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, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission file number 001-16767
WESTFIELD FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 73-1627673
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
141 Elm Street, Westfield, Massachusetts 01086
(Address of principal executive offices)
(Zip Code)
(413) 568-1911
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(D) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 Days. Yes_x_ No___.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer____ Accelerated filer__x__ Non-accelerated filer____
Indicate by check mark whether the registrant is a shell company. 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 August 2, 2006
- ------------------------------------- --------------------------------------
Common Stock, par value $0.01 9,727,012
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - June 30, 2006 and December
31, 2005
Consolidated Statements of Operations (Unaudited) - Three and six
months ended June 30, 2006 and 2005
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Six Months ended June 30, 2006 and
2005
Consolidated Statements of Cash Flows (Unaudited) - Six Months ended
June 30, 2006 and 2005
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 1A. Risk Factors
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".
These forward-looking statements are made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. The
words "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan," and similar expressions are intended to identify
forward-looking statements. These forward-looking statements may be subject to
significant known and unknown risks, uncertainties, and other factors,
including, but not limited to, changes in the real estate market or local
economy, changes in interest rates, changes in laws and regulations to which we
are subject, and competition in our primary market area.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially
from the results discussed in these forward-looking statements. You are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. Westfield Financial undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
2
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in thousands, except share data)
June 30, December 31,
2006 2005
---- ----
ASSETS
Cash and due from banks $ 16,335 $ 18,136
Federal funds sold 1,071 5,090
Interest-bearing deposits and other short term investments 137 3,230
-------- --------
Cash and cash equivalents 17,543 26,456
-------- --------
SECURITIES:
Available for sale - at estimated fair value 35,180 28,321
Held to maturity - at amortized cost (estimated fair value
of $73,492 in June 2006 and $72,704 in December 2005) 75,351 73,323
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 103,986 101,138
Held to maturity - at amortized cost (estimated fair value
of $147,806 in June 2006 and $149,017 in December 2005) 152,418 152,127
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,237 4,237
LOANS - Net of allowance for loan losses of $5,352
in June 2006 and $5,422 in December 2005 386,494 378,837
PREMISES AND EQUIPMENT - Net 11,597 11,048
ACCRUED INTEREST AND DIVIDENDS 4,286 3,853
BANK OWNED LIFE INSURANCE 20,212 19,819
OTHER ASSETS 6,632 5,936
-------- --------
TOTAL ASSETS $817,936 $805,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 40,694 $ 45,260
Interest-bearing 595,026 577,785
-------- --------
Total deposits 635,720 623,045
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 14,404 14,441
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 45,000 45,000
OTHER LIABILITIES 7,343 6,767
-------- --------
TOTAL LIABILITIES 702,467 689,253
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at June 30, 2006, and December 31, 2005 - -
Common stock - $.01 par value, 25,000,000 shares authorized,
10,580,000 shares issued, 9,727,012 and 9,754,757 shares
outstanding at June 30, 2006, and December 31, 2005, respectively 106 106
Additional paid-in capital 48,272 48,020
Unallocated Common Stock of Employee Stock Ownership Plan (4,981) (5,127)
Restricted stock unearned compensation (650) (861)
Retained earnings 93,195 92,789
Accumulated other comprehensive loss, net
(1,797) (1,177)
Treasury stock, at cost (852,988 shares at June 30, 2006,
and 825,243 shares at December 31, 2005) (18,676) (17,908)
-------- --------
Total stockholders' equity 115,469 115,842
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $817,936 $805,095
======== ========
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,
2006 2005 2006 2005
---- ---- ----- ----
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $ 4,558 $ 3,929 $ 8,662 $ 7,723
Debt securities, taxable 3,474 2,917 6,784 5,811
Commercial and industrial loans 1,905 1,563 3,623 2,970
Debt securities, tax-exempt 307 297 615 594
Marketable equity securities 118 102 227 191
Federal funds sold 117 181 328 352
Consumer loans 102 165 215 360
Interest-bearing deposits and other
short term investments 32 22 88 52
---------- ---------- ---------- ----------
Total interest and dividend income 10,613 9,176 20,542 18,053
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 4,207 2,836 7,875 5,398
Customer repurchase agreements 82 80 158 130
Other borrowings 413 363 819 713
---------- ---------- ---------- ----------
Total interest expense 4,702 3,279 8,852 6,241
---------- ---------- ---------- ----------
Net interest and dividend income 5,911 5,897 11,690 11,812
PROVISION FOR LOAN LOSSES 200 125 275 265
---------- ---------- ---------- ----------
Net interest and dividend income after
provision for loan losses 5,711 5,772 11,415 11,547
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Income from bank-owned life insurance 199 168 394 346
Service charges and fees 684 625 1,342 1,194
Gain on sales of securities, net - 18 - 19
---------- ---------- ---------- ----------
Total noninterest income 883 811 1,736 1,559
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employees benefits 2,989 2,747 5,988 5,475
Occupancy 526 485 1,021 956
Computer operations 370 401 765 794
Stationery, supplies and postage 137 121 254 265
Other 882 1,044 1,670 1,891
---------- ---------- ---------- ----------
Total noninterest expense 4,904 4,798 9,698 9,381
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,690 1,785 3,453 3,725
INCOME TAXES 430 373 879 802
---------- ---------- ---------- ----------
NET INCOME $ 1,260 $ 1,412 $ 2,574 $ 2,923
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.14 $ 0.15 $ 0.28 $ 0.31
Average shares outstanding 9,309,440 9,503,801 9,308,397 9,501,441
Diluted earnings per share $ 0.13 $ 0.15 $ 0.27 $ 0.30
Diluted average shares outstanding 9,478,897 9,720,266 9,478,877 9,719,148
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)
Accumu-
lated
Other
Common Stock Restricted Compre-
----------------- Additional Stock hensive Treasury Stock
Par Paid-In Unallocated Unearned Retained (Loss), -----------------
Shares Value Capital ESOP Compensation Earnings Net Shares Amount Total
------ ----- ---------- ----------- ------------ -------- ------- ------ ------ -----
Balance at December 31, 2005 10,580,000 $106 $48,020 $(5,127) $ (861) $92,789 $(1,177) (825,243) $(17,908) $115,842
Comprehensive income:
Net income - - - - - 2,574 - - - 2,574
Unrealized losses on
securities arising
during the year, net of
tax benefit of $362 - - - - - - (620) - - (620)
--------
Total comprehensive income 1,954
--------
Activity related to common
stock issued as employee
incentives - - 252 146 211 - - - - 609
Treasury stock purchased - - - - - - - (65,000) (1,583) (1,583)
Reissuance of treasury
shares in connection with
stock option exercises - - - - - (280) - 37,255 815 535
Cash dividends declared
($0.50 per share) - - - - - (1,888) - - - (1,888)
---------- ---- ------- ------- ------- ------- ------- -------- -------- --------
Balance at June 30, 2006 10,580,000 $106 $48,272 $(4,981) $ (650) $93,195 $(1,797) (852,988) $(18,676) $115,469
========== ==== ======= ======= ======= ======= ======= ======== ======== ========
===================================================================================================================================
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 period, 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
($0.40 per share) - - - - - (1,602) - - - (1,602)
---------- ---- ------- ------- ------- ------- ------- -------- -------- --------
Balance at June 30, 2005 10,580,000 $106 $47,766 $(5,227) $(1,292) $91,720 $ (382) (625,488) $(13,021) $119,620
========== ==== ======= ======= ======= ======= ======= ======== ======== ========
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,
2006 2005
---- ----
OPERATING ACTIVITIES:
Net income $ 2,574 $ 2,923
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 275 265
Depreciation of premises and equipment 530 488
Net amortization of premiums and discounts on
securities, mortgage backed securities, and
mortgage loans 339 526
Amortization of unearned compensation 836 590
Loss on sale of fixed assets 2 -
Net realized securities gains - (19)
Deferred income tax benefit (188) -
Increase in cash surrender value of
bank-owned life insurance (393) (346)
Changes in assets and liabilities:
Accrued interest and dividends (433) (162)
Other assets 6 (227)
Other liabilities 423 325
-------- --------
Net cash provided by operating activities 3,971 4,363
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (10,087) (10,015)
Proceeds from maturities and principal collections 8,000 8,000
Securities, available for sale:
Purchases (10,190) (6,161)
Proceeds from sales - 3,833
Proceeds from calls, maturities, and principal collections 3,000 365
Mortgage backed securities, held to maturity:
Purchases (18,018) (17,165)
Principal collections 17,533 22,897
Mortgage backed securities, available for sale:
Purchases (16,263) (28,944)
Proceeds from sales - 16,941
Principal collections 12,674 11,641
Purchase of residential mortgages (10,548) (807)
Net other decrease (increase) in loans 2,621 (19,368)
Purchases of premise and equipment (1,091) (259)
Proceeds from sale of fixed assets 10 -
Purchase of bank-owned life insurance - (1,813)
-------- --------
Net cash used in investing activities (22,359) (20,855)
-------- --------
FINANCING ACTIVITIES:
Increase in deposits 12,675 5,061
Decrease in customer repurchase agreements (37) (960)
Purchase of common stock in connection with employee
benefit program (227) (82)
Cash dividends paid (1,888) (1,602)
Treasury stock purchased (1,583) -
Reissuance of treasury shares in connection with
stock option exercises 535 -
-------- --------
Net cash provided by financing activities 9,475 2,417
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS: (8,913) (14,075)
Beginning of period 26,456 51,047
-------- --------
End of period $17,543 $36,972
======= =======
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 Corporation and Elm Street Securities Corporation,
Massachusetts chartered security corporations, were formed by the Company for
the primary purpose of holding qualified investment securities. In the third
quarter of 2005, the Company dissolved Westfield Securities Corporation in
order to streamline operations.
Plan of Stock Conversion - On June 21, 2006, Westfield Financial, Inc.
announced that the Boards of Directors of Westfield Mutual Holding Company (the
"Mutual Holding Company"), the Company and the Bank (collectively, "Westfield")
unanimously adopted a Plan of Conversion and Stock Issuance (the "Plan of
Conversion"). Under the terms of the Plan of Conversion, Westfield will
undertake a "second-step" conversion, and the Bank will reorganize from a
two-tier mutual holding company structure to a stock holding company structure.
Pursuant to the Plan of Conversion: (i) the Mutual Holding Company and the
Company will be merged with and into the Bank, with the Bank as survivor, (ii)
the Bank will become a wholly owned subsidiary of a to-be-formed Massachusetts
corporation ("New Holding Company"), (iii) the shares of common stock of the
Company held by persons other than the Mutual Holding Company (whose shares
will be canceled) will be converted into shares of common stock of the New
Holding Company pursuant to an exchange ratio designed to preserve the
percentage ownership interests of such persons, and (iv) the New Holding
Company will offer and sell shares of its common stock to members of the Mutual
Holding Company, shareholders of the Bank and others in the manner and subject
to the priorities set forth in the Plan of Conversion. The highest priority
will be depositors with qualifying deposits as of March 31, 2005.
The transactions contemplated by the Plan of Conversion are subject to approval
of the Company's shareholders, the members of the Mutual Holding Company and
the Office of Thrift Supervision. Proxy and offering materials setting forth
detailed information relating to the Plan of Conversion will be sent to the
members of the Mutual Holding Company and shareholders of the Company for their
consideration in a few months.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, the Bank, Elm Street Securities Corporation and
Westfield Securities Corporation prior to its dissolution. 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.
7
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. ADOPTION OF SFAS 123 (R) SHARE-BASED PAYMENT
On January 1, 2006 Westfield Financial adopted SFAS 123 (R), Share-Based
Payment ("SFAS 123 (R)" or the "Statement"), which requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. The effect of SFAS 123 (R) is that entities are required
to measure the cost of employee services received in exchange for stock options
based on the grant-date fair value of the award, and to recognize the cost over
the period the employee is required to provide services for the award. SFAS 123
(R) permits entities to use any option-pricing model that meets the fair value
objective in the Statement.
The adoption of SFAS 123 (R) by Westfield Financial resulted in additional
compensation expense of $73,000 and a related tax benefit of $17,000 for the
three months ended June 30, 2006 and additional compensation expense of
$146,000 and a related tax benefit of $34,000 for the six months ended June 30,
2006. Had compensation cost been determined based on the fair value at the
grant date awards under the plans consistent with the method prescribed by SFAS
123 (R), Westfield Financial's net income and income per share for the three
months and six months ended June 30, 2005 would have been adjusted to the pro
forma amounts indicated below (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2005
---- ----
Net income as reported $1,412 $2,923
Less: Compensation expense
determined under fair value
based method for all awards,
net of tax affect (68) (137)
------ ------
Pro forma net income $1,344 $2,786
====== ======
Net income per share
Basic as reported $ 0.15 $ 0.31
Pro forma $ 0.14 $ 0.29
Diluted as reported $ 0.15 $ 0.30
Pro forma $ 0.14 $ 0.29
As of June 30, 2006, the compensation cost of unvested stock options amounted
to $332,000 with a related tax benefit of $74,000. Compensation costs of
$310,000 with a related tax benefit of $74,000 will be recognized by July of
2007.
Under the Company's Stock Option Plan, the Company may grant options to its
directors, officers and employees for up to 497,260 shares of common stock.
Both incentive stock options and non-statutory stock options may be granted
under the plan. The exercise price of each option equals the market price of
the Company's stock on the date of grant with a maximum term of ten years. All
options currently outstanding vest at 20% per year.
8
A summary of the status of the Company's stock options at June 30, 2006 is
presented below:
Weighted Average
Shares Exercise Price
------ ----------------
Balance at December 31, 2003 444,500 $14.39
Granted 2,500 25.00
Exercised (1,800) 14.39
-------
Balance at December 31, 2004 445,200 14.45
Granted 2,500 24.66
Exercised (37,645) 14.39
-------
Balance at December 31, 2005 410,055 14.52
Exercised (37,255) 14.39
-------
Balance at June 30, 2006 372,800 14.53
=======
The weighted average fair value of the options granted in 2005 and 2004 using
the Black-Scholes option pricing model were $7.68 per share and $7.93 per
share, respectively. No options were granted during the three or the six months
ended June 30, 2006.
Information pertaining to options outstanding at June 30, 2006 is as follows:
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
-------- ----------- ---------------- -----------
$14.39 367,800 6.2 years 218,000
24.66 2,500 8.7 years 500
25.00 2,500 7.7 years 1,000
------- -------
372,800 219,500
======= =======
4. 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,
-----------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Service cost $ 181 $ 157 $ 7 $ 8
Interest cost 150 127 12 11
Expected return on assets (149) (131) 0 -
Transaction obligation (3) (3) 2 2
Actuarial loss 11 6 1 -
----- ----- --- ---
Net periodic pension cost $ 190 $ 156 $22 $21
===== ===== === ===
9
Pension Benefits Other Benefits
---------------- --------------
Six months ended June 30,
-----------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Service cost $ 362 $ 313 $15 $15
Interest cost 300 253 24 21
Expected return on assets (298) (262) 0 0
Transition obligation (6) (6) 5 5
Actuarial loss 22 11 2 0
----- ----- --- ---
Net periodic pension cost $ 380 $ 309 $46 $41
===== ===== === ===
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 2006, the preliminary estimated contribution is
approximately $605,000. As of June 30, 2006 no contribution had been made.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Westfield Financial strives to remain a leader in meeting the financial service
needs of the local community and to provide quality service to the individuals
and businesses in the market areas that it has served since 1853. Historically,
Westfield Bank has been a community-oriented provider of traditional banking
products and services to business organizations and individuals, including
products such as residential and commercial real estate loans, consumer loans
and a variety of deposit products. Westfield Bank meets the needs of its local
community through a community-based and service-oriented approach to banking.
In recent years, in addition to real estate lending, we have adopted a
growth-oriented strategy that has focused on increased emphasis on commercial
lending. Our strategy also calls for increasing deposit relationships and
broadening our product lines and services. We believe that this business
strategy is best for our long term success and viability, and complements our
existing commitment to high quality customer service. In connection with our
overall growth strategy, Westfield Bank seeks to:
* continue to grow its commercial loan portfolio as a means to
increase the yield on and diversify its loan portfolio and build
transactional deposit account relationships;
* focus on expanding its retail banking franchise, and increasing the
number of households served within its market area; and
* depending on market conditions, refer substantially all of the
fixed-rate residential real estate loans to a third party mortgage
company which underwrites, originates and services these loans in
order to diversify its loan portfolio, increase fee income and
reduce interest rate risk.
You should read our financial results for the quarter ended June 30, 2006 in
the context of this strategy.
* Net income was $1.3 million, or $0.13 per diluted share, for the quarter
ended June 30, 2006 compared to $1.4 million, or $0.15 per diluted share
for the same period in 2005. For the six months ended June 30, 2006, net
income was $2.6 million, or $0.27 per diluted share compared to $2.9
million, or $0.30 per diluted share for the same period in 2005.
10
* Net interest income was $5.9 million for both the three months ended June
30, 2006 and 2005. Net interest income for the six months ended June 30,
2006 was $11.7 million compared to $11.8 million for the same period in
2005. The net interest margin, on a tax equivalent basis, was 3.19% for
the three months ended June 30, 2006, compared to 3.24% for the same
periods in 2005. The net interest margin, on a tax equivalent basis, for
the six months ended June 30, 2006 was 3.19% compared to 3.28% for the
same period in 2005. As the rates on time deposits have increased over
the past several months, some customers have shifted funds out of core
deposits, which generally pay lower rates, and into time deposits.
* Commercial real estate and commercial and industrial loans increased $4.3
million to $273.9 million at June 30, 2006 from $269.6 million at
December 31, 2005. Westfield Bank's strategic plan emphasizes commercial
lending whereby the Bank seeks out high quality credit relationships. The
success of Westfield Bank's commercial lending is primarily dependent on
the local and national economy, along with local competition for
commercial loans.
* Residential real estate loans increased $4.6 million to $111.9 million at
June 30, 2006 from $107.3 million at December 31, 2005. During the six
months ended June 30, 2006, Westfield Bank purchased $10.5 million in
adjustable rate loans which are serviced by the originating financial
institutions. This was offset by principal payments and payoffs of other
residential loans. Westfield Bank refers its residential real estate
borrowers to a third party mortgage company and substantially all of
Westfield Bank's residential real estate loans are underwritten,
originated and serviced by a third party mortgage company. Westfield Bank
receives a fee from each of these loans originated. Westfield Bank
believes that this program has diversified its loan portfolio and
continues to reduce interest rate risk by reducing the amount of
long-term fixed rate loans held in Westfield Bank's loan portfolio.
* Total deposits increased $12.7 million to $635.7 million at June 30, 2006
from $623.0 million at December 31, 2005. The increase in deposits was
primarily the result of an increase of $36.0 million in time deposits,
which were $371.1 million at June 30, 2006. Management feels that in a
period of rising rates, the more rate sensitive customers will continue
to move funds into time deposits, resulting in a higher cost of deposits.
* Noninterest income for the three and six months ended June 30, 2006 was
$883,000 and $1.7 million, respectively, compared to $811,000 and $1.6
million for the same periods in 2005. The increase was primarily the
result of increases in checking account processing fee income and income
from Bank Owned Life Insurance.
* Noninterest expense for the three and six months ended June 30, 2006 was
$4.9 million and $9.7 million, respectively, compared to $4.8 million and
$9.4 million, respectively for the same periods in 2005. Salaries and
benefits increased $242,000 and $513,000 for the three and six months
ended June 30, 2006, respectively. This was primarily the result of an
increase in salary expense of $107,000 for the three months and $206,000
for the six months ended June 30, 2006, respectively, related to hiring
additional personnel and normal salary increases. In addition, Westfield
Financial recorded expenses of $73,000 and $146,000 for the three and six
months ended June 30, 2006, respectively, related to stock options. The
Financial Accounting Standards Board now requires public and nonpublic
companies to recognize stock-based compensation related to stock options
in their income statements. This requirement became effective for
Westfield Financial for the fiscal year beginning on January 1, 2006. In
previous periods, Westfield Financial was not required to treat
stock-based compensation related to stock options as an expense.
* Nonperforming loans were $914,000 at June 30, 2006 and $1.9 million
December 31, 2005. The decrease in nonperforming loans was primarily the
result of $1.4 million payment in full received on a single commercial
real estate relationship.
11
* Charge-offs increased by $123,000 from $411,000 for the six months ended
June 30, 2005 to $534,000 for the six months ended June 30, 2006. This
was primarily the result of an increase of $406,000 in charge offs of
commercial and industrial loans, which was partially offset by a decrease
of $303,000 in charge-offs of commercial real estate loans.
CRITICAL ACCOUNTING POLICIES
Westfield Financial'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.
Westfield Financial'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.
Westfield Financial'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 Westfield Financial 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. Westfield Financial has never sold held to
maturity securities or reclassified such securities to available for sale other
than in specifically permitted circumstances. Westfield Financial does not
acquire securities or mortgage-backed securities for purposes of engaging in
trading activities.
12
On a quarterly basis, Westfield Financial 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, 2006 AND DECEMBER 31, 2005
Total assets increased $12.8 million to $817.9 million at June 30, 2006 from
$805.1 million at December 31, 2005. Securities increased $12.0 million to
$366.9 million at June 30, 2006 from $354.9 million at December 31, 2005.
Net loans during the period increased by $7.7 million to $386.5 million at June
30, 2006 from $378.8 million at December 31, 2005. Commercial real estate and
commercial and industrial loans increased $4.3 million to $273.9 million at
June 30, 2006 from $269.6 million at December 31, 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 along with local competition for commercial loans.
Residential real estate loans increased $4.6 million to $111.9 million at June
30, 2006 from $107.3 million at December 31, 2005. Westfield Bank purchased
$10.5 million in adjustable rate loans during the first six months of 2006
which are serviced by the originating financial institutions. This was offset
by principal payments and payoffs of other residential loans. Westfield Bank
refers its residential real estate borrowers to a third party mortgage company
and substantially all of Westfield Bank's residential real estate loans are
underwritten, originated and serviced by a third party mortgage company.
Westfield Bank receives a fee from each of these loans originated. Westfield
Bank believes that this program has diversified its loan portfolio and
continues to reduce interest rate risk by reducing the amount of long-termed
fixed rate loans held in Westfield Bank's loan portfolio.
Total deposits increased $12.7 million to $635.7 million at June 30, 2006 from
$623.0 million at December 31, 2005. The increase in deposits was primarily the
result of an increase of $36.0 million in time deposits, which were $371.1
million at June 30, 2006. The rates paid on time deposits have increased over
the past several months. Some customers have shifted funds out of core
deposits, which generally pay lower rates, and into time deposits. Management
feels that in a period of rising rates, the more rate sensitive customers will
continue to move funds into time deposits, resulting in a higher cost of
deposits.
Federal Home Loan Bank borrowings totaled $45.0 million at both June 30, 2006
and December 31, 2005. Customer repurchase agreements were $14.4 million at
both June 30, 2006 and December 31, 2005. A customer repurchase agreement is an
agreement by Westfield Bank to sell to and repurchase from the customer an
interest in specific securities issued by or guaranteed by the United States
Government. This transaction settles immediately on a same day basis in
immediately available funds. Interest paid is commensurate with other products
of equal interest and credit risk. All of Westfield Bank's customer repurchase
agreements at June 30, 2006 were held by commercial customers.
Stockholders' equity at June 30, 2006 and December 31, 2005 was $115.5 million
and $115.8 million, respectively, which represented 14.1% of total assets as of
June 30, 2006 and 14.4% of total assets as of December 31, 2005. The change is
primarily comprised of net income of $2.6 million for the six months ended June
30, 2006, the net repurchase at 27,745 shares of common stock for $768,000 and
the declaration and payment by the Board of Directors of regular and special
dividends amounting to $1.9 million.
13
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND
JUNE 30, 2005
General
Net income was $1.3 million, or $0.13 per diluted share, for the quarter ended
June 30, 2006 as compared to $1.4 million, or $0.15 per diluted share, for the
same period in 2005. Net interest and dividend income was $5.9 million for both
the three months ended June 30, 2006 and 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 June 30, 2006 and 2005
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. For
analytical purposes, the interest earned on tax exempt assets is adjusted to a
tax equivalent basis to recognize the income tax savings which facilitates
comparison between taxable and tax exempt assets.
Three Months Ended June 30,
2006 2005
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 149 $ 12,278 4.85% $ 203 $ 28,361 2.86%
Investment Securities 4,059 365,300 4.44 3,481 343,307 4.06
Loans 6,604 390,125 6.77 5,706 384,696 5.93
------- -------- ------ --------
Total Interest-Earning Assets $10,812 $767,703 5.63 $ 9,390 $756,364 4.97
======= ======== ====== ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 223 $ 73,655 1.21% $ 75 $ 60,421 0.50%
Savings Accounts 50 40,323 0.50 55 43,902 0.50
Money Market Accounts 422 110,824 1.52 553 147,834 1.50
Time Deposits 3,512 368,121 3.82 2,153 318,568 2.70
Customer Repurchase Agreements and 495 60,444 3.28 443 62,720 2.83
------- -------- ------ --------
Borrowings
Total Interest-Bearing Liabilities $ 4,702 $653,367 2.88 $ 3,279 $633,445 2.07
======= ======== ====== ========
Net Interest Income/Interest Rate Spread $ 6,110 2.75% $6,111 2.90%
======= ==== ====== ====
Net Interest Margin 3.19% 3.24%
==== ====
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 June 30, 2006 Compared to
June 30, 2005
Increase (Decrease) Due To:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in Thousands)
Short Term Investments $(115) $ 61 $ (54)
Investment Securities 223 355 578
Loans 81 817 898
----- ------ ------
Net Change in Income on 189 1,233 1,422
----- ------ ------
Interest-Earning Assets
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 16 132 148
Savings Accounts (4) (1) (5)
Money Market Accounts (138) 7 (131)
Time Deposits 335 1,024 1,359
Customer Repurchase Agreements and
Borrowings (16) 68 52
----- ------ ------
Net Change in Expense on
Interest-Bearing Liabilities 193 1,230 1,423
----- ------ ------
Change in Net Interest Income $ (4) $ 3 $ (1)
===== ====== ======
Net interest and dividend income, on a tax equivalent basis, was $6.1 million
for both the three months ended June 30, 2006 and 2005. The net interest
margin, on a tax equivalent basis, was a 3.19% for the three months ended June
30, 2006 as compared to 3.24% for the same period in 2005.
The decrease in the net interest margin was primarily the result of higher
funding costs. The average cost of interest-bearing liabilities increased 81
basis points to 2.88% for the three months ended June 30, 2006 from 2.07% for
the same period in 2005. The yield on interest-earning assets, on a tax
equivalent basis, increased only 66 basis points to 5.63% for the three months
ended June 30, 2006 from 4.97% for the same period in 2005. The increase in the
average cost of interest-bearing liabilities was primarily due to an increase
in the cost of time deposits resulting from the rising interest rate
environment. As the rates on time deposits have increased over the past several
months, some customers have shifted funds out of core deposits, which generally
pay lower rates, and into time deposits. In a period of rising interest rates,
the more rate sensitive customers are expected to continue to shift funds into
time deposits, resulting in a higher cost of deposits.
15
Westfield Bank's net interest margin may be affected by the slope of the yield
curve. A flat or inverted yield curve may result in a decrease in the net
interest margin. Customer migration into time deposits, as discussed
previously, and increased local competition for deposits may lead to higher
deposit costs, which may also contribute to a decrease in the net interest
margin.
Provision for Loan Losses
The provision for loan losses is reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of Westfield Financial 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.
The amount that Westfield Bank allocated to the provision for loan losses
during the three months ended June 30, 2006 was based upon the changes that
occurred in the loan portfolio during that same period. After evaluating these
factors, Westfield Bank provided $200,000 for loan losses for the three months
ended June 30, 2006, compared to $125,000 for the same period in 2005. The
allowance was $5.4 million at June 30, 2006 and $5.5 million at March 31, 2006.
The allowance for loan losses was 1.37% of total loans at June 30, 2006 and
1.43% at March 31, 2006.
At June 30, 2006 commercial real estate loans and commercial and industrial
loans increased $7.8 million as compared to March 31, 2006. Commercial real
estate loans and commercial and industrial loans comprised 69.9% of the Bank's
loan portfolio as of June 30, 2006 compared to 68.9% as of March 31, 2006.
Westfield Bank considers these types of loans to contain more risk than
conventional residential real estate mortgages, which decreased by $1.4 million
during the three months ended June 30, 2006. Consumer loans also decreased
$823,000 to $6.0 million at June 30, 2006. Nonperforming loans were $914,000
June 30, 2006 and $2.1 million at March 31, 2006.
Net charge offs were $377,000 for the three months ended June 30, 2006. This
was comprised of charge-offs of $510,000 for the three months ended June 30,
2006, partially offset by recoveries of $133,000 for the same period.
Although management believes it has established and maintained the allowance
for loan losses at adequate levels, future adjustments may be necessary if
economic, real estate and other conditions differ substantially from the
current operating environment.
Noninterest Income
Noninterest income increased $72,000 to $883,000 for the three months ended
June 30, 2006 from $811,000 million in the same period in 2005. There were no
net gains on the sale of securities for the quarter ended June 30, 2006 as
compared to $18,000 for the same period in 2005.
Checking account processing fees increased $32,000 to $462,000 for the three
months ended June 30, 2006 from $430,000 in the same period in 2005. Income
from Bank Owned Life Insurance increased $31,000 to $199,000 for the three
months ended June 30, 2006 from $168,000 in the same period in 2005.
16
Noninterest Expense
Noninterest expense was $4.9 million for the three months ended June 30, 2006
and $4.8 million for the three months ended June 30, 2005. Salaries and
benefits increased $243,000 for the three months ended June 30, 2006 compared
to the same period in 2005. This was primarily the result of an increase in
salary expense of $107,000 related to hiring additional personnel and normal
salary increases, along with an additional expense of $73,000 related to stock
options. The Financial Accounting Standards Board now requires public and
nonpublic companies to recognize stock-based compensation related to stock
options in their income statements. This requirement became effective for
Westfield Financial for the fiscal year beginning on January 1, 2006. In
previous periods, Westfield Financial was not required to treat stock-based
compensation related to stock options as an expense.
Income Taxes
For the three months ended June 30, 2006, the Company had a tax provision of
$430,000 compared to $373,000 for the same period in 2005. The effective tax
rate was 25.4% for the three months ended June 30, 2006 compared to 20.9% for
the same period in 2005.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2006
AND JUNE 30, 2005
General
Net income was $2.6 million, or $0.27 per diluted share, for the six months
ended June 30, 2006 as compared to $2.9 million, or $0.30 per diluted share,
for the same period in 2005. Net interest and dividend income was $11.7 million
for the six months ended June 30, 2006 compared to $11.8 million for the same
period in 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 six months ended June 30, 2006 and 2005
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. For
analytical purposes, the interest earned on tax exempt assets is adjusted to a
tax equivalent basis to recognize the income tax savings which facilitates
comparison between taxable and tax exempt assets.
17
Six Months Ended June 30,
2006 2005
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- ----------------------
Short Term Investments $ 416 $ 18,402 4.52% $ 404 $ 31,344 2.58%
Investment Securities 7,951 362,550 4.39 6,923 341,414 4.06
Loans 12,582 383,822 6.56 11,153 379,491 5.88
------- -------- ------- --------
Total Interest-Earning Assets $20,949 $764,774 5.48 $18,480 $752,249 4.91
======= ======== ======= ========
Interest-Bearing Liabilities
NOW Accounts $ 383 $ 71,381 1.07% $ 146 $ 59,122 0.49%
Savings Accounts 100 40,589 0.49 109 44,057 0.49
Money Market Accounts 905 117,532 1.54 1,003 147,472 1.36
Time Deposits 6,486 359,757 3.61 4,139 316,778 2.61
Customer Repurchase Agreements and 978 59,783 3.27 844 61,902 2.73
------- -------- ------- --------
Borrowings
Total Interest-Bearing Liabilities $ 8,852 $649,042 2.73 $ 6,241 $629,331 1.98
======= ======== ======= ========
Net Interest Income/Interest Rate Spread $12,097 2.75% $12,239 2.93%
======= ==== ======= ====
Net Interest Margin 3.19% 3.28%
==== ====
The following table shows how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected Westfield Financial'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.
18
Six Months Ended June 30, 2006 Compared to
June 30, 2005
Increase (Decrease) Due To:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in Thousands)
Short Term Investments $(167) $ 179 $ 12
Investment Securities 429 599 1,028
Loans 127 1,302 1,429
----- ------ ------
Net Change in Income on 389 2,080 2,469
----- ------ ------
Interest-Earning Assets
INTEREST-BEARING LIABILITIES
NOW Accounts 30 207 237
Savings Accounts (9) - (9)
Money Market Accounts (204) 106 (98)
Time Deposits 562 1,785 2,347
Customer Repurchase Agreements and
Borrowings (29) 163 134
----- ------ ------
Net Change in Expense on
Interest-Bearing Liabilities 350 2,261 2,611
----- ------ ------
Change in Net Interest Income $ 39 $ (181) $ (142)
===== ====== ======
Net interest and dividend income, on a tax equivalent basis, was $12.1 million
for the six months ended June 30, 2006 as compared to $12.2 million for the
same period in 2005. The net interest margin equivalent basis was 3.19% for the
six months ended June 30, 2006 compared to 3.28% for the same period in 2005.
The decrease in the net interest margin was primarily the result of higher
funding costs. The average cost of interest-bearing liabilities increased 75
basis points to 2.73% for the six months ended June 30, 2006 from 1.98% for
same period in 2005. The yield of interest-earning assets, on a tax equivalent
basis, increased only 57 basis points to 5.48% for the six months ended June
30, 2006 from 4.91% for same period in 2005. The increase in the average cost
of interest-bearing liabilities was primarily due to an increase in the cost of
time deposits resulting from the rising interest rate environment. As the rates
on time deposits have increased over the past several months, some customers
have shifted funds out of core deposits, which generally pay lower rates, and
into time deposits. In a period of rising interest rates, the more rate
sensitive customers are expected to continue to shift funds into time deposits,
resulting in a higher cost of deposits.
Westfield Bank's net interest margin may be affected by the slope of the yield
curve. A flat or inverted yield curve may result in a decrease in the net
interest margin. Customer migration into time deposits, as discussed
previously, and increased local competition for deposits may lead to higher
deposit costs, which may also contribute to a decrease in the net interest
margin.
19
Provision for Loan Losses
The provision for loan losses is reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of Westfield Financial 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.
The amount that Westfield Bank allocated to the provision for loan losses
during the six months ended June 30, 2006 was based upon the changes that
occurred in the loan portfolio during that same period. After evaluating these
factors, Westfield Bank provided $275,000 for loan losses for the six months
ended June 30, 2006, compared to $265,000 for the same period in 2005. The
allowance was $5.4 million at both June 30, 2006 and December 31, 2005. The
allowance for loan losses was 1.37% of total loans at June 30, 2006 and 1.41%
at December 31, 2005.
At June 30, 2006 commercial real estate loans and commercial and industrial
loans increased $4.3 million as compared to December 31, 2005. Commercial real
estate loans and commercial and industrial loans comprised 69.9% of the Bank's
loan portfolio as of June 30, 2006 compared to 70.2% as of December 31, 2005.
Westfield Bank considers these types of loans to contain more risk than
conventional residential real estate mortgages, which increased by $4.6 million
during the six months ended June 30, 2006. Consumer loans decreased $1.3
million to $6.0 million at June 30, 2006. Nonperforming loans were $914,000 at
June 30, 2006 and $1.9 million at December 31, 2005.
Net charge offs were $345,000 for the six months ended June 30, 2006. This was
comprised of charge-offs of $534,000 for the six months ended June 30, 2006,
partially offset by recoveries of $189,000 for the same period.
Although management believes it has established and maintained the allowance
for loan losses at adequate levels, future adjustments may be necessary if
economic, real estate and other conditions differ substantially from the
current operating environment.
Noninterest Income
Noninterest income increased $177,000 to $1.7 million for the six months ended
June 30, 2006 compared to the same period in 2005. There were no net gains on
the sale of securities for the six months ended June 30, 2006 compared to
$19,000 for the same period in 2005.
Checking account processing fees increased $106,000 to $926,000 for the six
months ended June 30, 2006 from $820,000 for the same period in 2005. Income
from Bank Owned Life Insurance increased $48,000 to $394,000 for the six months
ended June 30, 2006 from $346,000 for the same period in 2005.
20
Noninterest Expense
Noninterest expense for the six months ended June 30, 2006 was $9.7 million
compared to $9.4 million for the same period in 2005. Salaries and benefits
increased $513,000 for the six months ended June 30, 2006 compared to the same
period in 2005. This was primarily the result of an increase in salary expense
of $206,000 related to hiring additional personnel and normal salary increases,
along with an additional expense of $146,000 related to stock options. The
Financial Accounting Standards Board now requires public and nonpublic
companies to recognize stock-based compensation related to stock options in
their income statements. This requirement became effective for Westfield
Financial for the fiscal year beginning on January 1, 2006. In previous
periods, Westfield Financial was not required to treat stock-based compensation
related to stock options as an expense.
Income Taxes
For the six months ended June 30, 2006, Westfield Financial had a tax provision
of $879,000 compared to $802,000 million for the same period in 2005. The
effective tax rate was 25.5% for the six months ended June 30, 2006 compared to
21.5% for the six months ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to Westfield Financial's ability to generate
adequate amounts of cash to fund loan originations, loan purchases, withdrawals
of deposits and operating expenses. Westfield Financial'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 ("FHLB") of Boston based on eligible
collateral of loans and securities. Westfield Bank's maximum additional
borrowing capacity from the FHLB at June 30, 2006 was approximately $43.0
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 Westfield Financial has sufficient liquidity to meet its current operating
needs.
At June 30, 2006, Westfield Financial exceeded each of the applicable
regulatory capital requirements. As of June 30, 2006 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 tables. There are no conditions or events since
that notification that management believes have changed Westfield Bank's
categorization. Westfield Financial's and Westfield Bank's actual capital
ratios as of June 30, 2006 and December 31, 2005 are also presented in the
tables.
21
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)
June 30, 2006
<c>
Total Capital (to Risk Weighted Assets):
Consolidated $122,385 25.55% $38,326 8.00% N/A -
Bank 116,802 24.42 38,268 8.00 47,835 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 117,033 24.43 19,163 4.00 N/A -
Bank 111,507 23.31 19,134 4.00 28,701 6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated 117,033 14.27 32,817 4.00 N/A -
Bank 111,507 13.66 32,655 4.00 40,819 5.00
December 31, 2005
Total Capital (to Risk Weighted Assets):
Consolidated $122,241 25.68% $38,066 8.00% N/A -
Bank 105,516 22.31 37,833 8.00 47,291 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 116,819 24.54 19,043 4.00 N/A -
Bank 100,151 21.18 18,917 4.00 28,375 6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated 116,819 14.48 32,261 4.00 N/A -
Bank 100,151 12.67 31,624 4.00 39,530 5.00
See the "Consolidated Statements of Cash Flows" in the Consolidated Financial
Statements included in this Form 10-Q for the sources and uses of cash flows
for operating, investing, and financing activities for the six months ended
June 30, 2006 and June 30, 2005.
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.
22
Westfield Bank is obligated under leases for certain branches and equipment. A
summary of lease obligations and credit commitments at June 30, 2006 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)
LEASE OBLIGATIONS
Operating lease obligations $ 284 $ 442 $255 $ 399 $ 1,380
======= ======= ==== ======= ========
BORROWINGS
Federal Home Loan Bank $10,000 $30,000 $ - $ 5,000 $ 45,000
======= ======= ==== ======= ========
CREDIT COMMITMENTS
Available lines of credit $38,773 $ - $ - $13,443 $ 52,216
Other loan commitments 41,104 4,654 - - 45,758
Letters of credit 4,708 - - 604 5,312
------- ------- ---- ------- --------
Total credit commitments $84,585 $ 4,654 $ - $14,047 $103,286
------- ------- ---- ------- --------
Grand total $94,869 $35,096 $255 $19,446 $149,666
======= ======= ==== ======= ========
OFF-BALANCE SHEET ARRANGEMENTS
Westfield Financial does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on Westfield
Financial'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 Westfield Financial 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 June 30,
2006, that Westfield Financial and Westfield Bank met all capital adequacy
requirements to which they were subject. As of June 30, 2006, 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, 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.
23
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 and 300 basis points, and
decrease 100, 200 and 300 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 table below sets forth as of June 30, 2006 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, 2007
(Dollars in thousands)
-------------------------------------------------
Changes in Net Interest
Interest Rates (Basis and Dividend
Points) Income % Change
--------------------- ------------ --------
300 25,754 -0.4%
200 25,805 0.2%
100 25,968 0.4%
0 25,856 -
-100 26,111 1.0%
-200 25,936 0.3%
-300 25,301 -2.1%
Management believes that there have been no significant changes in market risk
since December 31, 2005.
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 Westfield Financial's Chairman and Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
Westfield Financial'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 Chairman 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 Westfield Financial files and submits under the
Exchange Act is (i) recorded, processed, summarized and reported as and when
required and (ii) accumulated and communicated to Westfield Financial's
management, including Westfield Financial's principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
24
There have been no changes in Westfield Financial's internal control over
financial reporting identified in connection with the evaluation that occurred
during Westfield Financial's last fiscal quarter that has materially affected,
or that is reasonably likely to materially affect, Westfield Financial's
internal control over financial reporting.
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in
Westfield Financial's Form 10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no purchases made by Westfield Financial of its common stock during
the three months ended June 30, 2006.
In July 2004, Westfield Financial announced that the Board of Directors had
approved a share repurchase program which authorized the repurchase of up to
502,550 shares. There were 99,862 shares to be repurchased under this
repurchase program as of June 30, 2006. The repurchase program will continue
until it is completed.
There were no sales by Westfield Financial of unregistered securities during
the three months ended June 30, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Westfield Financial held its annual meeting of shareholders on May 19, 2006
(the "Meeting"). The sole proposal submitted to the shareholders at the Meeting
was the election of three candidates to the Board of Directors.
The number of votes cast with respect to this matter is as follows:
Nominee For Withheld
------- --- --------
David C. Colton, Jr. 8,916,661 94,527
Mary C. O'Neil 8,982,640 28,548
Donald A. Williams 8,981,852 29,336
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There were no broker non-votes or abstentions on this proposal. The following
directors' terms of office continued after the Meeting:
Victor J. Carra Charles E. Sullivan
Robert T. Crowley, Jr. Thomas C. Sullivan
Harry C. Lane
William H. McClure
Richard C. Placek
Paul R. Pohl
ITEM 5. OTHER INFORMATION
a. None
b. None
ITEM 6. EXHIBITS
The following exhibits are furnished with this report:
Exhibit Description
- ------- --------------------------------------------------------------------
2.1 Plan of Conversion and Stock Issuance of Westfield Mutual Holding
Company, Westfield Financial, Inc. and Westfield Bank (7)
3.1 Articles of Organization of Westfield Financial, Inc. (1)
3.2 Bylaws of Westfield Financial, Inc. (1)
3.3 Amended and Restated Charter of Westfield Mutual Holding Company. (1)
3.4 Amended and Restated Bylaws of Westfield Mutual Holding Company. (1)
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. (1)
10.1 Form of Employee Stock Ownership Plan of Westfield Financial, Inc. (1)
10.2 Form of the Benefit Restoration Plan of Westfield Financial, Inc. (5)
10.3 Form of Employment Agreement between Donald A. Williams and Westfield
Financial, Inc. (1)
10.4 [Reserved]
10.5 Form of Employment Agreement between Michael J. Janosco, Jr. and
Westfield Financial, Inc. (1)
10.6 Form of One Year Change in Control Agreement by and among certain
officers and Westfield Financial, Inc. and Westfield Bank. (1)
10.7 Form of Directors' Deferred Compensation Plan. (5)
10.8 The 401(k) Plan adopted by Westfield Bank. (2)
10.9 Amendments to the Employee Stock Ownership Plan of Westfield
Financial, Inc. (4) (6)
10.10 Form of Amended and Restated Deferred Compensation Agreement
with Donald A. Williams. (5)
16.1 Letter regarding change on certifying accountants (4)
31.1 Rule 13a - 14(a)/15d - 14(a) Certifications
32.1 Section 1350 Certifications
26
(1) Incorporated herein by reference to the Registration Statement No.
333-68550, on Form S-1 of Westfield Financial filed with the SEC on
August 28, 2001, as amended.
(2) Incorporated herein by reference to the Post-Effective Amendment No. 1 to
the Registration Statement No. 333-73132, on Form S-8, filed with the SEC
on April 28, 2006.
(3) Incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 2002 as filed with the SEC on March 31, 2003.
(4) Incorporated by reference to the Form 8-K filed with the SEC on June 21,
2004.
(5) Incorporated by reference to the Form 8-K filed with the SEC on December
22, 2005.
(6) Incorporated by reference to the Form 8-K filed with the SEC on August
25, 2005.
(7) Incorporated by reference to the Form 8-K filed with the SEC on June 22,
2006.
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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, 2006
28