------------------------------------------------------------------------------------------------
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 September 30, 2005.
25
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:
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.*
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.***
26
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>
27
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
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)
November 9, 2005
28