UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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 01085
(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 November 6, 2006
- ------------------------------------------ ----------------
Common Stock, $0.01 par value 9,728,912
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - September 30, 2006 and
December 31, 2005
Consolidated Statements of Income (Unaudited) - Three and nine months
ended September 30, 2006 and 2005
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Nine months ended September 30,
2006 and 2005
Consolidated Statements of Cash Flows (Unaudited) - Nine months ended
September 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"
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 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.
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,
2006 2005
---- ----
ASSETS
Cash and due from banks $ 15,810 $ 18,136
Federal funds sold 14,847 5,090
Interest-bearing deposits 182 3,230
-------- --------
Cash and cash equivalents 30,839 26,456
-------- --------
SECURITIES:
Available for sale - at estimated fair value 36,677 28,321
Held to maturity - at amortized cost (estimated fair value of
$78,049 at September 30, 2006, and $72,704 at December 31, 2005) 78,320 73,323
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 111,739 101,138
Held to maturity - at amortized cost (estimated fair value of
$149,818 at September 30, 2006 and $149,017 at December 31, 2005) 153,036 152,127
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,246 4,237
LOANS - Net of allowance for loan losses of $5,345 at
September 30, 2006 and $5,422 at December 31, 2005 379,751 378,837
PREMISES AND EQUIPMENT, Net 11,555 11,048
ACCRUED INTEREST RECEIVABLE 4,320 3,853
BANK OWNED LIFE INSURANCE 20,414 19,819
OTHER ASSETS 6,568 5,936
-------- --------
TOTAL ASSETS $837,465 $805,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 40,494 $ 45,260
Interest-bearing 597,610 577,785
-------- --------
Total deposits 638,104 623,045
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 20,027 14,441
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 55,000 45,000
OTHER LIABILITIES 7,308 6,767
-------- --------
TOTAL LIABILITIES 720,439 689,253
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at September 30, 2006 and December 31, 2005 -- --
Common stock - $.01 par value, 25,000,000 shares authorized,
10,580,000 shares issued, 9,728,912 and 9,754,757 shares
outstanding at September 30, 2006 and December 31, 2005, respectively 106 106
Additional paid-in capital 48,397 48,020
Unallocated Common Stock of Employee Stock Ownership Plan (4,908) (5,127)
Restricted stock unearned compensation (532) (861)
Retained earnings 93,485 92,789
Accumulated other comprehensive loss, net (888) (1,177)
Treasury stock, at cost (851,088 shares at September 30, 2006
and 825,243 shares at December 31, 2005) (18,634) (17,908)
-------- --------
Total stockholders' equity 117,026 115,842
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $837,465 $805,095
======== ========
See accompanying notes to consolidated financial statements.
3
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Income - Unaudited
(Dollars in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30
2006 2005 2006 2005
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $ 4,426 $4,085 $13,088 $11,809
Debt securities, taxable 3,687 2,907 10,471 8,718
Commercial and industrial loans 1,974 1,714 5,597 4,683
Debt securities, tax - exempt 307 299 923 892
Marketable equity securities 124 97 350 288
Federal funds sold 111 216 439 568
Consumer loans 97 143 313 503
Interest-bearing deposits and other
short term investments 1 43 88 95
------- ------ ------- -------
Total interest and dividend income 10,727 9,504 31,269 27,556
------- ------ ------- -------
INTEREST EXPENSE:
Deposits 4,585 3,098 12,460 8,496
Customer repurchase agreements 132 82 290 212
Other borrowings 466 374 1,285 1,086
------- ------ ------- -------
Total interest expense 5,183 3,554 14,035 9,794
------- ------ ------- -------
Net interest and dividend income 5,544 5,950 17,234 17,762
PROVISION FOR LOAN LOSSES 50 100 325 365
------- ------ ------- -------
Net interest and dividend income after
provision for loan losses 5,494 5,850 16,909 17,397
------- ------ ------- -------
NONINTEREST INCOME:
Income from bank owned life insurance 201 206 595 552
Service charges and fees 670 709 2,014 1,903
Loss on sales of fixed assets, net (378) -- (378) --
Gain on sales of securities, net -- -- -- 19
------- ------ ------- -------
Total noninterest income 493 915 2,231 2,474
------- ------ ------- -------
NONINTEREST EXPENSE:
Salaries and employees benefits 3,014 2,940 9,002 8,415
Occupancy 533 485 1,553 1,441
Computer operations 316 391 1,082 1,185
Stationery, supplies and postage 120 138 374 403
Other 894 663 2,567 2,554
------- ------ ------- -------
Total noninterest expense 4,877 4,617 14,578 13,998
------- ------ ------- -------
INCOME BEFORE INCOME TAXES 1,110 2,148 4,562 5,873
INCOME TAXES 236 553 1,115 1,355
------- ------ ------- -------
NET INCOME $ 874 $1,595 $ 3,447 $ 4,518
======= ====== ======= =======
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.09 $ 0.17 $ 0.37 $ 0.48
Diluted earnings per share $ 0.09 $ 0.16 $ 0.36 $ 0.46
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 -- -- -- -- -- 3,447 -- -- -- 3,447
Unrealized gains on
securities arising
during the period, net of
tax benefit of $159 -- -- -- -- -- -- 289 -- -- 289
--------
Comprehensive income 3,736
--------
Activity related to common
stock issued as employee
incentives -- -- 377 219 329 -- -- -- -- 925
Treasury stock purchased -- -- -- -- -- -- -- (65,000) (1,583) (1,583)
Reissuance of treasury
shares in connection with
stock option exercises -- -- -- -- -- (294) -- 39,155 857 563
Cash dividends declared -- -- -- -- -- (2,457) -- -- -- (2,457)
---------- ---- ------- ------- ------- ------- ------- -------- -------- --------
Balance, September 30, 2006 10,580,000 $106 $48,397 $(4,908) $ (532) $93,485 $ (888) (851,088) $(18,634) $117,026
========== ==== ======= ======= ======= ======= ======= ======== ======== ========
===================================================================================================================================
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 period, 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 at September 30, 2005 10,580,000 $106 $47,806 $(5,202) $ (978) $92,646 $ (771) (740,543) $(15,867) $117,740
========== ==== ======= ======= ======= ======= ======= ======== ======== ========
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,
2006 2005
---- ----
OPERATING ACTIVITIES:
Net income $ 3,447 $ 4,518
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 325 365
Depreciation of premises and equipment 773 720
Net amortization of premiums and discounts on
securities, mortgage backed securities, and
mortgage loans 497 833
Amortization of unearned compensation 1,278 1,058
Loss on sale of fixed assets 378 --
Net realized securities gains -- (19)
Deferred income tax benefit (52) --
Increase in cash surrender value of
bank-owned life insurance (595) (552)
Changes in assets and liabilities:
Accrued interest receivable (467) (138)
Other assets (739) 823
Other liabilities 541 577
------- -------
Net cash provided by operating activities 5,386 8,185
------- -------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (13,087) (11,130)
Proceeds from, maturities, and principal collections 8,000 9,000
Securities, available for sale:
Purchases (11,242) (9,206)
Proceeds from sales -- 3,833
Proceeds from calls, maturities, and principal collections 3,000 365
Mortgage backed securities, held to maturity:
Purchases (27,993) (17,165)
Principal collections 26,793 36,035
Mortgage backed securities, available for sale:
Purchases (29,884) (56,833)
Proceeds from sales -- 16,962
Principal collections 19,515 18,112
Purchase of Federal Home Loan Bank of Boston stock (9) --
Purchase of residential mortgages (11,705) (1,284)
Net other decrease (increase) in loans 10,452 (11,059)
Purchases of premises and equipment (1,668) (323)
Proceeds from sale of fixed assets 10 --
Purchase of bank-owned life insurance -- (1,813)
------- -------
Net cash used in investing activities (27,818) (24,506)
------- -------
FINANCING ACTIVITIES:
Increase in deposits 15,059 13,280
Increase in customer repurchase agreements 5,586 2,022
Federal Home Loan Bank of Boston advances 10,000 --
Purchase of common stock in connection with employee
benefit program (353) (121)
Cash dividends paid (2,457) (2,003)
Treasury stock purchased (1,583) (3,651)
Reissuance of treasury shares in connection with
stock option exercises 563 537
------- =======
Net cash provided by financing activities 26,815 10,064
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS: 4,383 (6,257)
Beginning of period 26,456 51,047
------- -------
End of period $30,839 $44,790
======= =======
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" or "Westfield
Financial") 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. 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 Corp. 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 newly 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 of
the Bank 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. Management anticipates that 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 the fourth quarter of 2006.
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.
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. Westfield Financial uses the binomial model for its
adoption of the Statement.
Westfield Financial adopted SFAS 123 (R) on January 1, 2006 using the "modified
prospective" method. Under this method, awards that are granted, modified, or
settled after December 31, 2005, are measured and accounted for in accordance
with SFAS 123 (R). Also under this method, expense is recognized for awards that
were granted prior to January 1, 2006 but vest after January 1, 2006, based on
the fair value determined at the grant date under SFAS 123, Accounting for
Stock-Based Compensation ("SFAS 123"). Prior to the adoption of SFAS 123 (R),
the Company accounted for stock compensation under the intrinsic value method
permitted by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related interpretations. Accordingly, the
Company previously recognized no compensation cost for employee stock options
that were granted with an exercise price equal to the market value of the
underlying common stock on the date of grant.
The adoption of SFAS 123 (R) by Westfield Financial resulted in additional
compensation expense of $219,000 and a related tax benefit of $51,000 for the
nine months ended September 30, 2006. As of September 30, 2006, the compensation
cost of unvested stock options amounted to $258,000 with a related tax benefit
of $74,000. Compensation costs of $237,000 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.
A summary of the status of the Company's stock options at September 30, 2006 is
presented below:
Weighted Average
Shares Exercise Price
------ ----------------
Balance at December 31, 2005 410,055 14.52
Exercised (39,155) 14.39
-------
Balance at September 30, 2006 370,900 14.53
=======
8
Information pertaining to options outstanding at September 30, 2006 is as
follows:
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
-------- ----------- ---------------- -----------
$14.39 365,900 5.9 years 291,000
24.66 2,500 8.4 years 500
25.00 2,500 7.4 years 1,000
------- -------
370,900 292,500
======= =======
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
nine months ended September 30, 2005 would have been adjusted to the pro forma
amounts indicated below (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2005
---- ----
Net income as reported $1,595 $4,518
Less: Compensation expense
determined under fair value
based method for all awards,
net of tax affect (135) (271)
------ ------
Pro forma net income $1,460 $4,247
====== ======
Net income per share
Basic as reported $ 0.17 $ 0.48
Pro forma $ 0.15 $ 0.45
Diluted as reported $ 0.16 $ 0.46
Pro forma $ 0.15 $ 0.44
No options were granted during the three or the nine months ended September 30,
2006.
9
4. 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,
2006 2005 2006 2005
---- ---- ---- ----
Service cost $ 181 $ 157 $ 7 $ 8
Interest cost 150 127 12 11
Expected return on assets (149) (131) -- --
Transaction obligation (3) (3) 2 2
Actuarial loss 11 6 1 --
----- ----- --- ---
Net periodic pension cost $ 190 $ 156 $22 $21
===== ===== === ===
Pension Benefits Other Benefits
---------------- --------------
Nine months ended September 30,
2006 2005 2006 2005
----- ---- ---- ----
Service cost $ 543 $ 470 $22 $23
Interest cost 450 380 35 32
Expected return on assets (447) (392) -- --
Transaction obligation (9) (9) 7 7
Actuarial loss 32 17 2 --
----- ----- --- ---
Net periodic pension cost $ 569 $ 466 $66 $62
===== ===== === ===
Westfield Financial 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 29, 2006, Westfield Financial made a
contribution in the amount of $576,000.
10
5. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 156, "Accounting for Servicing
of Financial Assets" ("SFAS 156"). The statement amends SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," with respect to the accounting for separately recognized
servicing assets and servicing liabilities. Consistent with SFAS No. 140, SFAS
156 requires companies to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a serving contract. However, the Statement permits a company to choose
either the amortized cost method or fair value measurement method for each class
of separately recognized servicing assets. The Statement is effective as of the
beginning of a company's first fiscal year after September 15, 2006. Earlier
adoption is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued financial statements, including interim financial
statements. The Company plans to adopt SFAS 156 at the beginning of 2007 and
does not expect the adoption of this Statement to have a material impact on its
consolidated financial statements.
In June 2006, FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes," which is an interpretation of FASB Statement No. 109, "Accounting for
Income Taxes." This Interpretation clarifies the accounting for uncertainty in
income taxes recognized in a Company's financial statements, prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position in the tax return and provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transition. The effective date of this
Interpretation is for fiscal years beginning after December 15, 2006. The
Company does not expect this Interpretation to have a material impact on the
Company's consolidated financial statements.
In September 2006, the FASB issued Financial Standards No. 157, "Fair Value
Measurement," which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands the
disclosures about fair value measurement. This Statement was developed to
provide guidance for consistency and comparability in fair value measurements
and disclosures and applies under other accounting pronouncements that require
or permit fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years.
In September 2006, the FASB issued Financial Accounting Standards No.158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)." This
Statement improves financial reporting by requiring employers to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as a
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income or a business entity or changes in unrestricted net assets
of a not-for-profit organization. An employer with publicly traded equity
securities is required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. The Company is currently
in the process of determining the impact this Statement will have on the
Company's consolidated financial statements.
11
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 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 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.
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:
o continue to grow its commercial and industrial loan and commercial
real estate loan portfolio by targeting commercial businesses in
its primary market area and in northern Connecticut as a means to
increase the yield on and diversify its loan portfolio and build
transactional deposit account relationships;
o focus on expanding its retail banking franchise, and increasing the
number of households served within its market area; and
o 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, 2006
in the context of this strategy.
o Net income was $874,000, or $0.09 per diluted share, for the quarter
ended September 30, 2006 compared to $1.6 million, or $0.16 per diluted
share for the same period in 2005. For the nine months ended September
30, 2006, net income was $3.4 million, or $0.36 per diluted share
compared to $4.5 million, or $0.46 per diluted share for the same period
in 2005. The results for the three and nine months ended September 30,
2006 included a net loss of $378,000 on the sale of fixed assets in the
third quarter of 2006, which was the result of the sale of a building
which housed a former Westfield Bank branch.
o Net interest income was $5.5 million for the three months ended September
30, 2006 and $5.9 million for the same period in 2005. Net interest
income for the nine months ended September 30, 2006 was $17.2 million
compared to $17.8 million for the same period in 2005. The net interest
margin, on a tax equivalent basis, was 2.94% for the three months ended
September 30, 2006, compared to 3.18% for the same period in 2005. The
net interest margin, on a tax equivalent basis, for the nine months ended
September 30, 2006 was 3.11% compared to 3.24% 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. This resulted in an
increase in the cost of funds.
12
o Commercial real estate and commercial and industrial loans decreased $1.7
million to $267.9 million at September 30, 2006 from $269.6 million at
December 31, 2005. The decrease was primarily the result of the payoff of
$18.2 million in commercial loans involving 11 relationships that either
divested real estate or the entire businesses were sold to concerns
headquartered outside of Westfield Bank's market area.
o Residential real estate loans increased $3.9 million to $111.2 million at
September 30, 2006 from $107.3 million at December 31, 2005. During the
nine months ended September 30, 2006, Westfield Bank purchased $11.7
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. In September 2001, Westfield Bank began
referring substantially all of the originations of its residential real
estate loans to a third party mortgage company. Residential real estate
borrowers submit applications to Westfield Bank, but the loan is approved
by and closed on the books of the mortgage company. The third party
mortgage company owns the servicing rights and services the loans.
Westfield Bank retains no residual ownership interest in these loans.
Westfield Bank receives a fee for each of the loans originated by the
third party mortgage company. 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.
o Total deposits increased $15.1 million to $638.1 million at September 30,
2006 from $623.0 million at December 31, 2005. The increase in deposits
was primarily the result of an increase of $46.1 million in time
deposits, to $381.1 million at September 30, 2006. As rates on time
deposits increased over the past several months, some customers shifted
funds out of core deposits, which generally pay lower rates, and into
time deposits.
o Noninterest expense for the three and nine months ended September 30,
2006 was $4.9 million and $14.6 million, respectively, compared to $4.6
million and $14.0 million, respectively for the same periods in 2005.
Salaries and benefits increased $74,000 and $587,000 for the three and
nine months ended September 30, 2006, respectively. This was primarily
the result of an increase in salary expense of $133,000 for the three
months and $339,000 for the nine months ended September 30, 2006,
respectively, related to hiring additional personnel and normal salary
increases. In addition, Westfield Financial recorded expenses of $73,000
and $219,000 for the three and nine months ended September 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.
o Nonperforming loans were $706,000 at September 30, 2006 and $1.9 million
at December 31, 2005. The decrease in nonperforming loans was primarily
the result of a $1.4 million payment in full received on a single
commercial real estate relationship.
o Charge-offs increased by $128,000 from $442,000 for the nine months ended
September 30, 2005 to $570,000 for the nine months ended September 30,
2006. This was primarily the result of an increase of $202,000 in charge
offs of commercial and industrial loans, which was partially offset by a
decrease of $74,000 in charge-offs of consumer loans and residential real
estate loans.
13
CRITICAL ACCOUNTING POLICIES
Westfield Financial's critical accounting policies, given its current business
strategy and asset/liability structure, are accounting for nonperforming loans,
the allowance for loan losses and provision for loan losses, the classification
of securities as either held to maturity or available for sale, other than
temporary impairment of securities, and discount rate assumptions used for
benefit liabilities. Senior management has discussed the development and
selection of these accounting estimates and the related disclosures with the
Audit Committee of Westfield Financial's Board of Directors.
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.
Securities, including mortgage-backed securities, that 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, that 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.
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 allocation of the allowance
consists of two key components, which are a specific allowance for identified
problems or impaired loans and a formula allowance for the remainder of the
portfolio. Measurement of impairment can be based on 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 allocation
of the allowance is also reviewed by management based upon its evaluation of
then-existing economic and business conditions affecting Westfield Financial's
key lending areas 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 adequate levels,
future adjustments may be necessary if economic, real estate and other
conditions differ substantially from the current operating environment.
14
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
Total assets increased $32.4 million to $837.5 million at September 30, 2006
from $805.1 million at December 31, 2005. Securities increased $24.9 million to
$379.8 million at September 30, 2006 from $354.9 million at December 31, 2005.
The securities portfolio is primarily comprised of mortgage-backed securities,
along with securities issued by government-sponsored enterprises and municipal
bonds. Securities issued by government-sponsored enterprises consist entirely of
bonds issued by the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, and the Federal Home Loan Bank. Westfield Financial also
invests in municipal bonds issued by cities and towns in Massachusetts and are
AAA rated by Moody's, Standard and Poor's, or Fitch, and the majority of which
are also independently insured. In addition, Westfield Financial has investments
in Federal Home Loan Bank stock and mutual funds that invest only in securities
allowed by the Office of Thrift Supervision.
Net loans during the period increased by $1.0 million, to $379.8 million at
September 30, 2006 from $378.8 million at December 31, 2005. Commercial real
estate and commercial and industrial loans decreased $1.7 million to $267.9
million at September 30, 2006 from $269.6 million at December 31, 2005. The
decrease was primarily the result of the payoff of $18.2 million in commercial
loans involving 11 relationships that either divested real estate or the entire
businesses were sold to concerns headquartered outside of Westfield Bank's
market area. Residential real estate loans increased $3.9 million to $111.2
million at September 30, 2006 from $107.3 million at December 31, 2005. During
the nine months ended September 30, 2006, Westfield Bank purchased $11.7 million
in adjustable rate loans which are serviced by the originating financial
institutions. In September 2001, Westfield Bank began referring substantially
all of the originations of its residential real estate loans to a third party
mortgage company. Residential real estate borrowers submit applications to
Westfield Bank, but the loan is approved by and closed on the books of the
mortgage company. The third party mortgage company owns the servicing rights and
services the loans. Westfield Bank retains no residual ownership interest in
these loans. Westfield Bank receives a fee for each of the loans originated by
the third party mortgage company.
Total deposits increased $15.1 million to $638.1 million at September 30, 2006
from $623.0 million at December 31, 2005. The increase in deposits was primarily
the result of an increase of $46.1 million in time deposits to $381.1 million at
September 30, 2006. The increase in time deposits was partially offset by a
decrease of $33.5 million in regular savings and money market accounts to $140.1
million at September 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.
Federal Home Loan Bank borrowings totaled $55.0 million at September 30, 2006
and $45.0 million at December 31, 2005. Customer repurchase agreements, all of
which are linked to commercial checking accounts, were $20.0 million at
September 30, 2006 and $14.4 million at 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 September 30, 2006 were held by commercial customers.
15
Excess funds are swept out of certain commercial checking accounts and into
repurchase agreements where the customers can earn interest on their funds. By
law, a bank cannot pay interest on commercial checking accounts; however,
interest can be paid on non-deposit products such as repurchase agreements. The
increase in customer repurchase agreements is consistent with Westfield Bank's
strategy to emphasize commercial customer relationships.
Stockholders' equity at September 30, 2006 and December 31, 2005 was $117.0
million and $115.8 million, respectively, which represented 14.0% of total
assets as of September 30, 2006 and 14.4% of total assets as of December 31,
2005. The change is primarily comprised of net income of $3.4 million for the
nine months ended September 30, 2006, the net repurchase of 25,845 shares of
common stock for $726,000 and the declaration and payment by the Board of
Directors of regular and special dividends amounting to $2.5 million.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2006 AND SEPTEMBER 30, 2005
General
Net income was $874,000, or $0.09 per diluted share, for the quarter ended
September 30, 2006 compared to $1.6 million, or $0.16 per diluted share, for the
same period in 2005. The results for the three months ended September 30, 2006
included a net loss of $378,000 on the sale of fixed assets, which was the
result of the sale of a building which housed a former Westfield Bank branch.
Net interest and dividend income decreased $406,000 to $5.5 million for the
three months ended September 30, 2006.
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, 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. 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.
16
Three Months Ended September 30,
--------------------------------
2006 2005
---- ----
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ---------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 112 $ 8,853 5.06% $ 259 $ 30,625 3.38%
Investment Securities 4,274 374,301 4.57 3,427 342,002 4.01
Loans 6,533 390,701 6.69 5,989 390,626 6.13
------- -------- ------ --------
Total Interest-Earning Assets $10,919 $773,855 5.64% $9,675 $763,253 5.07%
======= ======== ====== ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 249 $ 73,356 1.36% $ 77 $ 60,556 0.51%
Savings Accounts 48 38,442 0.50 54 42,715 0.51
Money Market Accounts 402 105,114 1.53 544 144,235 1.51
Time Deposits 3,886 375,920 4.13 2,423 332,271 2.92
Customer Repurchase Agreements and
Borrowings 598 66,158 3.62 456 61,716 2.96
------- -------- ------ --------
Total Interest-Bearing Liabilities $ 5,183 $658,990 3.15% $3,554 $641,493 2.22
======= ======== ====== ========
Net Interest Income/Interest Rate Spread $ 5,736 2.49% $6,121 2.85%
======= ==== ====== ====
Net Interest Margin 2.94% 3.18%
==== ====
1) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average
interest earning assets.
17
The following table shows how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
Westfield Financial's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to:
o interest income changes attributable to changes in volume (changes
in volume multiplied by prior rate);
o interest income changes attributable to changes in rate (changes in
rate multiplied by current volume); and
o 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, 2006
Compared to September 30, 2005
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ------------------------ ------ ---- ---
(Dollars in thousands)
Short Term Investments $(184) $ 37 $ (147)
Investment Securities 324 523 847
Loans 1 543 544
----- ------ ------
Net Change in Income on
Interest-Earning Assets 141 1,103 1,244
----- ------ ------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 16 156 172
Savings Accounts (5) (1) (6)
Money Market Accounts (148) 6 (142)
Time Deposits 318 1,145 1,463
Customer Repurchase Agreements and
Borrowings 33 109 142
----- ------ ------
Net Change in Expense on
Interest-Bearing Liabilities 214 1,415 1,629
----- ------ ------
Net Change in Interest Income $ (73) $ (312) $ (385)
===== ====== ======
18
Net interest and dividend income decreased $406,000 to $5.5 million for the
three months ended September 30, 2006. The net interest margin was 2.94% for the
three months ended September 30, 2006 as compared to 3.18% 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 93
basis points to 3.15% for the three months ended September 30, 2006 from 2.22%
for the same period in 2005. The yield on interest-earning assets, on a tax
equivalent basis, increased only 57 basis points to 5.64% for the three months
ended September 30, 2006 from 5.07% 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.
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 September 30, 2006 was based upon the changes that
occurred in the loan portfolio during that same period. The changes in the loan
portfolio, described in detail below, include partially replenishing the net
charge offs for the same period, tempered by a reduction in nonperforming loans
and a net decrease in the loan portfolio. After evaluating these factors,
Westfield Bank provided $50,000 for loan losses for the three months ended
September 30, 2006, compared to $100,000 for the same period in 2005. The
allowance was $5.3 million at September 30, 2006 and $5.4 million at June 30,
2006. The allowance for loan losses was 1.39% of total loans at September 30,
2006 and 1.37% at June 30, 2006.
At September 30, 2006 commercial real estate loans and commercial and industrial
loans decreased $6.0 million as compared to June 30, 2006. Commercial real
estate loans and commercial and industrial loans comprised 69.5% of Westfield
Bank's loan portfolio as of September 30, 2006 compared to 70.0% as of June 30,
2006. Westfield Bank considers these types of loans to contain more credit risk
and market risk than conventional residential real estate mortgages, which
decreased by $709,000 during the three months ended September 30, 2006. Consumer
loans showed no change from June 30, 2006 and remained at $6.0 million as of
September 30, 2006. Nonperforming loans were $706,000 September 30, 2006 and
$914,000 at June 30, 2006.
Net charge offs were $57,000 for the three months ended September 30, 2006. This
was comprised of charge-offs of $107,000 for the three months ended September
30, 2006, partially offset by recoveries of $50,000 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.
19
Noninterest Income
Noninterest income decreased $422,000 to $493,000 for the three months ended
September 30, 2006 from $915,000 million in the same period in 2005. The 2006
results included a net loss of $378,000 on the sale of fixed assets, which
primarily was the result of the sale of a building which housed a former
Westfield Bank branch. There were no net gains or losses on the sale of fixed
assets in the comparable 2005 period.
Checking account processing fees decreased $22,000 to $478,000 for the three
months ended September 30, 2006 from $500,000 in the same period in 2005. Income
from bank-owned life insurance was $201,000 for the three months ended September
30, 2006 and $206,000 in the same period in 2005.
Noninterest Expense
Noninterest expense was $4.9 million for the three months ended September 30,
2006 and $4.6 million for the three months ended September 30, 2005. Salaries
and benefits increased $74,000 for the three months ended September 30, 2006
compared to the same period in 2005. This was primarily the result of normal
salary increases and new hires. Westfield Financial recorded expenses of $73,000
related to stock options for the three months ended September 30, 2006 compared
to none for the same period in 2005. The requirement to expense stock based
compensation related to stock options became effective for Westfield Financial
for the fiscal year beginning on January 1, 2006. Expense related to charitable
contributions increased $77,000 to $116,000 for the three months ended September
30, 2006 compared to $39,000 for the same period in 2005. This was the result of
timing of when the contributions were paid.
Income Taxes
For the three months ended September 30, 2006, Westfield Financial had a tax
provision of $236,000 compared to $553,000 for the same period in 2005. The
effective tax rate was 21.3% for the three months ended September 30, 2006
compared to 25.7% for the same period in 2005.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
SEPTEMBER 30, 2005
General
Net income was $3.4 million, or $0.36 per diluted share, for the nine months
ended September 30, 2006 as compared to $4.5 million, or $0.46 per diluted
share, for the same period in 2005. The results for the nine months ended
September 30, 2006 include a net loss of $378,000 on the sale of fixed assets in
the third quarter of 2006, which was the result of the sale of a building which
housed a former Westfield Bank branch.
20
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, 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. 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.
Nine Months Ended September 30,
-------------------------------
2006 2005
---- ----
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- -------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 527 $ 15,184 4.63% $ 663 $ 31,106 2.84%
Investment Securities 12,225 366,510 4.45 10,306 341,607 4.02
Loans 19,115 386,140 6.60 17,143 383,243 5.96
------- -------- ------- --------
Total Interest-Earning Assets $31,867 $767,834 5.53 $28,112 $755,956 4.96
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 632 $ 72,047 1.17 $ 223 $ 60,004 0.50
Savings Accounts 148 39,866 0.49 162 43,605 0.50
Money Market Accounts 1,308 113,347 1.54 1,547 146,381 1.41
Time Deposits 10,372 365,204 3.79 6,563 321,999 2.72
Customer Repurchase Agreements and
Borrowings 1,575 61,931 3.39 1,299 61,839 2.80
------- -------- ------- --------
Total Interest-Bearing Liabilities $14,035 $652,395 2.87 $ 9,794 $633,828 2.06
======= ======== ======= ========
Net Interest Income/Interest Rate Spread $17,832 2.66% $18,318 2.90%
======= ==== ======= ====
Net Interest Margin 3.11% 3.24%
==== ====
1) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average
interest earning assets.
21
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:
o interest income changes attributable to changes in volume (changes
in volume multiplied by prior rate);
o interest income changes attributable to changes in rate (changes in
rate multiplied by current volume); and
o 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, 2006
Compared to September 30, 2005
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short Term Investments $(339) $ 203 $ (136)
Investment Securities 751 1,168 1,919
Loans 130 1,842 1,972
----- ------ ------
Net Change in Income on
Interest-Earning Assets 542 3,213 3,755
----- ------ ------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 45 364 409
Savings Accounts (14) 0 (14)
Money Market Accounts (349) 110 (239)
Time Deposits 881 2,928 3,809
Customer Repurchase Agreements and
Borrowings 2 274 276
----- ------ ------
Net Change in Expense on
Interest-Bearing Liabilities 565 3,676 4,241
----- ------ ------
Net Change in Interest Income $ (23) $ (463) $ (486)
===== ====== ======
22
Net interest and dividend income was $17.2 million for the nine months ended
September 30, 2006 compared to $17.8 million for the same period in 2005. The
net interest margin on a tax equivalent basis was 3.11% for the nine months
ended September 30, 2006 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 2.87% for the nine months ended September 30, 2006 from 2.06%
for same period in 2005. The yield of interest-earning assets, on a tax
equivalent basis, increased only 57 basis points to 5.53% for the nine months
ended September 30, 2006 from 4.96% 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.
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 nine months ended September 30, 2006 was based upon the changes that
occurred in the loan portfolio during that same period. The changes in the loan
portfolio, described in detail below, include partially replenishing the net
charge offs for the same period, tempered by a reduction in nonperforming loans
and relative stability in the balances in the loan portfolio. After evaluating
these factors, Westfield Bank provided $325,000 for loan losses for the nine
months ended September 30, 2006, compared to $365,000 for the same period in
2005. The allowance was $5.3 million at September 30, 2006 and $5.4 million at
December 31, 2005. The allowance for loan losses was 1.39% of total loans at
September 30, 2006 and 1.41% at December 31, 2005.
At September 30, 2006 commercial real estate loans and commercial and industrial
loans decreased $1.7 million as compared to December 31, 2005. Commercial real
estate loans and commercial and industrial loans comprised 69.6% of the Bank's
loan portfolio as of September 30, 2006 compared to 70.2% as of December 31,
2005. Westfield Bank considers these types of loans to contain more credit risk
and market risk than conventional residential real estate mortgages, which
increased by $3.9 million during the nine months ended September 30, 2006.
Consumer loans decreased $1.4 million to $6.0 million at September 30, 2006.
Nonperforming loans were $706,000 at September 30, 2006 and $1.9 million at
December 31, 2005.
Net charge offs were $402,000 for the nine months ended September 30, 2006. This
was comprised of charge-offs of $570,000 for the nine months ended September 30,
2006, partially offset by recoveries of $168,000 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.
23
Noninterest Income
Noninterest income decreased $243,000 to $2.6 million for the nine months ended
September 30, 2006 compared to $2.5 million in the same period in 2005. The 2006
results included a net loss of $378,000 on the sale of fixed assets, which
primarily was the result of the sale of a building which housed a former
Westfield Bank branch. There were no net gains on the sale of securities for the
nine months ended September 30, 2006 compared to $19,000 for the same period in
2005.
Income from fees and service charges increased $111,000 to $2.0 million for the
nine months ended September 30, 2006 from $1.9 million for the same period in
2005. This increase was primarily due to an increase in checking account
processing fees of $84,000, to $1.4 million for the nine months ended September
30, 2006 from $1.3 million for the same period in 2005. Income from bank-owned
life insurance increased $43,000 to $595,000 for the nine months ended September
30, 2006 from $552,000 for the same period in 2005.
Noninterest Expense
Noninterest expense for the nine months ended September 30, 2006 was $14.6
million compared to $14.0 million, respectively for the same period in 2005.
Salaries and benefits increased $587,000 for the nine months ended September 30,
2006. This was primarily the result of an increase in salary expense of $339,000
for the nine months ended September 30, 2006, related to hiring additional
personnel and normal salary increases. Westfield Financial recorded expenses of
$219,000 related to stock options for the nine months ended September 30, 2006
compared to none for the same period in 2005. The requirement to expense stock
based compensation related to stock options became effective for Westfield
Financial for the fiscal year beginning on January 1, 2006.
Income Taxes
For the nine months ended September 30, 2006, Westfield Financial had a tax
provision of $1.1 million compared to $1.4 million for the same period in 2005.
The effective tax rate was 24.4% for the nine months ended September 30, 2006
compared to 23.1% for the nine months ended September 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 based on eligible collateral of loans and
securities. Westfield Bank's maximum additional borrowing capacity from the
Federal Home Loan Bank at September 30, 2006 was approximately $28.6 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.
24
At September 30, 2006, Westfield Financial exceeded each of the applicable
regulatory capital requirements. As of September 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 table. There are no conditions or events
since that notification that management believes have changed Westfield Bank's
category. Westfield Financial's and Westfield Bank's actual capital ratios as
of September 30, 2006 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)
September 30, 2006
Westfield Financial, Inc.
Total Capital (to Risk Weighted Assets): $123,095 25.22% $39,044 8.00% N/A --
Tier 1 Capital (to Risk Weighted Assets): 117,750 24.13 19,522 4.00 N/A --
Tier 1 Capital (to Adjusted Total Assets): 117,750 14.04 34,550 4.00 N/A --
Westfield Bank
Total Capital (to Risk Weighted Assets): $117,969 24.21% $38,985 8.00% $48,732 10.00%
Tier 1 Capital (to Risk Weighted Assets): 112,651 23.12 19,493 4.00 29,239 6.00
Tier 1 Capital (to Adjusted Total Assets): 112,651 13.50 33,383 4.00 41,729 5.00
Tangible Equity (to Tangible Assets): 112,651 13.50 12,519 1.50 N/A --
December 31, 2005
Westfield Financial, Inc.
Total Capital (to Risk Weighted Assets): $123,783 26.07% $37,989 8.00% N/A --
Tier 1 Capital (to Risk Weighted Assets): 118,331 24.92 18,995 4.00 N/A --
Tier 1 Capital (to Adjusted Total Assets): 118,331 12.40 32,545 4.00 N/A --
Westfield Bank
Total Capital (to Risk Weighted Assets): $103,795 22.03% $37,685 8.00% $47,106 10.00%
Tier 1 Capital (to Risk Weighted Assets): 98,470 20.90 18,842 4.00 28,263 6.00
Tier 1 Capital (to Adjusted Total Assets): 98,470 12.40 31,771 4.00 39,713 5.00
Tangible Equity (to Tangible Assets): 98,470 12.40 11,859 1.50 N/A --
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, 2006 and September 30, 2005.
25
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, 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 $ 237 $ 465 $444 $ 407 $ 1,553
======== ======= ==== ======= ========
BORROWINGS
Federal Home Loan Bank $ 30,000 $20,000 $ -- $ 5,000 $ 55,000
======== ======= ==== ======= ========
CREDIT COMMITMENTS
Available lines of credit $ 42,307 $ -- $ -- $13,324 $ 55,631
Other loan commitments 32,769 15,084 -- -- 47,853
Letters of credit 5,171 -- -- 849 6,020
-------- ------- ---- ------- --------
Total credit commitments $ 80,247 $15,084 $ -- $14,173 $109,504
======== ======= ==== ======= ========
Grand total $110,484 $35,549 $444 $19,580 $166,057
======== ======= ==== ======= ========
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 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 September 30,
2006, that Westfield Financial and Westfield Bank met all capital adequacy
requirements to which they were subject. As of September 30, 2006, the most
recent notification from 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. There are no
conditions or events since that notification that management believes have
changed Westfield Bank's category.
26
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 or 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 tables below set forth for the twelve months ended September 30, 2007 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, 2007
(Dollars in thousands)
-------------------------------------------------
Changes in Net Interest
Interest Rates (Basis and Dividend
Points) Income % Change
--------------------- ------------ --------
300 $26,517 -0.3%
200 26,665 0.3
100 26,702 0.4
0 26,598 0.0
-100 26,732 0.5
-200 25,785 -3.1
-300 24,217 -9.0
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.
27
ITEM 4:
CONTROLS AND PROCEDURES
Management, including the Westfield Financial's Chairman and Chief Executive
Officer and the Westfield Financial'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 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's files and submits under Westfield Financial's
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 accounting officer, as appropriate to allow timely decisions regarding
required disclosure.
There have been no changes in the 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 USE OF PROCEEDS
There were no purchases made by Westfield Financial of its common stock during
the three months ended September 30, 2006.
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. There were 99,862 shares to be repurchased
under this repurchase program as of September 30, 2006. 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, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
28
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.
(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.
29
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, 2006
30