UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
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, a non-accelerated filer, or a smaller reporting
company.
Large accelerated filer Accelerated filer X
--- ---
Non-accelerated filer Smaller reporting company
--- ---
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 May 8, 2008
- ----------------------------------- ----------------------------------
Common Stock, par value $0.01 31,682,196
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - March 31, 2008 and
December 31, 2007
Consolidated Statements of Income (Unaudited) - Three months
ended March 31, 2008 and 2007
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Three Months ended
March 31, 2008 and 2007
Consolidated Statements of Cash Flows (Unaudited) - Three Months
ended March 31, 2008 and 2007
Notes to Consolidated Financial Statements
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 I
ITEM 1. FINANCIAL STATEMENTS
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in thousands, except per share data)
March 31, December 31,
2008 2007
---- ----
ASSETS
Cash and due from banks $ 15,399 $ 16,603
Federal funds sold 47,389 21,017
Interest-bearing deposits and other short-term investments 457 3
---------- ----------
Cash and cash equivalents 63,245 37,623
---------- ----------
SECURITIES:
Available for sale - at estimated fair value 29,878 38,051
Held to maturity - at amortized cost (estimated fair value of
$93,733 at March 31, 2008, and $105,829 at December 31, 2007) 91,011 104,025
MORTGAGE-BACKED SECURITIES:
Available for sale - at estimated fair value 230,653 206,178
Held to maturity - at amortized cost (estimated fair value of
$183,929 at March 31, 2008, and $174,550 at December 31, 2007) 182,894 174,594
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK - AT COST 7,871 7,510
LOANS - Net of allowance for loan losses of $5,908 at March 31, 2008,
and $5,726 at December 31, 2007 418,145 414,902
PREMISES AND EQUIPMENT - Net 12,496 12,712
ACCRUED INTEREST RECEIVABLE 5,475 5,761
BANK-OWNED LIFE INSURANCE 32,717 32,398
OTHER ASSETS 8,350 6,030
---------- ----------
TOTAL ASSETS $1,082,735 $1,039,784
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 42,154 $ 42,408
Interest-bearing 551,428 560,268
---------- ----------
Total deposits 593,582 602,676
---------- ----------
SHORT-TERM BORROWINGS 48,339 35,268
LONG-TERM DEBT 148,500 105,000
OTHER LIABILITIES 10,405 10,308
---------- ----------
TOTAL LIABILITIES 800,826 753,252
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding at March 31, 2008 and December 31, 2007 - -
Common stock - $.01 par value, 75,000,000 shares authorized, 31,571,591
shares issued and outstanding at March 31, 2008, 75,000,000 shares
authorized, 31,933,549 shares issued and outstanding at
December 31, 2007 316 319
Additional paid-in capital 206,105 209,497
Unallocated common stock of Employee Stock Ownership Plan (11,385) (11,542)
Restricted stock unearned compensation (5,243) (5,493)
Retained earnings 92,144 92,702
Accumulated other comprehensive (loss) income (28) 1,049
---------- ----------
Total stockholders' equity 281,909 286,532
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,082,735 $1,039,784
========== ==========
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
Ended March 31,
2008 2007
---- ----
INTEREST AND DIVIDEND INCOME:
Debt securities, taxable $ 6,302 $ 4,558
Residential and commercial real estate loans 4,676 4,432
Commercial and industrial loans 1,975 1,924
Debt securities, tax-exempt 334 308
Federal funds sold 214 1,315
Marketable equity securities 180 148
Consumer loans 87 91
Interest-bearing deposits and other
short-term investments 1 68
---------- ----------
Total interest and dividend income 13,769 12,844
---------- ----------
INTEREST EXPENSE:
Deposits 4,341 4,796
Short-term borrowings 318 137
Long-term debt 1,402 390
---------- ----------
Total interest expense 6,061 5,323
---------- ----------
Net interest and dividend income 7,708 7,521
PROVISION FOR LOAN LOSSES 175 100
---------- ----------
Net interest and dividend income after
provision for loan losses 7,533 7,421
---------- ----------
NONINTEREST INCOME:
Income from bank-owned life insurance 319 267
Service charges and fees 556 552
Gain on sales of securities, net 300 -
Other than temporary writedowns on securities (310) -
---------- ----------
Total noninterest income 865 819
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 3,608 3,314
Occupancy 603 589
Professional fees 474 399
Computer operations 435 352
Stationery, supplies and postage 125 127
Other 539 525
---------- ----------
Total noninterest expense 5,784 5,306
---------- ----------
INCOME BEFORE INCOME TAXES 2,614 2,934
INCOME TAXES 753 913
---------- ----------
NET INCOME $ 1,861 $ 2,021
========== ==========
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.06 $ 0.07
Weighted average shares outstanding 29,477,668 30,103,285
Diluted earnings per share $ 0.06 $ 0.07
Weighted average diluted shares outstanding 29,992,198 30,683,318
See accompanying notes to consolidated financial statements.
4
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - 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) Income Total
-------- ----- ---------- ---- ------------ -------- ------------- -----
BALANCE, DECEMBER 31, 2006 9,728,000 $ 274 $201,736 $ (4,835) $ (405) $93,364 $ (726) $289,408
Comprehensive income:
Net income - - - - - 2,021 - 2,021
Unrealized losses on
securities arising during
the year, net of tax
benefit of $299 - - - - - - 525 525
--------
Comprehensive income 2,546
--------
Exchange of common stock
pursuant to reorganization
(9,728,912 shares exchanged
at a 3.28138 ratio for
31,923,913 shares) 21,458,991 38 (342) - - - - (304)
Capital contribution pursuant
to dissolution of Mutual
Holding Company - - - - - 2,713 - 2,713
Share-based compensation - - 164 168 120 - - 452
Purchase of ESOP Shares 736,000 7 7,353 (7,360) - - - -
Issuance of common stock in
connection with stock
option exercise 984 - 4 - - - - 4
Cash dividends declared
($.05 per share) - - - - - (1,509) - (1,509)
---------- ----- -------- -------- ------- ------- ------- --------
BALANCE MARCH 31, 2007 31,924,887 $ 319 $208,915 $(12,027) $ (285) $96,589 $ (201) $293,310
========== ===== ======== ======== ======= ======= ======= ========
BALANCE DECEMBER 31, 2007 31,933,549 $ 319 $209,497 $(11,542) $(5,493) $92,702 $ 1,049 $286,532
Comprehensive income:
Net income - - - - - 1,861 - 1,861
Unrealized losses on
securities arising during
the period, net of tax
benefit of $715 - - - - - - (1,082) (1,082)
Reclassification for losses
included in net income,
net of tax benefit of $5 - - - - - - 5 5
--------
Comprehensive income 784
--------
Shared-based compensation - - 246 157 250 - - 653
Common stock repurchased (515,015) (5) (5,293) - - - - (5,298)
Issuance of common stock in
connection with stock
option exercises 153,057 2 1,582 - - (912) - 672
Excess tax benefits in
connection with stock
option exercises - - 73 - - - - 73
Cash dividends declared
($.05 per share) - - - - - (1,507) - (1,507)
---------- ----- -------- -------- ------- ------- ------- --------
BALANCE, MARCH 31, 2008 31,571,591 $ 316 $206,105 $(11,385) $(5,243) $92,144 $ (28) $281,909
========== ===== ======== ======== ======= ======= ======= ========
See accompanying notes to consolidated financial statements.
5
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Three Months
Ended March,
2008 2007
---- ----
OPERATING ACTIVITIES:
Net Income $ 1,861 $ 2,021
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 175 100
Depreciation and amortization of premises and equipment 297 248
Net amortization of premiums and discounts on securities,
mortgage-backed securities and mortgage loans 61 83
Share-based compensation expense 653 452
Net realized securities gains (300) -
Other than temporary writedowns on securities 310 -
Deferred income tax benefit (45) (18)
Income from bank-owned life insurance (319) (267)
Changes in assets and liabilities:
Accrued interest receivable 286 (459)
Other assets (1,560) 289
Other liabilities 97 17,715
--------- --------
Net cash provided by operating activities 1,516 20,164
--------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases - (31,758)
Proceeds from maturities and principal collections 13,001 5,000
Securities, available for sale:
Purchases (12,163) (10,086)
Proceeds from sales 15,242 -
Proceeds from calls, maturities, and principal collections 4,992 5,000
Mortgage-backed securities, held to maturity:
Purchases (18,340) (20,389)
Principal collections 9,969 8,664
Mortgage-backed securities, available for sale:
Purchases (41,242) (41,046)
Proceeds from sales 4,424 -
Principal collections 10,681 8,438
Purchase of residential mortgages - (579)
Net (increase) decrease in loans (3,433) 9,212
Purchase of Federal Home Loan Bank of Boston stock (361) -
Proceeds from redemption of Federal Home Loan Bank of Boston stock - 217
Purchases of premises and equipment (81) (583)
Purchase of bank-owned life insurance - (10,520)
--------- --------
Net cash used in investing activities (17,311) (78,430)
--------- --------
FINANCING ACTIVITIES:
(Decrease) increase in deposits (9,094) 561
Net change in short-term borrowings 13,071 (9,907)
Repayment of long-term debt (5,000) (5,000)
Proceeds from long-term debt 48,500 10,000
Cash dividends paid (1,507) (1,509)
Exchange of common stock pursuant to reorganization - (304)
Capital contribution pursuant to dissolution of MHC - 2,713
Common stock repurchased (5,298) -
Issuance of common stock in connection with stock option exercises 672 4
Excess tax benefits in connection with stock option exercises 73 -
--------- --------
Net cash provided by (used in) financing activities 41,417 (3,442)
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS: 25,622 (61,708)
Beginning of period 37,623 154,508
--------- --------
End of period $ 63,245 $ 92,800
========= ========
See accompanying notes to consolidated financial statements.
6
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Westfield Financial, Inc. (the "Company" or "Westfield
Financial") 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 Bank is a federally-chartered stock savings bank subsidiary of
Westfield Financial. 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.
Principles of Consolidation - The consolidated financial statements include the
accounts of Westfield Financial, Westfield Bank, Elm Street Securities
Corporation, and WFD 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
allowance for loan losses and other than temporary impairment of investment
securities.
Basis of Presentation - In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
Westfield Financial's financial condition as of March 31, 2008, and the results
of operations, changes in stockholders' equity and cash flows for the interim
periods presented. The results of operations for the three months ended March
31, 2008 are not necessarily indicative of the results of operations for the
remainder of the year ending December 31, 2008. Certain information and
disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
7
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements as of and for the year ended
December 31, 2007.
Reclassifications - Certain amounts in the prior year financial statements have
been reclassified to conform to the current year presentation.
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 from the assumed issuance. 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 months ended March 31, 2008 and 2007,
have been computed based on the following:
Three Months
Ended March 31,
2008 2007
---- ----
(In thousands, except
per share data)
Net income available to common stock holders $ 1,861 $ 2,021
======= =======
Weighted average number of common stock outstanding 29,477 30,103
Effect of dilutive stock awards and options 515 580
------- -------
Adjusted weighted average number of common shares
outstanding used to calculate diluted earnings
per common share 29,992 30,683
======= =======
Basic earnings per share $ .06 $ .07
Diluted earnings per share $ .06 $ .07
3. SHARE-BASED COMPENSATION
The Westfield Financial, Inc. 2007 Stock Option Plan (the "2007 Stock Option
Plan") was approved by the shareholders at the annual meeting of shareholders
on July 19, 2007. In August 2007, 1,351,702 shares of common stock were granted
under the 2007 Stock Option Plan. At March 31, 2008, 208,399 shares were
available for future grants. No shares were granted during the three months
ended March 31, 2008. In August 2007, 559,000 shares of common stock were
granted under the 2007 Recognition and Retention Plan. As of March 31, 2008,
65,041 shares were available for future grants. No shares were granted in the
three months ended March 31, 2008.
Westfield Financial applies Statement of Financial Accounting Standard No.
123(R), "Share Based Payment" ("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 $250,000 and $120,000 for the three months ended
March 31, 2008 and 2007, respectively.
8
4. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Westfield Bank utilizes short-term borrowings and long-term debt as an
additional source of funds to finance Westfield Bank's lending and investing
activities and to provide liquidity for daily operations. Short-term borrowings
are made up of Federal Home Loan Bank ("FHLB") advances with an original
maturity of less than one year as well as customer repurchase agreements, which
have an original maturity of one day. Short-term borrowings issued by the FHLB
were $30.0 million and $18.4 million at March 31, 2008 and December 31, 2007,
respectively. Customer repurchase agreements were $18.3 million at March 31,
2008 and $16.8 million at December 31, 2007. 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 March 31, 2008 and December 31, 2007 were held by commercial
customers.
Long-term debt consists of FHLB advances with an original maturity of one year
or more as well as securities sold under repurchase agreements. At March 31,
2008, Westfield Bank had $100.0 million in long-term debt with the FHLB and
$48.5 million in securities sold under repurchase agreements with an approved
broker-dealer. This compares to $105.0 million in FHLB advances and no
securities sold under repurchase agreements at December 31, 2007. In the first
quarter of 2008, securities sold under repurchase agreements of $48.5 million
were executed with a weighted average interest rate of 2.66% and final
maturities in the first quarter of 2018. The securities sold under agreements
to repurchase are callable at the issuer's option beginning in the years 2010
to 2012.
5. PENSION AND POSTRETIREMENT LIFE INSURANCE BENEFITS
The following table provides information regarding net benefit costs for the
periods shown:
Postretirement Life
Pension Benefits Insurance Benefits
Three months ended Three months ended
March 31, March 31,
------------------ -------------------
2008 2007 2008 2007
---- ---- ---- ----
(In thousands)
Service cost $ 175 $ 175 $ - $ 8
Interest cost 162 145 6 12
Expected return on assets (188) (162) - -
Transition obligation (3) (3) - 2
Actuarial gain (9) - - -
----- ----- ---- ----
Net periodic pension cost $ 137 $ 155 $ 6 $ 22
===== ===== ==== ====
The Company plans to contribute the amount required to meet the minimum funding
standards under Internal Revenue Code Section 412. Additional contributions
will be made as deemed appropriate by management in conjunction with the plan's
actuaries. For the year 2008, the preliminary estimated contribution is
approximately $557,000. As of March 31, 2008, no contribution had been made.
In 2007, Westfield Financial curtailed its postretirement life insurance
benefits for active employees to offset rising compensation costs.
9
6. FAIR VALUE OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Company adopted Statement of Financial
Accounting Standards No. 157 "Fair Value Measurements," ("SFAS 157"), which
provides a framework for measuring fair value under generally accepted
accounting principles.
The Company also adopted SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115" ("SFAS 159"). SFAS 159 allows an entity the irrevocable option to elect
fair value for the initial and subsequent measurement for certain financial
assets and liabilities on a contract-by-contract basis. The Company did not
elect fair value treatment for any financial assets or liabilities upon
adoption.
In accordance with SFAS 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the observable or
unobservable inputs used to determine fair value.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 1 assets and liabilities include debt and equity securities that are
traded in an active exchange market. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets or
liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities, quoted prices in markets that are not active, or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. For example,
Level 2 assets and liabilities may include debt securities with quoted prices
that are traded less frequently than exchange-traded instruments or mortgage
loans held for sale, for which the fair value is based on what the
securitization market is currently offering for mortgage loans with similar
characteristics.
Level 3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments whose
value is determined using pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or estimation. This
category generally includes certain private equity investments, residential
mortgage servicing rights, and long-term derivative contracts.
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
March 31, 2008
(In thousands)
Level 1 Level 2 Level 3 Total
------- ------- ------- -----
Assets
Securities available for sale $6,866 $ 23,012 $ - $ 29,878
Mortgage-backed securities
available for sale - 230,653 - 230,653
------ -------- ------- -------
Total assets $6,866 $253,665 $ - $260,531
====== ======== ======= ========
10
Also, the Company may be required, from time to time, to measure certain other
financial assets on a nonrecurring basis in accordance with U.S. GAAP. These
adjustments to fair value usually result from application of
lower-of-cost-or-market accounting or write-downs of individual assets. The
following table summarizes the fair value hierarchy used to determine each
adjustment and the carrying value of the related individual assets as of March
31, 2008.
March 31, 2008
(In thousands)
Quarter Ended
Level 1 Level 2 Level 3 March 31, 2008
------- ------- ------- --------------
Assets
Securities available for sale $1,000 $ - $ - $(310)
Loans - 2,000 - (91)
------ -------- ------- -----
Total assets $1,000 $ 2,000 $ - $(401)
====== ======== ======= =====
The amount of securities available for sale represents the carrying value and
related writedown of one other than temporarily impaired highly rated preferred
stock of a government-sponsored enterprise for which the adjustment was based
on the difficult underlying operating environment of this entity. The writedown
of $310,000 is included in the Company's earnings for the three months ended
March 31, 2008. The amount of loans represents the carrying value and related
valuation allowance of impaired loans for which adjustments are based on the
estimated fair value of the underlying collateral.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued Statement No. 141 (revised), "Business
Combinations." This Statement replaces FASB Statement No. 141, and applies to
all business entities, including mutual entities that previously used the
pooling-of-interests method of accounting for some business combinations. Under
Statement No. 141 (revised) an acquirer is required to recognize at fair value
the assets acquired, liabilities assumed, and any non-controlling interest in
the acquiree at the acquisition date. This replaces the cost-allocation process
under Statement No. 141, which resulted in the non-recognition of some assets
and liabilities at the acquisition date, and in measuring some assets and
liabilities at amounts other than their fair values at the acquisition date.
This Statement requires that acquisition costs and expected restructuring costs
be recognized separately from the acquisition, and that the acquirer in a
business combination achieved in stages recognize the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the
full amounts of their fair values. This Statement also requires an acquirer to
recognize assets acquired and liabilities assumed arising from contractual
contingencies as of the acquisition date, while Statement 141 allowed for the
deferred recognition of pre-acquisition contingencies until certain recognition
criteria were met, and an acquirer is only required to recognize assets or
liabilities arising from all other contingencies if it is more likely than not
that they meet the definition of an asset or a liability. Under this Statement,
an acquirer is required to recognize contingent consideration at the
acquisition date, whereas contingent consideration obligations usually were not
recognized at the acquisition date under Statement 141. Further, this Statement
eliminates the concept of negative goodwill and requires gain recognition in
instances in which the total acquisition-date fair value of the identifiable
net assets acquired exceeds the fair value of the consideration transferred
plus any non-controlling interest in the acquiree. This Statement makes
significant amendments to other Statements and other authoritative guidance,
and applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. An entity may not apply it before that
date.
In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51." This
Statement amends ARB No. 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement is effective for
fiscal years beginning on or after December 15, 2008.
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.
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 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 that underwrites, originates and services these loans in
order to diversify its loan portfolio, increase fee income and
reduce interest rate risk.
You should read our financial results for the quarter ended March 31, 2008 in
the context of this strategy.
o Net income was $1.9 million, or $0.06 per diluted share, for the
quarter ended March 31, 2008 compared to $2.0 million, or $0.07 per
diluted share for the same period in 2007.
o Net interest income was $7.7 million for the three months ended
March 31, 2008 and $7.5 million for the same period in 2007. The
increase in net interest income was mainly due to a $75.9 million
increase in average earning assets. The net interest margin, on a
tax equivalent basis, was 3.16% for the three months ended March
31, 2008, compared to 3.34% for the same period in 2007.
o For the three months ended March 31, 2008, noninterest expense was
$5.8 million, compared to $5.3 million for the same period in 2007.
This was primarily due to an increase of $294,000 in salaries and
benefits, which were $3.6 million for the three months ended March
31, 2008. The increase in salaries and benefits for the three
months ended March 31, 2008 compared to the same period in 2007 was
primarily the result of an increase of $201,000 in expenses related
to share-based compensation, due to new grants of restricted stock
and stock options in the third quarter of 2007. In addition,
expenses related to employee health insurance increased $57,000 due
to normal increases in this area.
12
o Westfield Financial incurred a net loss of $10,000 on the sale and
writedown of securities for the three months ended March 31, 2008.
This was due to a writedown of $310,000 on preferred stock issued
by the Federal Home Loan Mortgage Corporation ("Freddie Mac"), a
government-sponsored enterprise. Management deemed the value of
this preferred stock to be other than temporarily impaired. The
writedown was offset by net gains of $300,000 for the three months
ended March 31, 2008 on the sale of other investment securities.
There were no gains, losses, or writedowns related to investment
securities for the same period in 2007.
o Total assets increased $43.0 million to $1.1 billion at March 31,
2008 from $1.0 billion at December 31, 2007. Investment securities
increased $11.6 million to $534.4 million at March 31, 2008 from
$522.8 million at December 31, 2007. Cash and cash equivalents
increased $25.6 million to $63.2 million at March 31, 2008 from
$37.6 million at December 31, 2007.
o Net loans increased by $3.2 million to $418.1 million at March 31,
2008 from $414.9 million at December 31, 2007. Commercial and
industrial loans increased $7.3 million, to $123.8 million at March
31, 2008 from $116.5 million at December 31, 2007. Commercial real
estate loans increased $2.1 million to $192.0 million at March 31,
2008.
o Residential real estate loans decreased $5.4 million to $102.7
million at March 31, 2008 from $108.1 million at December 31, 2007.
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 $56.6 million increase
in short-term borrowings and long-term debt, which totaled $196.8
million at March 31, 2008. This was primarily due to an increase of
$48.5 million in new long-term debt, in the form of securities sold
under repurchase agreements with an approved broker-dealer, at
March 31, 2008. The securities sold under agreements to repurchase
have final maturities in the first quarter of 2018 and are callable
at the issuer's option beginning in the years 2010 to 2012. The
slope of the yield curve provided opportunities to earn a spread by
borrowing funds and reinvesting in loans and securities.
o Total deposits decreased $9.1 million to $593.6 million at March
31, 2008 from $602.7 million at December 31, 2007. The decrease in
deposits was due to a decrease in time deposits and money market
accounts, partially offset by an increase in regular savings and
checking accounts. Time deposits decreased $16.6 million to $336.7
million at March 31, 2008. Management placed less emphasis on
gathering time deposits in favor of using other types of funding,
such as borrowings.
o Stockholder's equity at March 31, 2008 and December 31, 2007 was
$281.9 million and $286.5 million, respectively, which represented
26.0% of total assets as of March 31, 2008 and 27.6% of total
assets as of December 31, 2007. The change in stockholders' equity
is comprised of the net repurchase of 361,958 shares for $3.7
million related to the stock repurchase plan, a dividend amounting
to $1.5 million declared on January 22, 2008, partially offset by
net income of $1.9 million for the three months ended March 31,
2008. The net repurchase of stock was comprised of the repurchase
of 515,015 shares for $5.3 million, partially offset by the
reissuance of 153,057 shares in connection with stock option
exercises.
o Nonperforming loans increased $1.8 million to $3.0 million at March
31, 2008 compared to $1.2 million at December 31, 2007. This
represented 0.70% of total loans at March 31, 2008 and 0.29% of
total loans at December 31, 2007. The increase was the result of a
single agricultural commercial loan relationship of $1.8 million.
The loan relationship is primarily secured by real estate.
Management does not anticipate incurring significant losses on this
relationship.
13
o The allowance for loan losses was $5.9 million at March 31, 2008
and $5.7 million at December 31, 2007. This represents 1.39% of
total loans at March 31, 2008 and 1.36% of total loans at December
31, 2007. At these levels, the allowance for loan losses as a
percentage of nonperforming loans was 199% at March 31, 2008 and
476% at December 31, 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. Compensation to an automobile dealer is normally based upon a spread
that a dealer adds on the loan base rate set by Westfield Financial. The
compensation is paid to an automobile dealer shortly after the loan is
originated. Westfield Financial records the amount as a deferred cost that is
amortized over the life of the loans in relation to the interest paid by the
consumer.
Westfield Financial's methodology for assessing the appropriateness of the
allowance consists of two key components: a specific allowance for identified
problem or impaired loans, and a general allowance for the remainder of the
portfolio. Measurement of an 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, that management has the
positive intent and ability to hold until maturity are classified as held to
maturity and are carried at amortized cost. Securities, including
mortgage-backed securities, that have been identified as assets for which there
is not a positive intent to hold to maturity are classified as available for
sale and are carried at fair value with unrealized gains and losses, net of
income taxes, reported as a separate component of equity. Accordingly, a
misclassification would have a direct effect on stockholders' equity. Sales or
reclassification as available for sale (except for certain permitted reasons)
of held to maturity securities may result in the reclassification of all such
securities to available for sale. Westfield Financial has never sold held to
maturity securities or reclassified such securities to available for sale other
than in specifically permitted circumstances. Westfield Financial does not
acquire securities or mortgage-backed securities for purposes of engaging in
trading activities.
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 MARCH 31, 2008 AND DECEMBER 31, 2007
Total assets increased $43.0 million to $1.1 billion at March 31, 2008 from
$1.0 billion at December 31, 2007. Investment securities increased $11.6
million to $534.4 million at March 31, 2008 from $522.8 million at December 31,
2007. Cash and cash equivalents increased $25.6 million to $63.2 million at
March 31, 2008 from $37.6 million at December 31, 2007. The increase in cash
and cash equivalents was primarily the result of cash flow received from the
investment portfolio late in the first quarter of 2008.
Net loans increased by $3.2 million to $418.1 million at March 31, 2008 from
$414.9 million at December 31, 2007. This was the result of increases in
commercial and industrial loans and commercial real estate loans, partially
offset by a decrease in residential real estate loans. Commercial and
industrial loans increased $7.3 million to $123.8 million at March 31, 2008
from $116.5 million at December 31, 2007. Commercial real estate loans
increased $2.1 million to $192.0 million at March 31, 2008.
Residential real estate loans decreased $5.4 million to $102.7 million at March
31, 2008 from $108.1 million at December 31, 2007. 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 $56.6 million increase in
short-term borrowings and long-term debt, which totaled $196.8 million at March
31, 2008. This was primarily due to $48.5 million in new long-term debt, in the
form of securities solder under repurchase agreements with an approved
broker-dealer, at March 31, 2008. The securities sold under agreements to
repurchase have final maturities in the first quarter of 2018 and are callable
at the issuer's option beginning in the years 2010 to 2012. The slope of the
yield curve provided opportunities to earn a spread by borrowing funds and
reinvesting in loans and securities.
Total deposits decreased $9.1 to $593.6 million at March 31, 2008 from $602.7
million at December 31, 2007. Time deposits decreased $16.6 million to $336.7
million at March 31, 2008 while regular savings and money market accounts
increased $4.6 million. Management placed less emphasis on gathering time
deposits in favor of using other types of funding, such as borrowings.
Short-term borrowings were $48.3 million at March 31, 2008 and $35.3 million at
December 31, 2007. Short-term borrowings are made up of FHLB advances with an
original maturity of less than one year as well as customer repurchase
agreements, which have an original maturity of one day. Short-term borrowings
issued by the FHLB were $30.0 million at March 31, 2008 and $18.4 million at
December 31, 2007. Customer repurchase agreements were $18.3 million at March
31, 2008 and $16.8 million at December 31, 2007. 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 March 31, 2008 were held by commercial customers.
15
Long-term debt, which includes FHLB advances and securities sold under
repurchase agreements with an original maturity of one year or more, were
$148.5 million at March 31, 2008 and $105.0 million at December 31, 2007. As of
March 31, 2008, FHLB advances comprised $100.0 million and securities sold
under repurchase agreements comprised $48.5 million of the long-term debt. The
securities sold under agreements to repurchase have final maturities in the
first quarter of 2018 and are callable at the issuer's option beginning in the
years 2010 to 2012.
Stockholders' equity at March 31, 2008 and December 31, 2007 was $281.9 million
and $286.5 million, respectively, representing 26.0% and 27.6% of total assets,
respectively. The change in stockholders' equity is comprised of the net
repurchase of 361,958 shares for $3.7 million related to the stock repurchase
plan, a dividend amounting to $1.5 million declared on January 22, 2008,
partially offset by net income of $1.9 million for the three months ended March
31, 2008. The net repurchase of stock was comprised of the repurchase of
515,015 shares for $5.3 million, partially offset by the reissuance of 153,057
shares in connection with stock option exercises.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2008
AND MARCH 31, 2007
General
Net income was $1.9 million, or $0.06 per diluted share, for the quarter ended
March 31, 2008 as compared to $2.0 million, or $0.07 per diluted share, for the
same period in 2007.
Net interest and dividend income was $7.7 million for the three months ended
March 31, 2008 and $7.5 million for the same period in 2007.
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 March 31, 2008 and 2007
and reflect the average yield on assets and average cost of liabilities for the
periods indicated. Yields and costs are derived by dividing interest income by
the average balance of interest-earning assets and interest expense by the
average balance of interest-bearing liabilities for the periods shown. Average
balances are derived from actual daily balances over the periods indicated.
Interest income includes fees earned from making changes in loan rates and
terms and fees earned when real estate loans are prepaid or refinanced.
Interest earned on tax exempt assets is adjusted to a tax equivalent basis to
recognize the income tax savings which facilitate comparison between taxable
and tax exempt assets.
16
Three Months Ended March 31,
2008 2007
------------------------------------ ------------------------------------
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---- -------- ------- ----
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short-term investments $ 215 $ 28,922 2.97% $ 1,383 $104,861 5.28%
Investment securities 6,922 542,533 5.10 5,096 428,074 4.76
Loans 6,772 420,904 6.44 6,485 383,520 6.76
------- -------- ------- --------
Total interest-earning assets $13,909 $992,359 5.61% $12,964 $916,455 5.66%
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW accounts $ 304 $ 85,092 1.43% $ 319 $ 79,144 1.61%
Savings accounts 160 51,747 1.24 48 38,920 0.49
Money market accounts 221 73,167 1.21 349 91,631 1.52
Time deposits 3,656 344,924 4.24 4,080 373,921 4.36
Repurchase agreements and borrowings 1,720 168,469 4.08 527 58,713 3.59
------- -------- ------- --------
Total interest-bearing liabilities $ 6,061 $723,399 3.35% $ 5,323 $642,329 3.31%
======= ======== ======= ========
Less: Tax equivalent adjustment (140) (120)
Net interest income/interest rate spread $ 7,708 2.26% $ 7,521 2.35%
======= ==== ======= ====
Net Interest Margin (1) 3.16% 3.34%
==== ====
- ------------------
(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.
17
Three Months Ended March 31, 2008
compared to Three Months Ended
March 31, 2007
Increase (decrease) due to:
---------------------------------
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short-term investments $(1,002) $(166) $(1,168)
Investment securities 1,363 463 1,826
Loans 632 (345) 287
------- ----- -------
Net change in income on
interest-earning assets 993 (48) 945
------- ----- -------
Interest-Bearing Liabilities
- ----------------------------
NOW accounts 24 (39) (15)
Savings accounts 16 96 112
Money market accounts (70) (58) (128)
Time deposits (316) (108) (424)
Customer repurchase agreements
and borrowings 985 208 1,193
------- ----- -------
Net change in expense on
interest-bearing liabilities 639 99 738
------- ----- -------
Change in net interest income $ 354 $(147) $ 207
======= ===== =======
Net interest and dividend income increased $187,000 to $7.7 million for the
three months ended March 31, 2008 from $7.5 million for the same period in
2007. The net interest margin, on a tax equivalent basis, was 3.16% for the
three months ended March 31, 2008 as compared to 3.34% for the same period in
2007. Interest and dividend income on a tax equivalent basis increased $945,000
to $13.9 million for the three months ended March 31, 2008 from $13.0 million
for the same period in 2007. The increase in interest income was mainly due to
a $75.9 million increase in average earning assets. Average earning assets were
$992.4 million for the three months ended March 31, 2008 compared to $916.5 for
the same period in 2007. The yield on interest-earning assets decreased five
basis points to 5.61% for the three months ended March 31, 2008 from 5.66% for
same period in 2007.
The increase in interest income was partially offset by an increase in interest
expense of $738,000 to $6.1 million for the three months ended March 31, 2008
from $5.3 million for the comparable 2007 period. The average cost of
interest-bearing liabilities increased four basis points to 3.35% for the three
months ended March 31, 2008 from 3.31% for same period in 2007. The increase in
the average cost of interest-bearing liabilities was primarily due to an
increase in the average balance of interest-bearing liabilities from the
comparable 2007 period.
Provision for Loan Losses
The allocation of the allowance 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.
18
The amount that Westfield Bank provided for the provision for loan losses
during the three months ended March 31, 2008 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 increases in nonperforming loans
and impaired loans an increase in commercial and industrial loans and
commercial real estate loans, tempered by a decrease in residential real estate
loan balances. After evaluating these factors, Westfield Bank provided $175,000
for loan losses for the three months ended March 31, 2008, compared to $100,000
for the same period in 2007. The allowance was $5.9 million at March 31, 2008
and $5.7 million at December 31, 2007. The allowance for loan losses was 1.39%
of total loans at March 31, 2008 and 1.36% at December 31, 2007.
Nonperforming loans were $3.0 million at March 31, 2008 and $1.2 million at
December 31, 2007. Nonperforming loans as a percentage of total loans were
0.70% at March 31, 2008 and 0.29% at December 31, 2007. The increase was the
result of a single agricultural commercial loan relationship of $1.8 million.
The loan relationship is primarily secured by real estate. Management does not
anticipate incurring significant losses on this relationship.
Impaired loans increased $1.8 million to $2.0 million at March 31, 2008 from
$196,000 at December 31, 2007 as a result of the single agricultural commercial
loan relationship of $1.8 million described above. A valuation allowance of
$91,000 was allocated in the first quarter of 2008 on the loan relationship of
$1.8 million based on the estimated fair value of the underlying collateral.
Commercial and industrial loans increased $7.3 million to $123.8 million at
March 31, 2008. Westfield Bank considers commercial and industrial 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 $2.1 million during the quarter ended March 31, 2008. At March
31, 2008, residential real estate loans decreased $5.4 million to $102.7
million compared to December 31, 2007.
Net recoveries were $7,000 for the three months ended March 31, 2008. This was
comprised of recoveries of $13,000 for the three months ended March 31, 2008,
partially offset by charge-offs of $6,000 for the same period. Net recoveries
for the three months ended March 31, 2007 were $16,000. This was comprised of
recoveries of $36,000 for the three months ended March 31, 2007, partially
offset by charge-offs of $20,000 for the same period.
Although management believes it has established and maintained the allowance
for loan losses at adequate levels, future adjustments may be necessary if
economic, real estate and other conditions differ substantially from the
current operating environment.
Noninterest Income
Noninterest income increased $46,000 to $865,000 for the three months ended
March 31, 2008 from $819,000 in the same period in 2007. Income from bank-owned
life insurance increased $52,000 to $319,000 for the three months ended March
31, 2008 compared to $267,000 in the same period in 2007. Net checking account
processing fee income decreased $59,000 to $327,000 for the three months ended
March 31, 2008, compared to $386,000 for the same period in 2007.
Westfield Financial incurred a net loss of $10,000 on the sale and writedown of
securities for the three months ended March 31, 2008. This was due to a
writedown of $310,000 on preferred stock issued by Freddie Mac. Management
deemed the value of this preferred stock to be other than temporarily impaired.
The writedown was offset by net gains of $300,000 for the three months ended
March 31, 2008 on the sale of other investment securities. There were no gains,
losses, or writedowns related to investment securities for the same period in
2007.
19
Noninterest Expense
Noninterest expense for the three months ended March 31, 2008 was $5.8 million,
compared to $5.3 million for the same period in 2007. Salaries and benefits
increased $294,000 to $3.6 million for the three months ended March 31, 2008
compared to $3.3 million for the same period in 2007. The increase in salaries
and benefits for the three months ended March 31, 2008 was primarily the result
of an increase of $201,000 in expenses related to share-based compensation, due
to new grants of restricted stock and stock options in the third quarter of
2007. In addition, expenses related to employee health insurance increased
$57,000 due to normal increases in this area.
Computer operations expense increased $83,000 to $435,000 for the three months
ended March 31, 2008 from $352,000 in the comparable 2007 period. The increase
was primarily the result of increased licensing and support fees over the
comparable 2007 period. Professional services increased $75,000 to $474,000 for
the three months ended March 31, 2008 from $399,000 in the comparable 2007
period. The increase was primarily the results of a $50,000 fee paid to a
consultant for a review of bank processes during the first quarter of 2008.
Income Taxes
For the three months ended March 31, 2008, Westfield Financial had a tax
provision of $753,000 as compared to $913,000 for the same period in 2007. The
effective tax rate was 28.8% for the three months ended March 31, 2008 and
31.1% for the same period in 2007. The decrease in effective tax rate for the
three months ended March 31, 2008 from the comparable 2007 period is due
primarily to a decrease in fully taxable income while maintaining tax-exempt
income levels.
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 FHLB based on eligible collateral of loans and securities.
Westfield Bank's maximum additional borrowing capacity from the FHLB at March
31, 2008 was $12.4 million.
Liquidity management is both a daily and long-term function of business
management. The measure of a company's liquidity is its ability to meet its
cash commitments at all times with available cash or by conversion of other
assets to cash at a reasonable price. Loan repayments and maturing investment
securities are a relatively predictable source of funds. However, deposit flow,
calls of investment securities and repayments of loans and mortgage-backed
securities are strongly influenced by interest rates, general and local
economic conditions and competition in the marketplace. These factors reduce
the predictability of the timing of these sources of funds. Management believes
that Westfield Financial has sufficient liquidity to meet its current operating
needs.
At March 31, 2008, Westfield Financial exceeded each of its applicable
regulatory capital requirements. As of March 31, 2008, the most recent
notification from the Office of Thrift Supervision (the "OTS") categorized
Westfield Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" Westfield Bank must
maintain minimum total risk-based, Tier 1 risk based and Tier 1 leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed Westfield Bank's
category. Westfield Financial's and Westfield Bank's actual capital ratios of
March 31, 2008 are also presented in the following table.
20
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)
March 31, 2008
Total Capital (to Risk Weighted Assets):
Consolidated $287,621 48.40% 47,541 8.00% N/A -
Bank 220,132 37.96 46,388 8.00 $57,985 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 281,804 47.42 23,770 4.00 N/A -
Bank 214,315 36.96 23,194 4.00 34,791 6.00
Tier 1 Capital (to Adjusted Assets):
Consolidated 281,804 26.03 43,307 4.00 N/A -
Bank 214,315 21.07 40,691 4.00 50,864 5.00
Tangible Equity (to Tangible Assets):
Consolidated N/A - N/A - N/A -
Bank 214,315 21.07 15,259 1.50 N/A -
December 31, 2007
Total Capital (to Risk Weighted Assets):
Consolidated $290,900 50.29% 46,276 8.00% N/A -
Bank 218,118 38.76 45,021 8.00 $56,277 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 285,174 49.30 23,138 4.00 N/A -
Bank 212,392 37.74 22,511 4.00 33,766 6.00
Tier 1 Capital (to Adjusted Assets):
Consolidated 285,174 27.48 41,506 4.00 N/A -
Bank 212,392 21.95 38,696 4.00 48,370 5.00
Tangible Equity (to Tangible Assets):
Consolidated N/A - N/A - N/A -
Bank 212,392 21.95 14,511 1.50 N/A -
See the "Consolidated Statements of Cash Flows" in the Consolidated Financial
Statements included in this Form 10-Q for the sources and uses of cash flows
for operating, investing, and financing activities for the three months ended
March 31, 2008 and March 31, 2007.
Westfield Bank also has outstanding, at any time, a significant number of
commitments to extend credit and provide financial guarantees to third parties.
These arrangements are subject to strict credit control assessments. Guarantees
specify limits to Westfield Bank's obligations. Because many commitments and
almost all guarantees expire without being funded in whole or in part, the
contract amounts are not estimates of future cash flows. Westfield Bank is
obligated under leases for certain of its branches and equipment. A summary of
lease obligations and credit commitments at March 31, 2008 follows:
21
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 $ 379 $ 746 $ 629 $ 6,693 $ 8,447
======== ======= ======= ======= ========
DEBT
Federal Home Loan Bank $ 20,000 $55,000 $20,000 $ 5,000 $100,000
Securities sold under
repurchase agreements - - - 48,500 48,500
-------- ------- ------- ------- --------
Total debt $ 20,000 $55,000 $20,000 $53,500 $148,500
======== ======= ======= ======= ========
CREDIT COMMITMENTS
Available lines of credit $ 52,826 $ - $ - $13,610 $ 66,436
Other loan commitments 30,060 4,393 - 34,453
Letters of credit 6,826 - - 458 7,284
-------- ------- ------- ------- --------
Total credit commitments $ 89,712 $ 4,393 $ - $14,068 $108,173
-------- ------- ------- ------- --------
Grand total $110,091 $60,139 $20,629 $74,261 $265,120
======== ======= ======= ======= ========
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
adjusted total assets. Management believes, as of March 31, 2008, that
Westfield Bank met all capital adequacy requirements to which it was subject.
As of March 31, 2008, the most recent notification from the OTS categorized
Westfield Bank as "well capitalized" under the regulatory framework for prompt
corrective action.
To be categorized as well capitalized, Westfield Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no
conditions or events since that notification that management believes have
changed Westfield Bank's category.
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 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 statements. Income from
tax-exempt assets is calculated on a fully taxable equivalent basis.
22
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.
The table below sets forth as of March 31, 2009 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 March 31, 2009
(Dollars in thousands)
----------------------------------------------
Changes in Net Interest
Interest Rates and Dividend
(Basis Points) Income % Change
-------------- ------------ --------
300 $30,872 7.0%
200 30,272 5.0%
100 29,503 2.3%
0 28,841 0.0%
-100 27,983 -3.0%
-200 25,606 -11.2%
-300 22,988 -20.3%
Management believes that there have been no significant changes in market risk
since December 31, 2007.
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 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 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 the Chief Executive Officer and
Chief Financial Officer, 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 have materially affected,
or that are reasonably likely to materially affect, Westfield Financial's
internal control over financial reporting.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously disclosed on
Westfield Financial's Form 10-K for the year ending December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information with respect to purchases made by
the Company of its common stock during the three months ended March 31, 2008.
- -------------------------------------------------------------------------------------------------
Total number
of shares Maximum number
purchased as of shares that
Total number part of publicly may yet be
of shares Average price announced purchased under
Period purchased paid per share($) programs the program
- -------------------------------------------------------------------------------------------------
January 1 - 31, 2008 33,402 10.20 33,402 3,160,598
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
February 1 - 29, 2008 368,985 10.39 368,985 2,791,613
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
March 1 - 31, 2008 112,628 9.97 112,628 2,678,985
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Total 515,015 10.29 515,015 2,678,985
- -------------------------------------------------------------------------------------------------
In January 2008, the Board of Directors voted to authorize the commencement of
a repurchase program ("Repurchase Program") authorizing the Company to
repurchase up to 3,194,000 shares, or ten percent of its outstanding shares of
common stock. The Repurchase Program will continue until it is completed. The
repurchases may be made from time to time at the discretion of management of
the Company.
During the three months ended March 31, 2008, 153,057 shares of the Company's
stock which were repurchased under the repurchase program were reissued in
connection with stock option exercises.
There were no sales by the Company of unregistered securities during the three
months ended March 31, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
a. None.
b. None.
24
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 Amended and Restated Benefit Restoration Plan of Westfield
Financial, Inc. (7)
10.6 Form of Amended and Restated Deferred Compensation Agreement with
Donald A. Williams. (5)
10.7 Amended and Restated Employment Agreement between Donald A.
Williams and Westfield Bank. (7)
10.8 Amended and Restated Employment Agreement between Michael J.
Janosco, Jr. and Westfield Bank. (7)
10.9 Amended and Restated Employment Agreement between James C. Hagan
and Westfield Bank. (7)
10.10 Amended and Restated Employment Agreement between Donald A.
Williams and Westfield Financial, Inc. (7)
10.11 Amended and Restated Employment Agreement between Michael J.
Janosco, Jr. and Westfield Financial, Inc. (7)
10.12 Amended and Restated Employment Agreement between James C. Hagan
and Westfield Financial, Inc. (7)
10.13 Form of Amended and Restated Change in Control Agreement by and
among certain officers, Westfield Financial, Inc. and Westfield
Bank. (7)
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
(1) Incorporated by reference to the Registration Statement No. 333-137024 on
Form S-1 filed with the Securities and Exchange Commission (the "SEC") on
August 31, 2006, as amended.
(2) Incorporated by reference to the Form 8-K filed with the SEC on January
5, 2007.
(3) Incorporated by reference to the Registration Statement No. 333-68550 on
Form S-1 filed with the SEC 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 SEC on March 31, 2003.
(5) Incorporated by reference to the Form 8-K filed with the SEC on December
22, 2005.
(6) Incorporated by reference to the Post-Effective Amendment No. 1 to the
Registration Statement No. 333-73132 on Form S-8 filed with the SEC on
April 28, 2006.
(7) Incorporated by reference to the Form 8-K filed with the SEC on October
25, 2007.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westfield Financial, Inc.
(Registrant)
By: /s/ Donald A. Williams
---------------------------------------------
Donald A. Williams
Chairman of the Board/Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael J. Janosco, Jr.
---------------------------------------------
Michael J. Janosco, Jr.
Vice President/Chief Financial Officer
(Principal Accounting Officer)
May 9, 2008
26