UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission file number 001-16767
Westfield Financial, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 73-1627673
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
141 Elm Street, Westfield, Massachusetts 01086
(Address of principal executive offices)
(Zip Code)
(413) 568-1911
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company.
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Outstanding at
Class August 2, 2007
- ----------------------------------- ----------------------------------
Common Stock, par value $0.01 31,926,587
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - June 30, 2007 and December
31, 2006
Consolidated Statements of Income (Unaudited) - Three and six months
ended June 30, 2007 and 2006
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Six Months ended June 30, 2007
and 2006
Consolidated Statements of Cash Flows (Unaudited) - Six Months ended
June 30, 2007 and 2006
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
Exhibits
1
FORWARD - LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements".
These forward-looking statements are made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. The
words "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan," and similar expressions are intended to identify
forward-looking statements. These forward-looking statements may be subject to
significant known and unknown risks, uncertainties, and other factors,
including, but not limited to, changes in the real estate market or local
economy, changes in interest rates, changes in laws and regulations to which we
are subject, and competition in our primary market area.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially
from the results discussed in these forward-looking statements. You are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. Westfield Financial undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
2
PART 1
ITEM 1. FINANCIAL STATEMENTS
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in thousands, except share data)
June 30, December 31,
2007 2006
---- ----
ASSETS
Cash and due from banks $ 21,004 $ 51,645
Federal funds sold 63,844 97,659
Interest-bearing deposits and other short term investments 237 5,204
---------- --------
Cash and cash equivalents 85,085 154,508
---------- --------
SECURITIES:
Available for sale - at estimated fair value 52,296 41,687
Held to maturity - at amortized cost (estimated fair value of
$97,321 at June 30, 2007 and $76,938 in December 31, 2006) 99,048 77,299
MORTGAGE-BACKED SECURITIES:
Available for sale - at estimated fair value 173,665 126,942
Held to maturity - at amortized cost (estimated fair value of
$161,408 at June 30, 2007 and $160,709 at December 31, 2006) 164,081 163,093
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 5,575 4,246
LOANS - Net of allowance for loan losses of $5,674 at June 30,
2007 and $5,437 at December 31, 2006 394,726 385,184
PREMISES AND EQUIPMENT - Net 13,181 12,247
ACCRUED INTEREST AND DIVIDENDS 5,509 4,502
BANK-OWNED LIFE INSURANCE 31,731 20,619
OTHER ASSETS 6,732 6,502
---------- --------
TOTAL ASSETS $1,031,629 $996,829
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 49,444 $ 42,383
Interest-bearing 580,824 585,083
---------- --------
Total deposits 630,268 627,466
---------- --------
CUSTOMER REPURCHASE AGREEMENTS 20,279 17,919
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 80,000 55,000
OTHER LIABILITIES 7,797 7,036
---------- -------
TOTAL LIABILITIES 738,344 707,421
---------- --------
COMMITMENTS AND CONTINGENCIES (page 23)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at June 30, 2007 and December 31, 2006 - -
Common stock - $.01 par value, 75,000,000 shares authorized, 31,926,587 shares
Issued and outstanding at June 30, 2007, 82,034,500 shares authorized,
34,717,000 shares issued, 31,924,257 shares outstanding at December 31, 2006 319 274
Additional paid-in capital 209,281 201,736
Unallocated Common Stock of Employee Stock Ownership Plan (11,864) (4,835)
Unearned compensation (363) (405)
Retained earnings 96,985 93,364
Accumulated and other comprehensive loss (1,073) (726)
---------- --------
Total stockholders' equity 293,285 289,408
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,031,629 $996,829
========== ========
See accompanying notes to consolidated financial statements.
3
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Income - Unaudited
(Dollars in thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30
2007 2006 2007 2006
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $ 4,377 $ 4,558 $ 8,809 $ 8,662
Debt securities, taxable 5,389 3,474 9,947 6,784
Commercial and industrial loans 2,069 1,905 3,993 3,623
Debt securities, tax-exempt 327 307 635 615
Marketable equity securities 160 118 307 227
Federal funds sold 620 117 1,936 328
Consumer loans 90 102 181 215
Interest-bearing deposits and other short term investments 27 32 95 88
---------- ---------- ---------- ----------
Total interest and dividend income 13,059 10,613 25,903 20,542
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 4,923 4,207 9,719 7,875
Customer repurchase agreements 136 82 273 158
Other borrowings 587 413 977 819
---------- ---------- ---------- ----------
Total interest expense 5,646 4,702 10,969 8,852
---------- ---------- ---------- ----------
Net interest and dividend income 7,413 5,911 14,934 11,690
PROVISION FOR LOAN LOSSES 75 200 175 275
---------- ---------- ---------- ----------
Net interest and dividend income after provision
for loan losses 7,338 5,711 14,759 11,415
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Income from bank-owned life insurance 324 199 591 394
Service charges and fees 650 684 1,202 1,342
---------- ---------- ---------- ----------
Total noninterest income 974 883 1,793 1,736
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employees benefits 3,290 2,989 6,604 5,988
Occupancy 578 526 1,167 1,021
Computer operations 361 370 713 765
Stationery, supplies and postage 127 137 253 254
Other 1,225 882 2,150 1,670
---------- ---------- ---------- ----------
Total noninterest expense 5,581 4,904 10,887 9,698
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,731 1,690 5,665 3,453
INCOME TAXES 826 430 1,740 879
---------- ---------- ---------- ----------
NET INCOME $ 1,905 $ 1,260 $ 3,925 $ 2,574
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.06 $ 0.04 $ 0.13 $ 0.08
Average shares outstanding 30,120,536 30,547,810 30,107,957 30,544,387
Diluted earnings per share $ 0.06 $ 0.04 $ 0.13 $ 0.08
Diluted average shares outstanding 30,575,244 31,103,863 30,625,328 31,103,797
See accompanying notes to consolidated financial statements.
4
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - UNAUDITED
(Dollars in thousands, except share data)
Common Stock Restricted Accumulated
------------------ Additional Stock Other
Par Paid-In Unallocated Unearned Retained Comprehensive
Shares Value Capital ESOP Compensation Earnings (Loss) Total
------ ----- ---------- ----------- ------------ -------- ------------- -----
Balance at December 31, 2006 9,728,912 $274 $201,736 $ (4,835) $(405) $93,364 $ (726) $289,408
Comprehensive income:
Net income - - - - - 3,925 - 3,925
Unrealized losses on
securities arising during
the year, net of tax
benefit of $244 - - - - - - (347) (347)
--------
Comprehensive income 3,578
--------
Exchange of common stock
pursuant to reorganization
(9,728,912 shares exchanged
at a 3.28138 ratio for
31,923,903 shares) 21,458,991 38 (358) - - - - (320)
Capital contribution pursuant
to dissolution of Mutual
Holding Company - - - - - 2,713 - 2,713
Share-based compensation - - 538 331 42 - - 911
Purchase of ESOP Shares 736,000 7 7,353 (7,360) - - - -
Issuance of common stock in
connection with stock option
exercises 2,684 - 12 - - - - 12
Cash dividends declared
($.10 per share) - - - - - (3,017) - (3,017)
---------- ---- -------- -------- ----- ------- ------- --------
Balance at June 30, 2007 31,926,587 319 209,281 (11,864) (363) 96,985 (1,073) 293,285
========== ==== ======== ======== ===== ======= ======= ========
Balance at December 31, 2005 9,754,757 98 30,120 (5,127) (861) 92,789 (1,177) 115,842
Comprehensive income:
Net income - - - - - 2,574 - 2,574
Unrealized losses on
securities arising during
the period, net of tax
benefit of $362 - - - - - - (620) (620)
--------
Total comprehensive income 1,954
--------
Activity related to common stock
issued as employee incentives - - 252 146 211 - - 609
Common stock repurchases - - (1,583) - - - - (1,583)
Issuance of common stock
connection with stock option
exercises - - 815 - - (280) - 535
Cash dividends declared
($.50 per share) - - - - - (1,888) - (1,888)
---------- ---- -------- -------- ----- ------- ------- --------
Balance at June 30, 2006 9,754,757 $ 98 $ 29,604 $ (4,981) $(650) $93,195 $(1,797) $115,469
========== ==== ======== ======== ===== ======= ======= ========
See accompanying notes to consolidated financial statements.
5
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Six Months
Ended June 30,
2007 2006
---- ----
OPERATING ACTIVITIES:
Net income $ 3,925 $ 2,574
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 175 275
Depreciation of premises and equipment 509 530
Net amortization of premiums and discounts on securities,
mortgage-backed securities, and mortgage loans 186 339
Share-based compensation expense 1,247 836
Excess tax benefit from share-based compensation (34) -
Loss on sale of fixed assets - 2
Deferred income tax benefit - (188)
Increase in cash surrender value of bank-owned life insurance (591) (393)
Changes in assets and liabilities:
Accrued interest and dividends (1,007) (433)
Other assets 49 6
Other liabilities 761 423
-------- --------
Net cash provided by operating activities 5,220 3,971
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (31,758) (10,087)
Proceeds from maturities and principal collections 10,000 8,000
Securities, available for sale:
Purchases (16,171) (10,190)
Proceeds from calls, maturities, and principal collections 5,293 3,000
Mortgage-backed securities, held to maturity:
Purchases (20,342) (18,018)
Principal collections 19,196 17,533
Mortgage-backed securities, available for sale:
Purchases (63,808) (16,263)
Principal collections 16,759 12,674
Purchase of residential mortgages (741) (10,548)
Net other (increase) decrease in loans (8,992) 2,621
Purchase of Federal Home Loan Bank of Boston stock (1,546) -
Proceeds from sale of Federal Home Loan Bank of Boston stock 217 -
Purchases of premises and equipment (1,443) (1,091)
Proceeds from sale of fixed assets - 10
Purchase of bank-owned life insurance (10,521) -
-------- --------
Net cash used in investing activities (103,857) (22,359)
-------- --------
FINANCING ACTIVITIES:
Increase in deposits 2,802 12,675
Increase (decrease) in customer repurchase agreements 2,360 (37)
Repayment of Federal Home Loan Bank of Boston advances (17,465) -
Federal Home Loan Bank of Boston advances 42,465 -
Cash dividends paid (3,017) (1,888)
Exchange of common stock pursuant to reorganization (320) -
Capital contribution pursuant to dissolution of MHC 2,713 -
Treasury stock purchased - (1,583)
Issuance of common stock in connection with stock option exercises 12 -
Reissuance of treasury stock in connection with stock option exercises - 535
Purchase of common stock in connection with employees benefit program (336) (227)
-------- --------
Net cash provided by financing activities 29,214 9,475
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS: (69,423) (8,913)
Beginning of period 154,508 26,456
-------- --------
End of period $ 85,085 $ 17,543
======== ========
See accompanying notes to consolidated financial statements.
6
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Westfield Financial, Inc. was organized as a
Massachusetts-chartered stock holding company in November 2001 in connection
with the reorganization of Westfield Mutual Holding Company, a
federally-chartered mutual holding company. As part of the reorganization,
Westfield Financial offered for sale 47% of its common stock. The remaining 53%
of Westfield Financial's shares were issued to Westfield Mutual Holding
Company. The reorganization and related stock offering were completed on
December 27, 2001.
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.
Westfield Financial has a federally-chartered stock savings bank subsidiary
called Westfield Bank. Westfield Bank's deposits are insured to the limits
specified by the Federal Deposit Insurance Corporation ("FDIC"). Westfield Bank
operates eleven branches in Western Massachusetts. Westfield Bank's primary
source of revenue is earnings on loans to small and middle-market businesses
and to residential property homeowners.
Elm Street Securities Corporation and WFD Securities Corporation,
Massachusetts-chartered security corporations, were formed by Westfield
Financial for the primary purpose of holding qualified investment securities.
The conversion was accounted for as a reorganization in corporate form with no
change in the historical basis of Westfield Financial's assets, liabilities,
and equity. All references to the number of shares outstanding, including
references for purposes of calculating per share amounts, are restated to give
retroactive recognition to the exchange ratio applied in the conversion.
Principles of Consolidation - The consolidated financial statements include the
accounts of Westfield Financial, Westfield Bank, Elm Street Securities
Corporation, WFD Securities Corporation and prior to its dissolution, Westfield
Securities Corporation. All material intercompany balances and transactions
have been eliminated in consolidation.
Estimates - The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
("U.S. GAAP") requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of income and expenses for each. Actual results could
differ from those estimates. Estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the fair
value of financial instruments and the allowance for loan losses.
7
2. EARNINGS PER SHARE
Basic earnings per share represents income available to stockholders divided by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential shares had been issued, as well as any
adjustment to income that would result form the assumed issuance. Per share
amounts related to periods prior to the date of completion of the conversion
(January 3, 2007) have been restated to give retroactive recognition to the
exchange ratio applied in the conversion (3.28138). Potential common shares
that may be issued by Westfield Financial relate solely to outstanding stock
awards and options and are determined using the treasury stock method.
Earnings per common share for the three and six months ended June 30, 2007 and
2006, have been computed based on the following:
Three Months Six Months
Ended June 30, Ended June 30,
2007 2006 2007 2006
---- ---- ---- ----
(In thousands, except per share data)
Net income available to common stock holders $ 1,905 $ 1,260 $ 3,925 $ 2,574
======= ======= ======= =======
Weighted average number of common stock outstanding 30,120 30,548 30,108 30,544
Effect of dilutive stock awards and options 455 556 517 559
------- ------- ------- -------
Adjusted weighted average number of common shares
outstanding used to calculate diluted earnings per
common share 30,575 31,104 30,625 31,103
======= ======= ======= =======
Basic earnings per share $ .06 $ .04 $ .13 $ .08
Diluted earnings per share $ .06 $ .04 $ .13 $ .08
3. SHARE-BASED COMPENSATION
Under Westfield Financial's 2002 Stock Option Plan and 2007 Stock Option Plan,
Westfield Financial may grant options to its directors, officers, and employees
for up to 1,631,682 shares and 1,560,101 shares, respectively, 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
Westfield Financial's stock the date of grant with a maximum term of ten years.
All options currently outstanding vest at 20% per year.
In May 2007, the remaining 150,155 shares available for issuance under the 2002
Stock Option Plan were fully allocated and no shares are currently available
for future grants. The 2007 Stock Option Plan was approved by the shareholders
at the annual meeting of shareholders on July 19, 2007. To date, no awards have
been granted from the 2007 Stock Option Plan.
Westfield Financial adopted Statement of Financial Accounting Standard No.
123(R), "Share-Based Payment" ("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, based on the fair value
determined at the grant date under SFAS 123, (Accounting for Stock-Based
Compensation" ("SFAS 123").
8
The adoption of SFAS 123(R) by Westfield Financial resulted in additional
share-based compensation expense of $84,000 and $73,000, and a related tax
benefit of $18,000 and $17,000 for the three months ended June 30, 2007 and
2006, respectively. Additional share-based compensation was $157,000 and
$146,000, with a related tax benefit of $35,000 and $34,000 for the six months
ended June 30, 2007 and 2006, respectively. As of June 30, 2007 the
compensation cost of unvested stock options amounted to $410,000 with a related
tax benefit of $37,000.
A summary of the status of Westfield Financial's stock options at June 30, 2007
is presented below:
Weighted Average
Shares Exercise Price
------ ----------------
Balance of December 31, 2006 1,217,050 $ 4.43
Shares Granted 150,155 10.11
Shares Exercised (2,684) 4.39
---------
Balance of June 30, 2007 1,364,521 $ 5.06
=========
Information pertaining to options outstanding at June 30, 2007 is as follows:
Aggregate Intrinsic Weighted Average Aggregate Intrinsic
Exercise Number Value of Outstanding Remaining Number Value of Exercisable
Price Outstanding Shares Contractual Life Exercisable Shares
- -------- ----------- -------------------- ---------------- ----------- --------------------
(in thousands) (in thousands)
$ 4.39 1,197,960 $6,685 5.1 Years 952,194 $5,313
7.52 8,203 20 7.7 Years 1,641 4
7.62 8,203 19 6.7 Years 3,281 8
10.11 150,155 (21) 10.0 Years - -
--------- ------ ------- ------
1,364,521 $6,703 957,116 $5,325
========= ====== ======= ======
4. STOCK AWARDS
Under Westfield Financial's Recognition and Retention Plan dated November 1,
2002, Westfield Financial may grant stock awards to its directors, officers and
employees for up to 652,664 shares of common stock. In May 2007, all remaining
shares under the plan were fully allocated and no shares are currently
available for future grants. Westfield Financial applies SFAS 123(R) in
accounting for stock awards. The stock allocations, based on the market price
at the date of grant, are recorded as unearned compensation. Unearned
compensation is amortized over the vesting period. Westfield Financial recorded
compensation cost related to the stock awards of approximately $125,000 and
$245,000 for the three and six months ended June 30, 2007, respectively.
Compensation cost related to stock awards was approximately $119,000 and
$238,000 for the three and six months ended June 30, 2006.
5. EMPLOYEE STOCK OWNERSHIP PLAN
In January 2002, Westfield Financial 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, Westfield Financial provided a
loan to the Westfield Financial Employee Stock Ownership Plan Trust which was
used to purchase 8%, or 1,305,359 shares, of Westfield Financial's outstanding
stock in the open market. In January 2007, as part of the second step stock
conversion, Westfield Financial provided a loan to the Westfield Financial
Employee Stock Ownership Plan Trust which was used to purchase 4.0%, or 736,000
shares, of the 18,400,000 shares of common stock sold in the offering. The 2002
and 2007 loans bear interest equal to 8.0% and provide for annual payments of
interest and principal.
9
At June 30, 2007 the remaining principal balance is payable as follows:
Years Ending
December 31 (In thousands)
------------ --------------
2007 $ 447
2008 447
2009 447
2010 447
2011 447
Thereafter 10,161
-------
$12,396
=======
Westfield Bank has committed to make contributions to the ESOP sufficient to
support the debt service of the loans. The loans are secured by the shares
purchased, which are held in a suspense account for allocation among the
participants as the loans are paid. Total compensation expense applicable to
the ESOP amounted to $252,000 and $511,000 for the three and six months ended
June 30, 2007 and $113,000 and $227,000 for the three and six months ended June
30, 2006.
6. PENSION AND OTHER BENEFITS
The following table provides information regarding net benefit costs for the
period shown:
Pension Benefits Other Benefits
---------------- --------------
Three months ended June 30,
----------------------------------
(in thousands)
2007 2006 2007 2006
---- ---- ---- ----
Service cost $ 175 $ 181 $ 8 $ 7
Interest cost 145 150 12 12
Expected return on assets (162) (149) 0 0
Transaction obligation (3) (3) 2 2
Actuarial loss 0 11 0 1
----- ----- --- ---
Net periodic pension cost $ 155 $ 190 $22 $22
===== ===== === ===
Pension Benefits Other Benefits
---------------- --------------
Six months ended June 30,
----------------------------------
(in thousands)
2007 2006 2007 2006
---- ---- ---- ----
Service cost $ 351 $ 362 $16 $15
Interest cost 291 300 25 24
Expected return on assets (323) (298) 0 0
Transition obligation (6) (6) 4 5
Actuarial loss (1) 22 0 2
----- ----- --- ---
Net periodic pension cost $ 312 $ 380 $45 $46
===== ===== === ===
10
Westfield Financial plans to contribute the amount required to meet the minimum
funding standards under Internal Revenue code Section 412. Additional
contributions will be made as deemed appropriate by management in conjunction
with the plan's actuaries. For the year 2007, the preliminary estimated
contribution is approximately $690,000. As of June 30, 2007 no contribution had
been made.
7. SUBSEQUENT EVENTS
Westfield Financial held its Annual Meeting of Shareholders on July 19, 2007
(the "Meeting"). The Westfield Financial 2007 Stock Option Plan and 2007
Recognition and Retention Plan were both approved at the Meeting. Under the
2007 Stock Option Plan, Westfield Financial has been authorized to grant
1,560,101 stock options to its directors, officers and other key employees. To
date, no options have been awarded from the 2007 Stock Option Plan.
Under the 2007 Recognition and Retention Plan, Westfield Financial has been
authorized to grant 624,041 shares of common stock to its directors, officers
and other key employees. To date, no shares have been awarded from the 2007
Recognition and Retention Plan.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements," which 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 Bank on January 1, 2008, with early adoption permitted and is not
expected to have a material impact on Westfield Bank'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 Westfield Bank's 2008 fiscal
year and Westfield Bank is in the process of evaluating the potential impacts
of adopting EITF 06-4 on its consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," which provides companies with an
option to report selected financial assets and liabilities at fair value.
Statement No. 159 also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies and choose different
measurement attributes for similar types of assets and liabilities. This
Statement is effective for Westfield Bank on January 1, 2008, with early
adoption permitted for fiscal 2007, provided that Westfield Bank also adopts
Statement No. 157 for fiscal 2007. Management is in the process of evaluating
the potential impacts of adopting SFAS No. 159 on its consolidate financial
statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
Westfield Financial strives to remain a leader in meeting the financial service
needs of the local community 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.
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. Proceeds, net of stock issuance costs, were approximately $171.2
million.
Westfield Financial has adopted a growth-oriented strategy that has focused on
increased commercial lending. Westfield Financial's strategy also calls for
increasing deposit relationships and broadening its product lines and services.
Westfield Financial believes that this business strategy is best for its long
term success and viability, and complements its 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 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.
Please review our financial results for the quarter ended June 30, 2007 in the
context of this strategy.
o Net income was $1.9 million, or $0.06 per diluted share, for the
quarter ended June 30, 2007 compared to $1.3 million, or $0.04 per
diluted share for the same period in 2006. For the six months ended
June 30, 2007, net income was $3.9 million, or $0.13 per diluted
share, compared to $2.6 million, or $0.08 per diluted share, for the
same period in 2006.
12
o Net interest income was $7.4 million for the three months ended June
30, 2007 and $5.9 million for the same period in 2006. Net interest
income was $14.9 million for the six months ended June 30, 2007 and
$11.7 million for the same period in 2006. The increase in net
interest income was mainly due to an increase in average earning
assets as a result of funds raised in the second step stock offering.
The net interest margin, on a tax equivalent basis, was 3.25% and
3.31% for the three and six months, respectively, ended June 30,
2007, compared to 3.19% in both the same periods in 2006.
o Total assets increased $34.8 million to $1.0 billion at June 30, 2007
from $996.8 million at December 31, 2006. Investment securities
increased $80.1 million, to $489.1 million at June 30, 2007 from
$409.0 million at December 31, 2006. Cash and cash equivalents
decreased $69.4 million, to $85.1 million at June 30, 2007 from
$154.5 million at December 31, 2006. The decrease in cash and cash
equivalents was the result of using funds to purchase investment
securities.
o Net loans increased by $9.6 million to $394.7 million at June 30,
2007 from $385.1 million at December 31, 2006. This was primarily the
result of an increase in commercial and industrial loans of $14.2
million to $114.6 million at June 30, 2007 from $100.4 million at
December 31, 2006.
o Residential real estate loans decreased $2.4 million to $107.5
million at June 30, 2007 from $109.9 million at December 31, 2006.
Since September 2001, Westfield Bank has referred 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.
o Asset growth was funded primarily through a $25.0 million increase in
Federal Home Loan Bank borrowing, which totaled $80.0 million at June
30, 2007 and $55.0 million at December 31, 2006.
o Total deposits increased $2.8 million to $630.3 million at June 30,
2007 from $627.5 million at December 31, 2006. NOW and checking
accounts increased $9.8 million to $132.6 million at June 30, 2007
from $122.8 million at December 31, 2006. Money market accounts
decreased $8.3 million to $86.2 million at June 30, 2007. Time
deposits decreased $2.2 million to $371.8 million at June 30, 2006.
o Customer repurchase agreements were $20.3 million at June 30, 2007
and $17.9 million at December 31, 2006. All of Westfield Bank's
customer repurchase agreements at June 30, 2007 were held by
commercial customers.
o Nonperforming loans were $1.0 million both at June 30, 2007 and
December 31, 2006. This represents 0.25% and 0.26% of total loans at
June 30, 2007 and December 31, 2006, respectively. Charge-offs
decreased by $489,000 to $45,000 for the six months ended June 30,
2007 from $534,000 for the six months ended June 30, 2006.
o The allowance for loan losses was $5.7 million at June 30, 2007 and
$5.4 million at December 31, 2006. This represents 1.42% of total
loans at June 30, 2007 and 1.39% of total loans at December 31, 2006.
At these levels, the allowance for loan losses as a percentage of
nonperforming loans was 563% at June 30, 2007 and 529% at December
31, 2006.
o Stockholders' equity at June 30, 2007 and December 31, 2006 was
$293.3 million and $289.4 million, respectively, which represented
28.4% of total assets as of June 30, 2007 and 29.0% of total assets
as of December 31, 2006.
13
o Noninterest expense for the three months ended June 30, 2007 was $5.6
million, compared to $4.9 million for the same period in 2006.
Noninterest expense for the six months ended June 30, 2007 was $10.9
million, compared to $9.7 million for the same period in 2006.
Salaries and benefits increased $301,000 and $616,000 for the three
and six months ended June 30, 2006, respectively, compared to the
same periods in 2006. The increase in salaries and benefits primarily
the result normal increases in this area, an increase in expense
related to the Employee Stock Ownership Plan, along with hiring new
employees. Much of the new hiring was associated with the opening of
a new Westfield Bank branch during the second quarter of 2007.
CRITICAL ACCOUNTING POLICIES
Westfield Financial's critical accounting policies, given its current business
strategy and asset/liability structure, are revenue recognition on loans, the
accounting for allowance for loan losses and provision for loan losses, the
classification of securities as either held to maturity or available for sale,
and the evaluation of securities for other than temporary impairment.
Westfield Financial's general policy is to discontinue the accrual of interest
when principal or interest payments are delinquent 90 days or more, or earlier
if the loan is considered impaired. Any unpaid amounts previously accrued on
these loans are reversed from income. Subsequent cash receipts are applied to
the outstanding principal balance or to interest income if, in the judgment of
management, collection of principal balance is not in question. Loans are
returned to accrual status when they become current as to both principal and
interest and when subsequent performance reduces the concern as to the
collectibility of principal and interest. Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income over the estimated average lives of the related
loans.
Westfield Financial's methodology for assessing the appropriateness of the
allowance consists of two key components, which are a specific allowance for
identified problem or impaired loans and a formula allowance for the remainder
of the portfolio. Measurement of impairment can be based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the collateral, if the
loan is collateral dependent. This evaluation is inherently subjective as it
requires material estimates that may be susceptible to significant change. The
appropriateness of the allowance is also reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of Westfield Financial and other conditions, such as new loan
products, credit quality trends (including trends in nonperforming loans
expected to result from existing conditions), collateral values, loan volumes
and concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions were
believed to have had on the collectibility of the loan portfolio. Although
management believes it has established and maintained the allowance for loan
losses at appropriate levels, future adjustments may be necessary if economic,
real estate and other conditions differ substantially from the current
operating environment.
Securities, including mortgage-backed securities, which management has the
positive intent and ability to hold until maturity are classified as held to
maturity and are carried at amortized cost. Securities, including
mortgage-backed securities, which have been identified as assets for which
there is not a positive intent to hold to maturity are classified as available
for sale and are carried at fair value with unrealized gains and losses, net of
income taxes, reported as a separate component of equity. Accordingly, a
misclassification would have a direct effect on stockholders' equity. Sales or
reclassification as available for sale (except for certain permitted reasons)
of held to maturity securities may result in the reclassification of all such
securities to available for sale. Westfield Financial has never sold held to
maturity securities or reclassified such securities to available for sale other
than in specifically permitted circumstances. Westfield Financial does not
acquire securities or mortgage-backed securities for purposes of engaging in
trading activities.
14
On a quarterly basis, Westfield Financial reviews available for sale investment
securities with unrealized depreciation on a judgmental basis to assess whether
the decline in fair value is temporary or other than temporary. Declines in the
fair value of held to maturity and available for sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. In estimating other than temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the corporation to
retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2007 AND DECEMBER 31, 2006
Total assets increased $34.8 million to $1.0 billion at June 30, 2007 from
$996.8 million at December 31, 2006. Securities and mortgage-backed securities
increased $80.1 million, to $489.1 million at June 30, 2007 from $409.0 million
at December 31, 2006. Cash and cash equivalents decreased $69.4 million to
$85.1 million at June 30, 2007 from $154.5 million at December 31, 2006. The
decrease in cash and cash equivalents was the result of investing offering
proceeds in investment securities and loans.
Net loans increased by $9.6 million to $394.7 million at June 30, 2007 from
$385.1 million at December 31, 2006. This was primarily the result of an
increase in commercial and industrial loans of $14.2 million to $114.6 million
at June 30, 2007 from $100.4 million at December 31, 2006. Commercial real
estate loans decreased $1.7 million, to $172.8 million at June 30, 2007 from
$174.5 million at December 31, 2006. This was primarily due to a single
commercial relationship that divested real estate holdings and paid off loans
totaling $10.2 million. This was partially offset by new commercial real estate
loan originations.
Residential real estate loans decreased $2.4 million to $107.4 million at June
30, 2007 from $109.9 million at December 31, 2006. Since September 2001,
Westfield Bank has referred 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.
Asset growth was funded primarily through a $25.0 million increase in Federal
Home Loan Bank borrowings, which totaled $80.0 million at June 30, 2007 and
$55.0 million at December 31, 2006.
Total deposits increased $2.8 million to $630.3 million at June 30, 2007 from
$627.5 million at December 31, 2006. NOW and checking accounts increased $9.8
million to $132.6 million at June 30, 2007 from $122.8 million at December 31,
2006. Money market accounts decreased $8.3 million to $86.2 million at June 30,
2007. Time deposits decreased $2.2 million to $371.8 million at June 30, 2006.
Customer repurchase agreements were $20.3 million at June 30, 2007 and $17.9
million at December 31, 2006. All of Westfield Bank's customer repurchase
agreements at June 30, 2007 were held by commercial customers. A customer
repurchase agreement is an agreement by Westfield Bank to sell to and
repurchase from the customer an interest in specific securities issued by or
guaranteed by the United States Government. This transaction settles
immediately on a same day basis in immediately available funds. Interest paid
is commensurate with other products of equal interest and credit risk. All of
Westfield Bank's customer repurchase agreements at June 30, 2007 were held by
commercial customers.
Stockholders' equity at June 30, 2007 and December 31, 2006 was $293.3 million
and $289.4 million, respectively, representing 28.4% and 29.0% of total assets,
respectively.
15
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND
JUNE 30, 2006
General
Net income was $1.9 million, or $0.06 per diluted share, for the quarter ended
June 30, 2007 as compared to $1.3 million, or $0.04 per diluted share, for the
same period in 2006. Net interest and dividend income was $7.4 million for both
the three months ended June 30, 2007 and $5.9 million for 2006.
Net Interest and Dividend Income
The following tables set forth the information relating to our average balance
at, and net interest income for, the three months ended June 30, 2007 and 2006
and reflect the average yield on assets and average cost of liabilities for the
periods indicated. Yields and costs are derived by dividing interest income by
the average balance of interest-earning assets and interest expense by the
average balance of interest-bearing liabilities for the periods shown. Average
balances are derived from actual daily balances over the periods indicated.
Interest income includes fees earned from making changes in loan rates and
terms and fees earned when real estate loans are prepaid or refinanced. For
analytical purposes, the interest earned on tax-exempt assets is adjusted to a
tax equivalent basis to recognize the income tax savings which facilitates
comparison between taxable and tax-exempt assets.
Three Months Ended June 30,
2007 2006
------------------------------------ ------------------------------------
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 647 $ 49,751 5.20% $ 149 $ 12,278 4.85%
Investment Securities 5,960 492,629 4.84 4,059 365,300 4.44
Loans 6,574 389,075 6.76 6,604 390,125 6.77
------- -------- ------- --------
Total Interest-Earning Assets $13,181 $931,455 5.66% $10,812 $767,703 5.63%
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 341 $ 80,813 1.69% $ 223 $ 73,655 1.21%
Savings Accounts 59 37,866 0.62 50 40,323 0.50
Money Market Accounts 346 87,367 1.58 422 110,824 1.52
Time Deposits 4,177 372,924 4.48 3,512 368,121 3.82
Customer Repurchase Agreements and
Borrowings 723 73,830 3.92 495 60,444 3.28
------- -------- ---- ------- --------
Total Interest-Bearing Liabilities $ 5,646 $652,800 3.46% $ 4,702 $653,367 2.88%
======= ======== ======= ========
Net Interest Income/Interest Rate Spread $ 7,535 2.20% $ 6,110 2.75%
======= ==== ======= ====
Net Interest Margin (1) 3.25% 3.19%
==== ====
(1) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average interest
earning assets.
16
The following table shows how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected Westfield Financial's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to:
o Interest income changes attributable to changes in volume (changes in
volume multiplied by prior rate);
o Interest income changes attributable to changes in rate (changes in rate
multiplied by current volume); and
o The net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
Three Months Ended June 30, 2007 compared to
June 30, 2006
Increase (decrease) due to:
--------------------------------------------
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short Term Investments $ 455 $ 43 $ 498
Investment Securities 1,415 486 1,901
Loans (18) (12) (30)
------ ------ ------
Net Change in Income on
Interest-Earning Assets 1,852 517 2,369
------ ------ ------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 22 96 118
Savings Accounts (3) 12 9
Money Market Accounts (89) 13 (76)
Time Deposits 46 619 665
Customer Repurchase Agreements
and Borrowings 110 118 228
------ ------ ------
Net Change in Expense on
Interest-Bearing Liabilities 86 858 944
------ ------ ------
Change in Net Interest Income $1,766 $ (341) $1,425
====== ====== ======
Net interest and dividend income increased $1.5 million to $7.4 million for the
three months ended June 30, 2007 from $5.9 million in the same period in 2006.
The net interest margin, on a tax equivalent basis, was 3.25% for the three
months ended June 30, 2007 as compared to 3.19% for the same period in 2006.
The increase in net interest income was mainly due to a $163.8 million increase
in average earning assets as a result of funds raised in the second step stock
offering. Average earning assets were $931.5 million for the three months ended
June 30, 2007 compared to $767.7 for the same period in 2006. As a result,
interest and dividend income increased $2.4 million to $13.2 million for the
six months ended June 30, 2007 from $10.8 million for same period in 2006. The
yield of interest-earning assets increased 3 basis points to 5.66% for the
three months ended June 30, 2007 from 5.63% for same period in 2006.
17
The increase in interest income was partially offset by an increase of $944,000
in interest expense. The average cost of interest-bearing liabilities increased
58 basis points to 3.46% for the three months ended June 30, 2007 from 2.88%
for same period in 2006. The increase in the average cost of interest-bearing
liabilities was primarily due to an increase in the cost of time deposits
resulting from the rising interest rate environment.
Provision for Loan Losses
The appropriations of the allowance is reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of Westfield Bank and other conditions, such as new loan
products, credit quality trends (including trends in nonperforming loans
expected to result from existing conditions), collateral values, loan volumes
and concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions were
believed to have had on the collectibility of the loan portfolio.
The amount that Westfield Bank provided for the provision for loan losses
during the three months ended June 30, 2007 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 a decrease in net charge offs,
tempered by an increase in commercial and industrial loans and commercial real
estate loans. After evaluating these factors, Westfield Bank provided $75,000
for loan losses for the three months ended June 30, 2007, compared to $200,000
for the same period in 2006. The allowance was $5.7 million at June 30, 2007
and $5.6 million at March 31, 2007. The allowance for loan losses was 1.42% of
total loans at June 30, 2007 and 1.45% at March 31, 2007.
For the three months ended June 30, 2007, Westfield Bank recorded net
recoveries of $46,000 compared to net charge-offs of $377,000 for the three
months ended June 30, 2006. The 2007 period was comprised of recoveries of
$71,000 for the three months ended June 30, 2007, partially offset by
charge-offs of $25,000 for the same period. The 2006 period was comprised of
charge-offs of $510,000 for the three months ended June 30, 2006, partially
offset by recoveries of $133,000 for the same period.
At June 30, 2007, commercial and industrial loans increased $12.6 million to
$114.6 million compared to March 31, 2007. Westfield Bank considers these types
of loans to contain more credit risk and market risk than both commercial real
estate loans and conventional residential real estate mortgages. Commercial
real estate loans increased by $7.2 million, while residential real estate
mortgages decreased by $1.5 million during the quarter ended June 30, 2007.
Nonperforming loans were unchanged at $1.0 million at both June 30, 2007 and at
March 31, 2007.
Although management believes it has established and maintained the allowance
for loan losses at adequate levels, future adjustments may be necessary if
economic, real estate and other conditions differ substantially from the
current operating environment.
Noninterest Income
Noninterest income increased $91,000 to $974,000 for the three months ended
June 30, 2007 from $883,000 in the same period in 2006.
Income from bank-owned life insurance increased $125,000 to $324,000 for the
three months ended June 30, 2007 compared to $199,000 in the same period in
2006. This was primarily the result of the purchase of an additional $10.0
million of bank-owned life insurance in the first quarter of 2007.
Net checking account processing fee income decreased $46,000 to $416,000 for
the three months ended June 30, 2007, compared to $462,000 for the same period
in 2006.
18
Noninterest Expense
Noninterest expense for the three months ended June 30, 2007 was $5.6 million,
compared to $4.9 million for the same period in 2006. Salaries and benefits
increased $301,000 to $3.3 million for the three months ended June 30, 2007
compared to $3.0 million for the same period in 2006. The increase in salaries
and benefits was primarily the result of normal increases, an increase in
expense related to the ESOP, and the hiring of new employees. Much of the new
hiring was associated with the opening of a new Westfield Bank branch during
the second quarter of 2007.
Advertising and marketing expense increased $137,000 to $280,000 for the three
months ended June 30, 2007 compared to $143,000 for the same period in 2006.
Also, charitable contributions increased $93,000 to $212,000 for the three
months ended June 30, 2007 compared to $119,000 for the same period in 2006.
For advertising and marketing expense, as well as charitable contributions,
management authorized a larger portion of the anticipated annual expenditures
in the three months ended June 30, 2007.
Income Taxes
For the three months ended June 30, 2007, Westfield Financial had a tax
provision of $826,000 compared to $430,000 for the same period in 2006. The
effective tax rate was 30.2% for the three months ended June 30, 2007 and 25.4%
for the same period in 2006.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND
JUNE 30, 2006
General
Net income was $3.9 million, or $0.13 per diluted share, for the six months
ended June 30, 2007 as compared to $2.6 million, or $0.08 per diluted share,
for the same period in 2006. Net interest and dividend income was $14.9 million
for the six months ended June 30, 2007 compared to $11.7 million for the same
period in 2006.
Net Interest and Dividend Income
The following tables set forth the information relating to our average balance
at, and net interest income for, the six months ended June 30, 2007 and 2006
and reflect the average yield on assets and average cost of liabilities for the
periods indicated. Yields and costs are derived by dividing interest income by
the average balance of interest-earning assets and interest expense by the
average balance of interest-bearing liabilities for the periods shown. Average
balances are derived from actual daily balances over the periods indicated.
Interest income includes fees earned from making changes in loan rates and
terms and fees earned when real estate loans are prepaid or refinanced. For
analytical purposes, the interest earned on tax-exempt assets is adjusted to a
tax equivalent basis to recognize the income tax savings which facilitates
comparison between taxable and tax-exempt assets.
19
Six Months Ended June 30,
2007 2006
------------------------------------ ------------------------------------
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 2,031 $ 77,153 5.26% $ 416 $ 18,402 4.52%
Investment Securities 11,055 460,530 4.80 7,951 362,550 4.39
Loans 13,059 386,313 6.76 12,582 383,822 6.56
------- -------- ------- --------
Total Interest-Earning Assets $26,145 $923,996 5.66% $20,949 $764,774 5.48%
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 660 $ 79,983 1.65% $ 383 $ 71,381 1.07%
Savings Accounts 107 39,108 0.55 101 40,589 0.49
Money Market Accounts 695 89,487 1.55 905 117,532 1.54
Time Deposits 8,257 373,420 4.42 6,486 359,757 3.61
Customer Repurchase Agreements and
Borrowings 1,250 66,313 3.77 977 59,783 3.27
------- -------- ------- --------
Total Interest-Bearing Liabilities $10,969 $648,311 3.38% $ 8,852 $649,042 2.73%
======= ======== ======= ========
Net Interest Income/Interest Rate Spread $15,176 2.28% $12,097 2.75%
======= ==== ======= ====
Net Interest Margin (1) 3.31% 3.19%
==== ====
(1) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average interest
earning assets.
The following table shows how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected Westfield Financial's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to:
o Interest income changes attributable to changes in volume (changes in
volume multiplied by prior rate);
o Interest income changes attributable to changes in rate (changes in rate
multiplied by current volume); and
o The net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
20
Six Months Ended June 30, 2007 compared to
June 30, 2006
Increase (decrease) due to:
------------------------------------------
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short Term Investments $1,328 $ 287 $1,615
Investment Securities 2,149 955 3,104
Loans 82 395 477
------ ------ ------
Net Change in Income on
Interest-Earning Assets 3,559 1,637 5,196
------ ------ ------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 46 231 277
Savings Accounts (4) 10 6
Money Market Accounts (216) 6 (210)
Time Deposits 246 1,525 1,771
Customer Repurchase Agreements
and Borrowings 107 166 273
------ ------ ------
Net Change in Expense on
Interest-Bearing Liabilities 179 1,938 2,117
------ ------ ------
Change in Net Interest Income $3,380 $ (301) $3,079
====== ====== ======
Net interest and dividend income increased $3.2 million to $14.9 million for
the six months ended June 30, 2007 from $11.7 million in the same period in
2006. The net interest margin, on a tax equivalent basis, was 3.31% for the six
months ended June 30, 2007 as compared to 3.19% for the same period in 2006.
The increase in net interest income was mainly due to a $159.2 million increase
in average earning assets as a result of funds raised in the second step stock
offering. Average earning assets were $924.0 million for the six months ended
June 30, 2007 compared to $764.8 million for the same period in 2006. As a
result, interest and dividend income increased $5.2 million to $26.1 million
for the six months ended June 30, 2007 from $20.9 million for same period in
2006. The yield of interest-earning assets increased 18 basis points to 5.66%
for the six months ended June 30, 2007 from 5.48% for same period in 2006.
The increase in interest income was partially offset by an increase of $2.1
million in interest expense. The average cost of interest-bearing liabilities
increased 65 basis points to 3.38% for the six months ended June 30, 2007 from
2.73% for same period in 2006. The increase in the average cost of
interest-bearing liabilities was primarily due to an increase in the cost of
time deposits resulting from the rising interest rate environment.
Provision for Loan Losses
The appropriations of the allowance is reviewed by management based upon its
evaluation of then-existing economic and business conditions affecting the key
lending areas of Westfield Bank 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.
21
The amount that Westfield Bank provided for the provision for loan losses
during the three months ended June 30, 2007 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 a decrease in net charge offs, a
decrease in real estate loans, tempered by an increase in commercial and
industrial loans and commercial real estate loans. After evaluating these
factors, Westfield Bank provided $175,000 for loan losses for the six months
ended June 30, 2007, compared to $275,000 for the same period in 2006. The
allowance was $5.7 million at June 30, 2007 and $5.4 million at December 31,
2006. The allowance for loan losses was 1.42% of total loans at June 30, 2007
and 1.39% at March December 31, 2006.
For the six months ended June 30, 2007, Westfield Bank recorded net recoveries
of $62,000 compared to net charge-offs of $345,000 for the six months ended
June 30, 2006. The 2007 period was comprised of recoveries of $107,000 for the
six months ended June 30, 2007, partially offset by charge-offs of $45,000 for
the same period. The 2006 period was comprised of charge-offs of $534,000 for
the six months ended June 30, 2006, partially offset by recoveries of $189,000
for the same period.
At June 30, 2007, commercial and industrial loans increased $14.2 million to
$114.6 million compared to December 31, 2006. Westfield Bank considers these
types of loans to contain more credit risk and market risk than both commercial
real estate loans and conventional residential real estate mortgages.
Commercial real estate loans decreased by $1.6 million and residential real
estate mortgages decreased by $2.4 during the six months ended June 30, 2007.
Nonperforming loans were unchanged at $1.0 million at both June 30, 2007 and at
December 31, 2006.
Although management believes it has established and maintained the allowance
for loan losses at adequate levels, future adjustments may be necessary if
economic, real estate and other conditions differ substantially from the
current operating environment.
Noninterest Income
Noninterest income increased $57,000 to $1.8 million for the six months ended
June 30, 2007 from $1.7 million in the same period in 2006.
Income from bank-owned life insurance increased $197,000 to $591,000 for the
six months ended June 30, 2007 compared to $394,000 in the same period in 2006.
This was primarily the result of the purchase of an additional $10.0 million of
bank-owned life insurance in the first quarter of 2007.
Net checking account processing fee income decreased $125,000 to $801,000 for
the six months ended June 30, 2007, compared to $926,000 for the same period in
2006.
Noninterest Expense
Noninterest expense for the six months ended June 30, 2007 was $10.9 million,
compared to $9.7 million for the same period in 2006. Salaries and benefits
increased $616,000 to $6.6 million for the six months ended June 30, 2007
compared to $6.0 million for the same period in 2006. Salaries increased
$515,000 primarily the result of hiring new employees and normal increases in
expenses related to employee salaries and benefits. Much of the new hiring was
associated with the opening of a new Westfield Bank branch during the second
quarter of 2007.
In addition, expense related to the ESOP increased $284,000 compared to the
same period in 2006. This was primarily the result of a new employee stock
ownership program which was formed upon completion of the second step stock
conversion.
22
Advertising and marketing expense increased $165,000 to $407,000 for the six
months ended June 30, 2007 compared to $242,000 for the same period in 2006.
For advertising and marketing expense, management authorized a larger portion
of the anticipated annual expenditures in the six months ended June 30, 2007.
Income Taxes
For the six months ended June 30, 2007, Westfield Financial had a tax provision
of $1.7 million compared to $879,000 for the same period in 2006. The effective
tax rate was 30.7% for the six months ended June 30, 2007 and 25.5% for the
same period in 2006.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to Westfield Financial's ability to generate
adequate amounts of cash to fund loan originations, loan purchases, withdrawals
of deposits and operating expenses. Westfield Financial's primary sources of
liquidity are deposits, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of investment
securities and funds provided by operations. Westfield Bank also can borrow
funds from the Federal Home Loan Bank ("FHLB") of Boston based on eligible
collateral of loans and securities. Westfield Bank's maximum additional
borrowing capacity from the FHLB at June 30, 2007 was approximately $52.4
million.
Liquidity management is both a short-and long-term function of business
management. The measure of a company's liquidity is its ability to meet its
cash commitments at all times with available cash or by conversion of other
assets to cash at a reasonable price. Loan repayments and maturing investment
securities are a relatively predictable source of funds. However, deposit flow,
calls of investment securities and repayments of loans and mortgage-backed
securities are strongly influenced by interest rates, general and local
economic conditions and competition in the marketplace. These factors reduce
the predictability of the timing of these sources of funds. Management believes
that Westfield Financial has sufficient liquidity to meet its current operating
needs.
At June 30, 2007, Westfield Bank exceeded each of the applicable regulatory
capital requirements. As of June 30, 2007 the most recent notification from the
Office of Thrift Supervision (the "OTS") categorized Westfield Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," Westfield Bank must maintain minimum total
risk-based, Tier 1 risk based and Tier 1 leverage ratios as set forth in the
following tables. There are no conditions or events since that notification
that management believes have changed Westfield Bank's categorization.
Westfield Bank's actual capital ratios as of June 30, 2007 and December 31,
2006 are also presented in the tables.
23
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
June 30, 2007
Total Capital (to Risk Weighted Assets):
Consolidated $299,845 53.54% $44,804 8.00% N/A -
Bank 213,665 39.45 43,325 8.00 54,157 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 294,171 52.53 22,402 4.00 N/A -
Bank 207,991 38.41 21,663 4.00 32,494 6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated 294,171 28.48 41,313 4.00 N/A -
Bank 207,991 21.92 37,961 4.00 47,452 5.00
Tangible Equity (to Tangible Assets):
Consolidated N/A - N/A - N/A -
Bank 207,991 21.92 18,981 2.00 N/A -
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 -
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.
24
Westfield Bank is obligated under leases for certain branches and equipment. A
summary of lease obligations and credit commitments at June 30, 2007 is shown
below:
After 1 Year After 3 Years
Within but Within but Within After
1 Year 3 Years 5 Years 5 Years Total
------ ------------ ------------- ------- -----
(In thousands)
LEASE OBLIGATIONS
Operating lease obligations $ 364 $ 728 $ 698 $ 6,892 $ 8,682
======== ======= ======= ======= ========
BORROWINGS
Federal Home Loan Bank $ 25,000 $35,000 $15,000 $ 5,000 $ 80,000
======== ======= ======= ======= ========
CREDIT COMMITMENTS
Available lines of credit $ 48,274 $ - $ - $13,248 $ 61,522
Other loan commitments 45,743 8,937 - - 54,680
Letters of credit 7,659 - - 588 8,247
-------- ------- ------- ------- --------
Total credit commitments $101,676 $ 8,937 $ - $13,836 $124,449
-------- ------- ------- ------- --------
Grand total $127,040 $44,665 $15,698 $25,728 $213,131
======== ======= ======= ======= ========
OFF-BALANCE SHEET ARRANGEMENTS
Westfield Financial does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on Westfield
Financial's financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative measures established by regulation to ensure capital adequacy
require Westfield Bank to maintain minimum amounts and ratios (set forth in the
table above) of total and Tier I capital to risk weighted assets and to average
assets. Management believes, as of June 30, 2007, that Westfield Bank met all
capital adequacy requirements to which it was subject. As of June 30, 2007, the
most recent notification from the OTS categorized Westfield Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, Westfield Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no
conditions or events since the most recent OTS notification that management
believes have changed Westfield Bank's categorization.
25
Management uses a simulation model to monitor interest rate risk. This model
reports the net interest income at risk primarily under seven different
interest rate change environments. Specifically, net interest income is
measured in one scenario that assumes no change in interest rates, and six
scenarios where interest rates increase 100, 200 and 300 basis points, and
decrease 100, 200 and 300 basis points, respectively, from current rates over
the one year time period following the current consolidated financial
statement. Income from tax-exempt assets is calculated on a fully taxable
equivalent basis.
The changes in interest income and interest expense due to changes in interest
rates reflect the interest sensitivity of our interest-earning assets and
interest-bearing liabilities. For example, in a rising interest rate
environment, the interest income from an adjustable rate loan will increase
depending on its repricing characteristics while the interest income from a
fixed loan would not increase until the loan was repaid and reinvested or
loaned out at a higher interest rate.
The table below sets forth as of June 30, 2007 the estimated changes in net
interest and dividend income that would result from incremental changes in
interest rates over the applicable period.
For the Twelve Months Ending June 30, 2008
(Dollars in thousands)
--------------------------------------------
Changes in Net Interest
Interest Rates and Dividend
(Basis Points) Income % Change
-------------- ------------ --------
300 34,585 -0.8%
200 34,769 -0.3%
100 35,225 1.1%
0 34,858 -
-100 34,767 -0.3%
-200 34,046 -2.3%
-300 33,063 -5.1%
Management believes that there have been no significant changes in market risk
since December 31, 2006.
The income simulation analysis was based upon a variety of assumptions. These
assumptions include, but are not limited to, balance sheet growth, asset mix,
prepayment speeds, the timing and level of interest rates, and the shape of the
yield curve. As market conditions vary from the assumptions in the income
simulation analysis, actual results will differ. As a result, the income
simulation analysis does not serve as a forecast of net interest income, nor do
the calculations represent any actions that management may undertake in
response to changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Management, including Westfield Financial's Chairman and Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
Westfield Financial's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period
covered by this report. Based upon the evaluation, the Chairman and Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were effective to ensure that information required to
be disclosed in the reports Westfield Financial files and submits under the
Exchange Act is (i) recorded, processed, summarized and reported as and when
required and (ii) accumulated and communicated to Westfield Financial's
management, including Westfield Financial's principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
26
There have been no changes in Westfield Financial's internal control over
financial reporting identified in connection with the evaluation that occurred
during Westfield Financial's last fiscal quarter that has materially affected,
or that is reasonably likely to materially affect, Westfield Financial's
internal control over financial reporting.
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in
Westfield Financial's Form 10-K for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no purchases made by Westfield Financial of its common stock during
the three months ended June 30, 2007.
There were no sales by Westfield Financial of unregistered securities during
the three months ended June 30, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Westfield Financial held its Annual Meeting of Shareholders on July 19, 2007
(the "Meeting"). All the proposals submitted to the shareholders at the Meeting
were approved. The proposals submitted to shareholders and the tabulation of
the votes for each proposal is as follows:
1. Election of three candidates to the Board of Directors
The number of votes cast with respect to this matter is as follows:
Nominee For Withheld
------- --- --------
Victor J. Carra 19,353,170 8,089,596
Richard C. Placek 26,746,772 695,994
Charles E. Sullivan 26,918,549 524,217
There were no broker non-votes or abstentions on this proposal. The following
directors' terms of office continued after the Meeting:
David C. Colton, Jr.
Robert T. Crowley, Jr.
Harry C. Lane
William H. McClure
Mary C. O'Neil
Paul R. Pohl
Donald A. Williams
27
2. Approval of the Westfield Financial, Inc. 2007 Stock Option Plan
The number of votes cast with respect to this matter was as follows:
For Against Abstain
--- ------- -------
20,199,036 1,187,229 221,770
There were 5,834,731 broker held non-voted shares represented at the Meeting
with respect to this matter.
3. Approval of the Westfield Financial, Inc. 2007 Recognition and Retention
Plan.
The number of votes cast with respect to this matter was as follows:
For Against Abstain
--- ------- -------
20,112,537 1,271,608 223,889
There were 5,834,731 broker held non-voted shares represented at the Meeting
with respect to this matter:
ITEM 5. OTHER INFORMATION
a. None
b. None
ITEM 6. EXHIBITS
The following exhibits are furnished with this report:
Exhibit Description
- ------- -----------
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)
10.14 Agreement between Westfield Bank and Village Mortgage Company.(1)
31.1 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
28
- -----------
(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.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westfield Financial, Inc.
By: /s/ Donald A. Williams
---------------------------------------
Donald A. Williams
Chairman/Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael J. Janosco, Jr.
---------------------------------------
Michael J. Janosco, Jr.
Vice President/Chief Financial Officer
(Principal Accounting Officer)
August 9, 2007
30