Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission File No.: 001-16767
Westfield Financial, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 73-1627673
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
141 Elm Street, Westfield, Massachusetts 01085
(Address of principal executive offices, including zip code)
(413) 568-1911
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share The American Stock Exchange
-------------------------------------- ---------------------------
(Title of each class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 12 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 if disclosure of delinquent files pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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 (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2006, was $119,468,748. This figure was based on the
closing price as of June 30, 2006 on The American Stock Exchange for a share of
the registrant's common stock, which was $29.00 on June 30, 2006.
As of March 7, 2007, the registrant had 31,924,887 shares of common stock,
$0.01 per value, issued and outstanding.
WESTFIELD FINANCIAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006
TABLE OF CONTENTS
ITEM PART I PAGE
1 BUSINESS 2
1A RISK FACTORS 42
1B UNRESOLVED STAFF COMMENTS 44
2 PROPERTIES 45
3 LEGAL PROCEEDINGS 46
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 46
PART II
5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 46
6 SELECTED FINANCIAL DATA 48
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 49
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 72
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 72
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 72
9A CONTROLS AND PROCEDURES 73
9B OTHER INFORMATION 74
PART III
10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 74
11 EXECUTIVE COMPENSATION 80
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 98
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE 101
14 PRINCIPAL ACCOUNTING FEES AND SERVICES 101
PART IV
15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES 103
SIGNATURES
FORWARD - LOOKING STATEMENTS
This Annual Report on Form 10-K 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, results of operation and business that are
subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not limited to:
o changes in the real estate market or local economy;
o changes in interest rates;
o changes in laws and regulations to which we are subject, and;
o competition in our primary market area.
Any or all of our forward-looking statements in this Annual Report on
Form 10-K 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 by known 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.
1
PART I
ITEM 1. BUSINESS
General. At December 31, 2006, Westfield Financial, Inc. was a
Massachusetts-chartered stock holding company organized in November 2001 in
connection with the reorganization of Westfield Mutual Holding Company, a
federally-chartered mutual holding company that owned 57.6% of the outstanding
common stock of Westfield Financial. On January 3, 2007, Westfield Financial
completed its stock offering in connection with the second step conversion of
Westfield Mutual Holding Company. As part of the conversion, New Westfield
Financial, Inc. succeeded Westfield Financial as the stock holding company of
Westfield Bank, and Westfield Mutual Holding Company was dissolved. In the
stock offering, a total of 18,400,000 shares representing Westfield Mutual
Holding Company's ownership interest in Westfield Financial were sold by New
Westfield Financial in a subscription offering, community offering and
syndicated offering. In addition, each outstanding share of Westfield Financial
as of January 3, 2007 was exchanged for 3.28138 new shares of New Westfield
Financial common stock. New Westfield Financial, Inc. changed its name to
Westfield Financial, Inc. effective January 3, 2007.
For financial reporting purposes, net proceeds of $171.7 million from the
second step conversion were recognized by Westfield Financial and reported in
its balance sheet as of December 31, 2006. Proceeds, net of stock issuance
costs, received directly by Westfield Financial or held by the underwriter for
the convenience of Westfield Financial were recorded by increasing cash, the
capital stock, and the paid-in capital accounts.
Westfield Bank was formed in 1853 and reorganized into a mutual holding
company structure without a stock offering in 1995. In July 2004, Westfield
Bank converted from a Massachusetts-chartered savings bank to a
federally-chartered savings bank regulated by the Office of Thrift Supervision.
Historically, Westfield Bank has been a community-oriented provider of
banking products and services to businesses and individuals, including
traditional products such as residential and commercial real estate loans,
consumer loans and a variety of deposit products. In recent years, however,
Westfield Bank has developed and implemented a lending strategy that focuses
less on residential real estate lending and more on servicing commercial
customers, including increased emphasis on commercial and industrial lending
and commercial deposit relationships, extending its branch network and
broadening its product lines and services. Westfield Bank believes that this
business strategy is best for its long term success and viability, and
complements its existing commitment to high quality customer service.
2
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 may purchase residential real
estate loans from the third party mortgage company depending on market
conditions. To date, Westfield Bank has not purchased a significant amount of
loans from the third party mortgage company.
Westfield Bank's revenues are derived principally from interest on its
loans and interest and dividends on its investment securities. Its primary
sources of funds are deposits, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of investment
securities, and funds provided by operations.
Elm Street Securities Corporation, a Massachusetts-chartered corporation,
was formed by Westfield Financial for the primary purpose of holding qualified
investment securities. In February 2007, Westfield Financial also formed WFD
Securities, Inc., a Massachusetts-chartered corporation, for the primary
purpose of holding qualified investment securities.
Unless the context otherwise requires, all references in this document to
Westfield Financial or Westfield Bank include Westfield Financial and Westfield
Bank on a consolidated basis.
Market Area. Westfield Bank operates through 10 banking offices in
Agawam, East Longmeadow, Holyoke, Southwick, Springfield, West Springfield and
Westfield, Massachusetts. It also has eight free-standing ATM locations in
Agawam, Feeding Hills, Springfield, West Springfield and Westfield,
Massachusetts. Westfield Bank's primary deposit gathering area is concentrated
in the communities surrounding these locations and its primary lending area
includes all of Hampden County in western Massachusetts. In addition, Westfield
Bank provides online banking services through its website located at
www.westfieldbank.com.
The markets served by Westfield Bank's branches are primarily suburban in
character, as Westfield Bank operates only two offices in Springfield, the
Pioneer Valley's primary urban market. Westfield, Massachusetts, is located in
the Pioneer Valley near the intersection of U.S. Interstates 90 (the
Massachusetts Turnpike) and 91. Interstate 90 is the major east-west highway
that crosses Massachusetts. Interstate 91 is the major north-south highway that
runs directly through the heart of New England. The Pioneer Valley of western
Massachusetts encompasses the fourth largest metropolitan area in New England.
The Springfield Metropolitan area covers a relatively diverse area ranging from
densely populated urban areas, such as Springfield, to outlying rural areas.
Westfield is located approximately 90 miles west of Boston, Massachusetts, 70
miles southeast of Albany, New York and 30 miles north of Hartford,
Connecticut. The 2005 population estimates for Westfield, Springfield and
Hampden County were approximately 41,187, 153,975 and 462,529, respectively.
3
The economy of Westfield Bank's market area historically has been
supported by a variety of industries. Its primary market area has benefited
from the presence of large employers centered in insurance, health care,
warehousing, manufacturing and education. Among the largest employers currently
in its market area are Bay State Health Systems, Big Y Foods, Friendly Ice
Cream Corporation, Hasbro, Mass Mutual Life Insurance Company, Mestek, Noble
Hospital, the University of Massachusetts, Westfield State College, American
International College, and the Sullivan Paper Company. In addition, other
employment and economic activity is provided by a substantial number of small
and medium size businesses in the area.
Westfield Bank's future growth opportunities will be influenced by the
growth and stability of the statewide and regional economies, other demographic
population trends and the competitive environment. Westfield Bank believes that
it has developed lending products and marketing strategies to address the
diverse credit-related needs of the residents in its market area.
Median household and per capita income levels in Hampden County are below
the state average, which is dominated by relatively high income levels
prevailing in the populous Boston metropolitan area. Similarly, the median
household and per capita income levels in Westfield Bank's markets more closely
approximate but also fall below the national averages.
As of December 2006, the unemployment rate of Hampden County and
Massachusetts was 5.9% and 5.3%, respectively, compared to 5.4% and 4.9%,
respectively, in December 2005.
Competition. Westfield Bank faces intense competition both in making
loans and attracting deposits. Its primary market area is highly competitive
and it faces direct competition from approximately 18 financial institutions,
many with a local, state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly
larger than and have greater financial resources than Westfield Bank. Westfield
Bank's competition for loans comes principally from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms.
Historically, Westfield Bank's most direct competition for deposits has come
from savings and commercial banks. Westfield Bank faces additional competition
for deposits from internet-based institutions, brokerage firms and insurance
companies.
4
Lending Activities
Loan Portfolio Composition. Westfield Bank's loan portfolio primarily
consists of commercial and industrial loans, commercial real estate loans,
residential real estate loans, home equity loans, and consumer loans.
At December 31, 2006, Westfield Bank had total loans of $390.2 million,
of which 72.3% were adjustable rate loans and 27.7% were fixed rate loans.
Commercial real estate loans and commercial and industrial loans totaled $174.6
million and $100.2 million, respectively. The remainder of its loans at
December 31, 2006 consisted of residential real estate loans, home equity loans
and consumer loans. Residential real estate and home equity loans outstanding
at December 31, 2006 totaled $109.5 million. Consumer loans outstanding at
December 31, 2006 were $5.5 million.
Westfield Bank's loans are subject to federal law and regulations. The
interest rates Westfield Bank charges on loans are affected principally by the
demand for loans, the supply of money available for lending purposes and the
interest rates offered by its competitors. These factors are, in turn, affected
by general and local economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies and
governmental budgetary matters. The following table presents the composition of
Westfield Bank's loan portfolio in dollar amounts and in percentages of the
total portfolio at the dates indicated.
5
At December 31,
--------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
-------------------- -------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Real estate loans:
Commercial $174,556 44.74% $169,564 44.17% $144,336 38.65% $131,292 37.57% $100,903 27.92%
Residential (1) 79,308 20.33 82,279 21.43 101,098 27.07 90,362 25.86 132,929 36.79
Home equity 30,232 7.75 24,639 6.42 21,724 5.82 20,185 5.78 24,967 6.91
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate
loans 284,096 72.82 276,482 72.02 267,158 71.54 241,839 69.21 258,799 71.62
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other loans:
Commercial and
industrial 100,237 25.69 100,019 26.06 94,726 25.36 85,292 24.41 61,494 17.01
Indirect auto 357 0.09 1,745 0.45 5,886 1.58 15,983 4.57 33,848 9.37
Consumer, other 5,484 1.40 5,627 1.47 5,679 1.52 6,327 1.81 7,216 2.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans 106,078 27.18 107,391 27.98 106,291 28.46 107,602 30.79 102,558 28.38
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 390,174 100.00% 383,873 100.00% 373,449 100.00% 349,441 100.00% 361,357 100.00%
Net deferred loan
origination costs 447 386 429 181 123
Allowance for loan
losses (5,437) (5,422) (5,277) (4,642) (4,325)
-------- -------- -------- -------- --------
Total loans, net $385,184 $378,837 $368,601 $344,980 $357,155
======== ======== ======== ======== ========
- --------------------
(1) Includes residential real estate loans purchased by Westfield Bank, or residential real estate loans originated by Westfield
Bank prior to September 2001, when Westfield Bank began referring substantially all of the originations of its residential
real estate loans to a third party mortgage company.
6
Loan Maturity and Repricing. The following table shows the repricing
dates or contractual maturity dates as of December 31, 2006. The table does not
reflect prepayments or scheduled principal amortization. Demand loans, loans
having no stated maturity, and overdrafts are shown as due in within one year.
At December 31, 2006
------------------------------------------------------------------------------------
Commercial
Residential Commercial and
Real Estate Home Equity Real Estate Industrial Consumer
Loans (1) Loans Loans Loans Loans Totals
----------- ----------- ----------- ---------- -------- ------
(In thousands)
Amounts due:
Within one year $15,423 $ 701 $ 30,585 $ 50,915 $1,066 $ 98,690
------- ------- -------- -------- ------ --------
After one year:
One to three years 23,731 529 59,997 11,007 1,566 96,830
Three to five years 8,131 2,627 41,987 16,575 2,785 72,105
Five to ten years 6,611 8,165 31,514 21,740 64 68,094
Ten to twenty years 11,658 18,210 10,473 - - 40,341
Over twenty years 13,754 - - - 360 14,114
------- ------- -------- -------- ------ --------
Total due after one year 63,885 29,531 143,971 49,322 4,775 291,484
------- ------- -------- -------- ------ --------
Total amount due: 79,308 30,232 174,556 100,237 5,841 390,174
------- ------- -------- -------- ------ --------
Less:
Net deferred loan origination
costs (fees), net 135 250 (93) 133 22 447
Allowance for loan losses (380) (42) (2,017) (2,919) (79) (5,437)
------- ------- -------- -------- ------ --------
Loans, net $79,063 $30,440 $172,446 $ 97,451 $5,784 $385,184
======= ======= ======== ======== ====== ========
- --------------------
(1) Includes residential real estate loans purchased by Westfield Bank, or residential real estate loans originated
by Westfield Bank prior to September 2001, when Westfield Bank began referring substantially all of the
originations of its residential real estate loans to a third party mortgage company.
7
The following table presents, as of December 31, 2006, the dollar amount
of all loans contractually due or scheduled to reprice after December 31, 2007
and whether such loans have fixed interest rates or adjustable interest rates.
Due After December 31, 2007
------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Real Estate Loans
Residential (1) $ 36,569 $ 27,316 $ 63,885
Home equity 19,841 9,690 29,531
Commercial real estate 6,348 137,623 143,971
-------- -------- --------
Total real estate loans 62,758 174,629 237,387
-------- -------- --------
Other Loans
Commercial and industrial 34,108 15,214 49,322
Consumer 4,775 - 4,775
-------- -------- --------
Total other loans 38,883 15,214 54,097
-------- -------- --------
Total loans $101,641 $189,843 $291,484
======== ======== ========
- --------------------
(1) Includes residential real estate loans purchased by Westfield Bank, or
residential real estate loans originated by Westfield Bank prior to
September 2001, when Westfield Bank began referring substantially all of
the originations of its residential real estate loans to a third party
mortgage company.
8
The following table presents our loan originations, purchases, sales and
principal payments for the years indicated:
For the Year Ended December 31,
--------------------------------
2006 2005 2004
---- ---- ----
(In thousands)
Loans:
Balance outstanding at beginning of year $383,873 $373,449 $349,441
Originations:
Real estate loans:
Residential (1) 4,337 2,016 1,403
Home equity 15,336 10,947 10,422
Commercial 52,807 58,382 31,174
-------- -------- --------
Total mortgage originations 72,480 71,345 42,999
Commercial and industrial loans 34,864 43,465 50,349
Consumer loans 3,657 3,325 3,516
-------- -------- --------
Total originations 111,001 118,135 96,864
Purchases of one-to-four-family
mortgage loans 11,845 1,236 34,996
-------- -------- --------
122,846 119,371 131,860
-------- -------- --------
Less:
Principal repayments, unadvanced
funds and other, net 116,170 108,627 107,737
Loan charge-offs, net 375 320 115
-------- -------- --------
Total deductions 116,545 108,947 107,852
-------- -------- --------
Ending balance $390,174 $383,873 $373,449
======== ======== ========
- --------------------
(1) Includes residential real estate loans purchased by Westfield Bank, or
residential real estate loans originated by Westfield Bank prior to
September 2001, when Westfield Bank began referring substantially all of
the originations of its residential real estate loans to a third party
mortgage company.
9
Commercial and Industrial Loans. Westfield Bank offers commercial and
industrial loan products and services which are designed to give business
owners borrowing opportunities for modernization, inventory, equipment,
construction, consolidation, real estate, working capital, vehicle purchases
and the financing of existing corporate debt. Westfield Bank offers business
installment loans, vehicle and equipment financing, lines of credit, equipment
leasing and other commercial loans. At December 31, 2006, Westfield Bank's
commercial and industrial loan portfolio consisted of 746 loans, totaling
$100.2 million or 25.7% of its total loans. Since 2002, commercial and
industrial loans have grown $38.7 million, or 61.4%, from $61.5 at December 31,
2002 to $100.2 million at December 31, 2006. Westfield Bank's commercial loan
team includes six commercial loan officers, one business development manager,
four credit analysts and one portfolio manager. Westfield Bank may hire
additional commercial loan officers on an as needed basis.
As part of Westfield Bank's strategy of increasing its emphasis on
commercial lending, Westfield Bank seeks to attract its business customers'
entire banking relationship. Most commercial borrowers also maintain a
commercial deposit at Westfield Bank. Westfield Bank provides complementary
commercial products and services, including an equipment leasing program with a
third party vendor, a variety of commercial deposit accounts, cash management
services, internet banking, sweep accounts, a broad ATM network and night
deposit services. In 2006, Westfield Bank introduced a remote deposit capture
product whereby commercial customers can receive credit for check deposits by
electronically transmitting check images from their own locations. Commercial
loan officers are based in its main and branch offices, and Westfield Bank
views its potential branch expansion as a means of facilitating these
commercial relationships. Westfield Bank intends to continue to expand the
volume of its commercial business products and services within its current
underwriting standards.
Westfield Bank's commercial and industrial loan portfolio does not have
any significant loan concentration by type of property or borrower. The largest
concentration of loans was for colleges and universities, which comprise
approximately 3.62% of the total loan portfolio as of December 31, 2006. At
December 31, 2006, Westfield Bank's largest commercial and industrial loan
relationship was $15.7 million to a private New England college. The loans of
this borrower have performed to contractual terms.
Commercial and industrial loans generally have terms of seven years or
less, however on an occasional basis, may have terms of up to ten years. Among
the $100.2 million Westfield Bank has in its commercial and industrial loan
portfolio as of December 31, 2006, $61.4 million have adjustable interest rates
and $38.8 million have fixed interest rates. Whenever possible, Westfield Bank
seeks to originate adjustable rate commercial and industrial loans. Borrower
activity and market conditions however, may influence whether Westfield Bank is
able to originate adjustable rate loans rather than fixed rate loans. Westfield
Bank generally requires the personal guarantee of the business owner. Interest
rates on commercial and industrial loans generally have higher yields than
residential or commercial real estate loans.
10
Commercial and industrial loans are generally considered to involve a
higher degree of risk than residential or commercial real estate loans because
the collateral may be in the form of intangible assets and/or inventory subject
to market obsolescence. Please see "Risk Factors - Our loan portfolio includes
loans with a higher risk of loss." Commercial and industrial loans may also
involve relatively large loan balances to single borrowers or groups of related
borrowers, with the repayment of such loans typically dependent on the
successful operation and income stream of the borrower. These risks can be
significantly affected by economic conditions. In addition, business lending
generally requires substantially greater oversight efforts by Westfield Bank's
staff compared to residential or commercial real estate lending. In order to
mitigate this risk, Westfield Bank monitors its loan concentration and its loan
policies generally to limit the amount of loans to a single borrower or group
of borrowers. Westfield Bank also utilizes the services of an outside
consultant to conduct credit quality reviews of the commercial and industrial
loan portfolio.
Commercial Real Estate Loans. Westfield Bank originates commercial real
estate loans to finance the purchase of real property, which generally consists
of apartment buildings, business properties, multi-family investment properties
and construction loans to developers of commercial and residential properties.
In underwriting commercial real estate loans, consideration is given to the
property's historic cash flow, current and projected occupancy, location and
physical condition. At December 31, 2006, Westfield Bank's commercial real
estate loan portfolio consisted of 392 loans, totaling $174.6 million, or 44.7%
of total loans. Since 2002, commercial real estate loans have grown by $73.7
million, or 73.0%, from $100.9 million at December 31, 2002 to $174.6 million
at December 31, 2006.
The majority of the commercial real estate portfolio consists of loans
which are collateralized by properties in Westfield Bank's normal lending area.
Westfield Bank's commercial real estate loan portfolio is diverse, and does not
have any significant loan concentration by type of property or borrower.
Westfield Bank generally lends up to a maximum loan-to-value ratio of 85% on
commercial properties and generally requires a minimum debt coverage ratio of
1.15 times. Its largest commercial real estate loan relationship had an
outstanding balance of $9.7 million at December 31, 2006 which was secured by
five commercial investment properties located in Massachusetts. The loans of
this borrower have performed to contractual terms.
Westfield Bank also offers construction loans to finance the construction
of commercial properties located in its primary market area. Westfield Bank had
$49.5 million in commercial construction loans and commitments at December 31,
2006.
Commercial real estate lending involves additional risks compared with
one-to-four- family residential lending. Payments on loans secured by
commercial real estate properties often depend on the successful management of
the properties, on the amount of rent from the properties, or on the level of
expenses needed to maintain the properties. Repayment of such loans may
therefore be adversely affected by conditions in the real estate market or the
general economy. Also, commercial real estate loans typically involve large
loan balances to single borrowers or groups of related borrowers. In order to
mitigate this risk, Westfield Bank monitors its loan concentration on a
quarterly basis and its loan policies generally limit the amount of loans to a
single borrower or group of borrowers.
11
Because of increased risks associated with commercial real estate loans,
Westfield Bank's commercial real estate loans generally have higher rates than
residential real estate loans. Please see "Risk Factors - Our loan portfolio
includes loans with a higher risk of loss." Commercial real estate loans
generally have adjustable rates with repricing dates of five years or less,
however, occasionally repricing dates may be as long as ten years. Whenever
possible, Westfield Bank seeks to originate adjustable rate commercial real
estate loans. Borrower activity and market conditions, however, may influence
whether the Westfield Bank is able to originate adjustable rate loans rather
than fixed rate loans.
Residential Real Estate Loans and Originations. 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 these loans originated by the third party mortgage
company.
Even though substantially all residential real estate loan originations
are referred to a third party mortgage company, Westfield Bank still holds
residential real estate loans in its loan portfolio. The loans consist
primarily of loans originated by Westfield Bank prior to September 2001, the
commencement of the third party residential mortgage referral program, or loans
purchased by Westfield Bank. Westfield Bank occasionally purchases adjustable
rate mortgages, which are serviced by the originating institutions, from other
banks located in Massachusetts. As of December 31, 2006, loans on one- to
four-family residential properties, including home equity lines, accounted for
$109.5 million, or 28.1%, of Westfield Bank's total loan portfolio.
Westfield Bank's residential adjustable rate mortgage loans generally are
fully amortizing loans with contractual maturities of up to 30 years, payments
due monthly. Its adjustable rate mortgage loans generally provide for specified
minimum and maximum interest rates, with a lifetime cap and floor, and a
periodic adjustment on the interest rate over the rate in effect on the date of
origination. As a consequence of using caps, the interest rates on these loans
are not generally as rate sensitive as its cost of funds. The adjustable rate
mortgage loans that Westfield Bank originates generally are not convertible
into fixed rate loans.
Adjustable rate mortgage loans generally pose different credit risks than
fixed rate loans, primarily because as interest rates rise, the borrower's
payments rise, increasing the potential for default. To date, Westfield Bank
has not experienced difficulty with payments for these loans. At December 31,
2006, its residential real estate and home equity loan portfolio included $52.4
million in adjustable rate loans, or 13.4% of its total loan portfolio, and
$57.1 million in fixed rate loans, or 14.7% of its total loan portfolio.
12
Westfield Bank's home equity loans totaled $30.2 million, or 7.7% of
total loans at December 31, 2006. Home equity loans include $19.9 million in
fixed rate loans, or 5.1% of total loans, and $10.3 million in adjustable rate
loans, or 2.6% of total loans. These loans may be originated in amounts of the
existing first mortgage, or up to 100% of the value of the property securing
the loan. Westfield Bank requires or obtains insurance on mortgages whose
loan-to-value ratio exceeds 80%. The term to maturity on Westfield Bank's home
equity and home improvement loans may be up to 15 years.
Consumer Loans. Consumer loans are generally originated at higher
interest rates than residential and commercial real estate loans, but they also
generally tend to have a higher credit risk than residential real estate loans
because they are usually unsecured or secured by rapidly depreciable assets.
Management, however, believes that offering consumer loan products helps to
expand and create stronger ties to Westfield Bank's existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities.
Westfield Bank offers a variety of consumer loans to retail customers in
the communities it serves. Examples of its consumer loans include automobile
loans, secured passbook loans, credit lines tied to deposit accounts to provide
overdraft protection, and unsecured personal loans. At December 31, 2006, the
consumer loan portfolio totaled $5.9 million or 1.5% of total loans. Westfield
Bank's consumer lending will allow it to diversify its loan portfolio while
continuing to meet the needs of the individuals and businesses that it serves.
Loans collateralized by rapidly depreciable assets such as automobiles or
that are unsecured entail greater risks than residential real estate loans. In
such cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a deficiency judgment.
Further, collections on these loans are dependent on the borrower's continuing
financial stability and, therefore, are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. There was no repossessed
collateral relating to consumer loans at December 31, 2006. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans if a borrower defaults.
Loan Approval Procedures and Authority. Individuals authorized to make
loans on behalf of Westfield Bank are designated by Westfield Bank's Chief
Lending Officer and approved by the Board of Directors. Each loan officer has
loan approval authority up to prescribed limits that depend upon the officer's
level of experience.
Upon receipt of a completed loan application from a prospective borrower,
Westfield Bank orders a credit report and verifies other information. If
necessary, Westfield Bank obtains additional financial or credit related
information. Westfield Bank also requires an appraisal for all commercial real
estate loans, which is performed by licensed or certified third party appraisal
13
firms and reviewed by Westfield Bank's lending department. Appraisals for home
equity loans are required for loans in excess of $250,000; otherwise, a
designated employee of Westfield Bank conducts an inspection of the property.
Westfield Bank requires title insurance on all commercial real estate loans.
Westfield Bank also requires borrowers to obtain flood insurance, if
applicable, prior to closing, for all loans secured by real estate within a
designated flood zone.
Commercial and Industrial Loans and Commercial Real Estate Loans.
Westfield Bank lends up to a maximum loan-to-value ratio of 85% on commercial
properties and requires a minimum debt coverage ratio of 1.2. Commercial real
estate lending involves additional risks compared with one- to four-family
residential lending. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, and/or the collateral value of the commercial real estate
securing the loan, repayment of such loans may be subject, to a greater extent,
to adverse conditions in the real estate market or the economy. Also,
commercial real estate loans typically involve large loan balances to single
borrowers or groups or related borrowers. Westfield Bank's loan policies limit
the amounts of loans to a single borrower or group of borrowers to reduce this
risk.
Westfield Bank's lending policies permit its underwriting department to
review and approve commercial and industrial loans and commercial real estate
loans up to $500,000. Any commercial and industrial or commercial real estate
loan application that exceeds $500,000 or that would result in the borrower's
total credit exposure with Westfield Bank to exceed $500,000, or whose approval
requires an exception to Westfield Bank's standard loan approval procedures,
requires approval of the Executive Committee of the Board of Directors. An
example of an exception to Westfield Bank's standard loan approval procedures
would be if a borrower was located outside Westfield Bank's primary lending
area. For loans requiring Board approval, management is responsible for
presenting to the Board information about the creditworthiness of a borrower
and the estimated value of the subject equipment or property. Generally, these
determinations are based on financial statements, corporate and personal tax
returns, as well as any other necessary information, including real estate and
or equipment appraisals.
Residential Real Estate 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.
Home Equity Loans. Home equity loans are originated and funded by
Westfield Bank. These loans may be originated in amounts of the existing first
mortgage, or up to 100% of the value of the property securing the loan.
Westfield Bank requires or obtains insurance on mortgages whose loan-to-value
ratio exceeds 80%. Westfield Bank's underwriting department may approve home
equity loans up to $150,000. Home equity loans in amounts greater than $150,000
and up to $300,000 may be approved by certain officers of Westfield Bank who
have been approved by the Board of Directors. Home equity loans over $300,000,
or whose approval requires an exception to Westfield Bank's standard loan
approval procedures, are reviewed and approved by the Executive Committee of
the Board of Directors.
14
Asset Quality
One of Westfield Bank's key operating objectives has been and continues
to be the achievement of a high level of asset quality. Westfield Bank
maintains a large proportion of loans secured by residential and commercial
properties, sets sound credit standards for new loan originations and follows
careful loan administration procedures. Westfield Bank also utilizes the
services of an outside consultant to conduct credit quality reviews of
Westfield Bank's commercial and industrial and commercial real estate loan
portfolio on a semi-annual basis. These practices and relatively favorable
economic and real estate market conditions have resulted in historically low
delinquency ratios and, in recent years, a low level of nonaccrual loans.
Delinquent Loans and Foreclosed Assets. Westfield Bank's policies require
that management continuously monitor the status of the loan portfolio and
report to the Board of Directors on a monthly basis. These reports include
information on delinquent loans and foreclosed real estate, as well as
Westfield Bank's actions and plans to cure the delinquent status of the loans
and to dispose of the foreclosed property.
The following table presents information regarding nonperforming
mortgage, consumer and other loans, and foreclosed real estate as of the dates
indicated. All loans where the interest payment is 90 days or more in arrears
as of the closing date of each month are placed on non-accrual status. At
December 31, 2006, 2005, and 2004, Westfield Bank had $1.0 million, $1.9
million, and $2.2 million, respectively, of nonaccrual loans. If all nonaccrual
loans had been performing in accordance with their terms, Westfield Bank would
have earned additional interest income of $67,000, $176,000, and $176,000 for
the years ended December 31, 2006, 2005, and 2004, respectively.
At December 31,
--------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual real estate loans:
Residential (1) $ 803 $ 321 $ 492 $ 953 $1,270
Home equity 103 108 139 74 83
Commercial real estate 69 1,285 1,341 342 374
------ ------ ------ ------ ------
Total nonaccrual real estate loans 975 1,714 1,972 1,369 1,727
------ ------ ------ ------ ------
Other loans:
Commercial and industrial 44 173 170 289 530
Consumer 9 32 29 110 126
------ ------ ------ ------ ------
Total nonaccrual consumer and other loans 53 205 199 399 656
------ ------ ------ ------ ------
Total nonperforming loans 1,028 1,919 2,171 1,768 2,383
Foreclosed real estate, net - - - - -
Total nonperforming assets $1,028 $1,919 $2,171 $1,768 $2,383
====== ====== ====== ====== ======
Nonperforming loans to total loans 0.26% 0.50% 0.58% 0.51% 0.66%
Nonperforming assets to total assets 0.10 0.24 0.27 0.22 0.29
- --------------------
(1) Includes residential real estate loans purchased by Westfield Bank, or residential real
estate loans originated by Westfield Bank prior to September 2001, when Westfield Bank began
referring substantially all of the originations of its residential real estate loans to a
third party mortgage company.
15
Allowance for Loan Losses. The following table presents the activity in
Westfield Bank's allowance for loan losses and other ratios (annualized as
applicable) at or for the dates indicated.
At or for Years Ended December 31,
------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of year $ 5,422 $ 5,277 $ 4,642 $ 4,325 $ 3,923
Charge-offs:
Residential (1) - - - (3) (36)
Commercial real estate - - - - (29)
Home equity loans - - - (31) -
Commercial and industrial (505) (431) (14) (124) (241)
Consumer (79) (181) (390) (567) (622)
-------- -------- -------- -------- --------
Total charge-offs (584) (612) (404) (725) (928)
-------- -------- -------- -------- --------
Recoveries:
Residential (1) 4 - - 10 17
Commercial real estate - 1 - - -
Home equity loans 3 3 4 3 -
Commercial and industrial 7 9 65 73 16
Consumer 195 279 220 206 363
-------- -------- -------- -------- --------
Total recoveries 209 292 289 292 396
-------- -------- -------- -------- --------
Net charge-offs (375) (320) (115) (433) (532)
Provision for loan losses 390 465 750 750 934
-------- -------- -------- -------- --------
Balance at end of year $ 5,437 $ 5,422 $ 5,277 $ 4,642 $ 4,325
======== ======== ======== ======== ========
Total loans receivable (2) $390,174 $383,873 $373,449 $349,441 $361,357
======== ======== ======== ======== ========
Average loans outstanding $386,039 $383,436 $366,677 $354,134 $398,555
======== ======== ======== ======== ========
Allowance for loan losses as
a percent of total loans
receivable 1.39% 1.41% 1.41% 1.33% 1.20%
Net loans charged off as a
percent of average loans
outstanding 0.10% 0.08% 0.03% 0.12% 0.13%
- --------------------
(1) Includes residential real estate loans purchased by Westfield Bank, or residential real
estate loans originated by Westfield Bank prior to September 2001, when Westfield Bank
began referring substantially all of the originations of its residential real estate loans
to a third party mortgage company.
(2) Does not include deferred fees or allowance for loan losses.
Westfield Bank maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio based on ongoing quarterly assessments of the
estimated losses. Westfield Bank's methodology for assessing the
appropriateness of the allowance consists of a review of the components, which
include a specific valuation allowance for identified problem loans and a
formula allowance for current performing loans. Fluctuations in the balances of
impaired loans affect the specific valuation allowance while fluctuations in
volume and concentrations of loans affects the formula reserve and the
allocation of the allowance of the loan losses among loan types.
16
The specific valuation allowance incorporates the results of measuring
impairment for specifically identified non-homogenous problem loans in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting By Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." In accordance with SFAS No. 114 and No. 118, the specific
allowance reduces the carrying amount of the impaired loans to their estimated
fair value. A loan is recognized as impaired when it is probable that principal
and/or interest are not collectible in accordance with the loan's contractual
terms. A loan is not deemed to be impaired if there is a short delay in receipt
of payment or if, during a longer period of delay, Westfield Bank expects to
collect all amounts due including interest accrued at the contractual rate
during the period of delay. 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. Measurement of impairment does
not apply to large groups of smaller balance homogenous loans that are
collectively evaluated for impairment such as the Westfield Bank portfolios of
home equity loans, real estate mortgages, installment and other loans.
The formula allowance is calculated by applying loss factors to
outstanding loans by type, excluding loans for which a specific allowance has
been determined. As part of this analysis, each quarter Westfield Bank prepares
an allowance for loan losses worksheet which categorizes the loan portfolio by
risk characteristics such as loan type and loan grade. The formula allowance is
inherently subjective as it requires material estimates that may be susceptible
to significant change. There are a number of factors that are considered when
evaluating the appropriate level of the allowance. These factors include
current economic and business conditions that affect key lending areas of the
company, new loan products, collateral values, loan volumes and concentrations,
credit quality trends such as nonperforming loans, delinquency and loan losses,
and specific industry concentrations within the portfolio segments that may
impact the collectibility of the loan portfolio.
In addition, management employs an independent third party to perform a
semi-annual review of all of Westfield Bank's commercial and industrial loans
and owner occupied commercial real estate loans with balances or commitments
equal or greater than $750,000. The third party also reviews all commercial
investment real estate loans in excess of $750,000, as well as all adversely
rated loans.
17
Westfield Bank's methodologies include several factors that are intended
to reduce the difference between estimated and actual losses. The loss factors
that are used to establish the allowance for pass graded loans are designated
to be self-correcting by taking into account changes in loan classification,
loan concentrations and loan volumes and by permitting adjustments based on
management's judgments of qualitative factors as of the evaluation date.
Similarly, by basing the pass graded loan loss factors on loss experience over
the prior three years, the methodology is designed to take Westfield Bank's
recent loss experience into account.
Westfield Bank's allowance methodology has been applied on a consistent
basis. Based on this methodology, Westfield Bank believes that it has
established and maintained the allowance for loan losses at adequate levels.
Future adjustments to the allowance for loan losses, however, may be necessary
if economic, real estate and other conditions differ substantially from the
current operating environment resulting in estimated and actual losses
differing substantially. Adjustments to the allowance for loan losses are
charged to income through the provision for loan losses.
A summary of the components of the allowance for loan losses is as
follows:
December 31, 2006 December 31, 2005 December 31, 2004
------------------------------- ------------------------------- -------------------------------
Specific Formula Total Specific Formula Total Specific Formula Total
-------- ------- ----- -------- ------- ----- -------- ------- -----
(In thousands)
Real Estate Mortgage
Residential (1) $ - $ 422 $ 422 $ - $ 355 $ 355 $ - $ 421 $ 421
Commercial 13 2,004 2,017 218 2,400 2,618 264 2,097 2,361
Commercial and
Industrial 7 2,912 2,919 32 2,334 2,366 236 2,078 2,314
Consumer - 79 79 - 83 83 - 181 181
--- ------ ------ ---- ------ ------ ---- ------ ------
Total $20 $5,417 $5,437 $250 $5,172 $5,422 $500 $4,777 $5,277
=== ====== ====== ==== ====== ====== ==== ====== ======
December 31, 2003 December 31, 2002
------------------------------- -------------------------------
Specific Formula Total Specific Formula Total
-------- ------- ----- -------- ------- -----
(In thousands)
Real Estate Mortgage
Residential (1) $ - $ 517 $ 517 $ - $ 713 $ 713
Commercial 17 1,994 2,011 17 1,618 1,635
Commercial and
Industrial 53 1,660 1,713 53 1,408 1,461
Consumer - 401 401 - 516 516
--- ------ ------ ---- ------ ------
Total $70 $4,572 $4,642 $ 70 $4,255 $4,325
=== ====== ====== ==== ====== ======
- --------------------
(1) Includes home equity loans. Also includes residential real estate loans purchased by Westfield Bank, or residential real
estate loans originated by Westfield Bank prior to September 2001, when Westfield Bank began referring substantially all of
the originations of its residential real estate loans to a third party mortgage company.
18
In addition, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews Westfield Bank's loan and foreclosed
real estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. The Office of Thrift Supervision may
require Westfield Bank to adjust the allowance for loan losses or the valuation
allowance for foreclosed real estate based on their judgments of information
available to them at the time of their examination, thereby adversely affecting
Westfield Bank's results of operations.
For the year ended December 31, 2006, Westfield Bank provided $390,000 to
the allowance for loan losses based on its evaluation of the items discussed
above. Westfield Bank believes that the allowance for loan losses accurately
reflects the level of risk in the current loan portfolio as of December 31,
2006.
19
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan
category, the total loan balances by category, and the percent of loans in each category to total loans indicated.
At December 31,
------------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Loan Loans in Loan Loans in Loan Loans in
Amount Balances Each Amount Balances Each Amount Balances Each
of Loan by Category to of Loan by Category to of Loan by Category to
Loan Category Loss Category Total Loans Loss Category Total Loans Loss Category Total Loans
- ------------- ------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate - mortgage:
Commercial $2,017 $174,556 44.74% $2,618 $169,564 44.17% $2,361 $144,336 38.65%
Residential (1) 422 109,540 28.08 355 106,918 27.85 421 122,822 32.89
Commercial loans 2,919 100,237 25.69 2,366 100,019 26.06 2,314 94,726 25.36
Consumer loans 79 5,841 1.49 83 7,372 1.92 181 11,565 3.10
------ -------- ------ ------ -------- ------ ------ -------- ------
Total allowance for
loan losses $5,437 $390,174 100.00% $5,422 $383,873 100.00% $5,277 $373,449 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
At December 31,
-------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------
Percent of Percent of
Loan Loans in Loan Loans in
Amount Balances Each Amount Balances Each
of Loan by Category to of Loan by Category to
Loss Category Total Loans Loss Category Total Loans
-------------------------------------------------------------------
(Dollars in thousands)
Real estate - mortgage:
Commercial $2,011 $131,292 37.57% $1,635 $100,903 27.92%
Residential (1) 517 110,547 31.64 713 157,896 43.70
Commercial loans 1,713 85,292 24.41 1,461 61,494 17.01
Consumer loans 401 22,310 6.38 516 41,064 11.37
------ -------- ------ ------ -------- ------
Total allowance for
loan losses $4,642 $349,441 100.00% $4,325 $361,357 100.00%
====== ======== ====== ====== ======== ======
- --------------------
(1) Includes home equity loans. Also includes residential real estate loans purchased by Westfield Bank, or residential real
estate loans originated by Westfield Bank prior to September 2001, when Westfield Bank began referring substantially all of
the originations of its residential real estate loans to a third party mortgage company.
20
Investment Activities. The Board of Directors reviews and approves
Westfield Bank's investment policy on an annual basis. The Chief Executive
Officer and Chief Financial Officer, as authorized by the Board of Directors,
implement this policy based on the established guidelines within the written
policy.
Westfield Bank's investment policy is designed primarily to manage the
interest rate sensitivity of its assets and liabilities, to generate a
favorable return without incurring undue interest rate and credit risk, to
complement its lending activities and to provide and maintain liquidity within
the range established by policy. In determining Westfield Bank's investment
strategies, it considers its interest rate sensitivity, yield, credit risk
factors, maturity and amortization schedules, and other characteristics of the
securities to be held.
Federally-chartered savings banks have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
government-sponsored enterprises, mortgage-backed securities, certain
certificates of deposit of insured financial institutions, repurchase
agreements, overnight and short term loans to other banks and corporate debt
instruments.
Securities Portfolio. Westfield Financial classifies securities as held
to maturity or available for sale at the date of purchase. Westfield Financial
does not have any securities classified as trading. Held to maturity securities
are reported at cost, adjusted for amortization of premium and accretion of
discount. Available for sale securities are reported at fair market value. At
December 31, 2006, held to maturity securities totaled $240.4 million, or 58.8%
of the total securities portfolio, and available for sale investments totaled
$168.6 million, or 41.2% of Westfield Financial's total securities portfolio.
Westfield Financial classifies U.S. Government securities and
Government-sponsored enterprise securities as available for sale and held to
maturity. These securities predominately have maturities of less than five
years, although Westfield Financial also invests in adjustable rate securities
with maturities of up to 30 years. Westfield Financial's mortgage-backed
securities, which are directly or indirectly insured or guaranteed by Freddie
Mac, Ginnie Mae or Fannie Mae or are rated AAA, consist of both fixed rate and
adjustable rate securities primarily with average lives of less than five
years. 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. These
securities generally have maturities between 7 and 20 years, however, many have
earlier call dates. 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.
21
The following table sets forth the composition of Westfield Bank's securities portfolio at the dates
indicated.
At December 31,
----------------------------------------------------------------------------
2006 2005 2004
---------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- -----
(In thousands)
Securities:
Government-sponsored enterprises $ 81,916 $ 81,242 $ 65,818 $ 64,944 $ 45,151 $ 45,061
Municipal bonds 30,204 30,387 30,233 30,339 29,147 29,597
Corporate debt securities - - - - 4,909 4,978
-------- -------- -------- -------- -------- --------
Total securities 112,120 111,629 96,051 95,283 79,207 79,636
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
Fannie Mae 150,547 148,310 144,440 141,472 153,271 152,292
Freddie Mac 90,972 90,477 74,775 73,834 62,614 62,501
Ginnie Mae 22,060 21,695 29,894 29,336 29,811 29,718
Other pass-through securities - - 4,726 4,709 - -
Collateralized mortgage
obligations 27,336 27,169 818 804 2,848 2,856
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities 290,915 287,651 254,653 250,155 248,544 247,367
-------- -------- -------- -------- -------- --------
Marketable equity securities 7,260 6,996 6,057 5,742 7,301 6,986
-------- -------- -------- -------- -------- --------
Total securities $410,295 $406,276 $356,761 $351,180 $335,052 $333,989
======== ======== ======== ======== ======== ========
22
Mortgage-Backed Securities. The following table sets forth the amortized cost and fair value of Westfield Bank's
mortgage-backed and mortgage-related securities, which are classified as available for sale or held to maturity at the dates
indicated.
At December 31,
-------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------- ------------------------------- -------------------------------
Amortized Percent of Fair Amortized Percent of Fair Amortized Percent of Fair
Cost Total Value Cost Total Value Cost Total Value
--------- ---------- ----- --------- ---------- ----- --------- ---------- -----
(Dollars in thousands)
Mortgage-backed securities
available for sale:
Fannie Mae $ 47,203 16.23% $ 46,730 $ 46,078 18.09% $ 45,376 $ 32,676 13.15% $ 32,713
Freddie Mac 49,554 17.03 49,378 38,310 15.04 37,863 22,842 9.19 22,838
Ginnie Mae 8,635 2.97 8,543 12,594 4.95 12,386 15,036 6.05 15,069
Other pass-through
securities - - - 4,726 1.86 4,709 - - -
Collateralized mortgage
obligations 22,430 7.71 22,291 818 0.32 804 2,688 1.08 2,696
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total mortgage-backed
securities available for sale 127,822 43.94 126,942 102,526 40.26 101,138 73,242 29.47 73,316
-------- ------ -------- -------- ------ -------- -------- ------ --------
Mortgage-backed securities
held to maturity:
Fannie Mae 103,344 35.52 101,580 98,362 38.63 96,096 120,595 48.52 119,579
Freddie Mac 41,418 14.24 41,099 36,465 14.32 35,971 39,772 16.00 39,663
Ginnie Mae 13,425 4.61 13,152 17,300 6.79 16,950 14,775 5.95 14,649
Collateralized mortgage
obligations 4,906 1.69 4,878 - - - 160 0.06 160
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total mortgage-backed
securities held to maturity 163,093 56.06 160,709 152,127 59.74 149,017 175,302 70.53 174,051
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total mortgage-backed
securities $290,915 100.00% $287,651 $254,653 100.00% $250,155 $248,544 100.00% $247,367
======== ====== ======== ======== ====== ======== ======== ====== ========
23
Securities Portfolio Maturities. The composition and maturities of the securities portfolio (debt securities) and the
mortgage-backed securities portfolio at December 31, 2006 are summarized in the following table. Maturities are based on the final
contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur.
More than One Year More than Five Years
One Year or Less Through Five Years Through Ten Years More than Ten Years Total Securities
------------------ ------------------ -------------------- ------------------- ---------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
--------- -------- --------- -------- --------- -------- --------- -------- --------- ----- --------
(Dollars in thousands)
Securities available
for sale:
Government-sponsored
enterprises $ 6,000 4.00% $23,831 5.31% $ 4,990 5.03% $ - -% $ 34,821 $ 34,691 5.04%
Mortgage-backed
securities available
for sale:
Ginnie Mae -- -- -- -- -- -- 8,635 4.58 8,635 8,543 4.58
Fannie Mae -- -- -- -- 2,816 4.52 44,387 4.47 47,203 46,730 4.48
Freddie Mac -- -- -- -- -- -- 49,554 4.56 49,554 49,378 4.56
Collateralized
mortgage
obligations -- -- -- -- -- -- 22,430 5.07 22,430 22,291 5.07
------- ---- ------- ---- ------- ---- -------- ---- -------- -------- ----
Total mortgage-
backed securities -- -- -- -- 2,816 4.52 125,006 4.62 127,822 126,942 4.62
------- ---- ------- ---- ------- ---- -------- ---- -------- -------- ----
Total $ 6,000 4.00 $23,831 5.31 $ 7,806 4.85 $125,006 4.62 $162,643 $161,633 4.71
======= ==== ======= ==== ======= ==== ======== ==== ======== ======== ====
Securities held to
maturity:
Government-sponsored
enterprises $10,000 4.28 $22,097 5.08 $14,998 4.92 $ - - $ 47,095 $ 46,551 4.86
Municipal bonds -- -- 1,480 3.47 13,834 3.87 14,890 4.41 30,204 30,387 4.12
------- ---- ------- ---- ------- ---- -------- ---- -------- -------- ----
Total investment
securities 10,000 4.28 23,577 4.98 28,832 4.42 14,890 4.41 77,299 76,938 4.57
------- ---- ------- ---- ------- ---- -------- ---- -------- -------- ----
Mortgage-backed
securities held to
maturity:
Ginnie Mae -- -- 83 4.91 463 4.88 12,879 3.97 13,425 13,152 4.01
Fannie Mae -- -- 2,835 3.29 11,857 3.63 88,652 4.67 103,344 101,580 4.52
Freddie Mac -- -- 3,243 2.15 714 4.79 37,461 5.16 41,418 41,099 4.93
Collateralized
mortgage obligations -- -- -- -- -- -- 4,906 5.48 4,906 4,878 5.48
------- ---- ------- ---- ------- ---- -------- ---- -------- -------- ----
Total mortgage-
backed securities -- -- 6,161 2.71 13,034 3.74 143,898 4.76 163,093 160,709 4.61
------- ---- ------- ---- ------- ---- -------- ---- -------- -------- ----
Total $10,000 4.28% $29,738 4.51% $41,866 4.21% $158,788 4.73% $240,392 $237,647 4.60%
======= ==== ======= ==== ======= ==== ======== ==== ======== ======== ====
24
Sources of Funds
General. Deposits, scheduled amortization and prepayments of loan
principal, maturities and calls of investments securities and funds provided by
operations are Westfield Bank's primary sources of funds for use in lending,
investing and for other general purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Deposits. Westfield Bank offers a variety of deposit accounts having a
range of interest rates and terms. Westfield Bank currently offers regular
savings deposits (consisting of passbook and statement savings accounts), NOW
accounts, noninterest-bearing demand accounts, money market accounts and time
deposits. Westfield Bank has expanded the types of deposit products that it
offers to include jumbo certificates of deposit, tiered money market accounts
and customer repurchase agreements to compliment its increased emphasis on
attracting commercial banking relationships.
Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Westfield Bank's deposits are primarily obtained from areas
surrounding its offices. Westfield Bank relies primarily on paying competitive
rates, service and long-standing relationships with customers to attract and
retain these deposits. Westfield Bank does not use brokers to obtain deposits.
When Westfield Bank determines its deposit rates, it considers local
competition, U.S. Treasury securities offerings and the rates charged on other
sources of funds. Core deposits (defined as regular accounts, money market
accounts, NOW accounts and demand accounts) represented 40.4% of total deposits
on December 31, 2006 and 46.2% on December 31, 2005. At December 31, 2006 and
December 31, 2005, time deposits with remaining terms to maturity of less than
one year amounted to $270.0 million and $227.8 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Net Interest and Dividend Income" for information relating to the
average balances and costs of Westfield Bank's deposit accounts for the years
ended December 31, 2006, 2005 and 2004.
25
Deposit Distribution Weighted Average. The following table sets forth the distribution of Westfield Bank's deposit accounts,
by account type, at the dates indicated.
At December 31,
---------------------------------------------------------------------------------------------
2006 2005 2004
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rates Amount Percent Rates Amount Percent Rates
------ ------- -------- ------ ------- -------- ------ ------- --------
(Dollars in thousands)
Demand deposits $ 42,383 6.75% 0.00% $ 45,260 7.26% 0.00% $ 48,305 7.88% 0.00%
NOW accounts 80,527 12.83 1.40 69,137 11.10 0.83 57,050 9.31 0.51
Regular accounts 36,110 5.76 0.50 41,387 6.64 0.50 44,882 7.33 0.50
Money market accounts 94,441 15.05 1.51 132,218 21.22 1.62 149,288 24.37 0.93
-------- ------ -------- ------ -------- ------
Total non-certificate accounts 253,461 40.39 1.08 288,002 46.22 1.01 299,525 48.89 0.64
-------- ------ -------- ------ -------- ------
Time certificates of deposit
Due within 1 year 270,026 43.04 4.40 227,770 36.56 3.05 184,500 30.12 2.14
Over 1 year through 3 years 91,201 14.53 4.33 85,951 13.80 3.51 103,856 16.95 2.88
Over 3 years 12,778 2.04 4.56 21,322 3.42 4.17 24,740 4.04 3.71
-------- ------ -------- ------ -------- ------
Total certificate accounts 374,005 59.61 4.39 335,043 53.78 3.24 313,096 51.11 2.51
-------- ------ -------- ------ -------- ------
Total $627,466 100.00% 3.05% $623,045 100.00% 2.21% $612,621 100.00% 1.59%
======== ====== ======== ====== ======== ======
Certificate of Deposit Maturities. At December 31, 2006, Westfield Bank
had $93.5 million in time certificates of deposit with balances of $100,000 and
over maturing as follows:
Weighted
Average
Maturity Period Amount Rate
- ----------------------------------------- ------ --------
(Dollars in thousands)
Three months or less $15,158 4.29%
Over three months through six months 11,511 4.61
Over six months through twelve months 39,940 4.72
Over twelve months 26,844 4.57
-------
Total $93,453 4.59%
=======
Certificate of Deposit Balances by Rates. The following table sets forth, by interest rate ranges,
information concerning Westfield Bank's time certificates of deposit at the dates indicated.
At December 31, 2006
------------------------------------------------------------------------------------
Period to Maturity
------------------------------------------------------------------------------------
Less than One to Two Two to More than Percent of
One Year Years Three Years Three Years Total Total
--------- ---------- ----------- ----------- ----- ----------
(Dollars in thousands)
2.00% and under $ 5,378 $ 13 $ - $ - $ 5,391 1.44%
2.01% to 3.00% 45,244 3,366 - - 48,610 13.00
3.01% to 4.00% 19,854 19,247 2,710 100 41,911 11.21
4.01% to 5.00% 122,859 21,265 16,370 10,142 170,636 45.62
5.01% and over 76,691 21,532 6,698 2,536 107,457 28.73
-------- ------- ------- ------- -------- ------
Total $270,026 $65,423 $25,778 $12,778 $374,005 100.00%
======== ======= ======= ======= ======== ======
26
Borrowings. In addition to deposits, borrowings from the Federal Home
Loan Bank of Boston are available as an additional source of funds to finance
Westfield Bank's lending and investing activities. Westfield Bank traditionally
has not relied upon borrowings from the Federal Home Loan Bank. Westfield
Bank's borrowings were $55.0 million at December 31, 2006.
Westfield Bank offers repurchase agreements to commercial customers and
higher balance retail customers. These agreements are linked to the customers'
checking accounts. 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. Since these repurchase agreements are not deposits, they
are not insured by the Federal Deposit Insurance Corporation. At December 31,
2006, such repurchase agreements borrowings totaled $17.9 million.
Personnel
As of December 31, 2006, Westfield Bank had 136 full-time employees and
34 part-time employees. The employees are not represented by a collective
bargaining unit, and Westfield Bank considers our relationship with its
employees to be excellent.
TAXATION
Federal
General. The following discussion is intended as only a summary and does
not purport to be a comprehensive description of the tax rules applicable to
Westfield Bank or Westfield Financial. For federal income tax purposes,
Westfield Bank reports its income on the basis of a taxable year ending
December 31, using the accrual method of accounting, and Westfield Financial is
generally subject to federal income taxation in the same manner as other
corporations. Since December 27, 2001, Westfield Bank and Westfield Financial
have constituted an affiliated group of corporations and, therefore, have
reported their income on a consolidated basis. Westfield Bank is currently
undergoing an audit of the 2005 tax year by the IRS. The tax years up to and
including the year ended December 31, 2002 are closed.
Distributions. To the extent that Westfield Bank makes "non-dividend
distributions" to stockholders, such distributions will be considered to result
in distributions from Westfield Bank's unrecaptured tax bad debt reserve "base
year reserve" (i.e. its reserve as of December 31, 1987), to the extent thereof
and then from its supplemental reserve for losses on loans, and an amount based
on the amount distributed, but no more than the amount of these reserves, will
be included in Westfield Bank's taxable income. Non-dividend distributions
include distributions in excess of Westfield Bank's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of Westfield
Bank's current or accumulated earnings and profits, as calculated for federal
income tax purposes, will not constitute non-dividend distributions and,
therefore, will not be included in Westfield Bank's income.
27
The amount of additional income created from a non-dividend distribution
is equal to the lesser of Westfield Bank's base year reserve and supplemental
reserve for losses on loans or an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
in some situations, approximately one and one-half times the non-dividend
distribution would be includible in gross income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. Westfield Bank does
not intend to pay dividends that would result in the recapture of any portion
of the bad debt reserves.
Corporate Alternative Minimum Tax. The alternative minimum tax rules have
been devised to ensure that at least a minimum amount of income tax is paid by
high-income corporate taxpayers who take advantage of substantial tax savings
due to the use of certain tax deductions and exemptions. In essence, the
alternative minimum tax functions as a recapture mechanism, reclaiming some of
the tax deductions and credits utilized by these taxpayers when calculating
their regular federal income tax liability. In general, a corporation's
alternative minimum taxable income is equal to its regular taxable income,
increased by its preference items for the year and adjusted by computing
certain items under special rules that negate the acceleration of certain tax
benefits which are available under the regular tax rules. The alternative
minimum tax rate is 20%. Such preference items include adjustments for tax
exempt interest, inside build-up of life insurance policies and accelerated
depreciation deductions. During the past five years, we have not been subject
to alternative minimum tax and therefore has no alternative minimum tax net
operating losses or credit to utilize.
Elimination of Dividends; Dividends Received Deduction. Westfield
Financial may exclude from its income 100% of dividends received from Westfield
Bank as a member of the same affiliated group of corporations.
Net Operating Losses. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding twenty taxable years. At December 31, 2006, Westfield Financial had
no net operating loss carry forwards for federal income tax purposes.
State
Financial institutions in Massachusetts are not allowed to file
consolidated income tax returns. Instead, each entity in the consolidated group
files a separate annual income tax return. The Massachusetts excise tax rate
for savings banks is currently 10.5% of federal taxable income, adjusted for
certain items. Taxable income includes gross income as defined under the
Internal Revenue code, plus interest from bonds, notes and evidences of
indebtedness of any state, including Massachusetts, less deductions, but not
the credits, allowable under the provisions of the Internal Revenue Code,
except for those deductions relating to dividends received and income or
franchise taxes imposed by a state or political subdivision. Carryforwards and
carrybacks of net operating losses and capital losses are not allowed.
28
Westfield Financial's state tax returns, as well as those of its
subsidiaries, are not currently under audit. In June 2003, Westfield Bank
reached a settlement with the Massachusetts Department of Revenue with respect
to the Department of Revenue's tax assessment resulting from the Department of
Revenue's disallowance of Westfield Bank's deduction of certain dividend
distributions received by Westfield Bank from its real estate investment trust
majority-owned subsidiary for the tax years ending December 31, 1999, 2001, and
2002. As a result, Westfield bank paid approximately $1.5 million to the
Department of Revenue representing one-half of the assessment plus interest and
obtained the Department of Revenue's release form liability for the remaining
half assessed. Westfield bank dissolved the real estate investment trust during
the fourth quarter of 2003.
REGULATION
General. As a federally-chartered savings bank, Westfield Bank is subject
to regulation, examination, and supervision by the Office of Thrift Supervision
as its chartering authority, and the Federal Deposit Insurance Corporation as
its deposit insurer. Westfield Bank must file reports with the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation describing its
activities and financial condition. Westfield Bank is also subject to certain
reserve requirements promulgated by the Federal Reserve Board. This supervision
and regulation is intended primarily for the protection of depositors.
Westfield Financial is a savings and loan holding company regulated by
the Office of Thrift Supervision. As such, Westfield Financial is registered
with and subject to Office of Thrift Supervision examination and supervision,
as well as certain Office of Thrift Supervision reporting requirements. In
addition, the Office of Thrift Supervision has enforcement authority over
Westfield Financial and Westfield Financial's non-savings association
subsidiaries. Among other things, this authority permits the Office of Thrift
Supervision to restrict or prohibit activities that are determined to be a
serious risk to the financial safety, soundness or stability of a subsidiary
savings association. Unlike bank holding companies, federal savings and loan
holding companies are not subject to any regulatory capital requirements or to
supervision by the Federal Reserve Board. Westfield Financial also is required
to file reports with the Office of Thrift Supervision and the Securities and
Exchange Commission, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision and the Securities and Exchange Commission under
federal securities laws.
The Office of Thrift Supervision and the Federal Deposit Insurance
Corporation have significant discretion in connection with their supervisory
and enforcement activities and examination policies. Any change in such
policies, whether by the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation, the Securities and Exchange Commission or the United
States Congress, could have a material adverse impact on Westfield Financial,
Westfield Bank, and Westfield Financial's operations and stockholders.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to federal savings banks and their holding
companies, and it does not purport to be a comprehensive description of all
such statutes and regulations.
29
Regulation of Federal Savings Banks
Business Activities. Westfield Bank derives its lending and investment
powers from the Home Owners' Loan Act, as amended, and Office of Thrift
Supervision regulations. The Home Owners' Loan Act and the Office of Thrift
Supervision regulations also limit Westfield Bank's authority to invest in
certain types of loans or other investments. Permissible investments include,
but are not limited to, mortgage loans secured by residential and commercial
real estate, commercial and consumer loans, certain types of debt securities,
and certain other assets. Westfield Bank may also establish service
corporations that may engage in activities not otherwise permissible for
Westfield Bank, including certain real estate equity investments and securities
and insurance brokerage.
Loans to One Borrower. Westfield Bank is generally subject to the same
limits on loans to one borrower as is a national bank. With specified
exceptions, Westfield Bank's total loans or extensions of credit to a single
borrower cannot exceed 15% of Westfield Bank's unimpaired capital and surplus,
which does not include accumulated other comprehensive income. Westfield Bank
may lend additional amounts up to 10% of its unimpaired capital and surplus
which does not include accumulated other comprehensive income, if the loans or
extensions of credit are fully-secured by readily-marketable collateral.
Westfield Bank currently complies with applicable loans-to-one borrower
limitations.
Qualified Thrift Lender Test. The Home Owners' Loan Act requires that
Westfield Bank, as a savings association, comply with the qualified thrift
lender test. Under the qualified thrift lender test, Westfield Bank is required
to maintain at least 65% of its portfolio assets in certain "qualified thrift
investments" in at least nine months of the most recent twelve-month period.
"Portfolio assets" means, in general, Westfield Bank's total assets less the
sum of:
o specified liquid assets up to 20% of total assets;
o goodwill and other intangible assets; and
o the value of property used to conduct Westfield Bank's business.
Westfield Bank also may satisfy the qualified thrift lender test by
qualifying as a domestic building and loan association as defined in the
Internal Revenue Code of 1986. If Westfield Bank fails the qualified thrift
lender test, and is unable to correct that failure for a period of time, it
must either operate under certain restrictions on its activities or convert to
a bank charter.
Westfield Bank met the qualified thrift lender test at December 31, 2006
and in each of the prior 12 months, and, therefore, is a "qualified thrift
lender."
30
Capital Requirements. Office of Thrift Supervision regulations require
Westfield Bank to meet three minimum capital standards:
(1) a tangible capital ratio requirement of 1.5% of total assets as
adjusted under Office of Thrift Supervision regulations;
(2) a leverage ratio requirement of 3% of core capital to such adjusted
total assets, if a savings association has been assigned the
highest composite rating of 1 under the Uniform Financial
Institutions Rating System; and
(3) a risk-based capital ratio requirement of 8% of core and
supplementary capital to total risk-based assets, provided that the
amount of supplementary capital used to satisfy this requirement
may not exceed the amount of core capital.
The minimum leverage capital ratio for any other depository institution
that does not have a composite rating of 1 will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. In determining the amount of risk-weighted assets
for purposes of the risk-based capital requirement, a savings association must
compute its risk-based assets by multiplying its assets and certain off-balance
sheet items by risk-weights, which range from 0% for cash and obligations
issued by the United States Government or its agencies to 100% for consumer and
commercial loans, as assigned by the Office of Thrift Supervision capital
regulation based on the risks found by the Office of Thrift Supervision to be
inherent in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights), and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital (or Tier 1
capital) is defined similarly to tangible capital, but core capital also
includes certain qualifying supervisory goodwill and certain purchased credit
card relationships. Supplementary capital (or Tier 2 capital) currently
includes cumulative and other preferred stock, mandatory convertible debt
securities, subordinated debt and intermediate preferred stock and the
allowance for loan and lease losses. In addition, up to 45% of unrealized gains
on available-for-sale equity securities with a readily determinable fair value
may be included in Tier 2 capital. The allowance for loan and lease losses
includable in Tier 2 capital is limited to a maximum of 1.25% of risk-weighted
assets.
At December 31, 2006, Westfield Bank met each of its capital
requirements, in each case on a fully phased-in basis.
31
Community Reinvestment. Under the Community Reinvestment Act, as
implemented by Office of Thrift Supervision regulations, Westfield Bank has a
continuing and affirmative obligation, consistent with safe and sound banking
practices, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the Community Reinvestment Act. The Community Reinvestment Act
requires the Office of Thrift Supervision, in connection with its examination
of a savings association, to assess Westfield Bank's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications by Westfield Bank.
The Community Reinvestment Act regulations establish an assessment system
that bases an association's rating on its actual performance in meeting
community needs. In particular, the assessment system focuses on three tests:
o a lending test, to evaluate the institution's record of making
loans in its assessment areas;
o an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing,
and programs benefiting low or moderate income individuals and
businesses in its assessment area or a broader area that includes
its assessment area; and
o a service test, to evaluate the institution's delivery of services
through its retail banking channels and the extent and
innovativeness of its community development services.
Westfield Bank received a "Satisfactory" Community Reinvestment Act
rating in its most recent examination, in January 2005.
Transactions with Affiliates. Westfield Bank's authority to engage in
transactions with its "affiliates" is limited by Sections 23A and 23B of the
Federal Reserve Act and the Federal Reserve Board's Regulation W, as made
applicable to federal savings associations by the Home Owners' Loan Act and the
Office of Thrift Supervision regulations. In general, these transactions must
be on terms that are as favorable to Westfield Bank as comparable transactions
with non-affiliates. In addition, certain types of these transactions are
restricted to an aggregate percentage of Westfield Bank's capital. Collateral
in specified amounts must usually be provided by affiliates in order to receive
loans from Westfield Bank. In addition, Office of Thrift Supervision
regulations prohibit a savings association from lending to any of its
affiliates that engage in activities not permissible for bank holding companies
and from purchasing the securities of any affiliate, other than a subsidiary.
32
Loans to Insiders. Westfield Bank's authority to extend credit to its
directors, executive officers and principal stockholders, as well as to
entities controlled by such persons, is currently governed by the requirements
of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the
Federal Reserve Board, as made applicable to federal savings associations by
the Home Owners' Loan Act and the Office of Thrift Supervision regulations.
Among other things, these provisions require that extensions of credit to
insiders: (i) be made on terms that are substantially the same as, and follow
credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do
not involve more than the normal risk of repayment or present other unfavorable
features; and (ii) not exceed certain limitations on the amount of credit
extended to such persons, individually and in the aggregate, which limits are
based, in part, on the amount of Westfield Bank's capital. In addition,
extensions for credit in excess of certain limits must be approved by Westfield
Bank's Board of Directors.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings associations, including Westfield Bank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations as well as in response to unsafe or unsound
practices.
Standards for Safety and Soundness. Pursuant to the Federal Deposit
Insurance Act, the Office of Thrift Supervision has adopted a set of guidelines
prescribing safety and soundness standards. These guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, asset quality, earnings standards, compensation, fees and
benefits. In general, the guidelines require appropriate systems and practices
to identify and manage the risks and exposures specified in the guidelines.
In addition, the Office of Thrift Supervision adopted regulations that
authorize, but do not require, the Office of Thrift Supervision to order a
savings association that has been given notice that it is not satisfying these
safety and soundness standards to submit a compliance plan. If, after being
notified, a savings association fails to submit an acceptable plan of
compliance or fails in any material respect to implement an accepted plan, the
Office of Thrift Supervision must issue an order directing action to correct
the deficiency, may issue an order directing other actions of the types to
which an undercapitalized association is subject under the "prompt corrective
action" provisions of the Federal Deposit Insurance Act. If a savings
association fails to comply with such an order, the Office of Thrift
Supervision may seek to enforce such order in judicial proceedings and to
impose civil money penalties.
33
Prompt Corrective Regulatory Action. Pursuant to the Federal Deposit
Insurance Act and the Office of Thrift Supervision prompt corrective action
regulations, the Office of Thrift Supervision is required to take certain, and
is authorized to take other, supervisory actions against undercapitalized
savings associations. For this purpose, a savings association would be placed
in one of the following four categories based on the association's capital:
o well-capitalized;
o adequately capitalized;
o undercapitalized; or
o critically undercapitalized.
When appropriate, the Office of Thrift Supervision can require corrective
action by a savings and loan holding company under the "prompt corrective
action" provisions of the Federal Deposit Insurance Act.
At December 31, 2006, Westfield Bank met the criteria for being
considered "well-capitalized."
Capital Distributions. The Office of Thrift Supervision imposes various
restrictions or requirements on Westfield Bank's ability to make capital
distributions, including the payment of cash dividends. A savings association
that is the subsidiary of a savings and loan holding company must file a notice
with the Office of Thrift Supervision at least 30 days before making a capital
distribution. Westfield Bank must file an application for prior approval if the
total amount of its capital distributions for the applicable calendar year
would exceed an amount equal to Westfield Bank's net income for that year plus
Westfield Bank's retained net income for the previous two years.
The Office of Thrift Supervision may disapprove of a notice of
application if:
o Westfield Bank would be undercapitalized following the
distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in
any statute, regulation, or agreement.
Liquidity. Westfield Bank is required to maintain a sufficient amount of
liquid assets to ensure its safe and sound operation.
34
Insurance of Deposit Accounts. Westfield Bank is a member of the Deposit
Insurance Fund, maintained by the Federal Deposit Insurance Corporation, and
Westfield Bank pays its deposit insurance assessments to the Deposit Insurance
Fund. The Deposit Insurance Fund was formed on March 31, 2006 following the
merger of the Bank Insurance Fund and the Savings Association Insurance Fund in
accordance with the Federal Deposit Insurance Reform Act of 2005. In addition
to merging the insurance funds, the Federal Deposit Insurance Reform Act
established a statutory minimum and maximum designated reserve ratio for the
Deposit Insurance Fund and granted the Federal Deposit Insurance Corporation
greater flexibility in establishing the required reserve ratio. In its
regulations implementing the Federal Deposit Insurance Reform Act, the Federal
Deposit Insurance Corporation has set the current annual designated reserve
ratio for the Deposit Insurance Fund at 1.25%.
In order to maintain the Deposit Insurance Fund, member institutions are
assessed an insurance premium. The amount of each institution's premium is
currently based on the balance of insured deposits and the degree of risk the
institution poses to the Deposit Insurance Fund. Under the assessment system,
the Federal Deposit Insurance Corporation assigns an institution to one of nine
risk categories using a two-step process based first on capital ratios (the
capital group assignment) and then on other relevant information (the
supervisory subgroup assignment). Each risk category is assigned an assessment
rate. Assessment rates currently range from 0% of deposits for an institution
in the highest category (i.e., well-capitalized and financially sound, with no
more than a few minor weaknesses) to 0.43% of deposits for an institution in
the lowest category (i.e., undercapitalized and substantial supervisory
concerns). The Federal Deposit Insurance Corporation is authorized to raise the
assessment rates as necessary to maintain the Deposit Insurance Fund. The
Bank's assessment rate at December 31, 2006 was 0.0122%. Any increase in
insurance assessments could have an adverse effect on the earnings of insured
institutions, including the Bank.
In addition, all Federal Deposit Insurance Corporation-insured
institutions are required to pay a pro rata portion of the interest due on
obligations issued by the Financing Corporation to fund the closing and
disposal of failed thrift institutions by the Resolution Trust Corporation. At
December 31, 2006, the Federal Deposit Insurance Corporation assessed Deposit
Insurance Fund-insured deposits 1.24 basis points per $100 of deposits to cover
those obligations. The Financing Corporation rate is adjusted quarterly to
reflect changes in assessment bases of the Deposit Insurance Fund. This
obligation will continue until the Financing Corporation bonds mature in 2017.
Federal Home Loan Bank System. Westfield Bank is a member of the Federal
Home Loan Bank of Boston, which is one of the regional Federal Home Loan Banks
composing the Federal Home Loan Bank System. Each Federal Home Loan Bank serves
as a central credit facility primarily for its member institutions. Westfield
Bank, as a member of the Federal Home Loan Bank of Boston, is required to
acquire and hold shares of capital stock in the Federal Home Loan Bank of
Boston. While the required percentages of stock ownership are subject to change
by the Federal Home Loan Bank of Boston, Westfield Bank was in compliance with
this requirement with an investment in Federal Home Loan Bank of Boston stock
at December 31, 2006 of $4.0 million. Any advances from an Federal Home Loan
Bank must be secured by specified types of collateral, and all long-term
advances may be obtained only for the purpose of providing funds for
residential housing finance.
35
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of earnings that the
Federal Home Loan Banks can pay as dividends to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, Westfield Bank's net interest income
would be affected.
Federal Reserve System. Westfield Bank is subject to provisions of the
Federal Reserve Act and the Federal Reserve Board's regulations under which
depository institutions may be required to maintain non-interest-earning
reserves against their deposit accounts and certain other liabilities.
Currently, reserves must be maintained against transaction accounts (primarily
NOW and regular checking accounts). The Federal Reserve Board regulations
exempt $8.5 million of otherwise reservable balances from the reserve
requirements. A 3.0% reserve is required for transaction account balances over
$8.5 million and up to $45.8 million. Transaction account balances over $45.8
million are subject to a reserve requirement of $1,119,000 plus 10% of the
amount over $45.8 million. Westfield Bank is in compliance with the foregoing
reserve requirements. Because required reserves must be maintained in the form
of either vault cash, a non-interest-bearing account at a Federal Reserve Bank,
or a pass-through account as defined by the Federal Reserve Board, the effect
of this reserve requirement is to reduce Westfield Bank's interest-earning
assets. The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed by
the Office of Thrift Supervision. Federal Home Loan Bank System members are
also authorized to borrow from the Federal Reserve Board discount window, but
Federal Reserve Board regulations require such institutions to exhaust all
Federal Home Loan Bank sources before borrowing from the Federal Reserve Board.
Prohibitions Against Tying Arrangements. Federal savings associations are
subject to prohibitions on certain tying arrangements. A savings association is
prohibited, subject to some exceptions, from extending credit or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain credit or services
from a competitor of the institution.
The Bank Secrecy Act. Westfield Bank and Westfield Financial are subject
to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the
federal government powers to address money laundering and terrorist threats
through enhanced domestic security measures, expanded surveillance powers, and
mandatory transaction reporting obligations. By way of example, the Bank
Secrecy Act imposes an affirmative obligation on Westfield Bank to report
currency transactions that exceed certain thresholds and to report other
transactions determined to be suspicious.
36
Title III of the USA PATRIOT Act takes measures intended to encourage
information sharing among financial institutions, bank regulatory agencies and
law enforcement bodies. Further, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions, including
banks, thrifts, brokers, dealers, credit unions, money transfer agents and
parties registered under the Commodity Exchange Act. Among other requirements,
the USA PATRIOT Act imposes the following obligations on financial
institutions:
o financial institutions must establish anti-money laundering
programs that include, at minimum: (i) internal policies,
procedures, and controls, (ii) specific designation of an
anti-money laundering compliance officer, (iii) ongoing employee
training programs, and (iv) an independent audit function to test
the anti-money laundering program;
o financial institutions must establish and meet minimum standards
for customer due diligence, identification and verification;
o financial institutions that establish, maintain, administer, or
manage private banking accounts or correspondent accounts in the
United States for non-United States persons or their
representatives (including foreign individuals visiting the United
States) must establish appropriate, specific, and, where necessary,
enhanced due diligence policies, procedures, and controls designed
to detect and report money laundering through those accounts;
o financial institutions are prohibited from establishing,
maintaining, administering or managing correspondent accounts for
foreign shell banks (foreign banks that do not have a physical
presence in any country), and are subject to certain recordkeeping
obligations with respect to correspondent accounts of foreign
banks; and
o bank regulators are directed to consider a depository
institutions's or holding company's effectiveness in combating
money laundering when ruling on Federal Reserve Act and Bank Merger
Act applications.
Office of Foreign Asset Control. Westfield Bank and Westfield Financial
are, like all United States companies and individuals, prohibited from
transacting business with certain individuals and entities named on the Office
of Foreign Asset Control's list of Specially Designated Nationals and Blocked
Persons. Failure to comply may result in fines and other penalties. The Office
of Foreign Asset Control has issued guidance directed at financial institutions
in which it asserts that it may, in its discretion, examine institutions
determined to be high-risk or to be lacking in their efforts to comply with
these prohibitions.
37
Holding Company Regulation
Activities Restrictions Applicable to Westfield Financial. Under the
Gramm-Leach-Bliley Act, Westfield Financial is prohibited from engaging in
non-financial activities. As a result, Westfield Financial's activities are
restricted to:
o furnishing or performing management services for a savings
institution subsidiary of such holding company;
o conducting an insurance agency or escrow business;
o holding, managing, or liquidating assets owned or acquired from a
savings association subsidiary of such company;
o holding or managing properties used or occupied by a savings
association subsidiary of such company;
o acting as trustee under a deed of trust;
o any other activity (i) that the Federal Reserve Board, by
regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of
1956, unless the Director of the Office of Thrift Supervision, by
regulation, prohibits or limits any such activity for savings and
loan holding companies, or (ii) in which multiple savings and loan
holding companies were authorized by regulation to directly engage
in on March 5, 1987;
o purchasing, holding, or disposing of stock acquired in connection
with a qualified stock issuance if the purchase of such stock by
such holding company is approved by the Director of the Office of
Thrift Supervision; and
o any activity permissible for financial holding companies under
section 4(k) of the Bank Holding Company Act.
Permissible activities which are deemed to be financial in nature or
incidental thereto under section 4(k) of the Bank Holding Company Act include:
o lending, exchanging, transferring, investing for others, or
safeguarding money or securities;
o insurance activities or providing and issuing annuities, and acting
as principal, agent, or broker;
o financial, investment, or economic advisory services;
38
o issuing or selling instruments representing interests in pools of
assets that a bank is permitted to hold directly;
o underwriting, dealing in, or making a market in securities;
o activities previously determined by the Federal Reserve Board to be
closely related to banking;
o activities that bank holding companies are permitted to engage in
outside of the U.S.; and
o portfolio investments made by an insurance company.
In addition, we cannot be acquired or acquire a company unless the
acquirer is engaged solely in financial activities.
Restrictions on Acquisition of Control Applicable to Westfield Financial.
The Home Owners' Loan Act prohibits all savings and loan holding companies,
including Westfield Financial, from acquiring, directly or indirectly:
o control (as defined under the Home Owners' Loan Act) of another
savings association (or a holding company parent) without prior
Office of Thrift Supervision approval;
o through merger, consolidation, or purchase of assets, another
savings association or a holding company thereof, or acquiring all
or substantially all of the assets of such savings association (or
a holding company) without prior Office of Thrift Supervision
approval; or
o control of any depository institution not insured by the Federal
Deposit Insurance Corporation (except through a merger with and
into the holding company's savings association subsidiary that is
approved by the Office of Thrift Supervision).
A savings and loan holding company may not acquire as a separate
subsidiary a savings association that has a principal office outside of the
state where the principal office of its subsidiary savings association is
located, except:
o in the case of certain emergency acquisitions approved by the
Federal Deposit Insurance Corporation;
o if such holding company controls a savings savings association
subsidiary that operated a home or branch office in such additional
state as of March 5, 1987; or
39
o if the laws of the state in which the savings association to be
acquired is located specifically authorize a savings association
chartered by that state to be acquired by a savings association
chartered by the state where the acquiring savings association or
savings and loan holding company is located or by a holding company
that controls such a state-chartered association.
Federal Securities Laws. Westfield Financial's common stock is registered
with the Securities and Exchange Commission under Section 12(b) of the
Securities Exchange Act of 1934, as amended, and Westfield Financial is subject
to information, proxy solicitation, insider trading restrictions, and other
requirements under the Securities Exchange Act of 1934, as amended.
The Sarbanes-Oxley Act. As a public company, Westfield Financial is
subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of
corporate governance and accounting measures for public companies designed to
promote honesty and transparency in corporate America and better protect
investors from corporate wrongdoing. The Sarbanes-Oxley Act's principal
legislation and the derivative regulation and rule making promulgated by the
Securities and Exchange Commission includes:
o the creation of an independent accounting oversight board;
o auditor independence provisions that restrict non-audit services
that accountants may provide to their audit clients;
o additional corporate governance and responsibility measures,
including the requirement that the chief executive officer and
chief financial officer certify financial statements;
o a requirement that companies establish and maintain a system of
internal control over financial reporting and that a company's
management provide an annual report regarding its assessment of the
effectiveness of such internal control over financial reporting to
the company's independent accountants and that such accountants
provide an attestation report with respect to management's
assessment of the effectiveness of the company's internal control
over financial reporting;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
o an increase in the oversight of, and enhancement of certain
requirements relating to audit committees of public companies and
how they interact with the company's independent auditors;
40
o the requirement that audit committee members must be independent
and are absolutely barred from accepting consulting, advisory or
other compensatory fees from the issuer;
o the requirement that companies disclose whether at least one member
of the committee is a "financial expert" (as such term is defined
by the Securities and Exchange Commission) and if not, why not;
o expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a
prohibition on insider trading during pension blackout periods;
o a prohibition on personal loans to directors and officers, except
certain loans made by insured financial institutions;
o disclosure of a code of ethics and the requirement of filing of a
Form 8-K for a change or waiver of such code;
o mandatory disclosure by analysts of potential conflicts of
interest; and
o a range of enhanced penalties for fraud and other violations.
Section 402 of the Sarbanes-Oxley Act prohibits the extension of personal
loans to directors and executive officers of issuers (as defined in the
Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgages
advanced by an insured depository institution, such as Westfield Bank, that are
subject to the insider lending restrictions of Section 22(h) of the Federal
Reserve Act.
Quotation on the American Stock Exchange. Westfield Financial's common
stock is traded on the American Stock Exchange. In order to maintain such
quotation, Westfield Financial is subject to certain corporate governance
requirements, including:
o a majority of its board must be composed of independent directors;
o it is required to have an audit committee composed of at least
three directors, each of whom is an independent director, as such
term is defined by both American Stock Exchange rules as set forth
in its Company Guide and by the regulations promulgated under the
Securities Exchange Act of 1934, as amended;
o its nominating committee and compensation committee must also be
composed entirely of independent directors; and
o each of its audit committee and nominating committee must have a
publicly available written charter.
41
ITEM 1A. RISK FACTORS
Our loan portfolio includes loans with a higher risk of loss. Westfield
Bank originates commercial and industrial loans, commercial real estate loans,
consumer loans, and residential mortgage loans primarily within our market
area. In recent years, Westfield Bank has developed and implemented a lending
strategy that focuses less on residential real estate lending and more on
servicing commercial customers, including increased emphasis on commercial and
industrial lending and commercial deposit relationships. Commercial and
industrial loans, commercial real estate loans, and consumer loans may expose a
lender to greater credit risk than loans secured by residential real estate
because the collateral securing these loans may not be sold as easily as
residential real estate. In addition, commercial real estate and commercial and
industrial loans may also involve relatively large loan balances to individual
borrowers or groups of borrowers. These loans also have greater credit risk
than residential real estate for the following reasons:
o Commercial and Industrial Loans. Repayment is generally dependent
upon the successful operation of the borrower's business.
o Commercial Real Estate Loans. Repayment is dependent on income
being generated in amounts sufficient to cover operating expenses
and debt service.
o Consumer Loans. Consumer loans are collateralized, if at all, with
assets that may not provide an adequate source of payment of the
loan due to depreciation, damage or loss.
Any downturn in the real estate market or local economy could adversely
affect the value of the properties securing the loans or revenues from the
borrower's business thereby increasing the risk of non-performing loans.
If our allowance for loan losses is not sufficient to cover actual loan
losses, our earnings could decrease. Our loan customers may not repay their
loans according to their terms and the collateral securing the payment of these
loans may be insufficient to pay any remaining loan balance. We therefore may
experience significant loan losses, which could have a material adverse effect
on our operating results.
Material additions to our allowance for loan losses also would materially
decrease our net income, and the charge-off of loans may cause us to increase
the allowance. We make various assumptions and judgments about the
collectibility of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of our loans. We rely on our loan quality
reviews, our experience and our evaluation of economic conditions, among other
factors, in determining the amount of the allowance for loan losses. If our
assumptions prove to be incorrect, our allowance for loan losses may not be
sufficient to cover losses inherent in our loan portfolio, resulting in
additions to our allowance.
42
Changes in interest rates could adversely affect our results of
operations and financial condition. Our profitability, like that of most
financial institutions, depends substantially on our net interest income, which
is the difference between the interest income earned on our interest-earning
assets and the interest expense paid on our interest-bearing liabilities.
Increases in interest rates may decrease loan demand and make it more difficult
for borrowers to repay adjustable rate loans. In addition, as market interest
rates rise, we will have competitive pressures to increase the rates we pay on
deposits, which will result in a decrease of our net interest income.
We also are subject to reinvestment risk associated with changes in
interest rates. Changes in interest rates may affect the average life of loans
and mortgage-related securities. Decreases in interest rates can result in
increased prepayments of loans and mortgage-related securities as borrowers
refinance to reduce borrowing costs. Under these circumstances, we are subject
to reinvestment risk to the extent that we are unable to reinvest the cash
received from such prepayments at rates that are comparable to the rates on
existing loans and securities.
Our local economy may affect our future growth possibilities. Our current
market area is principally located in Hamden County, Massachusetts. Our future
growth opportunities depend on the growth and stability of our regional economy
and our ability to expand our market area. A downturn in our local economy may
limit funds available for deposit and may negatively affect our borrowers'
ability to repay their loans on a timely basis, both of which could have an
impact on our profitability.
We depend on our executive officers and key personnel to continue the
implementation of our long-term business strategy and could be harmed by the
loss of their services. We believe that our continued growth and future success
will depend in large part upon the skills of our management team. The
competition for qualified personnel in the financial services industry is
intense, and the loss of our key personnel or an inability to continue to
attract, retain and motivate key personnel could adversely affect our business.
We cannot assure you that we will be able to retain our existing key personnel
or attract additional qualified personnel. We will have employment agreements
with our Chairman and Chief Executive Officer, President and Chief Operating
Officer, and Chief Financial Officer, and change of control agreements with
several other senior executive officers, and the loss of the services of one or
more of our executive officers and key personnel could impair our ability to
continue to develop our business strategy.
We operate in a highly regulated environment, and changes in laws and
regulations to which we are subject may adversely affect our results of
operations. Westfield Bank is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision, as its chartering authority,
and by the Federal Deposit Insurance Corporation as the insurer of its deposits
up to certain limits. In addition, the Office of Thrift Supervision regulates
and oversees Westfield Financial and Westfield Mutual Holding Company. We also
belong to the Federal Home Loan Bank System and, as a member of such system, we
are subject to certain limited regulations promulgated by the Federal Home Loan
Bank of Boston. This regulation and supervision limits the activities in which
we may engage. The purpose of regulation and supervision is primarily to
protect our depositors and borrowers and, in the case of Federal
43
Deposit Insurance Corporation regulation, the Federal Deposit Insurance
Corporation's insurance fund. Regulatory authorities have extensive discretion
in the exercise of their supervisory and enforcement powers. They may, among
other things, impose restrictions on the operation of a banking institution,
the classification of assets by such institution and such institution's
allowance for loan losses. Regulatory and law enforcement authorities also have
wide discretion and extensive enforcement powers under various consumer
protection and civil rights laws, including the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Fair Housing Act, and the Real Estate Settlement
Procedures Act. Any change in the laws or regulations applicable to us, or in
banking regulators' supervisory policies or examination procedures, whether by
the Office of Thrift Supervision, the Federal Deposit Insurance Corporation,
other state or federal regulators, or the United States Congress could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.
Competition in our primary market area may reduce our ability to attract
and retain deposits and originate loans. We operate in a competitive market for
both attracting deposits, which is our primary source of funds, and originating
loans. Historically, our most direct competition for deposits has come from
savings and commercial banks. Our competition for loans comes principally from
commercial banks, savings institutions, mortgage banking firms, credit unions,
finance companies, mutual funds, insurance companies and brokerage and
investment banking firms. We also face additional competition from
internet-based institutions, brokerage firms and insurance companies.
Competition for loan originations and deposits may limit our future growth and
earnings prospects.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
44
ITEM 2. PROPERTIES
Westfield Bank currently conducts its business through its ten banking
offices and eight off-site ATMs. As of December 31, 2006, the properties and
leasehold improvements owned by us had an aggregate net book value of $12.2
million.
Year of Lease or
Location Ownership Year Opened License Expiration
Main Office:
141 Elm St. Owned 1964 N/A
Westfield, MA
Branch Offices:
206 Park St. Owned 1957 N/A
West Springfield, MA
655 Main St. Owned 1968 N/A
Agawam, MA
26 Arnold St. Owned 1976 N/A
Westfield, MA
300 Southampton Rd. Owned 1987 N/A
Westfield, MA
462 College Highway Owned 1990 N/A
Southwick, MA
382 N. Main St. Leased 1997 2012
E. Longmeadow, MA
1500 Main St. Leased 2006 2016
Springfield, MA
1642 Northampton St. Owned 2001 N/A
Holyoke, MA
1342 Liberty St. Owned 2001 N/A
Springfield, MA
ATMs:
337 N. Westfield St. Leased 1988 2013
Feeding Hills, MA
830 Suffield St. Tenant at will 1997 N/A
Agawam, MA
516 Carew St. Tenant at will 2002 N/A
Springfield, MA
1000 State St. Tenant at will 2003 N/A
Springfield, MA
115 West Silver St. Tenant at will 2005 N/A
Westfield, MA
788 Memorial Ave. Tenant at will 2006 N/A
West Springfield, MA
2620 Westfield St. Tenant at will 2006 N/A
West Springfield, MA
98 Southwick Rd. Tenant at will 2006 N/A
Westfield, MA
45
ITEM 3. LEGAL PROCEEDINGS
Westfield Financial is not involved in any pending legal proceeding other
than routine legal proceedings occurring in the ordinary course of business. In
the opinion of management, no legal proceedings will have a material effect on
Westfield Financial's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Westfield Financial's common stock is listed on the American Stock
Exchange under the symbol "WFD." At December 31, 2006, there were 9,728,912
shares of common stock issued and outstanding, and there were approximately
2,979 shareholders of record. Westfield Mutual Holding Company owned 5,607,400
shares, or 57.6% of Westfield Financial's common stock at December 31, 2006.
On January 3, 2007, Westfield Financial completed its stock offering in
connection with the second step conversion of Westfield Mutual Holding Company.
As part of the conversion, New Westfield Financial, Inc. succeeded Westfield
Financial as the stock holding company of Westfield Bank, and Westfield Mutual
Holding Company was dissolved. In the stock offering, a total of 18,400,000
shares representing Westfield Mutual Holding Company's ownership interest in
Westfield Financial were sold by New Westfield Financial in a subscription
offering, community offering and syndicated offering. In addition, each
outstanding share of Westfield Financial as of January 3, 2007 was exchanged
for 3.28138 new shares of New Westfield Financial common stock. New Westfield
Financial, Inc. changed its name to Westfield Financial, Inc. effective January
3, 2007. After the second step conversion, shares of Westfield Financial common
stock continued to trade on the American Stock Exchange under the symbol "WFD."
As of January 4, 2007, there were 31,923,903 shares of Westfield Financial
common stock outstanding.
46
The table below shows the high and low sales price during the periods
indicated as well as dividends declared per share. The information set forth in
the table below was provided by the American Stock Exchange.
Cash
Dividends
Price Per Share Declared
----------------- ---------
For the Year Ended December 31, 2006 High Low
------------------------------------ ---- ---
Fourth Quarter ended December 31, 2006 $34.90 $31.59 $0.35
Third Quarter ended September 30, 2006 32.96 27.48 0.15
Second Quarter ended June 30, 2006 29.00 23.20 0.35
First Quarter ended March 31, 2006 25.24 24.00 0.15
Cash
Dividends
Price Per Share Declared
----------------- ---------
For the Year Ended December 31, 2005 High Low
------------------------------------ ---- ---
Fourth Quarter ended December 31, 2005 $24.53 $22.12 $0.40
Third Quarter ended September 30, 2005 25.69 23.48 0.10
Second Quarter ended June 30, 2005 25.35 23.15 0.30
First Quarter ended March 31, 2005 25.40 23.20 0.10
A quarterly cash dividend of $0.15 per share was declared on January 24,
April 25, July 25, and October 24, 2006 by the Board of Directors. In addition,
the Board of Directors declared special cash dividends of $0.20 per share on
April 25, and on October 24, 2006. The continued payment of dividends depends
upon our debt and equity structure, earnings, financial condition, need for
capital in connection with possible future acquisitions and other factors,
including economic conditions, regulatory restrictions and tax considerations.
Westfield Financial cannot guarantee the payment of dividends or that, if paid,
that dividends will not be reduced or eliminated in the future.
The only funds available for the payment of dividends on the capital
stock of Westfield Financial will be cash and cash equivalents held by
Westfield Financial, dividends paid by Westfield Bank to Westfield Financial,
and borrowings. Westfield Bank will be prohibited from paying cash dividends to
Westfield Financial to the extent that any such payment would reduce Westfield
Bank's capital below required capital levels or would impair the liquidation
account to be established for the benefit of the Westfield Bank's eligible
account holders and supplemental eligible account holders at the time of the
reorganization and stock offering.
In July 2004, Westfield Financial announced that the Board of Directors
had approved a share repurchasing program ("Repurchase Program 2") which
authorized the repurchase of up to 502,550 shares. At December 31, 2006
Westfield Financial had 99,862 shares remaining to be purchased under this
program. Upon completion of the second step stock offering however, Repurchase
Program 2 was eliminated.
There were no sales by the Company of unregistered securities during the
quarter ended December 31, 2006.
47
ITEM 6. SELECTED FINANCIAL DATA
The summary information presented below at or for each of the years
presented is derived in part from the consolidated financial statements of
Westfield Financial. The following information is only a summary, and you
should read it in conjunction with our consolidated financial statements and
notes beginning on page F-1.
At December 31,
---------------------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
(In thousands)
Selected Financial Condition Data:
Total assets $ 996,829 $ 805,095 $ 796,903 $ 795,216 $ 812,980
Loans, net(1) 385,184 378,837 368,601 344,980 357,155
Securities available for sale 41,687 28,321 14,968 25,806 79,842
Securities held to maturity 77,299 73,323 71,298 69,927 45,960
Mortgage-backed securities available for sale 126,942 101,138 73,316 76,177 90,468
Mortgage-backed securities held to maturity 163,093 152,127 175,302 191,683 159,339
Deposits 627,466 623,045 612,621 632,431 656,065
Customer repurchase agreements 17,919 14,441 14,615 12,135 8,724
Federal Home Loan Bank advances 55,000 45,000 45,000 20,000 15,000
Total equity (2) 289,408 115,842 118,051 124,804 126,699
Allowance for loan losses 5,437 5,422 5,277 4,642 4,325
Nonperforming loans 1,028 1,919 2,171 1,768 2,383
For the Years Ended
December 31,
---------------------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
(In thousands, except per share data)
Selected Operating Data:
Interest and dividend income $ 42,435 $ 37,306 $ 34,428 $ 35,635 $ 43,013
Interest expense 19,551 13,597 10,913 13,858 18,775
--------- --------- --------- --------- ---------
Net interest and dividend income 22,884 23,709 23,515 21,777 24,238
Provision for loan losses 390 465 750 750 934
--------- --------- --------- --------- ---------
Net interest and dividend income after provision for
loan losses 22,494 23,244 22,765 21,027 23,304
Total noninterest income (loss) 3,073 3,372 3,896 3,074 (362)
Total noninterest expense 19,390 18,464 17,776 17,630 16,659
--------- --------- --------- --------- ---------
Income before income taxes 6,177 8,152 8,885 6,471 6,283
Income taxes 1,523 1,933 2,562 2,820 2,239
--------- --------- --------- --------- ---------
Net income $ 4,654 $ 6,219 $ 6,323 $ 3,651 $ 4,044
========= ========= ========= ========= =========
Basic earnings per share $ 0.50 $ 0.66 $ 0.65 $ 0.36 $ 0.39
Diluted earnings per share $ 0.49 $ 0.64 $ 0.64 $ 0.36 $ 0.38
Dividends per share paid $ 1.00 $ 0.90 $ 0.30 $ 0.20 $ 0.15
- --------------------
(1) Loans are shown net of deferred loan fees, allowance for loan losses and unadvanced loan funds.
(2) Stockholders' equity includes $171.7 million in capital from the net proceeds raised in the stock offering. Westfield
Financial completed its second step stock offering on January 3, 2007. Consequently, the proceeds were recognized by
Westfield Financial and reported in its balance sheet as of December 31, 2006. Proceeds, net of stock issuance costs,
received directly by Westfield Financial or held by the underwriter for the convenience of Westfield Financial were recorded
by increasing cash, the capital stock, and the paid-in capital accounts.
48
At or for the Years Ended December 31,
----------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data(1)
Performance Ratios:
Return on average assets 0.56% 0.77% 0.79% 0.45% 0.51%
Return on average equity (2) 3.99 5.27 5.24 2.94 3.14
Average equity to average assets (2) 14.08 14.66 15.14 15.33 16.23
Equity to total assets at end of year (3) 29.03 14.39 14.83 15.69 15.58
Average interest rate spread 2.61 2.89 2.94 2.55 2.54
Net interest margin (4) 3.05 3.24 3.25 2.94 3.18
Average interest-earning assets to average interest-
earning liabilities 117.37 119.22 121.47 121.49 125.76
Total noninterest expense to average assets 2.34 2.29 2.24 2.18 2.10
Efficiency ratio (5) 73.63 68.23 66.99 72.13 65.01
Regulatory Capital Ratios:
Regulatory Tier 1 leverage capital 29.07 14.48 14.69 15.31 15.65
Tier 1 risk-based capital 54.38 24.54 25.75 28.46 28.77
Total risk-based capital 55.39 25.68 26.90 29.63 29.78
Asset Quality Ratios:
Nonperforming loans as a percent of total loans 0.26 0.50 0.58 0.51 0.66
Nonperforming assets as a percent of total assets 0.10 0.24 0.27 0.22 0.29
Allowance for loan losses as a percent of total loans 1.39 1.41 1.41 1.33 1.20
Allowance for loan losses as a percent of
nonperforming assets 529 283 243 263 181
Number of:
Banking offices 10 10 10 10 10
Full-time equivalent employees 155 142 144 152 146
- --------------------
(1) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
(2) Average equity includes $171.7 million in capital from the net proceeds raised in the stock offering. Westfield Financial
completed its second step stock offering on January 3, 2007. Consequently, the proceeds were recognized by Westfield
Financial and reported in its balance sheet as of December 31, 2006 and therefore affected the balance of stockholders'
equity for one calendar day. Proceeds, net of stock issuance costs, received directly by Westfield Financial or held by the
underwriter for the convenience of the Westfield Financial were recorded by increasing cash, the capital stock, and the
paid-in capital accounts.
(3) Stockholders' equity includes $171.7 million in capital from the net proceeds raised in the stock offering. Westfield
Financial completed its second step stock offering on January 3, 2007. Consequently, the proceeds were recognized by
Westfield Financial and reported in its balance sheet as of December 31, 2006. Proceeds, net of stock issuance costs,
received directly by Westfield Financial or held by the underwriter for the convenience of Westfield Financial were recorded
by increasing cash, the capital stock, and the paid-in capital accounts.
(4) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average interest earning
assets.
(5) The efficiency ratio represents the ratio of operating expenses divided by the sum of net interest and dividend income and
noninterest income less gain on sale of securities and sale of fixed assets.
ITEM 7. 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.
49
Westfield Financial has adopted a growth-oriented strategy that has
focused on increased emphasis on commercial lending. Westfield Financial's
strategy also calls for increasing deposit relationships and broadening our
product lines and services. Westfield Financial believes that this business
strategy is best for its long term success and viability, and complements our
existing commitment to high quality customer service. In connection with its
overall growth strategy, Westfield Bank seeks to:
o continue to grow its commercial and industrial and commercial real
estate loan portfolio by targeting the 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 year ended December 31,
2006 in the context of this strategy.
o Net income for the year ended December 31, 2006 was $4.7 million,
or $0.49 per diluted share, compared to $6.2 million, or $0.64 per
diluted share for the year ended December 31, 2005.
o Net interest and dividend income decreased $825,000 to $22.9
million for the year ended December 31, 2006, compared to $23.7
million for the same period in 2005. The net interest margin was
3.05% for the year ended December 31, 2006 and 3.24% for 2005. The
yield on earning assets, on a fully taxable equivalent basis,
increased 53 basis points to 5.56% for the year ended December 31,
2006, compared to the same period in 2005. The cost of paying
liabilities, however, increased 81 basis points to 2.95% for the
year ended December 31, 2006, compared to the same period in 2005.
o Total assets increased $191.7 million to $996.8 million at December
31, 2006 from $805.1 million at December 31, 2005. Westfield
Financial completed its second step stock offering with the
issuance of 18,400,000 shares on January 3, 2007. Consequently, net
proceeds, in the amount of $171.7 million, were recognized by
Westfield Financial and reported in its balance sheet as of
December 31, 2006.
o Proceeds, net of stock issuance costs, received directly by
Westfield Financial or held by the underwriter for the convenience
of Westfield Financial were recorded by increasing cash, the
capital stock, and the paid-in capital accounts.
50
o Cash and cash equivalents increased $128.0 million, to $154.5
million at December 31, 2006 from $26.5 million at December 31,
2005. The increase in cash and cash equivalents is the result of
funds raised in the stock offering.
o Commercial real estate and commercial and industrial loans
increased $5.2 million to $274.8 million at December 31, 2006.
Westfield Bank's strategic plan emphasizes commercial lending. The
success of Westfield Bank's commercial lending is primarily
dependent on the local and national economy, along with competition
for commercial loans.
o Residential real estate loans increased $2.6 million to $109.5
million at December 31, 2006 from $106.9 million at December 31,
2005. This increase is primarily attributable to a $6.1 million
increase in fixed rate home equity loans. Apart from home equity
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 residential mortgages held in
Westfield Bank's loan portfolio.
o Securities, including mortgage-backed securities increased $54.1
million to $409.0 million at December 31, 2006, compared to $354.9
million at December 31, 2005. The largest segment of the securities
portfolio is mortgage-backed securities, the majority of which are
adjustable rate instruments. Management feels that investing funds
in adjustable rate mortgage-backed securities has helped provide
cash flow and in addition, helped reduce interest rate risk.
o Total deposits increased $4.5 million to $627.5 million at December
31, 2006 from $623.0 million at December 31, 2005. Time deposits
increased $39.0 million to $374.0 million at December 31, 2006,
while regular savings and money market accounts decreased $43.1
million. As the rates paid on term deposits increased throughout
2006, some customers have shifted funds out of lower yielding core
deposits, and into higher yielding term deposits. Checking accounts
increased $8.5 million to $122.8 million at December 31, 2006. The
increase is primarily due to a checking account product which pays
higher rates to customers who maintain large balances.
o Noninterest income decreased $280,000 to $3.1 million for the year
ended December 31, 2006 compared to $3.4 million for the same
period in 2005. The 2006 results included a net loss of $378,000 on
the sale of fixed assets, which was primarily the result of the
sale of a building that housed a former Westfield Bank branch.
51
o Nonperforming loans were $1.0 million, or 0.26%, of total loans at
December 31, 2006, compared to nonperforming loans of $1.9 million,
or 0.50%, of total loans 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. Charge-offs decreased by $28,000 to $584,000 for the
year ended December 31, 2006 from $612,000 for the year ended
December 31, 2005.
o The allowance for loan losses was $5.4 million at both December 31,
2006 and 2005. This represents 1.39% of total loans at December 31,
2006 and 1.41% of total loans at December 31, 2005. At these
levels, the allowance for loan losses as a percentage of
nonperforming loans was 529% at December 31, 2006 and 283% at
December 31, 2005.
o Stockholder's equity at December 31, 2006 and December 31, 2005 was
$289.4 million and $115.8 million, respectively, which represented
29.0% of total assets as of December 31, 2006 and 14.4% of total
assets as of December 31, 2005. The change is primarily
attributable to net proceeds of $171.7 million from the Company's
second step stock offering.
General. Westfield Financial's consolidated results of operations are
comprised of earnings on investments and the net income recorded by its
principal operating subsidiary, Westfield Bank. Westfield Bank's consolidated
results of operations depend primarily on net interest and dividend income. Net
interest and dividend income is the difference between the interest income
earned on interest-earning assets and the interest paid on interest-bearing
liabilities. Interest-earning assets consist primarily of commercial real
estate loans, commercial and industrial loans, residential real estate loans,
consumer loans, mortgage-backed securities and investment securities.
Interest-bearing liabilities consist primarily of certificates of deposit and
money market account, NOW account and savings account deposits and borrowings
from the Federal Home Loan Bank of Boston. The consolidated results of
operations also depend on provision for loan losses, noninterest income, and
noninterest expense. Noninterest expense includes salaries and employee
benefits, occupancy expenses and other general and administrative expenses.
Noninterest income includes service fees and charges, income on bank-owned life
insurance, and gains (losses) on sales of securities and securities writedowns.
52
Critical Accounting Policies. Westfield Financial's accounting policies
are disclosed in Note 1 to the Consolidated Financial Statements. Given
Westfield Financial's current business strategy and asset/liability structure,
the more critical policies 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. In addition to the informational disclosure in the Notes
to the Consolidated Financial Statements, Westfield Financial's policy on each
of these accounting policies is described in detail in the applicable sections
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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
Westfield Financial 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, 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, 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.
53
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.
The process of evaluating the loan portfolio, classifying loans and
determining the allowance and provision is described in detail in "Business of
Westfield Financial and Westfield Bank - Lending Activities - Allowance for
Loan Losses." 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.
Average Balance Sheet and Analysis of Net Interest and Dividend Income
The following table sets forth information relating to Westfield Financial's
condition and net interest and dividend income for the years ended December 31,
2006, 2005 and 2004 and reflect the average yield on assets and average cost of
liabilities for the years indicated. The yields and costs were derived by
dividing income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years shown. Average
balances were derived from actual daily balances over the years indicated.
Interest income includes fees earned from making changes in loan rates or
terms, and fees earned when commercial real estate loans were prepaid or
refinanced.
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.
54
For the Year Ended December 31,
--------------------------------------------------------------------------------------------
2006 2005 2004
----------------------------- ----------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Short term investments(1) $ 18,658 $ 872 4.67% $ 30,141 $ 932 3.09% $ 20,866 $ 290 1.39%
Securities 372,519 16,764 4.50 344,618 14,102 4.09 361,253 13,802 3.82
Loans(2) 386,039 25,586 6.63 383,436 23,136 6.03 366,677 21,198 5.78
-------- ------- -------- ------- -------- -------
Total interest-earning assets 777,216 43,222 5.56 758,195 38,170 5.03 748,796 35,290 4.71
------- ------- -------
Total noninterest-earning
assets 50,535 47,226 46,135
-------- -------- --------
Total assets $827,751 $805,421 $794,931
======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts 73,256 908 1.24 60,839 325 0.53 48,004 249 0.52
Savings accounts 45,241 226 0.50 43,250 217 0.50 47,728 234 0.49
Money market deposit accounts 109,710 1,684 1.53 144,629 2,117 1.46 152,855 1,419 0.93
Time certificates of deposit 368,901 14,450 3.92 325,050 9,154 2.82 317,563 7,723 2.43
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits 597,108 17,268 573,768 11,813 566,150 9,625
Customer repurchase agreements
and other borrowings 65,062 2,283 3.51 62,209 1,784 2.87 50,309 1,288 2.56
-------- ------- -------- ------- -------- -------
Interest-bearing liabilities 662,170 19,551 2.95 635,977 13,597 2.14 616,459 10,913 1.77
-------- ------- -------- ------- -------- -------
Noninterest-bearing deposits 41,134 44,590 52,631
Other noninterest-bearing
liabilities 7,927 6,819 5,488
-------- -------- --------
Total noninterest-bearing
liabilities 49,061 51,409 58,119
-------- -------- --------
Total liabilities 711,231 687,386 674,578
Total equity 116,520 118,035 120,353
-------- -------- --------
Total liabilities and equity $827,751 $805,421 $794,931
======== ======== ========
Net interest and dividend income $23,671 $24,573 $24,377
======= ======= =======
Net interest rate spread(3) 2.61 2.89 2.94
Net interest margin(4) 3.05% 3.24% 3.25%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 117.4x 119.2x 121.5x
- --------------------
(1) Short term investments include Federal funds sold.
(2) Loans, including non-accrual loans, are net of deferred loan origination costs (fees), and unadvanced funds.
(3) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities.
(4) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average interest earning
assets.
55
Rate/Volume Analysis. 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 and dividend income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (1) interest income changes attributable to
changes in volume (changes in volume multiplied by prior rate); (2)interest
income changes attributable to changes in rate (changes in rate multiplied by
prior volume); and (3) 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.
Year Ended December 31, 2006 Year Ended December 31, 2005
Compared to Year Ended Compared to Year Ended
December 31, 2005 December 31, 2004
Increase/(Decrease) Increase/(Decrease)
------------------------------ -----------------------------------
Due to Due to
------------------ -------------------
Volume Rate Net Volume Rate Net
----------------- ------- ------------------- -------
(In thousands)
Interest-earning assets:
Short term investments $ (355) $ 295 $ (60) $ 129 $ 513 $ 642
Investment securities 1,142 1,520 2,662 (636) 936 300
Loans 157 2,293 2,450 969 969 1,938
------- ------- ------- ------- ------- -------
Total interest-earning assets 944 4,108 5,052 462 2,418 2,880
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW accounts 66 517 583 67 9 76
Savings accounts 10 (1) 9 (22) 5 (17)
Money market deposit accounts (511) 78 (433) (76) 774 698
Time certificates of deposit 1,235 4,061 5,296 182 1,249 1,431
Customer repurchase
agreements and other borrowings 82 417 499 305 191 496
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 882 5,072 5,954 456 2,228 2,684
------- ------- ------- ------- ------- -------
Change in net interest and
dividend income $ 62 $ (964) $ (902) $ 6 $ 190 $ 196
======= ======= ======= ======= ======= =======
56
Comparison of Financial Condition at December 31, 2006 and December 31, 2005
Total assets increased $191.7 million to $996.8 million at December 31,
2006 from $805.1 million at December 31, 2005. Westfield Financial completed
its second step stock offering with the issuance of 18,400,000 shares on
January 3, 2007. Consequently, net proceeds, in the amount of $171.7 million,
were recognized by Westfield Financial and reported in its balance sheet as
December 31, 2006. Proceeds, net of stock issuance costs, received directly by
Westfield Financial or held by the underwriter for the convenience of Westfield
Financial were recorded by increasing cash, the capital stock, and the paid-in
capital accounts.
Cash and cash equivalents increased $128.0 million, to $154.5 million at
December 31, 2006 from $26.5 million at December 31, 2005. The increase in cash
and cash equivalents is the result of funds raised in the stock offering.
Net loans during this period increased by $6.4 million to $385.2 million
at December 31, 2006, from $378.8 million at December 31, 2005.
Commercial real estate loans increased $5.0 million to $174.5 million at
December 31, 2006 from $169.5 million at December 31, 2005. Commercial and
industrial loans increased $218,000 to $100.2 million at December 31, 2006 from
$100.0 million at December 31, 2005. Westfield Bank's strategic plan calls for
emphasis on commercial lending. The success of the plan to grow commercial
loans is primarily dependent upon the health of the local and national economy
and competition for commercial loans.
Residential real estate loans increased $2.6 million to $109.9 million at
December 31, 2006 from $107.3 million at December 31, 2005. This increase is
primarily attributable to a $6.1 million increase in fixed rate home equity
loans. Westfield Bank refers its residential real estate borrowers to a third
party mortgage company for all real estate loans other than home equity loans.
As a result, 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 residential mortgages held in Westfield Bank's loan portfolio.
Securities, including mortgage-backed securities increased $54.1 million
to $409.0 million at December 31, 2006 as compared to $354.9 million at
December 31, 2005. The largest segment of the securities portfolio is
mortgage-backed securities, the majority of which are adjustable rate
instruments. Management feels that investing funds in adjustable rate mortgage
backed securities has helped provide cash flow and in addition, helped reduce
interest rate risk.
Total deposits increased $4.5 million to $627.5 million at December 31,
2006 from $623.0 million at December 31, 2005. Time deposits increased $39.0
million to $374.0 million at December 31, 2006, while regular savings and money
market accounts decreased $43.1 million. As the rates paid on term deposits
increased throughout 2006, some customers have shifted funds out of lower
yielding core deposits, and into higher yielding term deposits. Checking
accounts increased $8.5 million to $122.8 million at December 31, 2006. The
increase is primarily due to a new checking account product which pays higher
rates to customers who maintain large balances.
57
Federal Home Loan Bank borrowings increased $10.0 million to $55.0
million at December 31, 2006 from $45.0 million at December 31, 2005. Customer
repurchase agreements increased $3.5 million to $17.9 million at December 31,
2006 from $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 government-sponsored enterprises.
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 the customer repurchase agreements are held by
Westfield Bank's commercial loan customers. The increase in customer repurchase
agreements is consistent with Westfield Bank's strategy to emphasize commercial
customer relationships.
Stockholder's equity at December 31, 2006 and December 31, 2005 was
$289.4 million and $115.8 million, respectively, which represented 29.0% of
total assets as of December 31, 2006 and 14.4% of total assets as of December
31, 2005. The change is primarily attributable to net proceeds of $171.7
million from the Company's second step stock offering.
Comparison of Operating Results for Years Ended December 31, 2006 and 2005
General. Net income for the year ended December 31, 2006 was $4.7
million, or $0.49 per diluted share, compared to $6.2 million, or $0.64 per
diluted share for the year ended December 31, 2005.
Interest and Dividend Income. Total interest and dividend income
increased $5.1 million, or 13.7%, to $42.4 million for the year ended December
31, 2006, compared to $37.3 million for the same period in 2005.
The increase in interest income was primarily the result in an increase
in the yield on earning assets. The average yield on earning assets increased
53 basis points to 5.53% for the year ended December 31, 2006 compared to 5.03%
for the same period in 2005. The increase in yield on earning assets was
primarily the result of the rising interest rate environment.
Interest and dividends on securities was $16.1 million for the years
ended December 31, 2006 and $13.4 million for the same period in 2005. The
average balance on securities increased $27.9 million to $372.5 million at
December 31, 2006 from $344.6 million at December 31, 2005. In addition, the
fully taxable equivalent yield on securities increased from 4.09% for the year
2005 to 4.50% for the same period in 2006. As lower yielding investments
purchased in a higher rate environment matured, were called, or paid down in
2006, the funds were reinvested at higher rates. In addition, the interest rate
on adjustable rate securities repriced upward in the rising interest rate
environment.
Interest income from commercial real estate loans and commercial and
industrial loans increased $2.8 million for the year ended December 31, 2006
from the year ended December 31, 2005. In accordance with Westfield Bank's
strategic plan, the average balance of commercial real estate loans and
commercial and industrial loans increased $9.9 million to $269.2 million for
the year ended December 31, 2006, compared to $259.3 million for the same
period in 2005.
58
Interest income from residential real estate loans decreased $69,000 to
$6.4 million for the year ended December 31, 2006, compared to $6.5 million for
the same period in 2005. The average balance of residential real estate loans
decreased $4.6 million to $110.6 million for the year ended December 31, 2006
from $115.2 million for the year ended December 31, 2005 due to our residential
real estate loan program with a third party mortgage company. In addition,
interest on consumer loans decreased $221,000 to $410,000 for the year ended
December 31, 2006, compared to $631,000 for the same period in 2005. This was
primarily the result of a decrease in the average balance of consumer loans
from $9.0 million for 2005 to $6.3 million for 2006 due to management's
decision to discontinue indirect automobile loan originations in 2003 and allow
the portfolio to paydown.
Interest Expense. Interest expense for the year ended December 31, 2006
increased $6.0 million to $19.6 million from the comparable 2005 period. This
was attributable to an increase in the average cost of interest-bearing
liabilities increasing 81 basis points to 2.95% for the year ended December 31,
2006 from 2.14% for the same period in 2005. In addition, the average balance
of total interest-bearing liabilities increased $26.2 million to $662.2 million
for the year ended December 31, 2006 from $636.0 million for the same period in
2005.
As the rates paid on term deposits increased throughout 2006, some
customers have shifted funds out of lower yielding core deposits, and into
higher yielding term deposits.
Net Interest and Dividend Income. Net interest and dividend income
decreased $825,000 to $22.9 million for the year ended December 31, 2006 as
compared to $23.7 million for the same period in 2005. The net interest margin,
on a fully taxable equivalent basis, was 3.05%, for the twelve months ended
December 31, 2006 compared to 3.24% for the twelve months ended December 31,
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 2.95% for the twelve months ended December 31,
2006 from 2.14% for same period in 2005. The yield on interest-earning assets,
on a fully taxable equivalent basis, increased 53 basis points to 5.56% for the
twelve months ended December 31, 2006 from 5.03% for same period in 2005. The
increase in the average cost of interest-bearing liabilities is primarily due
to an increase in the cost of time deposits resulting from the rising 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.
59
The amount that Westfield Bank allocated to the provision for loan losses
during the year ended December 31, 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 $390,000 for loan losses for the year ended December
31, 2006, compared to $465,000 for the same period in 2005. The allowance was
$5.4 million at both December 31, 2006 and December 31, 2005. The allowance for
loan losses was 1.39% of total loans at December 31, 2006 and 1.41% at December
31, 2005.
At December 31, 2006, commercial real estate loans and commercial and
industrial loans increased $5.2 million as compared to December 31, 2005.
Commercial real estate loans and commercial and industrial loans comprised
70.4% of Westfield Bank's loan portfolio as of December 31, 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 $2.6 million during the year ended
December 31, 2006. Consumer loans decreased $1.5 million from December 31, 2005
and remained stable at $5.8 million as of December 31, 2006. Nonperforming
loans were $1.0 million at December 31, 2006 and $1.9 million at December 31,
2005.
Net charge offs were $375,000 for the year ended December 31, 2006. This
was comprised of charge-offs of $584,000 for the year ended December 31, 2006,
partially offset by recoveries of $209,000 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 decreased $299,000 to $3.1 million
for the year ended December 31, 2006 compared to $3.4 million for the same
period in 2005. The 2006 results included a net loss of $378,000 on the sale of
fixed assets, which was primarily the result of the sale of a building that
housed a former Westfield Bank branch.
Fees received from the third party mortgage company were $96,000 for the
year ended December 31, 2006, compared to $107,000 for the same period in 2005.
Fee income from the third party mortgage company in the future may be affected
by borrower activity, which generally decreases in a rising interest rate
environment.
Income from bank-owned life insurance increased $43,000 to $801,000 for
the year ended December 31, 2006 compared to the same period in 2005. This was
primarily the result of a $1.5 million increase in the average balance of
bank-owned life insurance in 2006 compared to 2005.
60
Noninterest Expense. Noninterest expense for the twelve months ended
December 31, 2006 was $19.4 million compared to $18.5 million for the same
period in 2005. Salaries and benefits increased $830,000 for the year ended
December 31, 2006, compared to the same period in 2005. This was primarily the
result of an increase in salary expense of $385,000 related to hiring
additional personnel and normal salary increases. In addition, Westfield
Financial recorded expenses of $293,000 related to stock options for the year
ended December 31, 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. Income taxes decreased $410,000 to $1.5 million in 2006
primarily as a result of a decrease in income before income taxes. The
effective tax rate was 24.7% in 2006 compared to 23.7% for 2005. The effective
tax rate for 2006 reflects the utilization of Elm Street Securities
Corporation, a Massachusetts corporation, and in 2005, also includes Westfield
Securities Corporation, a Massachusetts corporation. Westfield Securities
Corporation was dissolved in the third quarter of 2005.
Comparison of Financial Condition at December 31, 2005 and December 31, 2004
Consolidated assets increased $8.2 million, or 1.0%, to $805.1 million at
December 31, 2005 from $796.9 million at December 31, 2004. Cash and cash
equivalents decreased $24.6 million to $26.4 million at December 31, 2005 from
$51.0 million at December 31, 2004. This was primarily the result of a $26.9
million decrease in Federal funds sold.
Net loans during this period increased by $10.2 million, or 2.7%, to
$378.8 million at December 31, 2005, from $368.6 million at December 31, 2004.
Commercial real estate loans increased $25.2 million, or 17.5%, to $169.5
million at December 31, 2005 from $144.3 million at December 31, 2004.
Commercial and industrial loans increased $5.3 million, or 5.6%, to $100.1
million at December 31, 2005 from $94.8 million at December 31, 2004. Westfield
Bank's strategic plan calls for emphasis on commercial lending. The success of
the plan to grow commercial loans is primarily dependent upon the health of the
local and national economy.
Residential real estate loans decreased $15.9 million to $107.3 million
at December 31, 2005 from $123.2 million at December 31, 2004. Westfield Bank
refers its residential real estate borrowers to a third party mortgage company
and substantially all of Westfield Bank's residential real estate loans are
underwritten, originated and serviced by a third party mortgage company.
Westfield Bank receives a fee from each of these loans originated. Westfield
Bank believes that this program has diversified its loan portfolio and
continues to reduce interest rate risk by reducing the amount of long-term
fixed rate residential mortgages held in Westfield Bank's loan portfolio.
61
Securities, including mortgage-backed securities increased $20.0 million
to $354.9 million at December 31, 2005 as compared to $334.9 million at
December 31, 2004. The largest segment of the securities portfolio is
mortgage-backed securities, the majority of which are adjustable rate
instruments. Management feels that investing funds in adjustable rate mortgage
backed securities has helped provide cash flow and in addition, helped reduce
interest rate risk.
Total deposits increased $10.4 million to $623.0 million December 31,
2005 from $612.6 million at December 31, 2004. Time deposits increased $21.9
million to $335.0 million at December 31, 2005, while regular savings and money
market accounts decreased $20.6 million. As the rates paid on term deposits
increased throughout 2005, some customers have shifted funds out of lower
yielding core deposits, and into higher yielding term deposits. Demand deposits
and NOW accounts increased $9.0 million to $114.3 million at December 21, 2005.
The increase is primarily due to a new checking account product which pays
higher rates to customers who maintain large balances.
Federal Home Loan Bank borrowings were $45.0 million at both December 31,
2005 and December 31, 2004. Customer repurchase agreements decreased $174,000
to $14.4 million at December 31, 2005.
Stockholders' equity at December 31, 2005 and December 31, 2004 was
$115.8 million and $118.1 million, respectively, representing 14.4% and 14.8%
of total assets. The change is comprised of net income of $6.2 million for the
year ended December 31, 2005, the net repurchase of 199,755 shares of common
stock for $4.9 million, and the declaration by the Board of Directors of four
quarterly and two special dividends aggregating $3.6 million.
Comparison of Operating Results for Years Ended December 31, 2005 and 2004
General. Net income for the year ended December 31, 2005 and $6.2
million, or $0.64 per diluted share, compared to $6.3 million, or $0.64 per
diluted share for the year ended December 31, 2004. The 2004 results included
net gains from the sale of securities of $877,000 for the year ended December
31, 2004. This was primarily the result of the Company selling its common stock
portfolio in 2004. Net gains from sales of securities for the year ended
December 31, 2005 were $19,000.
Interest and Dividend Income. Total interest and dividend income
increased $2.9 million or 8.4% to $37.3 million for the year ended December 31,
2005, compared to $34.4 million for the same period in 2004.
The increase in interest income was primarily the result of an increase
in the yield on earning assets. The average yield on earning assets increased
32 basis points to 5.03% for the year ended December 31, 2005 compared to 4.71%
for the same period in 2005. The increase in yield on earning assets was
primarily the result of the rising interest rate environment.
62
Interest and dividends on securities was $13.6 million for the years
ended December 31, 2005 and $13.2 million for the same period in 2004. The
average yield on securities increased from 3.82% for the year 2004 to 4.09% for
the same period in 2005. This change was offset by a $16.7 million decrease in
the average balance of securities from $361.3 million for 2004 to $344.6
million for 2005. Market interest rates increased during 2005. As lower
yielding investments purchased in a higher rate environment matured, were
called, or paid down in 2005, the funds were reinvested at higher rates. In
addition, the interest rate on adjustable rate securities repriced upward in
the rising interest rate environment.
Interest income from commercial real estate loans and commercial and
industrial loans increased $2.9 million for the year ended December 31, 2005
from the year ended December 31, 2004. In accordance with Westfield Bank's
strategic plan, the average balance of commercial real estate loans and
commercial industrial loans increased $28.2 million to $259.3 million for the
year ended December 31, 2005, compared to $231.1 million for the same period in
2004.
Interest income from residential real estate loans decreased $336,000 to
$6.5 million for the year ended December 31, 2005, compared to the same period
in 2004. The average balance of residential real estate loans decreased $4.4
million for the year ended December 31, 2005 from $119.6 million for the year
ended December 31, 2004 due to our residential real estate loan program with a
third party mortgage company. In addition, interest on consumer loans decreased
$581,000 to $631,000 for the year ended December 31, 2005, compared to $1.2
million for the same period in 2004. This was primarily the result of a
decrease in average balance of consumer loans from $16.0 million for 2004 to
$9.0 million for 2005 due to management's decision to discontinue indirect
automobile loan originations in 2003 and allow the portfolio to paydown.
Interest Expense. Interest expense for the year ended December 31, 2005
increased $2.7 million to $13.6 million from the comparable 2004 period. This
was attributable to an increase in the average cost of interest-bearing
liabilities increasing 37 basis points to 2.14% for the year ended December 31,
2005 from 1.77% for the same period in 2004. In addition, the average balance
of total interest-bearing liabilities increased $19.5 million to $636.0 million
for the year ended December 31, 2005 from $616.5 million for the same period in
2004. As the rates paid on term deposits increased throughout 2005, some
customers have shifted funds out of lower yielding core deposits, and into
higher yielding term deposits.
Net Interest and Dividend Income. Net interest and dividend income
increased $194,000 to $23.7 million for the twelve months ended December 31,
2005 as compared to $23.5 million for the same period in 2004. The net interest
margin was 3.24% for the twelve months ended December 31, 2005 and 3.25% for
the twelve months ended December 31, 2004.
The increase in income from interest-earning assets was mostly offset by
an increase in interest expense from interest-bearing liabilities. The average
cost of interest-bearing liabilities increased 37 basis points to 2.14% for the
twelve months ended December 31, 2005 from 1.77% for same period in 2004. The
yield on interest-earning assets increased 32 basis points to 5.03% for the
twelve months ended December 31, 2005 from 4.71% for same period in 2004.
63
Provision for Loan Losses. The amount that Westfield Bank allocated to
the provision for loan losses during the year ended December 31, 2005 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 growth of
$30.5 million in the commercial real estate and commercial and industrial loan
portfolio and replenishing the net charge offs for the same period. After
evaluating these factors, Westfield Bank provided $465,000 for loan losses for
the year ended December 31, 2005, compared to $750,000 for the same period in
2004. The allowance was $5.4 million at December 31, 2005 and $5.3 million at
December 31, 2004. The allowance for loan losses was 1.41% of total loans at
both December 31, 2005 and 2004.
At December 31, 2005, commercial real estate loans and commercial and
industrial loans increased $30.5 million compared to December 31, 2004.
Commercial real estate loans and commercial and industrial loans comprised
70.2% of Westfield Bank's loan portfolio as of December 31, 2005 compared to
64.0% as of December 31, 2004. Westfield Bank considers these types of loans to
contain more credit risk and market risk than conventional residential real
estate mortgages, which decreased by $15.9 million during the year ended
December 31, 2005. Consumer loans also decreased $4.3 million to $7.3 million
at December 31, 2005. Nonperforming loans were $1.9 million December 31, 2005
and $2.2 million at December 31, 2004.
Net charge-offs were $320,000 for the year ended December 31, 2005. This
was comprised of charge-offs of $612,000 for the year December 31, 2005,
partially offset by recoveries of $292,000 for the same period.
Noninterest Income. Noninterest income decreased $524,000 to $3.4 million
in 2005 from $3.9 million for 2004. Net gains from sales and writedowns of
securities were $19,000 for the year ended December 31, 2005, compared to
$877,000 for the same period in 2004. This is primarily the result of Westfield
Financial selling its common stock portfolio in 2004 to comply with Office of
Thrift Supervision regulations. Income on bank-owned life insurance was
$758,000 for the period ended December 31, 2005, compared to $741,000 for the
same period in 2004.
Fees received from the third party mortgage company were $107,000 for the
year ended December 31, 2005, compared to $100,000 for the same period in 2004.
Checking account processing fees increased $148,000 for the twelve months
ended December 31, 2005, compared to the same period in 2004. This was a result
of Westfield Bank's overdraft privilege program offered to checking account
customers. The overdraft privilege program commenced in the second quarter of
2004, therefore the 2004 results reflect only a partial year under the program.
In 2005, the overdraft privilege program was in effect for the entire year.
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Noninterest Expense. Noninterest expense for the twelve months ended
December 31, 2005 was $18.5 million as compared to $17.8 million for the same
period in 2004. Salaries and benefits increased $402,000 for the year ended
December 31, 2005, compared to the same period in 2004. This was primarily the
result of normal increases in salaries and health care costs along with an
increase in stock-based benefit plan expenses of $176,000.
Advertising and marketing expenses increased $195,000 for the twelve
months ended December 31, 2005, compared to the same period in 2004. This was
the result of management's decision to increase spending on advertising and
marketing to promote the Bank's products and services.
Income Taxes. Income taxes decreased $629,000 to $1.9 million in 2005.
The effective tax rate was 23.7% in 2005 compared to 28.8% for 2004. This was
primarily the result of an increase in income from tax-exempt assets. The
effective tax rates for 2005 and 2004 also reflect the utilization of Westfield
Securities Corporation (dissolved in the third quarter of 2005), and Elm Street
Securities Corporation, both Massachusetts qualified securities corporations.
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, deposit
withdrawals 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 our operations. Westfield Bank also can borrow
funds from the Federal Home Loan Bank based on eligible collateral of loans and
securities. Outstanding borrowings from the Federal Home Loan Bank were $55.0
million at December 31, 2006 and $45.0 million at December 31, 2005. At
December 31, 2006, Westfield Bank's maximum borrowing capacity from the Federal
Home Loan Bank was approximately $25.0 million, net of any outstanding
borrowings. Westfield Bank has the ability to increase its borrowing capacity
with the Federal Home Loan Bank by pledging investment securities or loans. In
addition, Westfield Bank may enter into reverse repurchase agreements with
approved broker-dealers. Reverse repurchase agreements are agreements that
allow Westfield Bank to borrow money using its securities as collateral.
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 also
obligated under agreements with the Federal Home Loan Bank to repay borrowed
funds and is obligated under leases for certain of its branches and equipment.
A summary of lease obligations, borrowings, and credit commitments at December
31, 2006 follows:
65
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 $ 366 $ 727 $ 735 $ 7,037 $ 8,865
--------- --------- --------- --------- ---------
Borrowings
Federal Home Loan Bank $ 30,000 $ 20,000 $ -- $ 5,000 $ 55,000
--------- --------- --------- --------- ---------
Credit Commitments
Available lines of credit $ 45,235 $ -- $ -- $ 13,040 $ 58,275
Other loan commitments 25,656 12,997 -- -- 38,653
Letters of Credits 5,571 -- -- 588 6,159
--------- --------- --------- --------- ---------
Total credit commitments 76,462 12,997 -- 13,628 103,087
--------- --------- --------- --------- ---------
Total $ 106,828 $ 33,724 $ 735 $ 25,665 $ 166,952
========= ========= ========= ========= =========
Maturing investment securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments 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.
Westfield Financial's primary investing activities are the origination of
commercial real estate, commercial and industrial and consumer loans, and the
purchase of mortgage-backed and other investment securities. During the year
ended December 31, 2006, Westfield Bank originated loans of approximately
$111.0 million, and during the comparable period of 2005, Westfield Bank
originated loans of approximately $118.1 million. Under Westfield Bank's
residential real estate loan program, 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. Purchases of securities totaled
$138.8 million for the year ended December 31, 2006 and $125.9 million for the
year ended December 31, 2005. At December 31, 2006, Westfield Bank had loan
commitments to borrowers of approximately $44.8 million, and available home
equity and unadvanced lines of credit of approximately $58.3 million.
Deposit flows are affected by the level of interest rates, by the
interest rates and products offered by competitors and by other factors. Total
deposits increased $4.4 million during the year ended December 31, 2006 and
increased $10.4 million during the year ended December 31, 2005. Time deposit
accounts scheduled to mature within one year were $270.0 million at December
31, 2006. Based on Westfield Bank's deposit retention experience and current
pricing strategy, it anticipates that a significant portion of these
certificates of deposit will remain on deposit. Westfield Bank monitors its
liquidity position frequently and anticipates that it will have sufficient
funds to meet its current funding commitments.
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At December 31, 2006, Westfield Bank exceeded each of the applicable
regulatory capital requirements. Westfield Bank's tier 1 leverage capital was
$113.9 million, or 11.9% to adjusted total assets. Westfield Bank's tier 1
capital to risk weighted assets was $113.9 million or 21.7%. Westfield Bank had
total capital to risk weighted assets of $119.3 million or 22.7%.
Westfield Financial does not anticipate any material capital expenditures
during calendar year 2007, nor do we have any balloon or other payments due on
any long-term obligations or any off-balance sheet items other than the
commitments and unused lines of credit noted above.
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 our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
Management of Market Risk
As a financial institution, Westfield Financial's primary market risk is
interest rate risk since substantially all transactions are denominated in U.S.
dollars with no direct foreign exchange or changes in commodity price exposure.
Fluctuations in interest rates will affect both our level of income and expense
on a large portion of our assets and liabilities. Fluctuations in interest
rates will also affect the market value of all interest-earning assets.
The primary goal of Westfield Financial's interest rate management
strategy is to limit fluctuations in net interest income as interest rates vary
up or down and control variations in the market value of assets, liabilities
and net worth as interest rates vary. Westfield Financial seeks to coordinate
asset and liability decisions so that, under changing interest rate scenarios,
net interest income will remain within an acceptable range.
To achieve the objectives of managing interest rate risk, Westfield
Bank's Asset and Liability Management Committee meets monthly to discuss and
monitor the market interest rate environment relative to interest rates that
are offered on its products. The Asset and Liability Management Committee
presents periodic reports to the Board of Directors of Westfield Bank and
Westfield Financial, Inc. at their regular meetings.
In recent years, Westfield Bank's lending activities have emphasized
commercial real estate and commercial and industrial loans. Commercial real
estate loans have grown $30.2 million or 20.9% since December 31, 2004.
Commercial and industrial loans have grown $5.5 million or 5.8% since December
31, 2004. Consumer loans decreased $5.7 million, or 49.5%, since December 31,
2004. Management curtailed its indirect lending beginning in fiscal year 2000
and in the fourth quarter of 2003 the program was discontinued. Management
believes that Westfield Bank's increased emphasis on commercial lending has
allowed it to diversify its loan portfolio while continuing to meet the needs
of the businesses and individuals that it serves.
67
Westfield Bank's primary source of funds has been deposits, consisting
primarily of time deposits, money market accounts, savings accounts, demand
accounts and NOW accounts, which have shorter terms to maturity than the loan
portfolio. Several strategies have been employed to manage the interest rate
risk inherent in the asset/liability mix, including but not limited to:
o maintaining the diversity of Westfield Bank's existing loan
portfolio through the origination of commercial loans and
commercial real estate loans which typically have variable rates
and shorter terms than residential mortgages; and
o emphasizing investments with an expected average duration of five
years or less.
In addition, emphasis on commercial loans has reduced the average
maturity of Westfield Bank's loan portfolio. Moreover, the actual amount of
time before loans are repaid can be significantly affected by changes in market
interest rates. Prepayment rates will also vary due to a number of other
factors, including the regional economy in the area where the loans were
originated, seasonal factors, demographic variables and the assumability of the
loans. However, the major factors affecting prepayment rates are prevailing
interest rates, related financing opportunities and competition. Westfield
Financial monitors interest rate sensitivity so that it can adjust its asset
and liability mix in a timely manner and minimize the negative effects of
changing rates.
Each of Westfield Bank's sources of liquidity is vulnerable to various
uncertainties beyond the control of Westfield Bank. Scheduled loan and security
payments are a relatively stable source of funds, while loan and security
prepayments and calls, and deposit flows vary widely in reaction to market
conditions, primarily prevailing interest rates. Asset sales are influenced by
pledging activities, general market interest rates and unforeseen market
conditions. Westfield Bank's financial condition is affected by its ability to
borrow at attractive rates, retain deposits at market rates and other market
conditions. Management considers Westfield Bank's sources of liquidity to be
adequate to meet expected funding needs and also to be responsive to changing
interest rate markets
Net Interest and Dividend Income Simulation. We use a simulation model to
monitor interest rate risk. This model reports the net interest income at risk
primarily under seven different interest rate environments. Specifically, net
interest income is measured in one scenario that assumes no change in interest
rates, and six scenarios where interest rates increase 100, 200 and 300 and
decrease 100, 200 and 300 basis points, respectively, from current rates over
the one year time period following the current consolidated financial
statements.
The changes in interest income and interest expense due to changes in
interest rates reflect the rate sensitivity of our interest earning assets and
interest bearing liabilities. For example, in a rising interest rate
environment, the interest income from an adjustable rate loan is likely to
increase depending on its repricing characteristics while the interest income
from a fixed rate loan would not increase until the funds were repaid and
loaned out at a higher interest rate.
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The tables below set forth as of December 31, 2006 the estimated changes
in net interest and dividend income that would result from incremental changes
in interest rates over the applicable twelve-month period.
For the Twelve Months Ending December 31, 2007
(Dollars in thousands)
------------------------------------------------------
Changes in Net Interest
Interest Rates (Basis and Dividend
Points) Income % Change
--------------------- ------------ --------
300 33,290 2.7%
200 33,153 2.3%
100 32,872 1.4%
0 32,413 0.0%
-100 32,245 - 0.5%
-200 32,909 1.5%
-300 31,850 -1.7%
Market rates were assumed to increase 100, 200 and 300 basis points and
decrease 100, 200 and 300 basis points, in even increments over the twelve
month period. The repricing and/or new rates of assets and liabilities moved in
tandem with market rates. However, in certain deposit products, the use of data
from a historical analysis indicated that the rates on these products would
move only a fraction of the rate change amount.
Management believes that a percentage of the growth in core deposits over
the last three years was due to the low rate environment, i.e. no incentive for
customers to lock up funds in time deposits. Management believes that in a
rising rate environment, Westfield Bank will experience a shift, by some
customers, out of core deposits and back into term deposits. Based upon
analysis, Management has estimated what is believed to be the rate sensitive
portion of the funds currently in core deposits. In scenarios that assume a
rising rate environment of 100 basis points or more, this shift is incorporated
into the balance sheet forecasts.
We have developed consolidated balance sheet growth projections for the
twelve month period. The same product mix and growth strategy was used for all
rate change simulations, except for the shift into term deposits in certain
scenarios as described in the previous paragraph. Income from tax-exempt assets
is calculated on a fully taxable equivalent basis.
Pertinent data from each loan account, deposit account and investment
security was used to calculate future cash flows. The data included such items
as maturity date, payment amount, next repricing date, repricing frequency,
repricing index and spread. Prepayment speed assumptions were based upon the
difference between the account rate and the current market rate.
69
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.
Recent Accounting Pronouncements
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), Westfield Financial 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, Westfield Financial 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.
In March 2006, the FASB issued Statement No. 156, "Accounting for
Servicing of Financial Assets," which amends FASB Statement No. 140. This
statement requires that all separately recognized servicing rights be initially
measured at fair value, if practicable. For each class of separately recognized
servicing assets and liabilities, this Statement permits an entity to choose
either of the following subsequent measurement methods: (1) amortize servicing
assets or liabilities in proportion to and over the period of estimated net
servicing income or net servicing loss, or (2) report servicing assets or
liabilities at fair value at each reporting date and report changes in fair
value in earnings in the period in which the changes occur (the "fair value
method"). This Statement also requires additional disclosures for all
separately recognized servicing rights and is effective for new transactions
occurring and for subsequent measurement at the beginning of Westfield
Financial's 2007 calendar year. As management does not plan to adopt the fair
value method of accounting for its servicing rights, this Statement is not
expected to have a material impact on Westfield Financial's consolidated
financial statements.
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In July 2006, the FASB issued Financial Accounting Standards
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an entity's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. FIN 48 is effective
for fiscal years beginning after December 15, 2006 and is not expected to have
a material impact on Westfield Financial's consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements." This Statement defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. This
Statement is effective for Westfield Financial on January 1, 2008 and is not
expected to have a material impact on Westfield Financial's consolidated
financial statements.
In September 2006, 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 an
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. This Statement is effective for Westfield
Financial for the year ended December 31, 2006 and is not expected to have a
material impact on Westfield Financial's consolidated financial statements.
In September 2006, the FASB ratified EITF 06-4, "Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements." This issue addresses accounting for split-dollar
life insurance arrangements whereby the employer purchases a policy to insure
the life of an employee, and separately enters into an agreement to split the
policy benefits between the employer and the employee. This EITF states that an
obligation arises as a result of a substantive agreement with an employee to
provide future postretirement benefits. Under EITF 06-4, the obligation is not
settled upon entering into an insurance arrangement. Since the obligation is
not settled, a liability should be recognized in accordance with applicable
authoritative guidance. EITF 06-4 is effective for fiscal years beginning after
December 15, 2007. Westfield Financial is in the process of evaluating the
potential impacts of adopting EITF 06-4 on its consolidated financial
statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108. SAB No. 108 provides interpretive guidance
on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement.
Prior to SAB 108, companies might evaluate the materiality of
financial-statement misstatements using either the income statement or balance
approach, with the income statement approach focusing on new misstatements
added in the current year, and the balance sheet approach focusing on the
cumulative amount of misstatement present in a
71
company's balance sheet. Misstatements that would be material under one
approach could be viewed as immaterial under another approach, and not be
corrected. SAB 108 now requires that companies view financial statement
misstatements as material if they are material according to either the income
statement or balance sheet approach. SAB 108 is applicable to all financial
statements issued by Westfield Financial for the year ended December 31, 2006.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS 159"). This Statement provides companies with an option to report
selected financial assets and liabilities at fair value. The Standard's
objective is to reduce both the complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS 159 also established presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective as of the beginning of an entity's
first fiscal year beginning after November 15, 2007. Early adoption is
permitted if the Company makes the choice in the first 120 days of that fiscal
year and also elects to apply the provisions of SFAS 157. Westfield Financial
does not expect SFAS 159 to have a material impact on the consolidated
financial statements.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and accompanying Notes of Westfield
Financial have been prepared in accordance with Accounting Principles Generally
Accepted in the United States of America ("GAAP"). GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of Westfield Financial's operations. Unlike industrial
companies, Westfield Financial's assets and liabilities are primarily monetary
in nature. As a result, changes in market interest rates have a greater impact
on performance than do the effects of inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Management of Market Risk," for a discussion of
quantitative and qualitative disclosures about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Westfield Financial may be found
on pages F-1 through F-41 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including Westfield Financial's President and Chief Executive
Officer and Chief Financial Officer and Treasurer, 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 that evaluation, Westfield
Financial's President and Chief Executive Officer and Chief Financial Officer
and Treasurer 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 (i) is recorded,
processed, summarized and reported as and when required and (ii) accumulated
and communicated to Westfield Financial's management including the Chief
Executive Officer and Chief Financial Officer and Treasurer, as appropriate to
allow timely discussion regarding required disclosure.
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.
Management Report on Internal Control Over Financial Reporting
o The management of Westfield Financial, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting. Westfield Financial Inc.'s internal control
system is a process designed to provide reasonable assurance to the
company's management and board of directors regarding the
preparation and fair presentation of published financial
statements.
o Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and
dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles
generally accepted in the United States of America, and that
receipts and expenditures are being made only in accordance with
authorizations of management and the directors of Westfield
Financial Inc.; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or
disposition of Westfield Financial Inc.'s assets that could have a
material effect on our financial statements.
o Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
73
o Westfield Financial, Inc.'s management assessed the effectiveness
of the company's internal control over financial reporting as of
December 31, 2006. In making this assessment, we used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework. Based
on our assessment we believe that, as of December 31, 2006, the
company's internal control over financial reporting is effective
based on those criteria.
o Westfield Financial Inc.'s Independent Registered Public Accounting
Firm has issued an audit report on our assessment of, and the
effective operation of, the company's internal control over
financial reporting as of December 31, 2006. This report appears on
pages F-42 and F-43.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Performance Graph
The following graph compares Westfield Financial, Inc.'s total cumulative
shareholder return by an investor who invested $100.00 on December 31, 2001 to
December 31, 2006, to the total return by an investor who invested $100.00 in
each of the Russell 2000 Index and the Nasdaq Bank Index for the same period.
74
CHART
12/01 12/02 12/03 12/04 12/05 12/06
- -------------------------------------------------------------------------------
Westfield Financial, Inc. 100.00 117.09 181.44 199.87 192.85 288.17
Russell 2000 100.00 79.52 117.09 138.55 144.86 171.47
NASDAQ Bank 100.00 59.14 89.11 103.85 130.57 166.05
75
Directors
Westfield Financial's Board of Directors consists of eleven members.
Westfield Financial's Articles of Organization provide that the Board of
Directors shall be divided into three classes, as nearly equal in number as
possible.
The following table sets forth each director of Westfield Financial, and
his or her age, the year when he or she began serving as director, and the year
when his or her current terms of office as director will expire.
Position with
Name Age(1) New Westfield Financial Term Expires Served Since(2)
- ---------------------- ------ ---------------------------------- ----------- ---------------
Victor J. Carra 66 Director 2007 1995
David C. Colton, Jr. 63 Director 2009 1980
Robert T. Crowley 58 Director 2008 1999
Harry C. Lane 68 Director 2008 1978
William H. McClure 71 Director 2008 1996
Mary C. O'Neil 71 Director 2009 1994
Richard C. Placek 67 Director 2007 1979
Paul R. Pohl 65 Director 2008 1999
Charles E. Sullivan 63 Director 2007 1992
Thomas C. Sullivan 73 Director 2007 1989
Donald A. Williams 62 Chairman and Chief Executive Officer 2009 1983
- --------------------
(1) At December 31, 2006.
(2) Includes terms served on the Board of Directors of Westfield Bank. All
members of the current Board of Directors of Westfield Financial have
served as directors since the company's inception in 2001.
Business Experience of Directors
The business experience of each director for at least the past five years
is set forth below.
Victor J. Carra served as Executive Vice President of Westfield Bank from
1998 until 2005, and as Executive Vice President of Westfield Financial from
its inception in 2001 until 2005. Since 1975, Mr. Carra served in various
capacities during his employment with Westfield Bank.
David C. Colton, Jr. is the former owner and operator of The Colton
Agency, Inc., an insurance agency located in Westfield, Massachusetts for the
past 65 years. He recently sold the business and is serving as an independent
consultant.
Robert T. Crowley, Jr. is a Certified Public Accountant and the Managing
Partner of the accounting firm of Downey, Sweeney, Fitzgerald & Co., P.C. The
firm provides tax, accounting and auditing services to the public. Mr. Crowley
has been a partner with this firm since 1980 and a Certified Public Accountant
since 1979.
Harry C. Lane is the President of John S. Lane & Son, Inc., a quarry and
asphalt company located in Westfield, Massachusetts, incorporated in 1904. Mr.
Lane has served in this capacity since 1986.
76
William H. McClure is the President of the McClure Insurance Agency,
Inc., a position he has held since December 1993. He is the owner of 51% of
this insurance agency, which sells and services fire, casualty, life and health
insurance. He is also an owner of 103 Van Deene Realty Trust, which is made up
of a building located at that same address.
Mary C. O'Neil is the former Vice President of Development and Community
Relations at Noble Health Systems, located in Westfield, Massachusetts. Ms.
O'Neil has held this position since 1993. Prior to that, she served as
President of T.L. O'Neil Insurance Agency, Inc.
Richard C. Placek is the Chairman of Commercial Distributing Company,
located in Westfield Massachusetts. Mr. Placek has held this position since
1985. Prior to that, he served as General Manager.
Paul R. Pohl serves as the President and Owner of Chemi-Graphic, Inc., a
name plate manufacturing company located in Ludlow, Massachusetts. Mr. Pohl has
served in this capacity since 1964.
Charles E. Sullivan is the President of Charles E. Sullivan C.P.A., Inc.,
a public accounting firm located in West Springfield, Massachusetts. Mr.
Sullivan has served in this capacity since 1979.
Thomas C. Sullivan is the former President and Chief Operating Officer of
Sullivan Paper Co., Inc., located in West Springfield, Massachusetts. He
retired from this position in 1998. Mr. Sullivan presently serves as a director
of Sullivan Paper Co., Inc., a position he has held since 1959. He also serves
as President and Director of Patriot Realty, located in Appleton, Wisconsin,
and is the Vice President and Director of George Sullivan Realty, a realty
company located in West Springfield, Massachusetts. Mr. Sullivan has served in
these capacities since 1994 and 1970, respectively.
Donald A. Williams served as President of Westfield Bank from 1983
through 2005 and Westfield Financial from its inception in 2001 through 2005.
Mr. Williams has served as Chief Executive Officer of Westfield Bank since 1987
and Westfield Financial since its inception in 2001.
77
Executive Officers Who Are Not Directors
James C. Hagan, age 45, has served as President and Chief Operating
Officer of Westfield Financial and Westfield Bank since June 2005. Prior to
that, he served as Senior Vice President and Commercial Loan Department Manager
of Westfield Bank from 1998. From 1994 through 1998, Mr. Hagan was a Vice
President at Westfield Bank.
Gerald P. Ciejka, age 46, was appointed Vice President of Westfield
Financial and Westfield Bank on February 22, 2005. Mr. Ciejka also serves as
General Counsel and Director of Human Resources of Westfield Financial and
Westfield Bank. Mr. Ciejka was previously a partner at the Springfield,
Massachusetts law firm of Bulkley, Richardson and Gelinas in the business
organization and real estate departments. From 1997 to 2004, he served as
branch manager and senior underwriting counsel for First American Title
Insurance Company and Chicago Title Insurance Company.
Michael J. Janosco, Jr., age 60, has served as the Chief Financial
Officer and Treasurer of Westfield Bank since 1999 and of Westfield Financial
since its inception in 2001. Mr. Janosco was previously a partner at KPMG Peat
Marwick until his retirement in 1994. From 1994 to 1997, he served as the Chief
Financial Officer and Treasurer of Primary Bank, located in Peterborough, New
Hampshire. From October 1997 to March 1999, he was a consultant to various
banks.
Rebecca S. Kozaczka, age 56 has served as Vice President and Residential
Loan Officer at Westfield Financial and Westfield Bank since 1989. She worked
as a Mortgage Loan Officer and Assistant Vice President from 1985 until 1989.
Deborah J. McCarthy, age 47, has served as Vice President of Westfield
Financial and Westfield Bank since 2000. She is the Manager of the Operations
and Information Systems Departments. She has worked for Westfield Bank in
numerous capacities since 1979.
Allen J. Miles, III, age 44, has served as Senior Vice President and
Chief Lending Officer of Westfield Financial and Westfield Bank since August
2005. From 1998 to 2005 he served as Vice President and Commercial Loan
Officer.
Leo R. Sagan, Jr., age 43, has served as the Vice President and
Controller of Westfield Financial and Westfield Bank since 2003. Prior to that
he served as Controller of Westfield Financial and Westfield Bank from 2002 to
2003 and as Assistant Treasurer of Westfield Financial and Westfield Bank from
1999 to 2002.
Audit Committee
The Audit Committee is chaired by Director Placek, with Directors Crowley
and McClure as members. The Audit Committee assists the Board by overseeing the
audit coverage and monitoring the accounting, financial reporting, data
processing, regulatory and internal control environments. The primary duties
and responsibilities of the Audit Committee are to: (1) oversee and monitor the
financial reporting process and internal controls system; (2) review and
evaluate the audit performed by outside auditors and report any substantive
issues found during the audit to the Board; (3) appoint, compensate and oversee
the work of the independent auditors; (4) review and approve all transactions
with affiliated parties; and (5) provide an open avenue of
78
communication among the independent auditors, financial and senior management,
the internal audit department and the Board. All members of the Audit Committee
are independent directors as defined under the American Stock Exchange listing
standards. Westfield Financial believes that Mr. Crowley qualifies as an Audit
Committee Financial Expert as that term is defined by Securities and Exchange
Commission regulations. The Board of Directors has adopted a written charter
for the Audit Committee, a copy of which was attached as Appendix A to the
proxy statement filed with the SEC on April 15, 2005. The Audit Committee of
Westfield Financial met five times in the 2006 fiscal year.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Westfield Financial's directors and executive officers, and persons
who own more than 10% of Westfield Financial's common stock, to report to the
Securities and Exchange Commission their initial ownership of Westfield
Financial's common stock and any subsequent changes in that ownership. Specific
due dates for these reports have been established by the Securities and
Exchange Commission and Westfield Financial is required to disclose in this
proxy statement any late filings or failures to file.
Based solely on its review of the copies of such reports furnished to
Westfield Financial and written representations that no other reports were
required during the fiscal year ended December 31, 2006, all Section 16(a)
filing requirements applicable to Westfield Financial's executive officers and
directors during fiscal 2006 were met.
Code of Ethics
Westfield Financial has adopted a Conflict of Interest Policy and Code of
Conduct, which applies to all employees and officers of Westfield Financial and
Westfield Bank. Westfield Financial has also adopted a Code of Ethics for
Senior Financial Officers of Westfield Financial, Inc., which applies to
Westfield Financial's principal executive officer, principal financial officer,
principal accounting officer or controller or person performing similar
functions for Westfield Financial and Westfield Bank, and which requires
compliance with the Conflict of Interest Policy and Code of Conduct. The Code
of Ethics for Senior Financial Officers of Westfield Financial meets the
requirements of a "code of ethics" as defined by Item 406 of Regulation S-K.
The Code of Ethics for Senior Financial Officers was filed as exhibit 14.1 to
the Form 10-K filed with the SEC on March 15, 2003 and is hereby incorporated
by reference. There have been no amendments to the Code of Ethics since that
time.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Philosophy and Overall Program Objectives. Westfield Financial strives to
attract, retain and motivate qualified executives crucial to Westfield
Financial's success. Westfield Financial's approach is to compensate executives
commensurate with their experience, expertise and performance and to be
competitive with the other comparative financial companies of similar size,
complexities and business. Westfield Financial designs its compensation program
to:
o Support its strategic plan by communicating what is expected of
executives with respect to results and achievement;
o Retain and recruit executive talent; and
o Create financial strength and shareholder value.
Westfield Financial seeks to achieve these objectives through the use of
a base salary, annual bonus (short-term incentive) and grants of long-term,
equity-based compensation such as stock options and restricted stock, deferred
compensation and fringe benefits.
Westfield Financial uses market comparisons for comparative financial
companies of similar size, complexities and business as one factor in making
compensation decisions along with individual contribution and performance, and
importance of role and responsibilities as well as leadership and growth
potential.
Base Salary Annual Bonuses for Named Executive Officers. The minimum
salaries for two of the five executives officers named in the "Summary
Compensation Table" are determined by employment agreements for the Chief
Executive and Chief Financial Officers and any increase over these minimums,
and salaries of the other executive officers are determined by the Compensation
Committee based on a variety of factors, including:
o The nature and responsibility of the position and to the extent
available, salary norms for persons in comparable positions at
other financial institutions; and
o The expertise of the individual executive and (except for their own
compensation) the recommendations of the Chief Executive Officer
and the President and Chief Operating Officer.
Where not specified by contract, salaries are generally reviewed
annually.
In setting salaries, the Compensation Committee considers Westfield
Financial's financial and market performance and individual performances and
responsibilities.
80
As in prior years the compensation program provided for a cash annual
bonus that is based the company's performance as compared to its operating
budget, which was prepared by company management and approved by the Board of
Directors at the beginning of the fiscal year. Based on the degree of success,
cash bonus percentage of base salary is created by the Compensation Committee
at the end of the fiscal year and applied to each executive officer, as well as
all other employees of Westfield Financial, on a uniform basis. In 2006, this
bonus percentage was 10% of base salary.
Stock-Based Incentives. The stock-based incentive program provides a
periodic award that is both performance and retention based. The objective of
the program is to align compensation for named executive officers over a
multi-year period directly with the interests of shareholders of Westfield
Financial by motivating and rewarding creation and preservation of long term
shareholder value and relative shareholder return. The level of long-term
incentive compensation is determined based on an evaluation of competitive
market factors in conjunction with total compensation provided to named
executive officers and the goals of the compensation program. Westfield
Financial's long-term incentive compensation generally takes the form of a
combination of restricted stock unit grants and option rewards. These two
vehicles reward shareholder value creation in slightly different ways. Stock
options (which have exercise prices equal to the market price at date of grant)
reward named executive officers only if Westfield Financial's stock price
increases. Restricted stock units are impacted by all stock price changes, so
the value to named executive officers is affected by both increases and
decreases in Company's stock price.
It is the policy and part of the Compensation Committee's charter that
neither the Compensation Committee, nor any member of Westfield Financial's
management, shall backdate an equity grant under Westfield Financial's
stock-based incentive program or manipulate the timing of a public release of
material information with the intent of benefiting a grantee under an equity
award. In furtherance of this policy the Compensation Committee, in order to
ensure the integrity of awards granted under its stock-based incentive program,
has adopted an annual grant date for such awards being the June Board of
Directors meeting. Grants made outside of this annual grant date must be
approved in writing by Westfield Financial's Chief Executive Officer and must
be presented and approved at the next subsequent Board of Director's meeting
and will be deemed granted on the first business day following approval by
Westfield Financial's Board of Directors.
Restricted Stock. Restricted stock units granted as long-term incentive
compensation to named executive officers vest over a period of five years at
20% per year at the anniversary date.
Stock Options. Stock options granted to named officers have exercise
prices of not less than fair market value of Westfield Financial's stock on the
date of grant and vest over five years conditioned on continued employment. The
Compensation Committee has never granted stock options with exercise prices
below the market price of Westfield Financial's stock on the date of grant and
has never reduced the exercise price of stock options except to reflect the
exchange value in connection with the second step conversion closed on January
3, 2007.
81
Benefit Restoration. Westfield Financial has established the Benefit
Restoration Plan of Westfield Financial, Inc. in order to provide restorative
payments of executives who are prevented from receiving full benefits
contemplated by Westfield Financial's employee stock ownership plan's benefit
formula as well as the 401(k) plan's benefit formula. The restorative payments
consist of payments in lieu of shares that cannot be allocated to participants
due to legal limitations imposed on tax-qualified plans. Currently, only the
Chief Executive Officer is a participant in the plan. The Compensation
Committee considers the remuneration received under this plan when annually
determining the executives' total compensation.
Periodic Review. The Compensation Committee has previously and will
continue to review both the annual bonus program and the long-term incentive
program annually to ensure that their respective key elements continue to meet
objectives described above.
Benefits and Perquisites. The Compensation Committee supports providing
benefits and perquisites to the named executive officers that are substantially
the same as those offered to other officers of Westfield Financial. In
addition, Westfield Financial may also make available to certain named officers
the use of a company automobile as was the case in 2006 for the Chief Executive
Officer, the President and Chief Operating Officer and the Chief Financial
Officer.
Westfield Financial entered into a deferred compensation agreement with
the Chief Executive Officer in June of 1991. Under the deferred compensation
agreement, the Chief Executive Officer is guaranteed monthly payments equal to
70% of his monthly salary after retirement for the remainder of the executive's
life or 240 months, whichever is greater. The amount of these payments is
reduced by any payments received by the executive from Westfield Financial's
defined benefit pension plan and trust, as amended, sponsored by the Savings
Bank Employee Retirement Association and are also reduced by social security
payments received by the executive. The purpose of this Agreement is to provide
the executive with benefits otherwise limited to certain provisions of the
Internal Revenue Code. The Compensation Committee considers the recommendation
received under the deferred compensation agreement when annually determining
the executive's total compensation received from Westfield Financial.
Employment Agreements and Change in Control Agreements. The Compensation
Committee believes that Westfield Financial's continued success depends to a
significant degree on the skills and competence of certain senior officers and
the employment agreements are intended to ensure that Westfield Financial
continues to maintain and retain experienced senior management.
Westfield Financial presently has employment agreements with its Chief
Executive, Chief Operating and Chief Financial Officers. Each agreement
provides for three year rolling terms with minimum annual salaries,
discretionary cash bonuses and other fringe benefits. The agreements also
include protection for the executives if Westfield Financial experiences a
change in ownership or control. If such a change in control occurs, a portion
of the severance payments might constitute an "excess parachute payment" under
current federal tax laws. Under the agreements, Westfield Financial would
reimburse the executives for the amount of this excise tax and would have an
additional payment so that, after payment the excise tax and all income and
excise imposed on the
82
reimbursement and gross-up payments, the executives will retain approximately
the same net after tax amounts under the employment agreement that they would
have retained if there were no 20% excise tax. The effect of this provision is
that Westfield Financial, rather than the executives, bears the financial cost
of the excise tax.
Change in Control Agreements. Westfield Financial has entered into
one-year change of control agreements with six officers: Gerald P. Ciejka,
James C. Hagan, Rebecca S. Kozaczka, Deborah J. McCarthy, Allem J. Miles, III,
and Leo Sagan. The term of these agreements is perpetual until Westfield
Financial gives notice of non-extension, at which time the term is fixed for
one year. Generally, Westfield Financial may terminate the employment of any
officer covered under these agreements, with or without cause, at any time
prior to a change of control without obligation for severance benefits.
However, if Westfield Financial signs a merger or other business combination
agreement, or if a third party makes a tender offer or initiates a proxy
contest, if could not terminate an officer's employment without cause without
liability for severance benefits. The severance benefits would generally be
equal to the value of the cash compensation and fringe benefits that the
officer would have received if he or she had continued working for an
additional one year. Westfield Financial would pay the same severance benefits
if the officer resigns after a change of control following a loss of title,
office or membership on the Board of Directors, material reduction in duties,
functions or responsibilities, involuntary relocation of his other principal
place of employment to a location over 25 miles from Westfield Bank's principal
office on the day before the change of control and over 25 miles from the
officer's principal residence or other material breach of contract which is not
cured within 30 days. These agreements also provide uninsured death and
disability benefits. If Westfield Financial experiences a change in ownership,
a change in effective ownership or control or a change in the ownership of a
substantial portion of their assets as contemplated by Section 280G of the
Internal Revenue Code, a portion of any severance payments under the change of
control agreements might constitute an "excess parachute payment" under current
federal tax laws. Any excess parachute payment would be subject to a federal
excise tax payable by the officer and would be non-deductible by Westfield
Financial for federal income tax purposes. The change of control agreements do
not provide a tax indemnity.
Total Compensation. In making decisions with respect to any element of a
named executive officer's compensation, the Compensation Committee considers
the total compensation that may be awarded to the officer, including salary,
annual bonus and long-term incentive compensation. In addition, in reviewing
and approving employment agreements for named executive officers, the
Compensation Committee considers the other benefits to which the officer is
entitled by the agreement, including compensation payable upon termination of
the agreement under variety of circumstances. The Compensation Committee's goal
is to award compensation that is reasonable when all elements of potential
compensation are considered. The Compensation Committee is provided, prior to
the end of each fiscal year, a summary compensation schedule for each executive
officer, containing the amount of all forms of compensation. This schedule is
used as a tool by the Compensation Committee when considering the total
compensation of each executive officer.
83
Compensation Decision-Making Policies and Procedures
Decision-Making and Policy-Making. Westfield Financial's bylaws require
that the business and affairs of Westfield Financial be under the direction of
the Board of Directors. This includes executive officer compensation. Executive
compensation is set by the Board of Directors or a board committee to which
decision-making authority has been delegated. As a company listed on the
American Stock Exchange Market, Westfield Financial must observe governance
standards and listing requirements that require executive officer compensation
decisions to be made by a majority of independent director members of our
board, by a committee of independent directors or in exceptional and limited
circumstances, a compensation committee comprised of at least three members
where only one member is not independent. Consistent with these requirements,
Westfield Financial's Board of Directors has established a Compensation
Committee which is comprised of Directors Carra, Pohl and T. Sullivan with
Director Sullivan serving as Chairperson of the Committee. Directors Pohl and
T. Sullivan are independent under the American Stock Exchange listing
standards. Mr. Carra served as executive Vice President of Westfield Financial,
Inc. from 2001 until his retirement in July 2005, and as a result does not
qualify as an independent director under the American Stock Exchange listing
requirements.
The Compensation Committee has been delegated authority from Westfield
Financial's Board of Directors to oversee executive compensation by approving
salary increases for Vice Presidents and above and by reviewing general
personnel matters such as staff performance evaluations for Vice Presidents and
above. The Compensation Committee has established a compensation program and
has a formal charter which was adopted in December of 2006 and advises senior
management on the average salary increases for all employees under the
compensation program. The compensation program consists of three components:
(1) base salary; (2) bonuses (short-term incentives); and (3) long-term
incentives (e.g., stock options, restricted stock, deferred compensation, and
fringe benefits).
The Compensation Committee meets four times a year. It considers the
expectations of the Chief Executive Officer with respect to their own
compensation and their recommendations with respect to the compensation of more
junior executive officers, as well as empirical data and the recommendations of
advisors both internal and external. The Compensation Committee does not
delegate its' duties to others. The Compensation Committee also confirms and
approves the Summary Compensation Tables included in this Annual Report on Form
10-K in accordance with the rules and regulations of the Securities and
Exchange Commission.
Use of Outside Advisors and Survey Data. The Compensation Committee uses
its own criteria coupled with a peer comparison based on similar companies to
establish the Chief Executive Officer's base salary along with essentially the
same process, compiled by the same independent outside consultant Westfield
Financial uses to determine the compensation of all other employees. The above
process is repeated for determining a fair compensation for all members of the
Board of Directors and their committees. The Compensation Committee employs an
outside compensation consultant, Thomas Warren of Thomas Warren & Associates,
Inc., Sherborn, Massachusetts to assist in the evaluation of Westfield
Financial's CEO and other selected officers. The Compensation Committee
maintains the authority to approve fees and other retention terms with respect
to such compensation consultant.
84
Compensation Committee Interlocks
During 2006, none of Westfield Financial's executive officers served as a
director or member of the compensation committee (or equivalent body) of
another entity where a director or member of our Compensation Committee served
as an executive officer or director.
Compensation Committee Report
The Compensation Committee has reviewed the Compensation Discussion and
Analysis included in this SEC Form 10K Annual Report and has discussed it with
management. Based on such review and discussion, the Compensation Committee
recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in this Annual Report on Form 10-K.
Westfield Financial, Inc.
Compensation Committee
Thomas C. Sullivan, Chairperson
Victor Carra
Paul R. Pohl
Director Compensation
Meeting Fees. The members of the board of directors of Westfield
Financial are identical to those of Westfield Bank. To date, Westfield Bank has
compensated its directors for their services to the Bank. Westfield Financial
has not paid any additional compensation to its directors for their additional
services to the holding company. Westfield Financial expects to continue this
practice until there is a business reason to establish separate compensation
fees.
Westfield Bank's practice has been to pay a fee of $800 to each of its
non-employee directors for attendance at each Board meeting. In addition, each
member of the Executive Committee received $1,733 per month for meetings, each
member of the Audit Committee received $500 for each meeting the member
attended, each member of the Compensation Committee received $250 for each
meeting the member attended, and each member of the Nominating Committee
received $250 for each meeting the member attended. Westfield Bank paid fees
totaling $203,284 to its non-employee directors for the year ended December 31,
2006.
Directors' Deferred Compensation Plan. Westfield Bank has established the
Westfield Bank Directors' Deferred Compensation Plan for the benefit of
non-employee directors. Under the Deferred Compensation Plan, each non-employee
director may make an annual election to defer receipt of all or a portion of
his or her director fees received from Westfield Financial and Westfield Bank.
The deferred amounts are allocated to a deferral account and credited with
interest at an annual rate equal to the rate on the highest yielding
certificate of deposit issued by Westfield Bank during the year or according to
the investment return of other assets as may be selected by the Compensation
Committee of Westfield Bank. The Deferred Compensation Plan is an unfunded,
non-qualified plan that provides for distribution of the amounts deferred to
participants or their designated beneficiaries upon the occurrence of certain
events such as death, retirement, disability or a change in control of
Westfield Financial or Westfield Bank (as those terms are defined in the
Deferred Compensation Plan).
85
The following table sets forth information regarding compensation earned by the
non-employee directors of Westfield Financial, Inc. during the last fiscal
year.
Fees Earned or Stock Option
Paid in Cash Awards Awards Total
Name ($)(1) ($)(2) ($)(3) ($)
- -------------------- ------------ ----- ------ ------
Victor J. Carra 12,700 -- -- 12,700
David C. Colton, Jr. 31,196 14,390 10,192 55,778
Robert T. Crowley, Jr. 13,700 14,390 10,192 38,282
Harry C. Lane 31,446 14,390 10,192 56,028
William H. McClure 12,900 14,390 10,192 37,482
Mary C. O'Neil 30,396 14,390 10,192 54,978
Richard C. Placek 13,700 14,390 10,192 38,282
Paul R. Pohl 12,150 14,390 10,192 36,732
Charles E. Sullivan 32,496 14,390 10,192 57,078
Thomas C. Sullivan 12,150 14,390 10,192 36,732
- --------------------
(1) Includes retainer payments, meeting fees, and committee and/or
chairmanship fees earned during the fiscal year, whether such fees were
paid currently or deferred.
(2) Represents the compensation cost recognized for the fiscal year in
connection with restricted stock of Westfield Financial granted to the
named executive officer, regardless of the year in which granted and
calculated in accordance with FAS 123R for financial statement purposes.
Unvested shares of restricted stock awards held in trust for each director
as of December 31, 2006 are as follows: for each of Messrs. Colton,
Crowley, Lane, McClure, Placek, Pohl, C. Sullivan, T. Sullivan and Ms.
O'Neil - 1,000 shares. For more information concerning the assumptions
used for these calculations, please refer to the discussion under Note 11
in the Notes to Consolidated Financial Statements attached hereto. This
amount does not reflect the value of dividends paid on unvested restricted
stock.
(3) Represents the compensation cost recognized for the fiscal year for
options to purchase shares of Westfield Financial common stock outstanding
to the named executive officer, regardless of the year in which granted
and calculated in accordance with FAS 123R for financial statement
purposes. Stock options outstanding for each director at December 31, 2006
are as follows for each of Messrs. Colton, Crowley, Lane, McClure, Placek,
Pohl, C. Sullivan, T. Sullivan and Ms. O'Neil - 2,600 shares. For more
information concerning the assumptions used for these calculations, please
refer to the discussion under Note 11 in the Notes to Consolidated
Financial Statements attached hereto.
86
Executive Compensation
The table below sets forth for 2006 the compensation of each of our
named executive officers.
SUMMARY COMPENSATION TABLE
Change in
Pension Value
and
Nonqualified
Stock Option Non-Equity Deferred All Other
Name and Principal Salary(1) Bonus(1) Awards(2) Awards(3) Incentive Plan Compensation Compensation(5)
Positions Year ($) ($) ($) ($) Compensation ($) Earnings(4)($) ($) Total ($)
------------------ ---- --------- -------- --------- --------- ---------------- --------------- --------------- ---------
Donald A. Williams,
Chairman and Chief
Executive Officer 2006 382,706 38,271 141,022 94,080 -- 277,897 87,584 1,021,560
Michael J. Janosco, Jr.,
Chief Financial
Officer and Treasurer 2006 199,586 19,959 84,613 52,560 -- 44,295 39,438 440,451
James C. Hagan,
President and Chief
Operating Officer 2006 209,284 20,928 28,780 9,408 -- 26,870 28,146 323,416
Allen J. Miles, III
Senior Vice
President & Chief
Lending Officer 2006 148,524 14,852 4,980 1,960 -- 13,556 19,834 203,706
Rebecca S. Kozaczka
Vice President 2006 110,984 11,098 24,463 7,056 -- 37,136 18,960 209,697
- --------------------
(1) The figures shown for salary and bonus represent amounts earned for the fiscal year, whether or not actually paid during such
year.
(2) Represents the compensation cost recognized for the fiscal year in connection with restricted stock of Westfield Financial
granted to the named executive officer, regardless of the year in which granted and calculated in accordance with FAS 123R
for financial statement purposes. For more information concerning the assumptions used for these calculations, please refer
to Note 11 in the Notes to Consolidated Financial Statements attached hereto. This amount does not reflect the value of
dividends paid on unvested restricted stock, which are included in the Summary Compensation Table under the caption "All
Other Compensation."
(3) Represents the compensation cost recognized for the fiscal year for options to purchase shares of Westfield Financial common
stock outstanding to the named executive officer, regardless of the year in which granted and calculated in accordance with
FAS 123R for financial statement purposes. For more information concerning the assumptions used for these calculations,
please refer to Note 11 in the Notes to Consolidated Financial Statements attached hereto.
(4) Includes for each named executive officer (a) the increase (if any) for the fiscal year in the present value of the
individual's accrued benefit (whether not vested) under each tax-qualified and non-qualified actuarial or defined benefit
plan calculated by comparing the present value of each individual's accrued benefit under each such plan in accordance with
Statement of Financial Accounting Standards 87 ("FAS 87") as of the plan's measurement date in such fiscal year to the
present value of the individual's accrued benefit as of the plan's measurement date in the prior fiscal year plus.
(5) The named executive officers participate in certain group life, health, disability insurance and medical reimbursement plans,
not disclosed in the Summary Compensation Table, that are generally available to salaried employees and do not discriminate
in scope, terms and operation. The figure shown for each named executive officer includes: (i) life insurance premiums as
follows: Mr. Williams - $3,378, Mr. Janosco - $2,504, Mr. Hagan - $776, Mr. Miles - $504, and Ms. Kozaczka - $1,026; (ii)
401(k) matching contributions as follows: Mr. Williams - $4,151, Mr. Janosco - $5,988, Mr. Hagan - $4,496, Mr. Miles - $4,456
and (1) Ms. Kozaczka - $3,330; (iii) ESOP contributions as follows: Mr. Williams - $22,801, Mr. Janosco - $21,244, Mr. Hagan
- $19,574, Mr. Miles - $13,944 and Ms. Kozaczka - $11,799: (iv) dividends on unvested restricted stock as follows: Mr.
Williams - $16,170, Mr. Janosco - $9,702, Mr. Hagan- $3,300, Mr. Miles - $930, and Ms. Kozaczka - $2,805; and (v)
contributions under the benefit restoration plan of $41,084 for the benefit of Mr. Williams. In addition, we provide certain
non-cash perquisites and personal benefits to each named executive officer that do not exceed $10,000 in the aggregate for
any individual, and are not included in the reported figures.
87
Compensation Plans
2002 Stock Option Plan. Westfield Financial has a Stock Option Plan in
effect that was approved by the shareholders and became effective on July 26,
2002. The purpose of the Stock Option Plan is to encourage the retention of key
employees and directors by facilitating their purchase of a stock interest in
Westfield Financial. The Stock Option Plan is not subject to ERISA and is not a
tax-qualified plan. Westfield Financial has reserved an aggregate of 1,631,699
shares of common stock for issuance upon the exercise of stock options granted
under the Plan.
2002 Recognition and Retention Plan. Westfield Financial's Recognition
and Retention Plan was approved by shareholders and became effective on July
26, 2002. Like the Stock Option Plan, the Recognition and Retention Plan
functions as a long-term incentive compensation program for eligible officers,
employees and outside directors of Westfield Financial and Westfield Bank. The
Recognition and Retention Plan is not subject to ERISA and is not a
tax-qualified plan. The members of the Board's Compensation Committee who are
disinterested directors (the "RRP Committee") administer the Recognition and
Retention Plan. Westfield Financial pays all costs and expenses of
administering the Recognition and Retention Plan.
As required by the terms of the Recognition and Retention Plan, Westfield
Financial has established a trust and has contributed to the trust in order to
fund the purchase of 652,679 shares of common stock, the maximum number of
restricted stock awards that may be granted under the RRP. Shares of common
stock subject to a restricted stock award are held in the trust until the award
vests at which time the shares of common stock attributable to the portion of
the award that have vested are distributed to the award holder. An award
recipient is entitled to exercise voting rights and receive cash dividends with
respect to the shares of common stock subject to his or her award, whether or
not the underlying shares have vested. Restricted stock awards are granted
under the Recognition and Retention Plan on a discretionary basis to eligible
officers, executives and outside directors selected by the RRP Committee.
Westfield Financial may amend or terminate the Recognition and Retention Plan,
in whole or in part, at any time, subject to the requirements of all applicable
laws.
88
GRANTS OF PLAN BASED AWARDS TABLE
All Other All Other
Stock Option Closing
Awards: Awards: Exercise Sale
Number of Number of or Base Price of
Shares of Securities Price of Common Stock
Stock or Underlying Option on the Grant
Grant Units Options Awards Date
Name Date ($) (#) ($/Sh) ($/Sh)
---- ----- -------- ---------- ------- --------------
Donald A. Williams -- -- -- -- --
Michael J. Janosco, Jr. -- -- -- -- --
James C. Hagan -- -- -- -- --
Allen J. Miles, III 1/23/06 $1,000 -- -- 24.60
Rebecca S. Kozaczka -- -- -- -- --
89
Stock Awards and Stock Option Grants Outstanding
The following tables set forth information regarding stock awards, stock
options and similar equity compensation outstanding at January 1, 2007, whether
granted in 2006 or earlier, including awards that have been transferred other
than for value.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
Number of Number of Number of Market Value
Securities Securities Shares or of Shares or
Underlying Underlying Units of Units of
Unexercised Unexercised Option Stock That Stock That
Options Options Exercise Option Have Not Have Not
(1) (1) Price Expiration Vested Vested ($)
Name Exercisable Unexercisable ($) Date (2) (3)
---- ----------- ------------- -------- ---------- ---------- -----------
Donald A. Williams 96,000 24,000 14.39 7/26/12 9,800 339,080
Michael J. Janosco, Jr. 57,600 14,400 14.39 7/26/12 5,880 203,448
James C. Hagan 9,600 2,400 14.39 7/26/12 2,000 69,200
Allen J. Miles, III 1,000 500 14.39 7/26/12 800 27,680
Rebecca S. Kozaczka 7,200 1,800 14.39 7/26/12 1,700 58,820
- --------------------
(1) The stock option awards were granted in July 2002 and vest annually over a five-year period, the last year being
July 2007.
(2) The Recognition and Retention Plan shares were granted in October 2002 and vest annually over a five-year period,
the last being October 2007, except for that awarded to Mr. Miles which vests over a similar five-year period with
the final installment vesting in October 2009.
(3) Market value is calculated on the basis of $34.60 per share, which is the closing sales price for our common stock
on December 29, 2006.
90
The following table sets forth the stock awards that vested and the
option awards that were exercised for the named executive officers during the
last fiscal year.
OPTION EXERCISES AND STOCK VESTED TABLE
Option Awards Stock Awards
Number of Number of
Shares Value Shares Value
Acquired on Realized on Acquired on Realized on
Exercise Exercise Vesting Vesting
Name (#) ($)(1) (#) ($)(1)
- ------------------------ ----------- ---------- ----------- ----------
Donald A. Williams -- -- 9,800 334,278
Michael J. Janosco, Jr. -- -- 5,880 200,567
James C. Hagan -- -- 2,000 68,220
Allen J. Miles, III -- -- 200 6,822
Rebecca S. Kozaczka -- -- 1,700 57,987
- --------------------
(1) The figures shown include the amount realized during the fiscal year upon
exercise of vested stock options by the named individual and the vesting
of restricted stock, based on the closing sales price for a share of our
common stock on the on the exercise date or vesting date, as applicable.
Unexercised stock options and unvested restricted stock may not be
transferred for value.
Post-Employment Compensation
Pension Benefits
Pension Plan. Westfield Bank maintains a pension plan for its eligible
employees. Generally, employees of Westfield Bank begin participation in the
pension plan once they reach age 21 and complete 1,000 hours of service in a
consecutive 12-month period. Participants in the pension plan become vested in
their accrued benefit under the pension plan upon the earlier of: (1) the
attainment of their "normal retirement age" (as described in the pension plan)
while employed at Westfield Bank; (2) the completion of five vesting years of
service with Westfield Bank; or (3) the death or disability of the participant.
Participants are generally credited with a vesting year of service for each
year in which they complete at least 1,000 hours of service. A participant's
normal benefit under the pension plan equals the sum of (i) 1.25% of the
participant's average compensation (generally defined as the average taxable
compensation for the three consecutive limitation years that produce the
highest average) by the number of years of service the participant has under
the plan up to 25 years of service, plus (ii) 0.6% of the excess of the
participant's average compensation over the participant's covered compensation
(the social security taxable wage base for the 35 years ending in the year the
participant becomes eligible for non-reduced social security benefits) for each
year of service under the plan up to 25 years of service. Participants may
retire at or after age 65 and receive their full benefit under the plan.
Participants may also retire early at age 62 or at age 55 with ten years of
service or at age 50 with 15 years of service under the plan and receive a
reduced retirement benefit. Pension benefits are payable in equal monthly
installments for life, or for married persons, as a joint survivor annuity over
the lives of the participant and spouse. Participants may also elect a lump sum
payment with the consent of their spouse. If a participant dies while employed
by Westfield Bank, a death benefit will be payable to either his or her spouse
or estate, or named beneficiary, equal to the entire amount of the
participant's accrued benefit in the plan.
91
Deferred Compensation Agreement. Westfield Bank has also entered into a
deferred compensation agreement with Donald A. Williams. Under this agreement,
the executive is guaranteed monthly payments equal to 70% of his monthly salary
after retirement for the remainder of the executive's life or 240 months,
whichever is greater. The amount of these payments is reduced by any payments
received from the pension plan and are also reduced by Social Security payments
attributable to contributions made by Westfield Bank. This agreement also
provides for payments upon the death or disability of the executive that are
equal in amount to the payments that would have been payable to the executive
upon retirement with such payments being made for a period of 120 months.
The following table sets forth information regarding pension benefits
accrued by the named executive officers during the last fiscal year.
PENSION BENEFITS TABLE
Number of
Years of Present Value of Payments
Credited Accumulated During Last
Service Benefit Fiscal Year
Name Plan Name (#)(1) ($)(1) ($)
- ---------------------- -------------------------- --------- --------------- ------------
Donald A. Williams Pension Plan for Employees 34.83 793,488
Deferred Compensation 1,654,518
Agreement --
Michael J. Janosco, Jr. Pension Plan for Employees 7.58 210,467 -
James C. Hagan Pension Plan for Employees 12.33 101,133 -
Allen J. Miles, III Pension Plan for Employees 8.33 44,627 -
Rebecca s. Kozaczka Pension Plan for Employees 21.08 225,747 -
- --------------------
(1) The figures shown are determined as of the plan's measurement date during 2006 under FAS 87 for purposes of
Westfield Financial's audited financial statements. For the mortality, discount rate and other assumptions
used for this purpose, please refer to Note 12 in the Notes to Consolidated Financial Statements attached
hereto.
Nonqualified Deferred Compensation
401(k) Plan. Westfield Bank maintains a 401(k) Plan, a tax-qualified
defined contribution plan, for substantially all employees of Westfield Bank
who have attained age 21 and completed at least three months of service.
Eligible employees may contribute from 1% to 75% of annual compensation to the
plan on a pre-tax basis each year, subject to limitations of the Internal
Revenue Code (for 2006 the limit was $15,000). Westfield Bank makes a matching
contribution to the plan equal to 50% of the first six percent of annual
compensation contributed to the plan on a pre-tax basis by a participant after
such participant has completed one year of service. This plan has an individual
account for each participant's contributions and allows each participant to
direct the investment of his or her account. One permitted investment is the
common stock of Westfield Financial.
92
Employee Stock Ownership Plan. The employee stock ownership plan is a
tax-qualified plan that covers substantially all employees who have completed
1,000 hours of service in a 12 month period and attained age 21. Although
contributions to this plan will be discretionary, Westfield Bank intends to
contribute enough money each year to make the required principal and interest
payments on the loan from Westfield Financial made in the initial public
offering as well as the second-step conversion. Each loan is for a term of 30
years and calls for level annual payments of principal and interest. The plan
pledges the shares it purchases as collateral for the loan and holds them in a
suspense account. The plan will not distribute the pledged shares right away.
Instead, it will release a portion of the pledged shares annually. The plan
will allocate the shares released each year among the accounts of participants
in proportion to their compensation for the year. For example, if a
participant's compensation for a year represents 1% of the total compensation
of all participants for the year, the plan would allocate to that participant
1% of the shares released for the year, subject to certain legal limitations
imposed on tax-qualified plans. Participants direct the voting of shares
allocated to their accounts. Shares in the suspense account will usually be
voted by the plan trustee in a way that mirrors the votes which participants
cast for shares in their individual accounts. This plan may purchase additional
shares in the future, and may do so using borrowed funds, cash dividends,
periodic employer contributions or other cash flow.
Benefit Restoration Plan. Westfield Financial has also established the
Benefit Restoration Plan in order to provide restorative payments to executives
who are prevented from receiving the full benefits contemplated by the employee
stock ownership plan's benefit formula as well as the 401(k) plan's benefit
formula. The restorative payments consist of payments in lieu of shares that
cannot be allocated to participants under the employee stock ownership plan due
to the legal limitations imposed on tax-qualified plans and, in the case of
participants who retire before the repayment in full of the employee stock
ownership plan's loan, payments in lieu of the shares that would have been
allocated if employment had continued through the full term of the loan. The
restorative payments also consist of amounts unable to be provided under the
401(k) plan due to certain legal limitations imposed on tax-qualified plans.
The following table sets forth information regarding nonqualified
deferred compensation earned by our named executive officers during the last
fiscal year under non-qualified defined contribution plans.
NONQUALIFIED DEFERRED COMPENSATION TABLE(1)
Executive Registrant Aggregate Aggregate
Contributions in Contributions in Earnings in Withdrawals/ Aggregate Balance
Last FY Last FY Last FY Distributions at Last FYE
Name ($)(2) ($)(3) ($)(4) ($) ($)
---- ---------------- ---------------- ----------- ------------- -----------------
Donald A. Williams -- 236,627 -- -- 1,654,518
Michael J. Janosco, Jr. -- 44,295 -- -- 210,467
James C. Hagan -- 26,870 -- -- 101,133
Allen J. Miles, III -- 13,556 -- -- 44,627
Gerald P. Ciejka -- 37,136 -- -- 225,747
93
- --------------------
(1) Non-qualified deferred compensation includes benefits provided under our
Benefit Restoration Plan.
(2) Executive contributions are included in the Summary Compensation Table
under the captions "Salary" and "Non-Equity Incentive Plan Compensation,"
as applicable.
(3) Registrant contributions are included under the caption "Change in Pension
Value and Nonqualified Deferred Compensation Earnings" in the Summary
Compensation Table.
(4) Earnings did not accrue at above-market or preferential rates and are not
reflected in the Summary Compensation Table.
Termination and Change in Control Benefits
Westfield Financial provides additional benefits, not included in the
previous tables, to the named executive officers in the event of retirement or
termination of employment in certain circumstances and in the event of a change
in control. The following table provides an estimate of the value of such
benefits, assuming termination of employment or a change in control occurred on
December 31, 2006.
Employment Agreements. Westfield Financial and Westfield Bank have
jointly entered into employment agreements with Mr. Donald A. Williams, Mr.
Michael J. Janosco, Jr. and, on January 31, 2007, James C. Hagan. For purposes
of Westfield Financial's obligations, the employment agreements of Mr. Williams
and Mr. Janosco have rolling three-year terms beginning on January 1, 2007, and
the employment agreement of Mr. Hagan has a rolling three-year term beginning
on January 30, 2007, which by decision of the executive or joint decision of
Westfield Financial and Westfield Bank may be converted to a fixed three-year
term. For purposes of Westfield Bank's obligations, the employment agreements
have fixed terms of three years beginning on the same dates as above, and may
be renewed annually after a review of the executive's performance. These
agreements provide for minimum annual salaries of $416,078, $211,484 and
$221,780, respectively, discretionary cash bonuses, and participation on
generally applicable terms and conditions in other compensation and fringe
benefit plans. They also guarantee customary corporate indemnification and
errors and omissions insurance coverage throughout the employment term and for
six years after termination. Westfield Financial and Westfield Bank may
terminate each executive's employment, and each executive may resign, at any
time with or without cause. However, in the event of termination during the
term without cause, they will owe the executive severance benefits generally
equal to the value of the cash compensation and fringe benefits that the
executive would have received if he had continued working for an additional
three years. The same severance benefits would be payable if the executive
resigns during the term following: a loss of title, office or membership on the
board of directors; material reduction in duties, functions or
responsibilities; involuntary relocation of the executive's principal place of
employment to a location over 25 miles in distance from Westfield Bank's
principal office in Westfield, Massachusetts and over 25 miles from the
executive's principal residence; or other material breach of contract by
Westfield Financial or Westfield Bank which is not cured within 30 days. For 60
days after a change in control, each executive may resign for any reason and
collect severance benefits as if he or she had been discharged without cause.
The employment agreements also provide uninsured death and disability benefits.
If Westfield Financial or Westfield Bank experiences a change in ownership, a
change in effective
94
ownership or control or a change in the ownership of a substantial portion of
their assets as contemplated by section 280G of the Internal Revenue Code, a
portion of any severance payments under the employment agreements might
constitute an "excess parachute payment" under current federal tax laws.
Federal tax laws impose a 20% excise tax, payable by the executive, on excess
parachute payments. Under the employment agreements, Westfield Financial would
reimburse each of Messrs. Williams and Janosco for the amount of this excise
tax and would make an additional gross-up payment so that, after payment of the
excise tax and all income and excise taxes imposed on the reimbursement and
gross-up payments, the executive will retain approximately the same net-after
tax amounts under the employment agreement that he or she would have retained
if there were no 20% excise tax. The effect of this provision is that Westfield
Financial, rather than the executive, bears the financial cost of the excise
tax. Neither Westfield Financial nor Westfield Bank could claim a federal
income tax deduction for an excess parachute payment, excise tax reimbursement
payment or gross-up payment.
Change of Control Agreements. Westfield Bank and Westfield Financial have
jointly entered into one-year change of control agreements with the following
executives: Gerald P. Ciejka, Rebecca S. Kozaczka, Deborah J. McCarthy, Allen
J. Miles, III, and Leo R. Sagan, Jr. The term of these agreements is perpetual
until Westfield Bank gives notice of non-extension, at which time the term is
fixed for one year. Generally, Westfield Bank may terminate the employment of
any officer covered by these agreements, with or without cause, at any time
prior to a change of control without obligation for severance benefits.
However, if Westfield Bank or Westfield Financial signs a merger or other
business combination agreement, or if a third party makes a tender offer or
initiates a proxy contest, it could not terminate an officer's employment
without cause without liability for severance benefits. The severance benefits
would generally be equal to the value of the cash compensation and fringe
benefits that the officer would have received if he or she had continued
working for an additional one year. Westfield Bank would pay the same severance
benefits if the officer resigns after a change of control following a loss of
title, office or membership on the Board of Directors, material reduction in
duties, functions or responsibilities, involuntary relocation of his or her
principal place of employment to a location over 25 miles from Westfield Bank's
principal office on the day before the change of control and over 25 miles from
the officer's principal residence or other material breach of contract which is
not cured within 30 days. These agreements also provide uninsured death and
disability benefits. If Westfield Bank or Westfield Financial experiences a
change in ownership, a change in effective ownership or control or a change in
the ownership of a substantial portion of their assets as contemplated by
section 280G of the Internal Revenue Code, a portion of any severance payments
under the change of control agreements might constitute an "excess parachute
payment" under current federal tax laws. Any excess parachute payment would be
subject to a federal excise tax payable by the officer and would be
non-deductible by Westfield Bank and Westfield Financial for federal income tax
purposes. The change of control agreements do not provide a tax indemnity.
95
Donald A. Michael J. James C. Allen J. Rebecca S.
Williams Janosco, Jr. Hagan Miles III Kozaczka
Retirement
Retiree Life Insurance (1) 17,543 12,550 4,787 3,420 10,492
Disability
Salary Continuation (2) 191,353 99,793 -- -- --
Death
Stock Option Vesting (3) 485,040 291,024 48,504 40,844 36,378
Restricted Stock Vesting (4) 339,080 203,448 69,200 27,680 58,820
Discharge Without Cause
or Resignation With Good
Reason - No Change in
Control
Stock Option Vesting (3) -- -- -- -- --
Restricted Stock Vesting (4) -- -- -- -- --
Lump Sum Cash Payment (5) 1,480,274 597,583 -- -- --
Health Insurance (6) 21,315 26,976
Discharge Without Cause
Or Resignation With Good
Reason - Change in
Control - related
Stock Option Vesting (3) 485,040 291,024 48,504 40,844 36,378
Restricted Stock Vesting (4) 339,080 203,448 69,200 27,680 58,820
Lump Sum Cash Payment (5) 1,480,274 597,583 209,431 145,466 108,091
Health Insurance (6) 21,315 26,976 10,008 10,008 10,008
ESOP Restoration Plan
Benefit (7) 359,148 195,200 169,835 121,394 102,461
Golden Parachute Excise
Tax Gross-up Payment (8) 754,555 325,648 -- --- --
Change in Control - No
Termination of
Employment
Stock Option Vesting (3) 485,040 291,024 48,504 40,844 36,378
Restricted Stock Vesting (4) 339,080 203,448 69,200 27,680 58,820
ESOP Restoration Plan
Benefit (7) 359,148 195,200 169,835 121,394 102,461
96
- --------------------
(1) The reported figure reflects the estimated present value of the future
premium cost of such benefits for the named individual, calculated on the
basis of the assumptions used by Westfield Financial in measuring its
liability for such benefits for financial statement purposes under
Statement of Financial Account Standards No. 106 ("FAS 106"). For more
information concerning the assumptions used for these calculations, please
refer to Note 12 in the Notes to Consolidated Financial Statements
attached hereto.
(2) The employment agreements in effect for Messrs. Williams and Janosco
provide for salary continuation payments following termination due to
disability for the remaining contract term or until group long-term
disability benefits begin. The figures shown assume payment of full salary
for 180 days, equal to the waiting period for benefits under our group
long-term disability program, without discount for present value.
(3) All stock options granted under the 2002 Stock Option Plan provide for
full vesting upon death, disability, retirement, or change in control. The
figures shown reflect the in-the-money value of those stock options that
would accelerate, calculated based on the positive difference between the
option exercise price and the closing sales price for a share of our
common stock on December 29, 2006.
(4) All restricted stock granted under the 2002 Recognition and Retention Plan
provide for full vesting upon death, disability, retirement or change in
control. The figures shown reflect the value of those restricted stock
awards that would accelerate, calculated based on the closing sales price
for a share of our common stock on December 29, 2006.
(5) The employment agreements in effect for Messrs. Williams and Janosco
provide for a lump sum cash payment equal to the present value of the
salary payments, estimated cash incentives (based on the prior
three-years' cash incentives, as a percentage of salary), and additional
qualified and non-qualified defined benefit and defined contribution plan
benefits that would be earned during the remaining contract term. The
figure shown reflects an assumed remaining contract term of 3 years and a
discount rate of 5.75%. Similarly, individuals with change of control
contracts are paid cash severance for a one year period.
(6) The employment agreements in effect for Messrs. Williams and Janosco
provide for continued health, life and other insurance benefits for the
remaining contract term, with an offset for benefits provided by a
subsequent employer. The change of control agreements with other officers
also provide continued health, life and other insurance benefits for a
maximum period of one year. The figure shown represents the present value
of continued insurance benefits for a fixed period of three years and
assumes no offset for benefits provided by a subsequent employer,
calculated on the basis of the assumptions used by Westfield Financial in
measuring its liability for retiree benefits other than pensions for
financial statement purposes under FAS 106. For more information
concerning the assumptions used for these calculations, please refer to
Note 12 in the Notes to Consolidated Financial Statements attached hereto.
(7) Westfield Financial's tax-qualified employee stock ownership plan provides
that, in the event of a change in control, a portion of the proceeds from
the sale of shares of our common stock held in a suspense account for
future allocation to employees would be applied to repay the outstanding
balance on the loan used to purchase the unallocated shares. The remaining
unallocated shares (or the proceeds from their sale) would be distributed
on a pro-rata basis among the accounts of plan participants. Westfield
Financial estimates this distribution to be approximately $18.17 per
allocated share, based on 91,353 allocated shares, 306,454 unallocated
shares, an outstanding loan balance of $5,036,213 and stock price of
$18.17 per share, which is the closing sales price for a share on December
29, 2006. Under the terms of Westfield Financial's Benefit Restoration
Plan, a corresponding earnings credit would be applied to accumulated
share equivalents under this plan. The figures shown represent an
estimated earnings credit of $18.17 per share equivalent credited to each
of the named individuals who participate in the Benefit Restoration Plan.
(8) The employment agreements in effect for Messrs. Williams and Janosco
provide that Westfield Financial will indemnify them, on a net after-tax
basis, against the effects of a 20% federal excise tax that is applied to
payments that are contingent on a change in control, where the aggregate
value of such payments equals or exceeds three times the individual's
average five-year W-2 earnings for the period of five consecutive calendar
years ending prior to the date of the change in control. The figure shown
reflects an estimate of the indemnification payment that would be due to
each named individual.
97
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Principal Shareholders of Westfield Financial
The following table contains common stock ownership information for
persons known to Westfield Financial to "beneficially own" 5% or more of
Westfield Financial's common stock as of January 3, 2007. In general,
beneficial ownership includes those shares that a person has the power to vote,
sell or otherwise dispose of. Beneficial ownership also includes that number of
shares that an individual has the right to acquire within 60 days (such as
stock options) after January 3, 2007. Two or more persons may be considered the
beneficial owner of the same shares. Westfield Financial obtained the
information provided in the following table from filings with the SEC and from
Westfield Financial.
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent
- ----------------------- --------------------------------------- -------------------- -------
Common Stock, par value Employee Stock Ownership Plan Trust of 2,027,029(1) 6.4%
$0.01 per share Westfield Financial, Inc.
141 Elm Street
Westfield, MA 01085
- --------------------
(1) The Employee Stock Ownership Plan of Westfield Financial, Inc. (the "ESOP") is a tax qualified employee
stock ownership plan under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with
individual accounts for the accrued benefits of participating employees and their beneficiaries. The ESOP
is administered by an ESOP Committee ("ESOP Committee"). The ESOP's assets are held in trust by First
Bankers Trust Services, Inc., as plan trustee (the "Plan Trustee"). The number of shares listed as
beneficially owned represents the entire number of shares of Westfield Financial common stock held by the
Plan Trustee as of January 3, 2007. As of January 3, 2007, 285,455 of such shares of Westfield Financial
common stock had been allocated to individual accounts established for participating employees and their
beneficiaries, and 1,741,574 of such shares were held, unallocated, for allocation in future years. In
general, participating employees and their beneficiaries have the power and authority to direct the voting
of shares of Westfield Financial common stock allocated to their individual accounts. The ESOP, through the
Plan Trustee, has shared voting power over unallocated Westfield Financial common stock. Any unallocated
Westfield Financial common stock is generally required to be voted by the Plan Trustee in the same
proportion as Westfield Financial common stock which has been allocated to Participants is directed to be
voted. The reporting person, through the Plan Trustee (who is instructed by the ESOP Committee) shares
dispositive power over all unallocated Westfield Financial common stock held by the ESOP. The ESOP, acting
through the Plan Trustee (who is instructed by the ESOP Committee) shares dispositive power over allocated
Westfield Financial common stock with participating employees and their beneficiaries, who have the right
to determine whether Westfield Financial common stock allocated to their respective accounts will be
tendered in response to a tender offer but otherwise have no dispositive power. Any unallocated Westfield
Financial common stock is generally required to be tendered by the Plan Trustee in the same proportion as
Westfield Financial common stock which has been allocated to Participants is directed to be tendered. In
limited circumstances, ERISA may confer upon the Plan Trustee the power and duty to control the voting and
tendering of Westfield Financial common stock allocated to the accounts of participating employees and
beneficiaries who fail to exercise their voting and/or tender rights. The ESOP disclaims voting power with
respect to such allocated Westfield Financial common stock.
98
Security Ownership of Management
The following table shows the number of shares of Westfield Financial's
common stock beneficially owned by each director, each named executive officer,
and all directors and executive officers of Westfield Financial as a group, as
of January 3, 2007. Except as otherwise indicated, each person and each group
shown in the table has sole voting and investment power with respect to the
shares of common stock listed next to his or her name.
Amount and Nature of
Position with Beneficial Percent of Common
Name Westfield Financial Ownership(1)(2)(3)(4)(5) Stock Outstanding
- ------------------------- --------------------------- ----------------------- -----------------
Victor J. Carra Director 228,679(6) *
David C. Colton, Jr. Director 69,942(7) *
Robert T. Crowley, Jr. Director 63,734(8) *
James C. Hagan President and Chief 68,940 *
Operating Officer
Michael J. Janosco, Jr. Chief Financial Officer and 374,032(9) 1.2%
Treasurer
Rebecca S. Kozaczka Vice President 55,750 *
Harry C. Lane Director 55,530 *
William H. McClure Director 69,375(10) *
Allen J. Miles, III Senior Vice President and 17,402 *
Chief Lending Officer
Mary C. O'Neil Director 53,343(11) *
Richard C. Placek Director 71,940(12) *
Paul R. Pohl Director 83,325(13) *
Charles E. Sullivan Director 81,500(14) *
Thomas C. Sullivan Director 137,565 *
Donald A. Williams Chairman and Chief Executive 631,649(15) 2.0%
Officer
Other Executive Officers 1,823,808(16) 5.7%
and ESOP
All Executive Officers 3,877,980 11.8%
and Directors as a Group
(18 Persons)
- --------------------
* Less than one percent of the total outstanding shares of common stock.
(1) See "Principal Shareholders of Westfield Financial" for definition of
"beneficial ownership."
(2) Based on a total of 31,923,903 shares of Westfield Financial's Common
Stock outstanding as of January 3, 2007.
(3) Includes unvested shares of restricted stock awards held in trust as part
of the Westfield Financial, Inc. 2002 Recognition and Retention Plan (the
"RRP"), with respect to which the beneficial owner has voting but not
investment power as follows: Messrs. Colton, Crowley, Lane, McClure,
Placek, Pohl, C. Sullivan, T. Sullivan and Ms. O'Neil each - 3,281 shares;
Mr. Hagan - 6,563 shares; Mr. Janosco - 19,294 shares; Ms. Kozaczka -
5,578 shares; Mr. Miles - 656 shares and Mr. Williams - 32,157 shares.
99
(4) Includes shares allocated to the account of the individuals under the
Westfield Financial, Inc. Employee Stock Ownership Plan (the "ESOP") with
respect to which each individual has voting but not investment powers as
follows; Mr. Carra - 6,634 shares; Mr. Janosco - 8,154 shares; Mr. Hagan -
6,526 shares; Ms. Kozaczka - 4,561 shares; Mr. Miles - 4,931 shares and
Mr. Williams - 8,861 shares. Includes shares held in trust in Westfield
Bank's 401(k) Plan as to which each participant has investment but not
voting powers as follows: Mr. Carra - 44,423 shares; Mr. Hagan - 6,764
shares; Mr. Janosco - 17,000 shares; Ms. Kozaczka - 5,252 shares; Mr.
Miles - 5,909 shares and Mr. Williams - 34,756 shares.
(5) Includes 34,124 shares of common stock which may be acquired by each of
Messrs. Colton, Crowley, Lane, McClure, Pohl, C. Sullivan, T. Sullivan and
Ms. O'Neil, and 25,595 shares of common stock which may be acquired by Mr.
Placek, pursuant to vested options granted to them under the 2002 Stock
Option Plan (the "Stock Option Plan"). Also includes shares of common
stock which may be acquired pursuant to vested options issued under the
Stock Option Plan as follows: Mr. Hagan - 31,500 shares; Mr. Janosco -
189,004 shares; Ms. Kozaczka - 23,626 shares; Mr. Miles - 3,281 shares and
Mr. Williams -315,012 shares.
(6) Includes 2,263 shares held in an individual retirement account ("IRA") for
the benefit of Mr. Carra's spouse, 2,723 shares held in an IRA for the
benefit of Mr. Carra, and 24,935 shares held jointly with Mr. Carra's
spouse.
(7) Includes 4,698 shares held in an IRA for the benefit for Mr. Colton's
spouse, 3,071 shares held in an IRA for the benefit of Mr. Colton, and
1,640 shares held jointly with Mr. Colton's spouse.
(8) Includes 8,203 shares held jointly with Mr. Crowley's spouse.
(9) Includes 66,543 shares held jointly with Mr. Janosco's spouse, and 54,742
shares held in an IRA for the benefit of Mr. Janosco.
(10) Includes 9,844 shares held jointly with Mr. McClure's spouse.
(11) Includes 1,500 shares held jointly by Ms. O'Neil's spouse and 1,312 shares
held jointly with Ms. O'Neil's spouse.
(12) Includes 19,235 shares held by Mr. Placek's spouse
(13) Includes 32,796 shares held jointly with Mr. Pohl's spouse.
(14) Includes 13,844 shares held in an IRA for the benefit of Mr. Sullivan.
(15) Includes 67,924 shares held jointly with Mr. Williams' spouse, 18,539
shares held in an IRA for the benefit of Mr. Williams, 18,769 shares held
in an IRA for the benefit of Mr. Williams' spouse, and 7,000 shares by the
Karen F. Williams 2004 Family Trust.
(16) The figures shown for each of the executive officers named in the table do
not include 1,741,574 shares held in trust pursuant to the ESOP that have
not been allocated as of January 3, 2007 to any individual's account and
as to which each of the executive officers named in the table share voting
powers with the other ESOP participants. The figure shown for all
directors and executive officers as a group includes 1,741,574 shares as
to which members of Westfield Financial's Compensation Committee
(consisting of Messrs. Carra, Pohl and T. Sullivan) may be deemed to have
sole investment power, except in limited circumstances, thereby causing
each such member to be deemed a beneficial owner of such shares. Each of
the members of the Compensation Committee disclaims beneficial ownership
of such shares and, accordingly, such shares are not attributed to the
members of the Compensation Committee individually.
100
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Transactions with Certain Related Persons
Westfield Bank makes loans to its executive officers, employees and
directors. These loans are made in the ordinary course of business and on the
same terms and conditions as those of comparable transactions with the general
public prevailing at the time, in accordance with our underwriting guidelines,
and do not involve more than the normal risk of collectibility or present other
unfavorable features. At December 31, 2006, loans to non-employee directors and
their associates totaled $12.9 million.
Director Independence
Westfield Financial has determined Directors Crowley, Colton, Lane,
McClure, O'Neil, Placek, Pohl, C. Sullivan and T. Sullivan are independent as
defined under the American Stock Exchange listing standards. In addition, all
members of the Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee are independent as defined under the American
Stock Exchange listing standards.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Principal Accounting Fees and Services
During the fiscal years ended December 31, 2006 and December 31, 2005,
respectively, Westfield Financial retained and paid Wolf & Company, P.C. to
provide audit and other services as follows:
Audit Fees
2006 (3) 2005
-------- --------
Audit (1) $348,100 $249,000
Audit-Related Fees -- --
Tax Fees(2) 28,100 58,000
All Other Fees -- --
-------- --------
Total $376,200 $307,000
======== ========
- --------------------
(1) Audit fees consisted of audit work performed in the preparation of
financial statements as well as work generally only the independent
auditors can reasonably be expected to provide, such as statutory audits.
(2) Tax fees consisted of assistance with matters related to tax compliance
and counseling.
(3) Includes fees associated with second step stock conversion.
101
Preapproval Policies and Procedures
Preapproval of Services. The Audit Committee shall preapprove all
auditing services and permitted non-audit services (including the fees and
terms) to be performed for Westfield Financial by its independent registered
public accounting firm, subject to the de minimis exception for non-audit
services described below which are approved by the Committee prior to
completion of the audit.
Exception. The preapproval requirement set forth above shall not be
applicable with respect to non-audit services if:
(i) The aggregate amount of all such services provided constitutes no
more than five percent of the total amount of revenues paid by
Westfield Financial to its auditor during the fiscal year in which
the services are provided;
(ii) Such services were not recognized by Westfield Financial at the
time of the engagement to be non-audit services; and
(iii) Such services are promptly brought to the attention of the
Committee and approved prior to the completion of the audit by the
Committee or by one or more members of the Committee who are
members of the Board of Directors to whom authority to grant such
approvals has been delegated by the Committee.
Delegation. The Committee may delegate to one or more designated members
of the Committee the authority to grant required preapprovals. The decisions of
any member to whom authority is delegated under this paragraph to preapprove
activities under this subsection shall be presented to the full Committee at
its next scheduled meeting.
The Audit Committee preapproved 100% of the services performed by the
independent registered public accounting firm pursuant to the policies outlined
above.
102
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Financial Statements
Reference is made to the Consolidated Financial Statements included in
Item 8 of Part II hereof.
b. Exhibits
2.1 Amended and Restated Plan of Conversion and Stock Issuance of
Westfield Mutual Holding Company, Westfield Financial, Inc. and
Westfield Bank. (1)
3.1 Articles of Organization of Westfield Financial, Inc. (2)
3.2 Bylaws of Westfield Financial, Inc. (2)
4.1 Form of Stock Certificate of Westfield Financial, Inc. (1)
10.1 Form of Employee Stock Ownership Plan of Westfield Financial, Inc. (3)
10.2 Amendments to the Employee Stock Ownership Plan of Westfield
Financial, Inc. (4)
10.3 Form of Director's Deferred Compensation Plan. (5)
10.4 The 401(k) Plan adopted by Westfield Bank. (6)
10.5 Form of Benefit Restoration Plan of Westfield Financial, Inc. (5)
10.6 Form of Amended and Restated Deferred Compensation Agreement with
Donald A. Williams. (5)
10.7 Form of Employment Agreement between Donald A. Williams and Westfield
Bank. (1)
10.8 Form of Employment Agreement between Michael J. Janosco, Jr. and
Westfield Bank. (1)
10.9 Form of Employment Agreement between James C. Hagan and Westfield
Bank. (1)
10.10 Form of Employment Agreement between Donald A. Williams and New
Westfield Financial, Inc. (1)
10.11 Form of Employment Agreement between Michael J. Janosco, Jr. and New
Westfield Financial, Inc. (1)
10.12 Form of Employment Agreement between James C. Hagan and New Westfield
Financial, Inc. (1)
10.13 Form of One Year Change in Control Agreement by and among certain
officers and New Westfield Financial, Inc. and Westfield Bank. (1)
103
10.14 Agreement between Westfield Bank and Village Mortgage Company. (1)
14.1 Code of Ethics. (7)
23.1 Consent of Wolf & Company, P.C.
31.1 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
- --------------------
(1) Incorporated by reference to the Registration Statement No. 333-137024 on
Form S-1 filed with the Securities and Exchange Commission on August 31,
2006, as amended.
(2) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007.
(3) Incorporated herein by reference to the Registration Statement No.
333-68550 on Form S-1 filed with the Securities and Exchange Commission on
August 28, 2001, as amended.
(4) Incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 2002 filed with the Securities and Exchange Commission
on March 31, 2003.
(5) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on December 22, 2005.
(6) 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
Securities and Exchange Commission on April 28, 2006.
(7) Incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 2004 filed with the Securities and Exchange Commission
on March 15, 2005.
104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 15, 2007.
WESTFIELD FINANCIAL, INC.
By: /s/ Donald A. Williams
--------------------------------
Donald A. Williams
Chairman and Chief Executive Officer
105
Pursuant to the requirements of the Securities Act of 1933, as amended,
and any rules and regulations promulgated thereunder, this Annual Report on
Form 10-K, has been signed by the following persons in the capacities and on
the dates indicated.
Name Title Date
---- ----- ----
/s/ Donald A. Williams Chairman and Chief Executive Officer March 15, 2007
- --------------------------- (Principal Executive Officer)
Donald A. Williams
/s/ Michael J. Janosco, Jr. Chief Financial Officer and Treasurer March 15, 2007
- --------------------------- (Principal Accounting Officer)
Michael J. Janosco, Jr.
/s/ Victor J. Carra Director March 15, 2007
- ---------------------------
Victor J. Carra
/s/ David C. Colton, Jr. Director March 15, 2007
- ---------------------------
David C. Colton, Jr.
/s/ Robert T. Crowley, Jr. Director March 15, 2007
- ---------------------------
Robert T. Crowley, Jr.
/s/ Harry C. Lane Director March 15, 2007
- ---------------------------
Harry C. Lane
/s/ William H. McClure Director March 15, 2007
- ---------------------------
William H. McClure
/s/ Mary C. O'Neil Director March 15, 2007
- ---------------------------
Mary C. O'Neil
/s/ Richard C. Placek Director March 15, 2007
- ---------------------------
Richard C. Placek
/s/ Paul R. Pohl Director March 15, 2007
- ---------------------------
Paul R. Pohl
/s/ Charles E. Sullivan Director March 15, 2007
- ---------------------------
Charles E. Sullivan
/s/ Thomas C. Sullivan Director March 15, 2007
- ---------------------------
Thomas C. Sullivan
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Westfield Financial, Inc.
We have audited the accompanying consolidated balance sheets of Westfield
Financial, Inc. and subsidiaries (the "Company") as of December 31, 2006 and
2005, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the 2006 and 2005 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Westfield Financial, Inc. and subsidiaries as of December 31, 2006 and 2005,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2006 in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Accounting
Oversight Board (United States), the effectiveness of Westfield Financial, Inc.
and subsidiaries' internal control over financial reporting as of December 31,
2006 based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 9, 2007 expressed an unqualified opinion on
management's assessment of the effectiveness of Westfield Financial, Inc.'s
internal control over financial reporting and an unqualified opinion on the
effectiveness of Westfield Financial, Inc.'s internal control over financial
reporting.
WOLF & COMPANY, P.C.
Boston, Massachusetts
March 9, 2007
F-1
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 31,
---------------------
2006 2005
---- ----
ASSETS
CASH AND DUE FROM BANKS $ 51,645 $ 18,136
FEDERAL FUNDS SOLD 97,659 5,090
INTEREST-BEARING DEPOSITS AND OTHER SHORT TERM INVESTMENTS 5,204 3,230
-------- --------
CASH AND CASH EQUIVALENTS 154,508 26,456
-------- --------
SECURITIES:
Available for Sale - at estimated fair value 41,687 28,321
Held to Maturity - at amortized cost (estimated fair value of
$76,938 at December 31, 2006 and $72,704 at December 31, 2005) 77,299 73,323
MORTGAGE-BACKED SECURITIES:
Available for Sale - at estimated fair value 126,942 101,138
Held to Maturity - at amortized cost (estimated fair value of
$160,709 at December 31, 2006 and $149,017 at December 31, 2005) 163,093 152,127
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK-AT COST 4,246 4,237
LOANS - Net of allowance for loan losses of $5,437 at
December 31, 2006 and $5,422 at December 31, 2005 385,184 378,837
PREMISES AND EQUIPMENT - NET 12,247 11,048
ACCRUED INTEREST RECEIVABLE 4,502 3,853
BANK-OWNED LIFE INSURANCE 20,619 19,819
OTHER ASSETS 6,502 5,936
-------- --------
TOTAL ASSETS $996,829 $805,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
DEPOSITS:
Noninterest-bearing $ 42,383 $ 45,260
Interest-bearing 585,083 577,785
-------- --------
Total deposits 627,466 623,045
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 17,919 14,441
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 55,000 45,000
OTHER LIABILITIES 7,036 6,767
-------- --------
TOTAL LIABILITIES 707,421 689,253
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at December 31, 2006 and 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 December 31, 2006 and December 31, 2005, respectively (see Note 23) 274 98
Additional paid-in capital (see Note 23) 201,736 30,120
Unallocated common stock of Employee Stock Ownership Plan (4,835) (5,127)
Unearned compensation (405) (861)
Retained earnings 93,364 92,789
Accumulated other comprehensive loss (726) (1,177)
-------- --------
Total stockholders' equity 289,408 115,842
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $996,829 $805,095
======== ========
See notes to consolidated financial statements.
F-2
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Years Ended December 31,
-------------------------------
2006 2005 2004
---- ---- ----
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $17,551 $15,901 $14,644
Debt securities, taxable 14,396 11,829 11,660
Commercial and industrial loans 7,475 6,409 5,087
Debt securities, tax-exempt 1,230 1,200 1,065
Federal funds sold 770 788 288
Marketable equity securities 501 404 355
Consumer loans 410 631 1,212
Interest-bearing deposits and other short term investments 102 144 117
------- ------- -------
Total interest and dividend income 42,435 37,306 34,428
------- ------- -------
INTEREST EXPENSE:
Deposits 17,268 11,813 9,625
Customer repurchase agreements 438 312 195
Federal Home Loan Bank advances 1,845 1,472 1,093
------- ------- -------
Total interest expense 19,551 13,597 10,913
------- ------- -------
Net interest and dividend income 22,884 23,709 23,515
PROVISION FOR LOAN LOSSES 390 465 750
------- ------- -------
Net interest and dividend income after
provision for loan losses 22,494 23,244 22,765
------- ------- -------
NONINTEREST INCOME:
Income from bank-owned life insurance 800 758 741
Service charges and fees 2,651 2,595 2,278
Gains on sales and writedowns of securities, net - 19 877
Loss on sale of fixed assets, net 378 - -
------- ------- -------
Total noninterest income 3,073 3,372 3,896
------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 11,985 11,155 10,753
Occupancy 2,060 1,927 1,808
Computer operations 1,446 1,557 1,582
Professional fees 1,081 943 893
Stationery, supplies and postage 510 522 530
Other 2,308 2,360 2,210
------- ------- -------
Total noninterest expense 19,390 18,464 17,776
------- ------- -------
INCOME BEFORE INCOME TAXES 6,177 8,152 8,885
INCOME TAXES 1,523 1,933 2,562
------- ------- -------
NET INCOME $ 4,654 $ 6,219 $ 6,323
======= ======= =======
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.50 $ 0.66 $ 0.65
Diluted earnings per share $ 0.49 $ 0.64 $ 0.64
See notes to consolidated financial statements.
F-3
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
Restricted Accumulated
Additional Stock Other
Common Stock Paid-In Unallocated Unearned Retained Comprehensive
Shares Amount Capital ESOP Compensation Earnings (Loss) Income Total
------ ------ ---------- ----------- ------------ -------- ------------- --------
BALANCE, JANUARY 1, 2004 10,522,300 $105 $ 46,048 $(5,837) $(2,094) $85,794 $ 788 $124,804
--------
Comprehensive income:
Net income - - - - - 6,323 - 6,323
Unrealized losses on
securities arising
during the year, net
of tax benefit of $161 - - - - - - (324) (324)
Reclassification for
gains included in net
income, net of taxes
of $291 - - - - - - (586) (586)
--------
Comprehensive income - - - - - - - 5,413
--------
Shared-based compensation - - 516 410 551 - - 1,477
Common stock repurchased (569,588) (6) (11,950) - - - - (11,956)
Issuance of common stock
in connection with stock
option exercises 1,800 1 30 - - (5) - 26
Cash dividends declared
($0.30 per share) - - - - - (1,713) - (1,713)
---------- ---- -------- ------- ------- ------- ------- --------
BALANCE, DECEMBER 31, 2004 9,954,512 100 34,644 (5,427) (1,543) 90,399 (122) 118,051
--------
Comprehensive income:
Net income - - - - - 6,219 - 6,219
Unrealized losses on
securities arising
during the year, net
of tax benefit of $622 - - - - - - (1,043) (1,043)
Reclassification for
gains included in net
income, net of taxes
of $7 - - - - - - (12) (12)
--------
Comprehensive income - - - - - - - 5,164
--------
Shared-based compensation - - 361 300 682 - - 1,343
Common stock repurchased (237,400) (2) (5,697) - - - - (5,699)
Issuance of common stock
in connection with stock
option exercises 37,645 - 812 - - (271) - 541
Cash dividends declared
($0.90 per share) - - - - - (3,558) - (3,558)
--------
BALANCE, DECEMBER 31, 2005 9,754,757 98 30,120 (5,127) (861) 92,789 (1,177) 115,842
---------- ---- -------- ------- ------- ------- ------- --------
Comprehensive income:
Net income - - - - - 4,654 - 4,654
Unrealized losses on
securities arising
during the year, net
of tax benefit of $204 - - - - - - 374 374
--------
Comprehensive income 5,028
--------
Adjustment to initially
apply FASB Statement
No. 158, net of tax
benefit of $40 - - - - - - 77 77
Net proceeds from sale
of common stock - 177 171,535 - - - - 171,712
Share-based compensation - - 546 292 456 - - 1,294
Excess tax benefits from
share-based compensation - - 260 - - - - 260
Common stock repurchased (65,000) (1) (1,582) - - - - (1,583)
Issuance of common stock
in connection with stock
option exercises 39,155 - 857 - - (294) - 563
Cash dividends declared
($1.00 per share) - - - - - (3,785) - (3,785)
---------- ---- -------- ------- ------- ------- ------- --------
BALANCE, DECEMBER 31, 2006 9,728,912 $274 $201,736 $(4,835) $ (405) $93,364 $ (726) $289,408
========== ==== ======== ======= ======= ======= ======= ========
See notes to consolidated financial statements.
F-4
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
------------------------------------
2006 2005 2004
---- ---- ----
OPERATING ACTIVITIES:
Net Income $ 4,654 $ 6,219 $ 6,323
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 390 465 750
Depreciation and amortization of premises and equipment 1,030 950 1,003
Net amortization of premiums and discounts on securities,
mortgage backed securities and mortgage loans 657 1,080 1,452
Shared-based compensation expense 2,075 1,678 1,962
Excess tax benefits from share-based compensation (260) - -
Loss on sale of fixed assets, net 378 - -
Gains on sales and writedown of securities, net - (19) (877)
Deferred income tax benefit (256) (334) (615)
Income from bank-owned life insurance (800) (758) (741)
Changes in assets and liabilities:
Accrued interest receivable (649) (302) 4
Other assets (436) 857 748
Other liabilities 270 151 155
-------- -------- --------
Net cash provided by operating activities 7,053 9,987 10,164
-------- -------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (17,097) (11,131) (18,473)
Proceeds from maturities and principal collections 13,000 9,000 17,000
Securities, available for sale:
Purchases (21,295) (17,982) (5,332)
Proceeds from sales 5,000 3,833 11,891
Proceeds from calls, maturities and principal collections 3,000 548 4,155
Mortgage-backed securities, held to maturity:
Purchases (48,727) (24,979) (39,255)
Principal collections 37,368 47,528 54,687
Mortgage-backed securities, available for sale:
Purchases (51,720) (71,791) (41,110)
Proceeds from sales - 16,962 20,325
Principal collections 26,307 25,305 22,943
Purchase of Federal Home Loan Bank of Boston and other stock (9) - -
Purchase of residential mortgages (11,845) (1,236) (35,294)
Net decrease (increase) in loans 5,080 (9,528) 10,864
Purchases of premises and equipment (2,618) (493) (734)
Proceeds from sale of fixed assets 10 - -
Purchase of bank-owned life insurance - - (1,813)
-------- -------- --------
Net cash (used in) provided by investing activities (63,546) (35,777) 1,667
-------- -------- --------
FINANCING ACTIVITIES:
Increase (decrease) in deposits 4,421 10,424 (19,810)
Increase (decrease) in customer repurchase agreements 3,478 (174) 2,480
Repayment of Federal Home Loan Bank of Boston advances (10,000) (5,000) -
Advances from Federal Home Loan Bank of Boston 20,000 5,000 25,000
Net proceeds from sale of common stock 171,712 - -
Cash dividends paid (3,785) (3,558) (1,713)
Common stock repurchased (1,583) (5,699) (11,956)
Issuance of common stock in connection with stock option exercises 563 541 26
Purchase of common stock in connection with employee benefit program (521) (335) (485)
Excess tax benefits from share-based compensation 260 - -
-------- -------- --------
Net cash provided by (used in) financing activities 184,545 1,199 (6,458)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS: 128,052 (24,591) 5,373
Beginning of year 26,456 51,047 45,674
-------- -------- --------
End of year $154,508 $ 26,456 $ 51,047
======== ======== ========
See notes to consolidated financial statements.
F-5
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation - Westfield Financial,
Inc. (the "Company") is a Massachusetts 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 10
branches in western Massachusetts. The Bank's primary source of revenue
is earned from 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
Corporation in order to streamline operations.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, the Bank, and Elm Street Securities
Corporation, as well as Westfield Securities Corp., 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 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 allowance for loan losses and other
than temporary impairment of investment securities.
Cash and Cash Equivalents - The Company defines cash on hand, cash due
from banks, federal funds sold and interest bearing deposits having an
original maturity of 90 days or less as cash and cash equivalents. Cash
and due from banks at December 31, 2006 and 2005 includes partially
restricted cash of approximately $417,000, and $291,000 respectively, for
Federal Reserve Bank of Boston cash reserve requirements.
F-6
Securities and Mortgage-Backed Securities - Debt 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 comprehensive income.
The Company does not acquire securities and mortgage-backed securities
for purposes of engaging in trading activities.
Realized gains and losses on sales of securities and mortgage-backed
securities are computed using the specific identification method and are
included in noninterest income. The amortization of premiums and
accretion of discounts is determined by using the level yield method to
the maturity date.
Other than Temporary Impairment of Securities - On a quarterly basis, the
Company reviews 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 Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
Loans - Loans are recorded at the principal amount outstanding. Interest
on loans is calculated using the effective yield method on daily balances
of the principal amount outstanding and is credited to income on the
accrual basis to the extent it is deemed collectible. The Company's
general policy is to discontinue the accrual of interest when principal
or interest payments are delinquent 90 days or more based on the
contractual terms of the loan, 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 the principal balance is not in question.
Loans are returned to accrual status when they become current as to both
principal and interest and when subsequent performance reduces the
concern as to the collectibility of principal and interest. Loan fees and
certain direct loan origination costs are deferred, and the net fee or
cost is recognized as an adjustment to interest income over the estimated
average lives of the related loans. Compensation to an auto dealer is
normally based upon a spread that a dealer adds on the loan base rate set
by the Company. The compensation is paid to an automobile dealer shortly
after the loan is originated. The Company records the amount as a
deferred cost that is amortized against interest income over the life of
the loans in relation to the interest paid by the customer.
Allowance for Loan Losses - The allowance for loan losses is established
through provisions for loan losses charged to expense. Loans are charged
off against the allowance when management believes that the
collectibility of the principal is unlikely. Recoveries of amounts
previously charged-off are credited to the allowance.
The Bank maintains an allowance for loan losses to absorb losses inherent
in the loan portfolio based on ongoing quarterly assessments of the
estimated losses. The Bank's methodology for assessing the
appropriateness of the allowance consists of two key components, which
are a specific allowance for identified problem loans and a formula
allowance for the remainder of the portfolio. The specific allowance
incorporates the results of measuring impaired loans as provided in
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -
F-7
Income Recognition and Disclosures." These accounting standards prescribe
the measurement methods, income recognition and disclosures related to
impaired loans. Measurement of impairment can be based on the present
value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of
the collateral, if the loan is collateral dependent. This evaluation is
inherently subjective as it requires material estimates that may be
susceptible to significant change. The appropriateness of the allowance
is also reviewed by management based upon its evaluation of then-existing
economic and business conditions affecting the key lending areas of the
Company and other conditions, such as new loan products, credit quality
trends (including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments that existed as of
the balance sheet date and the impact that such conditions were believed
to have had on the collectibility of the loan portfolio. Although
management believes it has established and maintained the allowance for
loan losses at appropriate levels, future adjustments may be necessary if
economic, real estate and other conditions differ substantially from the
current operating environment.
A loan is recognized as impaired when it is probable that principal
and/or interest are not collectible in accordance with the loan's
contractual terms. A loan is not deemed to be impaired if there is a
short delay in receipt of payment or if, during a longer period of delay,
the Company expects to collect all amounts due including interest accrued
at the contractual rate during the period of delay. 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. If the fair value of the impaired loan is less than the related
recorded amount, a specific valuation allowance is established within the
allowance for loan losses or a writedown is charged against the allowance
for loan losses if the impairment is considered to be permanent.
Measurement of impairment does not apply to large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment
such as the Company's portfolios of consumer and residential real estate
loans.
In addition, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews the loan and foreclosed real
estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. The Office of Thrift Supervision
may require adjustment to the allowance for loan losses based on their
judgments of information available to them at the time of their
examination, thereby adversely affecting results of operations.
Management believes that the allowance for loan losses accurately
reflects estimated credit losses for specifically identified loans, as
well as probable credit losses inherent in the remainder of the portfolio
as of the end of the years presented.
F-8
Transfers and Servicing of Financial Assets - Transfers of financial
assets are accounted for as sales, when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
Premises and Equipment - Land is carried at cost. Buildings and equipment
are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of
the assets, or the expected lease term, if shorter. Expected terms
include lease option periods to the extent that the exercise of such
options is reasonably assured.
The cost of maintenance and repairs is charged to expense when incurred.
Major expenditures for betterments are capitalized and depreciated.
Other Real Estate Owned - Other real estate owned represents property
acquired through foreclosure or deeded to the Company in lieu of
foreclosure. Other real estate owned is recorded at the lower of the
carrying value of the related loan, or the estimated fair value of the
real estate acquired, net of estimated selling costs. Initial write-downs
are charged to the allowance for loan losses at the time the loan is
transferred to other real estate owned. Subsequent valuations are
periodically performed by management and the carrying value is adjusted
by a charge to expense to reflect any subsequent declines in the
estimated fair value. Operating costs associated with other real estate
owned are expensed as incurred. There was no other real estate owned at
December 31, 2006 and 2005, respectively.
Retirement Plans and Employee Benefits - The Company provides a defined
benefit pension plan for eligible employees through membership in the
Savings Banks Employees Retirement Association ("SBERA"). The Company's
policy is to fund pension cost as accrued. Employees are also eligible to
participate in a 401(k) plan through SBERA. The Company makes matching
contributions to this plan at 50% of up to 6% of the employees' eligible
compensation.
The Company currently offers postretirement life insurance benefits to
retired employees. Such postretirement benefits represent a form of
deferred compensation which requires that the cost and obligations of
such benefits are recognized in the period in which services are
rendered.
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Post Retirement Plans" ("SFAS 158"), which requires
employers to (a) recognize in its statement of financial position the
funded status of a benefit plan, (b) measure a plan's assets and its
obligations that determine its funded status as of the end of the
employer's fiscal year, (c) recognize, through other comprehensive
income, net of tax, changes in the funded status of the benefit plan that
are not recognized as net periodic benefit cost, and (d) disclose
additional information about certain effects on net periodic benefit cost
for the next fiscal year that relate to the delayed recognition of
certain benefit cost elements. The requirement to recognize the funded
status of a benefit plan and provide additional disclosures is effective
as of December 31, 2006.
F-9
The following table illustrates the incremental effect of applying SFAS
158 on individual line items in the consolidated balance sheet as of
December 31, 2006.
Before After
Application Application
of SFAS 158 Adjustments of SFAS 158
----------- ----------- -----------
(In thousands)
Accrued pension benefit $ 2,139 $(117) $ 2,022
Net deferred tax asset 4,635 (40) 4,595
Total assets 996,869 (40) 996,829
Accumulated other
comprehensive loss (803) 77 (726)
Total stockholders' equity 289,331 77 289,408
Income Taxes - The Company uses the asset and liability method for income
tax accounting, whereby, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applied to taxable
income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings per Share - Basic earnings per share represents income available
to common 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 common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate solely to outstanding
stock awards and options and are determined using the treasury stock
method.
Earnings per common share for the years ended December 31, have been
computed based on the following:
2006 2005 2004
---- ---- ----
(In thousands, except per share data)
Net income available to common stockholders $4,654 $6,219 $6,323
====== ====== ======
Weighted average number of common shares outstanding 9,343 9,467 9,706
Effect of dilutive stock awards and options 165 231 224
------ ------ -------
Adjusted weighted average number of common shares
outstanding used to calculate diluted earnings per
common shares 9,508 9,698 9,930
====== ====== =======
Basic earnings per share $ 0.50 $ 0.66 $ 0.65
Diluted earnings per share $ 0.49 $ 0.64 $ 0.64
Reclassifications - Certain amounts in the prior year financial
statements have been reclassified to conform to the current year
presentation.
F-10
Adoption of SFAS 123(R) Share-Based Payment - On January 1, 2006, the
Company 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 Company uses the binomial
model for its adoption of the Statement.
The Company 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 the Company resulted in additional
share-based compensation expense of $293,000 and a related tax benefit of
$69,000 for the year ended December 31, 2006. The increase in stock-based
compensation expense resulted in a $0.02 decrease in basic earnings per
share and a $0.02 decrease in diluted earnings per share for the year
ended December 31, 2006. As of December 31, 2006, the compensation cost
of unvested stock options amounted to $183,000 with a related tax benefit
of $40,000. Compensation costs of $164,000 with a related tax benefit of
$40,000 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.
Had compensation cost been determined based on the fair value at the
grant date of awards under the plans consistent with the method
prescribed by SFAS 123(R), the Company's net income and income per share
for the years ended December 31, 2005 and 2004 would have been adjusted
to the pro forma amounts as follows:
F-11
2005 2004
---- ----
(In thousands, except per share data)
Net income, as reported $6,219 $6,323
Less: Compensation expense
determined under fair value
based method for all awards,
net of tax effects (333) (272)
------ ------
Pro forma net income $5,886 $6,051
====== ======
Net income per share:
Basic as reported $ 0.66 $ 0.65
Basic pro forma 0.62 0.62
Diluted as reported 0.64 0.64
Diluted pro forma 0.61 0.61
The fair value of each option grant is estimated on the date of grant
with the following weighted average assumptions: Years Ended December 31,
2005 2004
---- ----
Dividend yield 1.70% 1.02%
Expected life in years 10 years 10 years
Expected volatility 21% 17%
Risk-free interest rate 4.14% 4.16%
No options were granted during the year ended December 31, 2006.
Comprehensive Income/Loss
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of
the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income.
The components of other comprehensive income/loss and related tax effects
are as follows:
Years Ended December 31,
---------------------------
2006 2005 2004
---- ---- ----
(In thousands)
Unrealized holding gains (losses) on
available for sale securities $ 578 $(1,665) $ (485)
Reclassification adjustment for gains
realized in income - (19) (877)
----- ------- -------
Net unrealized gains (losses) 578 (1,684) (1,362)
Tax effect (204) 629 452
----- ------- -------
Net-of-tax amount 374 (1,055) (910)
----- ------- -------
Adjustment to initially apply SFAS No. 158 117 - -
Tax effect (40) - -
----- ------- -------
Net-of-tax amount 77 - -
----- ------- -------
$ 451 $(1,055) $ (910)
===== ======= =======
F-12
The components of accumulated other comprehensive income, included in
stockholders' equity, are as follows:
December 31,
-----------------
2006 2005
---- ----
(In thousands)
Net unrealized loss on securities available
for sale $(1,274) $(1,852)
Tax effect 471 675
------- -------
Net-of-tax amount (803) (1,177)
------- -------
Unrecognized transition asset pertaining to defined
benefit plan 92 -
Unrecognized deferred gain pertaining to defined
benefit plan 25 -
------- -------
117 -
Tax effect (40) -
------- -------
Net-of-tax amount 77 -
------- -------
$ (726) $(1,177)
======= =======
Recent Accounting Pronouncements--In March 2006, the FASB issued
Statement No. 156, "Accounting for Servicing of Financial Assets," which
amends FASB Statement No. 140. This Statement requires that all
separately recognized servicing rights be initially measured at fair
value, if practicable. For each class of separately recognized servicing
assets and liabilities, this Statement permits an entity to choose either
of the following subsequent measurement methods: (1) amortize servicing
assets or liabilities in proportion to and over the period of estimated
net servicing income or net servicing loss, or (2) report servicing
assets or liabilities at fair value at each reporting date and report
changes in fair value in earnings in the period in which the changes
occur (the "fair value method"). This Statement also requires additional
disclosures for all separately recognized servicing rights and is
effective for new transactions occurring and for subsequent measurement
at the beginning of the Company's 2007 calendar year. As management does
not plan to adopt the fair value method of accounting for its servicing
rights and the amounts of servicing rights are not material, this
Statement is not expected to have a material impact on the Company's
consolidated financial statements.
In July 2006, the FASB issued Financial Accounting Standards
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an entity's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transitions. FIN 48 is effective for
fiscal years beginning after December 15, 2006 and is not expected to
have a material impact on the Company's consolidated financial
statements.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements." This Statement defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. This
Statement is effective for the Company on January 1, 2008 and is not
expected to have a material impact on the Company's consolidated
financial statements.
F-13
In September 2006, 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 an 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. This Statement is effective for the Company for the year
ended December 31, 2006 and is not expected to have a material impact on
the Company's consolidated financial statements.
In September 2006, the FASB ratified EITF 06-4, "Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements." This issue addresses
accounting for split-dollar life insurance arrangements whereby the
employer purchases a policy to insure the life of an employee, and
separately enters into an agreement to split the policy benefits between
the employer and the employee. This EITF states that an obligation arises
as a result of a substantive agreement with an employee to provide future
postretirement benefits. Under EITF 06-4, the obligation is not settled
upon entering into an insurance arrangement. Since the obligation is not
settled, a liability should be recognized in accordance with applicable
authoritative guidance. EITF 06-4 is effective for fiscal years beginning
after December 15, 2007. The Company is in the process of evaluating the
potential impacts of adopting EITF 06-4 on its consolidated financial
statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108. SAB No. 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a potential current
year misstatement. Prior to SAB 108, companies might evaluate the
materiality of financial statement misstatements using either the income
statement or balance sheet approach, with the income statement approach
focusing on new misstatements added in the current year, and the balance
sheet approach focusing on the cumulative amount of misstatement present
in a company's balance sheet. Misstatements that would be material under
one approach could be viewed as immaterial under the other approach, and
not be corrected. SAB 108 now requires that companies view financial
statement misstatements as material if they are material according to
either the income statement or balance sheet approach. SAB 108 is
applicable to all financial statements issued by the Company for the year
ended December 31, 2006 and does not have a material impact on those
financial statements.
In February 2007, the FASB issued Statement of financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities" ("SFAS 159"). This Statement provides companies
with an option to report selected financial assets and liabilities at
fair value. The Standard's objective is to reduce both the complexity in
accounting for financial instruments and the volatility in earnings
caused by measuring related assets and liabilities differently. SFAS 159
also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. This
Statement is effective as of the beginning of an entity's first fiscal
year beginning after November 15, 2007. Early adoption is permitted if
the Company makes the choice in the first 120 days of that fiscal year
and also elects to apply the provisions of SFAS 157. The Company does not
expect SFAS 159 to have a material impact on the Company's consolidated
financial statements.
F-14
2. SECURITIES
Securities are summarized as follows:
December 31, 2006
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Held to maturity:
Government-sponsored enterprises $ 47,095 $ 42 $ 586 $ 46,551
Municipal bonds 30,204 316 133 30,387
-------- ---- ------ --------
Total held to maturity 77,299 358 719 76,938
-------- ---- ------ --------
Available for sale:
Government-sponsored enterprises 34,821 79 209 34,691
Equity securities 7,260 - 264 6,996
-------- ---- ------ --------
Total available for sale 42,081 79 473 41,687
-------- ---- ------ --------
Total Securities $119,380 $437 $1,192 $118,625
======== ==== ====== ========
December 31, 2005
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Held to maturity:
Government-sponsored enterprises $ 43,090 $ 6 $ 731 $ 42,365
Municipal bonds 30,233 289 183 30,339
-------- ---- ------ --------
Total held to maturity 73,323 295 914 72,704
-------- ---- ------ --------
Available for sale:
Government-sponsored enterprises 22,728 4 153 22,579
Equity securities 6,057 - 315 5,742
-------- ---- ------ --------
Total available for sale 28,785 4 468 28,321
-------- ---- ------ --------
Total Securities $102,108 $299 $1,382 $101,025
======== ==== ====== ========
F-15
Information pertaining to securities with gross unrealized losses at
December 31, 2006 and 2005, aggregated by investment category and length
of time that individual securities have been in a continuous loss
position, follows:
December 31, 2006
------------------------------------------------
Less than Twelve Months Over Twelve Months
----------------------- ---------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ----- ---------- -----
(In thousands)
Held to maturity:
Government-sponsored enterprises $ 34 $11,973 $ 552 $24,446
Municipal bonds 48 7,993 85 4,805
---- ------- ------ -------
Total held to maturity 82 19,966 637 29,251
---- ------- ------ -------
Available for sale:
Government-sponsored enterprises 38 9,962 171 14,549
Equity securities - - 264 5,518
---- ------- ------ -------
Total available for sale 38 9,962 435 20,067
---- ------- ------ -------
Total temporarily impaired securities $120 $29,928 $1,072 $49,318
==== ======= ====== =======
December 31, 2005
------------------------------------------------
Less than Twelve Months Over Twelve Months
----------------------- ---------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ----- ---------- -----
(In thousands)
Held to maturity:
Government-sponsored enterprises $222 $14,792 $ 509 $22,567
Municipal bonds 78 8,586 105 2,748
---- ------- ------ -------
Total held to maturity 300 23,378 614 25,315
---- ------- ------ -------
Available for sale:
Government-sponsored enterprises 153 17,575 - -
Equity securities - - 315 5,264
---- ------- ------ -------
Total available for sale 153 17,575 315 5,264
---- ------- ------ -------
Total temporarily impaired securities $453 $40,953 $ 929 $30,579
==== ======= ====== =======
At December 31, 2006, fourteen debt securities have gross unrealized
losses of 0.4% from the Company's amortized cost basis of temporarily
impaired debt securities which existed for less than twelve months.
Because these losses relate to government-sponsored enterprises and
highly rated municipal obligations, are the result of fluctuations in
interest rates, and management has the intent and ability to hold these
securities for the foreseeable future, no declines are deemed to be other
than temporary.
F-16
At December 31, 2006, fifteen debt securities have gross unrealized
losses of 1.8% from the Company's amortized cost basis of temporarily
impaired debt securities which existed for greater than twelve months.
Because these losses relate to government-sponsored enterprises and
highly rated municipal obligations, are the result of fluctuations in
interest rates, and management has the intent and ability to hold these
securities for the foreseeable future, no declines are deemed to be other
than temporary.
At December 31, 2006, three equity securities have an unrealized loss of
3.8% from the Company's cost basis which existed for greater than twelve
months and is principally related to fluctuations in interest rates.
These losses relate to mutual funds which invest primarily in short-term
debt instruments and adjustable rate mortgage-backed securities. Because
these losses are the result of fluctuations in interest rates, and
management has the intent and ability to hold these securities for the
foreseeable future, no declines are deemed to be other than temporary.
At December 31, 2006, one equity security has an unrealized loss of 8.4%
from the Company's cost basis which existed for greater than twelve
months. Because the security is an adjustable rate preferred stock issued
by a government-sponsored enterprise, the unrealized loss is principally
related to fluctuations in interest rates, and management has the intent
and ability to hold this security for the foreseeable future, the decline
is not deemed to be other than temporary.
December 31, 2006
-----------------------
Amortized Estimated
Cost Fair Value
--------- ----------
(In thousands)
Held to maturity:
Due in one year or less $10,000 $ 9,970
Due after one year through five years 23,577 23,462
Due after five years through ten years 28,832 28,444
Due after ten years 14,890 15,062
------- -------
Total held to maturity $77,299 $76,938
======= =======
Available for sale:
Due in one year or less $ 6,000 $ 5,952
Due after one year through five years 23,831 23,859
Due after five years through ten years 4,990 4,880
------- -------
Total available for sale $34,821 $34,691
======= =======
Gross gains of $0, $34,000, and $1,130,000, and gross losses of $0,
$1,000, and $39,000 were recorded on sales of securities during the years
ended December 31, 2006, 2005, and 2004, respectively. There were no
impairment losses recognized during 2006, 2005 and 2004.
Proceeds from the sale of securities amounted to $5.0 million, $3.8
million and $11.9 million at December 31, 2006, 2005 and 2004,
respectively.
Securities with a carrying value of $40 million and $35 million were
pledged as collateral at the Federal Reserve Bank of Boston at December
31, 2006 and 2005, respectively, to secure public deposits and repurchase
agreements.
Unrealized losses on securities available for sale, net of tax were
$240,000 and $283,000 at December 31, 2006 and 2005, respectively.
F-17
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
December 31, 2006
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Held to maturity:
Fannie Mae $103,344 $181 $1,945 $101,580
Freddie Mac 41,418 129 448 41,099
Ginnie Mae 13,425 1 274 13,152
Collateralized mortgage obligations 4,906 - 28 4,878
Total held to maturity 163,093 311 2,695 160,709
-------- ---- ------ --------
Available for sale:
Fannie Mae 47,203 $ 20 $ 493 $ 46,730
Freddie Mac 49,554 109 285 49,378
Ginnie Mae 8,635 10 102 8,543
Collateralized mortgage obligations 22,430 46 185 22,291
-------- ---- ------ --------
Total available for sale 127,822 185 1,065 126,942
-------- ---- ------ --------
Total Mortgage-Backed Securities $290,915 $496 $3,760 $287,651
======== ==== ====== ========
December 31, 2005
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Held to maturity:
Fannie Mae $ 98,362 $ 34 $2,300 $ 96,096
Freddie Mac 36,465 78 572 35,971
Ginnie Mae 17,300 4 354 16,950
-------- ---- ------ --------
Total held to maturity 152,127 116 3,226 149,017
-------- ---- ------ --------
Available for sale:
Fannie Mae 46,078 40 742 45,376
Freddie Mac 38,310 12 459 37,863
Ginnie Mae 12,594 22 230 12,386
Other pass-through securities 4,726 - 17 4,709
Collateralized mortgage obligations 818 - 14 804
-------- ---- ------ --------
Total available for sale 102,526 74 1,462 101,138
-------- ---- ------ --------
Total Mortgage-Backed Securities $254,653 $190 $4,688 $250,155
======== ==== ====== ========
F-18
Gross gains of $0, $27,000 and $135,000 and gross losses of $0, $41,000,
and $349,000 were recorded on sales of mortgage-backed securities during
the years ended December 31, 2006, 2005, and 2004, respectively.
Proceeds from the sale of mortgage-backed securities amounted to $0,
$17.0 million and $20.3 million at December 31, 2006, 2005 and 2004,
respectively.
Unrealized losses on mortgage-backed securities available for sale, net
of tax were $563,000 and $894,000 at December 31, 2006 and 2005,
respectively.
Information pertaining to securities with gross unrealized losses at
December 31, 2006 and 2005, aggregated by investment category and length
of time that individual securities have been in a continuous loss
position, follows:
December 31, 2006
------------------------------------------------
Less than Twelve Months Over Twelve Months
----------------------- ---------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ----- ---------- -----
(In thousands)
Held to maturity:
Fannie Mae $ 15 $ 3,176 $1,930 $ 67,630
Freddie Mac 13 772 435 18,793
Ginnie Mae 1 361 273 12,699
Collateralized mortgage obligations 28 4,878 - -
---- ------- ------ --------
Total held to maturity 57 9,187 2,638 99,122
---- ------- ------ --------
Available for sale:
Fannie Mae 19 10,960 474 30,842
Freddie Mac 29 10,681 256 24,820
Ginnie Mae - - 102 6,496
Collateralized mortgage obligations 182 14,061 3 3,604
---- ------- ------ --------
Total available for sale 230 35,702 835 65,762
---- ------- ------ --------
Total temporarily impaired securities $287 $44,889 $3,473 $164,884
==== ======= ====== ========
F-19
December 31, 2005
------------------------------------------------
Less than Twelve Months Over Twelve Months
----------------------- ---------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ----- ---------- -----
(In thousands)
Held to maturity:
Fannie Mae $ 452 $ 26,869 $1,848 $ 64,076
Freddie Mac 25 5,120 547 16,954
Ginnie Mae 178 8,424 176 7,772
------ -------- ------ --------
Total held to maturity 655 40,413 2,571 88,802
------ -------- ------ --------
Available for sale:
Fannie Mae 691 40,327 51 3,935
Freddie Mac 376 28,952 83 5,707
Ginnie Mae 214 8,020 16 836
Other pass-thru securities 17 4,709 - -
Collateralized mortgage obligations - - 14 804
------ -------- ------ --------
Total available for sale 1,298 82,008 164 11,282
------ -------- ------ --------
Total temporarily impaired securities $1,953 $122,421 $2,735 $100,084
====== ======== ====== ========
At December 31, 2006, twenty-two mortgage-backed securities have gross
unrealized losses of 0.6% from the Bank's amortized cost basis which
existed for less than twelve months. Because these losses relate to
mortgage-backed securities, which were primarily issued by
government-sponsored enterprises, are the result of fluctuations in
interest rates, and management has the intent and ability to hold these
securities for the foreseeable future, no declines are deemed to be other
than temporary.
At December 31, 2006, ninety-nine mortgage-backed securities have gross
unrealized losses of 2.1% from the Bank's amortized cost basis which
existed for greater than twelve months. Because these losses relate to
mortgage-backed securities, which were primarily issued by
government-sponsored enterprises, are the result of fluctuations in
interest rates, and management has the intent and ability to hold these
securities for the foreseeable future, no declines are deemed to be other
than temporary.
4. LOANS
Loans consisted of the following amounts:
December 31,
---------------------
2006 2005
---------------------
(In thousands)
Commercial real estate $174,556 $169,564
Residential real estate:
Owner-occupied 1-4 family loans 70,640 73,516
Other residential real estate loans 38,900 33,402
Commercial and industrial 100,237 100,019
Consumer 5,841 7,372
-------- --------
Total Loans 390,174 383,873
Unearned premiums and deferred loan
fees and costs, net 447 386
Allowance for loan losses (5,437) (5,422)
-------- --------
$385,184 $378,837
======== ========
F-20
The following table summarizes information regarding impaired loans:
December 31,
--------------
2006 2005
--------------
(In thousands)
Recorded investment in impaired loans $133 $1,641
Specific allowance for impaired loans 20 250
Impaired loans on nonaccrual status 133 1,641
Years Ended
December 31,
------------------------
2006 2005 2004
------------------------
(In thousands)
Average recorded investment in impaired loans $490 $1,532 $1,787
Income recorded during the period for impaired loans - - 11
Income recorded on cash basis during the period for impaired loans 300 - 12
There were no restructured loans during the years ended December 31,
2006, 2005 and 2004.
Nonaccrual loans at December 31, 2006, 2005 and 2004 and related interest
income are summarized as follows:
At or For the Years Ended
December 31,
--------------------------
2006 2005 2004
--------------------------
(In thousands)
Amount $1,028 $1,919 $2,171
Interest income that would have been
recorded under the original contract terms 67 176 176
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid balances of these loans totaled
$13.0 million and $16.3 million at December 31, 2006 and 2005,
respectively. Net service fee income of $22,000, $24,000, and $30,000 was
recorded for the years ended December 31, 2006, 2005, and 2004,
respectively.
F-21
5. ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses is as follows:
Years Ended
December 31,
----------------------------
2006 2005 2004
----------------------------
(In thousands)
Balance, beginning of year $5,422 $5,277 $4,642
Provision 390 465 750
Charge-offs (584) (612) (404)
Recoveries 209 292 289
------ ------ ------
Balance, end of year $5,437 $5,422 $5,277
====== ====== ======
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
-------------------
2006 2005
-------------------
(In thousands)
Land $ 2,201 $ 2,201
Buildings 10,008 9,949
Leasehold improvements 1,435 883
Furniture and equipment 6,174 5,614
Construction in process 835 -
------- -------
Total 20,653 18,647
Accumulated depreciation and amortization (8,406) (7,599)
------- -------
Premises and equipment, net $12,247 $11,048
======= =======
Depreciation and amortization expense for the years ended December 31,
2006, 2005, and 2004 amounted to $1,030,000, $950,000, and $1,003,000,
respectively.
F-22
7. DEPOSITS
Deposit accounts by type and weighted average rates are summarized as
follows:
December 31,
-------------------------------------
2006 2005
---------------- ----------------
Amount Rate Amount Rate
---------------- ----------------
(Dollars in thousands)
Demand and Now:
Now accounts $ 80,527 1.40% $ 69,137 0.83%
Demand accounts 42,383 - 45,260 -
Savings:
Regular accounts 36,110 0.50 41,387 0.50
Money market accounts 94,441 1.51 132,218 1.62
Time certificates of deposit 374,005 4.39 335,043 3.24
-------- --------
Total Deposits $627,466 3.05% $623,045 2.21%
======== ========
Time deposits of $100,000 or more totaled approximately $93.5 million and
$71.2 million at December 31, 2006 and 2005, respectively. Interest
expense on such deposits totaled $3.6 million, $2.0 million and $1.6
million for the years ended December 31, 2006, 2005, and 2004
respectively.
Cash paid for interest was:
Years Ended
December 31,
-----------------------------
2006 2005 2004
-----------------------------
(In thousands)
Deposits $17,249 $11,807 $ 9,615
Customer repurchase agreements 438 312 195
Federal Home Loan Bank of Boston advances 1,785 1,462 1,093
------- ------- -------
Total $19,472 $13,581 $10,903
======= ======= =======
At December 31, 2006 and 2005, the scheduled maturities of time
certificates of deposit are as follows:
2006 2005
---------------- ----------------
Amount Rate Amount Rate
-------------------------------------
(Dollars in thousands)
Within 1 year $270,026 4.40% $227,770 3.05%
Over 1 year to 3 years 91,201 4.33 85,951 3.51
Over 3 years to 5 years 12,778 4.56 21,322 4.17
-------- --------
Total certificates of deposits $374,005 4.39% $335,043 3.24%
======== ========
F-23
Interest expense on deposits for the years ended December 31, 2006, 2005,
and 2004 is summarized as follows:
Years Ended December 31,
----------------------------
2006 2005 2004
----------------------------
(In thousands)
Savings $ 226 $ 217 $ 234
Money market accounts 1,684 2,117 1,419
Time certificates of deposit 14,450 9,154 7,723
Other interest bearing 908 325 249
------- ------- ------
$17,268 $11,813 $9,625
======= ======= ======
8. CUSTOMER REPURCHASE AGREEMENTS
The following table summarizes information regarding repurchase
agreements:
Years Ended
December 31,
----------------------
2006 2005
----------------------
(Dollars in thousands)
Balance outstanding, end of year $17,919 $14,441
Maximum amount outstanding at any month end during year 20,137 18,116
Average amount outstanding during year 16,632 16,907
Weighted average interest rate, end of year 3.03% 2.16%
Book value of collateral pledged, end of year 30,380 35,424
Fair value of collateral pledged, end of year 29,995 34,821
9. FEDERAL HOME LOAN BANK OF BOSTON ADVANCES
The following fixed rate advances are collateralized by a blanket lien on
the Company's residential real estate loans and certain mortgage-backed
securities.
December 31,
December 31, Weighted Average
Amount Rate
------------------ ----------------
2006 2005 2006 2005
------------------ ----------------
Year of Maturity (Dollars in thousands)
2006 $ - $10,000 -% 3.0%
2007 30,000 20,000 3.9 3.1
2008 15,000 10,000 4.4 4.2
2009 5,000 5,000 3.3 3.3
2014 5,000 - 5.0 -
------- -------
Total advances $55,000 $45,000 4.1% 3.4%
======= =======
F-24
10. LINE OF CREDIT
The Company has an "Ideal Way" line of credit with the Federal Home Loan
Bank of Boston for $9,541,000 for the years ended December 31, 2006 and
2005. Interest on this line of credit is payable at a rate determined and
reset by the Federal Home Loan Bank on a daily basis. The outstanding
principal shall be due daily but that portion not repaid will be
automatically renewed. No amounts were outstanding under this line at
December 31, 2006 and 2005.
11. STOCK PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN
Stock Options
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 for the years
ended December 31, 2006 and 2005 is presented below:
Weighted Average
Shares Exercise Price
------- ----------------
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
Granted - -
Exercised (39,155) 14.39
-------
Balance at December 31, 2006 370,900 14.53
=======
The weighted average fair value of the options granted in 2005 and 2004
were $7.68 per share and $7.93 per share, respectively. No options were
granted during the twelve months ended December 31, 2006. The total
intrinsic value of options exercised during the year ended December 31,
2006 was $526,000.
Information pertaining to options outstanding at December 31, 2006, 2005
and 2004 is as follows:
December 31, 2006
-----------------
Aggregate Aggregate
Intrinsic Intrinsic
Value of Weighted Average Value of
Exercise Number Outstanding Remaining Number Exercisable
Price Outstanding Shares Contractual Life Exercisable Shares
- -------- ----------- ----------- ---------------- ----------- -----------
(In thousands) (In thousands)
$14.39 365,900 $7,395 5.7 Years 291,000 $5,881
24.66 2,500 25 8.2 Years 500 5
25.00 2,500 24 7.2 Years 1,000 10
------- ------ ------- ------
370,900 $7,444 292,500 $5,896
======= ====== ======= ======
F-25
December 31, 2005
-----------------
Aggregate Aggregate
Intrinsic Intrinsic
Value of Weighted Average Value of
Exercise Number Outstanding Remaining Number Exercisable
Price Outstanding Shares Contractual Life Exercisable Shares
- -------- ----------- ----------- ---------------- ----------- -----------
(In thousands) (In thousands)
$14.39 405,055 $3,897 6.6 Years 255,255 $2,456
24.66 2,500 - 9.1 Years 500 -
25.00 2,500 - 8.1 Years 1,000 -
------- ------ ------- ------
410,055 $3,897 256,755 $2,456
======= ====== ======= ======
December 31, 2004
-----------------
Aggregate Aggregate
Intrinsic Intrinsic
Value of Weighted Average Value of
Exercise Number Outstanding Remaining Number Exercisable
Price Outstanding Shares Contractual Life Exercisable Shares
- -------- ----------- ----------- ---------------- ----------- -----------
(In thousands) (In thousands)
$14.39 442,700 $5,060 7.6 Years 174,800 $1,998
25.00 2,500 2 9.1 Years 500 -
------- ------ ----------- ------
445,200 $5,062 175,300 $1,998
======= ====== ======= ======
Stock Awards
Under the Company's Recognition and Retention Plan dated November 1,
2002, the Company may grant stock awards to its directors, officers and
employees for up to 198,904 shares of common stock. The Company applies
SFAS 123 (R) in accounting for stock awards. The stock allocations, based
on the market price at the date of grant, is recorded as unearned
compensation. Unearned compensation is amortized over the vesting period.
The Company recorded compensation cost related to the stock awards of
approximately $481,000 in 2006, $706,000 in 2005 and $551,000 in 2004.
Stock awards for 1,000 shares, having a fair value of $25.00 per share,
were granted in 2004. Stock awards for 1,000 shares, having a fair value
of $24.66 per share, were granted in 2005. No stock awards were granted
in 2006.
Employee Stock Ownership Plan
In January 2002, the Company established an Employee Stock Ownership Plan
(the ESOP) for the benefit of each employee that has reached the age of
21 and has completed at least 1,000 hours of service in the previous
twelve-month period. As part of the conversion, the Company provided a
loan to the Westfield Financial Employee Stock Ownership Plan Trust which
was used to purchase 8%, or 397,808 shares, of the Company's outstanding
stock in the open market. The loan bears interest equal to 8.0% and
provides for annual payments of interest and principal.
F-26
At December 31, 2006 the remaining principal balance is payable as
follows:
Years Ending
December 31 (In thousands)
------------ --------------
2007 $ 201
2008 201
2009 201
2010 201
2011 201
Thereafter 4,031
------
$5,036
======
The Bank has committed to make contributions to the ESOP sufficient to
support the debt service of the loan. The loan is secured by the shares
purchased, which are held in a suspense account for allocation among the
participants as the loan is paid. Total compensation expense applicable
to the ESOP amounted to $545,000, $458,000 and $440,000 for the years
ended December 31, 2006, 2005, and 2004, respectively.
Shares held by the ESOP include the following at December 31, 2006 and
2005.
2006 2005
---- ----
Allocated 68,485 50,863
Committed to be allocated 18,507 18,988
Unallocated 306,449 324,961
------- -------
393,441 394,812
======= =======
Cash dividends received on allocated shares are allocated to participants
and cash dividends received on shares held in suspense are applied to
repay the outstanding debt of the ESOP. The fair value of unallocated
shares was approximately $10.6 million and $7.8 million at December 31,
2006 and 2005, respectively.
ESOP shares are considered outstanding for earnings per share
calculations based on the number of shares allocated. Unallocated ESOP
shares are excluded from earnings per share calculations. Dividends
declared on allocated ESOP shares are charged to retained earnings. The
value of unearned shares to be allocated to ESOP participants for future
services not yet performed is reflected as a reduction of stockholders'
equity.
F-27
12. RETIREMENT PLANS AND EMPLOYEE BENEFITS
Pension Plan - The Company provides basic and supplemental pension
benefits for eligible employees through the Savings Banks Employees
Retirement Association Pension Plan (the "Plan"). Employees must work a
minimum of 1,000 hours per year to be eligible for the Plan. Eligible
employees become vested in the Plan after five years of service.
The following table provides information for the Plan at December 31:
2006 2005 2004
---- ---- ----
(In thousands)
Change in benefit obligation:
Benefit obligation, beginning of year $10,430 $ 8,805 $7,410
Service cost 724 625 548
Interest 600 506 463
Actuarial (gain) loss (594) 648 570
Benefits paid (1,057) (154) (186)
------- ------- ------
Benefit obligation, end of year 10,103 10,430 8,805
------- ------- ------
Change in plan assets:
Fair value of plan assets, beginning of year 7,453 6,536 5,658
Actual return on plan assets 1,109 596 607
Employer contribution 576 475 457
Benefits paid (1,057) (154) (186)
------- ------- ------
Fair value of plan assets, end of year 8,081 7,453 6,536
------- ------- ------
Funded status (benefit obligation less
fair value of plan assets) 2,022 2,978 2,269
Unrecognized net actuarial loss - (1,127) (574)
Transition liability - 104 115
------- ------- ------
Accrued benefit cost $ 2,022 $ 1,955 $1,810
======= ======= ======
Accumulated benefit obligation $ 5,188 $ 5,313 $4,635
======= ======= ======
Net pension cost includes the following components for the years ended
December 31:
2006 2005 2004
---- ---- ----
(In thousands)
Service cost $ 724 $ 625 $ 548
Interest cost 600 506 463
Expected return on assets (596) (523) (452)
Actuarial loss 43 22 7
Transition obligation (12) (11) (12)
----- ----- -----
Net periodic pension cost $ 759 $ 619 $ 554
===== ===== =====
F-28
The following actuarial assumptions were used in determining the pension
benefit obligation and service costs for the years ended December 31:
2006 2005 2004
---- ---- ----
Weighted-average assumptions:
Discount rate 5.75% 5.75% 6.25%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00%
The expected long term rate of return on plan assets is based on
prevailing yields of high quality fixed income investments increased by a
premium of 3% to 5% for equity investments. The Company expects to
contribute $538,000 to its pension plan in 2007.
The Company's pension plan asset allocation at December 31, 2006 and 2005
are as follows:
Percentage of Plan
Assets
at December 31,
------------------
Asset Category 2006 2005
-------------- ---- ----
Fixed Income Securities (including money market) 36.5% 35.1%
Domestic Equity 48.5 50.5
International Equity 15.0 14.4
----- -----
100.0% 100.0%
===== =====
The target allocation mix for the pension plan for 2006 was an
equity-based investment deployment range from 55% to 75% of total
portfolio assets. The remainder of the portfolio is allocated to fixed
income.
Trustees of the Savings Bank Employees Retirement Association ("SBERA")
select investment managers for the portfolio and a special investment
advisory firm is retained to provide allocation analysis. The overall
investment objective is to diversify equity investments across a spectrum
of types, small cap, large cap and international, along with investment
styles such as growth and value.
The Company estimates that the benefits to be paid from the pension plan
for years ended December 31, are as follows:
Benefit Payments to
Year Participants
---- -------------------
(In thousands)
2007 $ 690
2008 21
2009 1,014
2010 20
2011 699
In Aggregate for 2012 - 2016 3,989
------
$6,433
======
Postretirement Benefits - The Company provides postretirement life
insurance benefits to employees based on the employee's salary at time of
retirement. The accrual of postretirement benefits other than pension
expense is made during the years an employee provides service. As of
December 31, 2006 and 2005, the accrued liability recorded in other
liabilities on the consolidated balance sheet amounted to $622,000 and
$560,000, respectively. Total expense associated with this plan amounted
to $88,000, $81,000 and $71,000 for the years ended December 31, 2006,
2005 and 2004, respectively.
F-29
Supplemental Retirement Benefits - The Company provides supplemental
retirement benefits to certain key officers. At December 31, 2006 and
2005, the Company had accrued $2.3 million and $2.2 million,
respectively, relating to these benefits. Amounts charged to expense were
$270,000, $389,000, and $289,000 for the years ended December 31, 2006,
2005 and 2004, respectively.
401(k) - Employees are eligible to participate in a 401(k) plan. The
Company makes a matching contribution of 50% with respect to the first 6%
of each participant's annual earnings contributed to the plan. The
Company's contributions to the plan were $149,000, $150,000 and $134,000,
for the years ended December 31, 2006, 2005 and 2004, respectively.
13. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective action
provisions are not applicable to savings and loan holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined),Tier 1 capital (as
defined) to average assets (as defined) and of tangible capital (as
defined) to tangible assets (as defined). Management believes, as of
December 31, 2006 and 2005, that the Bank met all capital adequacy
requirements to which it is subject.
As of December 31, 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" the Bank must maintain minimum total risk-based, Tier
1 risk based and Tier 1 leverage ratios as set forth in the following.
There are no conditions or events since that notification that management
believes have changed the Bank's category. The Company's and the Bank's
actual capital ratios as of December 31, 2006 and 2005 are also presented
in the table.
F-30
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)
December 31, 2006
Total Capital (to Risk Weighted Assets):
Consolidated $295,404 55.39% $42,662 8.00% N/A -
Bank 119,266 22.70 42,029 8.00 $52,536 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 289,967 54.37 21,331 4.00 N/A -
Bank 113,856 21.67 21,014 4.00 31,522 6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated 289,967 29.07 39,905 4.00 N/A -
Bank 113,856 11.88 38,327 4.00 47,908 5.00
Tangible Equity (to Tangible Assets):
Consolidated N/A - N/A - N/A -
Bank 113,856 11.88 19,163 2.00 N/A -
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)
December 31, 2006
December 31, 2005
Total Capital (to Risk Weighted Assets):
Consolidated $122,241 25.68% $38,086 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
Tangible Equity (to Tangible Assets):
Consolidated N/A - N/A - N/A -
Bank 100,151 12.67 15,812 2.00 N/A -
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 or five percent of its
outstanding shares of common stock, continuing until its completion. At
December 31, 2006, the Company had 99,862 shares remaining to be
purchased under this program. Upon completion of the second step stock
offering (see Note 23), Repurchase Program 2 was eliminated.
F-31
The Company and the Bank are subject to dividend restrictions imposed by
various regulators, including a limitation on the total of all dividends
that the Bank may pay to the Company in any calendar year, to an amount
that shall not exceed the Bank's net income for the current year, plus
the Bank's net income retained for the two previous years, without
regulatory approval. In addition, the Bank may not declare or pay
dividends on, and the Company may not repurchase, any of its shares of
common stock if the effect thereof would cause stockholders' equity to be
reduced below applicable regulatory capital maintenance requirements or
if such declaration, payment or repurchase would otherwise violate
regulatory requirements. At December 31, 2006 and 2005, the Bank's
retained earnings available for payment of dividends was $16.5 million
and $14.6 million, respectively. Accordingly, $42.7 million and $38.1
million of the Company's equity in net assets of the Bank was restricted
at December 31, 2006 and 2005, respectively.
The only funds available for the payment of dividends on the capital
stock of Westfield Financial will be cash and cash equivalents held by
Westfield Financial, dividends paid from Westfield Bank to Westfield
Financial, and borrowings. Westfield Bank will be prohibited from paying
cash dividends to Westfield Financial to the extent that any such payment
would reduce Westfield Bank's capital below required capital levels.
The following is a reconciliation of the Company's GAAP capital to
regulatory Tier 1 capital:
December 31,
2006 2005
---- ----
(In thousands)
Consolidated GAAP capital $289,408 $115,842
Plus: Unrealized losses (gains) on certain available-for-sale securities,
net of tax 636 977
Less: Adjustment to initially apply SFAS No. 158, net of tax (77) -
-------- --------
Tier 1 Capital 289,967 116,819
Plus: Allowance for loan losses 5,437 5,422
-------- --------
Total Regulatory Capital $295,404 $122,241
======== ========
14. INCOME TAXES
Income taxes consist of the following:
Years Ended December 31,
----------------------------
2006 2005 2004
---- ---- ----
(In thousands)
Current tax provision:
Federal $1,631 $2,131 $2,883
State 148 136 294
------ ------ ------
Total 1,779 2,267 3,177
------ ------ ------
Deferred tax provision (benefit):
Federal (257) (335) (616)
State 1 1 1
------ ------ ------
Total (256) (334) (615)
------ ------ ------
Total $1,523 $1,933 $2,562
====== ====== ======
F-32
The reasons for the differences between the statutory federal income tax
rate and the effective rates are summarized below:
Years Ended December 31,
------------------------
2006 2005 2004
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 1.6 1.1 2.2
Tax exempt income (8.0) (6.5) (5.6)
Bank-owned life insurance (4.7) (3.4) (3.0)
Dividends received deduction (0.2) (0.1) (0.1)
Other, net 2.0 (1.4) 1.3
---- ---- ----
Effective tax rate 24.7% 23.7% 28.8%
==== ==== ====
Cash paid for income taxes for the years ended December 31, 2006, 2005,
and 2004 was $1.8 million, $1.4 million and $2.3 million, respectively.
The tax effects of each item that gives rise to deferred taxes, included
in other assets, are as follows:
December 31,
----------------
2006 2005
---- ----
(In thousands)
Net unrealized loss on securities available for sale $ 471 $ 675
Adjustment to initially apply SFAS No. 158
(40) -
Depreciation - (126)
Allowance for loan losses 1,849 1,843
Employee benefit and stock-based compensation plans 2,040 1,779
Other 275 412
------ ------
Net deferred tax asset $4,595 $4,583
====== ======
A summary of the change in the net deferred tax asset is as follows:
Years Ended
December 31,
----------------
2006 2005
---- ----
(In thousands)
Balance at beginning of year $4,583 $3,620
Deferred tax benefit 256 334
Net unrealized gain/loss on securities available for sale (204) 629
Adjustment to initially apply SFAS No. 158 (40) -
------ ------
Balance at end of year $4,595 $4,583
====== ======
The federal income tax reserve for loan losses at the Bank's base year is
$5.8 million. If any portion of the reserve is used for purposes other
than to absorb loan losses, approximately 150% of the amount actually
used, limited to the amount of the reserve, would be subject to taxation
in the fiscal year in which used. As the Bank intends to use the reserve
solely to absorb loan losses, a deferred tax liability of $2.4 million
has not been provided.
F-33
15. TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
The Company has had, and expects to have in the future, loans with its
directors and executive officers. Such loans, in the opinion of
management do not include more than the normal risk of collectibility or
other unfavorable features. Following is a summary of activity for such
loans:
Years Ended December 31,
------------------------------
2006 2005 2004
------------------------------
(In thousands)
Balance, beginning of year $13,538 $13,467 $ 7,175
New loans granted 770 6,266 10,532
Repayments of principal (893) (6,195) (4,240)
------- ------- -------
Balance, end of year $13,415 $13,538 $13,467
======= ======= =======
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as standby letters of credit and
commitments to extend credit with off-balance-sheet risk that are not
reflected in the consolidated financial statements. Financial instruments
with off-balance-sheet risk involve elements of credit, interest rate,
liquidity and market risk.
Management does not anticipate any significant losses as a result of
these transactions. The following summarizes these financial instruments
and other commitments and contingent liabilities at their contract
amounts:
December 31,
------------------
2006 2005
------------------
(In thousands)
Commitment to extend credit:
Unused lines of credit $58,275 $62,053
Loan commitments 35,443 29,068
Existing loan agreements 3,210 985
Standby letters of credit 6,159 5,936
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some commitments expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property,
plant and equipment, and income-producing commercial properties.
F-34
Standby letters of credit are written conditional commitments issued by
the Company guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers.
At December 31, 2006 outstanding commitments to extend credit totaled
$103.1 million, with $18.7 million in fixed rate commitments with
interest rates ranging from 6.00% to 10.00% and $84.4 million in variable
rate commitments. At December 31, 2005, outstanding commitments to extend
credit totaled $98.0 million, with $1.6 million in fixed rate commitments
with interest rates ranging from 5.72% to 12.50% and $96.4 million in
variable rate commitments.
In the ordinary course of business, the Company is party to various legal
proceedings, none of which, in the opinion of management, will have a
material effect on the Company's consolidated financial position or
results of operations.
The Company leases facilities and certain equipment under cancelable and
noncancelable leases expiring in various years through the year 2046.
Certain of the leases provide for renewal periods for up to forty years
at the discretion of the Company. Rent expense under operating leases was
$246,000, $197,000, and $199,000 for the years ended December 31, 2006,
2005, and 2004, respectively.
Aggregate future minimum rental payments under the terms of the operating
leases at December 31, 2006, are as follows:
Years Ending (In thousands)
2007 $ 366
2008 363
2009 364
2010 364
2011 371
Thereafter 7,037
------
$8,865
======
17. CONCENTRATIONS OF CREDIT RISK
Most of the Company's loans consist of residential and commercial real
estate loans located in Western Massachusetts. As of December 31, 2006
and 2005, the Company's residential and commercial related real estate
loans represented 73% of total loans. The Company's policy for collateral
requires that the amount of the loan may not exceed 100% and 85% of the
appraised value of the property for residential and commercial real
estate, respectively, at the date the loan is granted. For residential
loans, in cases where the loan exceeds 80%, private mortgage insurance is
typically obtained for that portion of the loan in excess of 80% of the
appraised value of the property.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Methods and assumptions for valuing the Company's financial instruments
are set forth below for financial instruments that have fair values
different than their carrying values. Estimated fair values are
calculated based on the value without regard to any premium or discount
that may result from concentrations of ownership of a financial
instrument, possible tax ramifications or estimated transaction costs.
Cash and Cash Equivalents and Accrued Interest Receivable and Accrued
Interest Payable - The carrying amounts of these items are considered to
be a reasonable estimate of fair value due to their short-term nature.
Securities and Mortgage Backed Securities - The estimated fair values for
securities and mortgage- backed securities are based on quoted market
prices or dealer quotations.
F-35
Federal Home Loan Bank and Other Stock - These investments are carried at
cost which approximates fair value.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, net of the
applicable portion of the allowance for loan losses, such as commercial
and industrial, commercial real estate, residential mortgage, and
consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and nonperforming
categories.
The fair value of performing loans, except residential mortgage loans, is
calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. The estimate of maturity is
based on the Company's historical experience with repayments for each
loan classification, modified, as required, by an estimate of the effect
of current economic and lending conditions. For performing residential
mortgage loans, fair value is estimated by discounting contractual cash
flows adjusted for prepayment estimates using discount rates based on
secondary market sources adjusted to reflect differences in credit costs.
Estimated fair value for impaired loans is based on recent external
appraisals if the loan is collateral dependent. Assumptions regarding
credit risk cash flows and discount rates are judgmentally determined
using available market information and specific borrower information.
Management has made estimates of fair value discount rates that it
believes to be reasonable.
Deposits -The estimated fair value of deposits with no stated maturity,
such as noninterest-bearing demand deposits, savings and NOW accounts,
and money market and checking accounts, is equal to the amount payable on
demand. The estimated fair value of certificates of deposit is based on
the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar
remaining maturities.
Customer Repurchase Agreements -The fair value of these agreements is
estimated based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered.
Federal Home Loan Bank Advances - The estimated fair value of these
borrowings is based upon the discounted value of contractual cash flows.
The discount rate is estimated using Federal Home Loan Bank of Boston
advance rates currently offered for borrowings with similar maturities.
Commitments to Extend Credit - The stated value of commitments to extend
credit approximates fair value as the current interest rates for similar
commitments do not differ significantly. For fixed-rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. Such differences are not
considered significant.
F-36
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
2006 2005
------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------------------------------------
(In thousands)
ASSETS:
Cash and cash equivalents $154,508 $154,508 $ 26,456 $ 26,456
Securities:
Available for sale 41,687 41,687 28,321 28,321
Held to maturity 77,299 76,938 73,323 72,704
Mortgage backed securities:
Available for sale 126,942 126,942 101,138 101,138
Held to maturity 163,093 160,709 152,127 149,017
Federal Home Loan Bank and
other stock 4,246 4,246 4,237 4,237
Loans - net 385,184 398,724 378,837 379,384
Accrued interest receivable 4,502 4,502 3,853 3,853
LIABILITIES:
Deposits 627,466 628,599 623,045 617,837
Customer repurchase agreements 17,919 17,919 14,441 14,441
Federal Home Loan Bank advances 55,000 54,233 45,000 43,969
Accrued interest payable
235 235 156 156
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Where quoted market prices
are not available, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment. Changes in assumptions could
significantly affect the estimates.
19. SEGMENT INFORMATION
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
others. For example, commercial lending is dependent upon the ability of
the Bank to fund itself with retail deposits and other borrowings and to
manage interest rate and credit risk. This situation is also similar for
consumer and residential mortgage lending. Accordingly, all significant
operating decisions are based upon analysis of the Company as one
operating segment or unit.
The Company operates only in the U.S. domestic market, primarily in
Western Massachusetts. For the years ended December 31, 2006 2005 and
2004 there is no customer that accounted for more than 10% of the
Company's revenue.
F-37
20. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The condensed balance sheets of the Parent Company are as follows:
December 31,
--------------------------------
2006 2005 2004
---- ---- ----
(In thousands)
ASSETS:
Due from banks $171,737 $ 18 $ 25
Federal funds sold 636 2,910 987
Securities HTM 1,883 10,833 -
Mortgage-backed HTM 399 2,029 -
Investment in subsidiaries 113,297 99,174 115,810
Other assets 1,528 923 1,271
-------- -------- --------
TOTAL ASSETS $289,480 $115,887 $118,093
======== ======== ========
LIABILITIES AND EQUITY:
Liabilities $ 72 $ 45 $ 42
Equity 289,408 115,842 118,051
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $289,480 $115,887 $118,093
======== ======== ========
The condensed statements of income for the Parent Company are as follows:
Years Ended December 31,
-----------------------------
2006 2005 2004
---- ---- ----
(In thousands)
INTEREST AND DIVIDEND INCOME:
Securities $ 248 $ 280 $ -
Interest-bearing deposits - - 23
Federal funds sold 40 91 6
Other income 6 7 -
------- ------- -------
\ Total interest income 294 378 29
------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,331 1,189 1,019
Other 160 194 183
------- ------- -------
Total noninterest expense 1,491 1,383 1,202
------- ------- -------
LOSS BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES AND BENEFIT
FOR INCOME TAX (1,197) (1,005) (1,173)
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 5,434 6,736 7,016
INCOME TAX BENEFIT (417) (488) (480)
------- ------- -------
NET INCOME $ 4,654 $ 6,219 $ 6,323
======= ======= =======
F-38
The condensed statement of cash flows of the Company are as follows:
Years Ended December 31,
----------------------------------
2006 2005 2004
---- ---- ----
(In thousands)
OPERATING ACTIVITIES:
Net Income $ 4,654 $ 6,219 $ 6,323
Equity in undistributed earnings of subsidiaries (5,434) (6,736) (7,016)
Net amortization of premiums and discounts on securities 12 9 -
Change in other liabilities (42) 3 (204)
Change in other assets (535) 347 (771)
Net transfers from subsidiaries 236 10,090 7,641
Other, net 2,074 1,006 694
-------- -------- --------
Net cash provided by operating activities 965 10,938 6,667
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from principal collections 530 430 -
-------- -------- --------
Net cash provided by investing activities 530 430 -
-------- -------- --------
FINANCING ACTIVITIES:
Cash dividends paid (3,785) (3,558) (1,713)
Common stock repurchased (1,583) (5,699) (11,956)
Net proceeds from sale of common stock 171,712 - -
Excess tax benefit from share-based compensation 260 - -
Other, net 1,346 (195) 810
-------- -------- --------
Net cash provided by (used in) financing activities 167,950 ( 9,452) (12,859)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 169,445 1,916 (6,192)
CASH AND CASH EQUIVALENTS:
Beginning of year 2,928 1,012 7,204
-------- -------- --------
End of year $172,373 $ 2,928 $ 1,012
======== ======== ========
Supplemental cash flow information:
Transfer of securities from Westfield Securities Corp. $ - $ 24,584 $ -
Transfer of securities to Westfield Bank (10,153) (11,399) -
F-39
21. OTHER NONINTEREST EXPENSE
There is no item that as a component of other noninterest expense,
exceeds 1% of the aggregate of total interest income and noninterest
income for the years ended December 31, 2006, 2005 and 2004 respectively.
22. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2006
---------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(Dollars in thousands, except per share amounts)
Interest and dividend income $9,928 $10,613 $10,727 $11,167
Interest expense 4,150 4,702 5,183 5,516
------ ------- ------- -------
Net interest and dividend income 5,778 5,911 5,544 5,651
------ ------- ------- -------
Provision for loan losses 75 200 50 65
Noninterest income 853 883 871 844
Loss on sales of fixed assets, net - - 378 -
Noninterest expense 4,794 4,904 4,877 4,815
------ ------- ------- -------
Income before income taxes 1,762 1,690 1,110 1,615
Income taxes 449 430 236 408
------ ------- ------- -------
Net income $1,313 $ 1,260 $ 874 $ 1,207
====== ======= ======= =======
Basic earnings per share $ 0.14 $ 0.14 $ 0.09 $ 0.13
Diluted earnings per share $ 0.14 $ 0.13 $ 0.09 $ 0.13
2005
---------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(Dollars in thousands, except per share amounts)
Interest and dividend income $8,878 $ 9,176 $ 9,504 $ 9,748
Interest expense 2,963 3,279 3,554 3,801
------ ------- ------- -------
Net interest and dividend income 5,915 5,897 5,950 5,947
------ ------- ------- -------
Provision for loan losses 140 125 100 100
Noninterest income 748 793 915 897
Gains on sales and writedowns
of securities, net - 18 - 1
Noninterest expense 4,582 4,798 4,617 4,467
------ ------- ------- -------
Income before income taxes 1,941 1,785 2,148 2,278
Income taxes 430 373 553 577
------ ------- ------- -------
Net income $1,511 $ 1,412 $ 1,595 $ 1,701
====== ======= ======= =======
Basic earnings per share $ 0.16 $ 0.15 $ 0.17 $ 0.18
Diluted earnings per share $ 0.16 $ 0.15 $ 0.16 $ 0.17
F-40
23. SUBSEQUENT EVENTS
On January 3, 2007, Westfield Financial completed its stock offering in
connection with the second step conversion of Westfield Mutual Holding Company.
As part of the conversion, New Westfield Financial, Inc. succeeded Westfield
Financial as the stock holding company of Westfield Bank, and Westfield Mutual
Holding Company was dissolved. In the stock offering, a total of 18,400,000
shares representing Westfield Mutual Holding Company's ownership interest in
Westfield Financial were sold by New Westfield Financial in a subscription
offering, community offering and syndicated offering. In addition, each
outstanding share of Westfield Financial as of January 3, 2007 was exchanged
for 3.28138 new shares of New Westfield Financial common stock. New Westfield
Financial, Inc. changed its name to Westfield Financial, Inc. effective January
3, 2007.
For financial reporting purposes, net proceeds of $171.7 million from the
second step conversion were recognized by Westfield Financial and reported in
its balance sheet as of December 31, 2006. Proceeds, net of stock issuance
costs, received directly by Westfield Financial or held by the underwriter for
the convenience of Westfield Financial were recorded by increasing cash, the
capital stock, and paid-in capital accounts.
F-41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Westfield Financial, Inc.
We have audited management's assessment, included in Management's Annual Report
on Internal Control Over Financial Reporting, that Westfield Financial, Inc.
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Westfield Financial Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
F-42
In our opinion, management's assessment that Westfield Financial, Inc.
maintained effective internal control over financial reporting as of December
31, 2006 is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, Westfield Financial, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of Westfield Financial, Inc. and our report dated March 9, 2007
expressed an unqualified opinion.
WOLF & COMPANY, P.C.
Boston, Massachusetts
March 9, 2007
F-43