UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 01085
(Address of principal executive offices)
(Zip Code)
(413) 568-1911
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_ No___.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large accelerated filer Smaller reporting company
--- ---
Accelerated filer X Non-accelerated filer
--- ---
Indicate by check mark whether the registrant is a shell company.
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Outstanding at
Class November 7, 2008
- ----------------------------------- ----------------------------------
Common Stock, $0.01 par value 31,363,431
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - September 30, 2008 and
December 31, 2007
Consolidated Statements of Income (Unaudited) - Three and nine months
ended September 30, 2008 and 2007
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Nine months ended
September 30, 2008 and 2007
Consolidated Statements of Cash Flows (Unaudited) - Nine months
ended September 30, 2008 and 2007
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, Inc. 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)
September 30, December 31,
2008 2007
---- ----
ASSETS
Cash and due from banks $ 14,464 $ 16,603
Federal funds sold 54,238 21,017
Interest-bearing deposits and other short-term investments 60 3
---------- ----------
Cash and cash equivalents 68,762 37,623
---------- ----------
SECURITIES:
Available for sale - at estimated fair value 23,414 38,051
Held to maturity - at amortized cost (estimated fair value of
$81,874 at September 30, 2008, and $105,829 at December 31, 2007) 82,120 104,025
MORTGAGE-BACKED SECURITIES:
Available for sale - at estimated fair value 201,189 206,178
Held to maturity - at amortized cost (estimated fair value of
$169,489 at September 30, 2008 and $174,550 at December 31, 2007) 170,076 174,594
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK- AT COST 8,446 7,510
LOANS - Net of allowance for loan losses of $6,408 at September 30, 2008
and $5,726 at December 31, 2007 456,548 414,902
PREMISES AND EQUIPMENT, Net 12,158 12,712
ACCRUED INTEREST RECEIVABLE 5,118 5,761
BANK-OWNED LIFE INSURANCE 35,400 32,398
OTHER ASSETS 10,122 6,030
---------- ----------
TOTAL ASSETS $1,073,353 $1,039,784
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 49,530 $ 42,408
Interest-bearing 536,508 560,268
---------- ----------
Total deposits 586,038 602,676
---------- ----------
SHORT-TERM BORROWINGS 36,693 35,268
LONG-TERM DEBT 168,500 105,000
OTHER LIABILITIES 8,811 10,308
---------- ----------
TOTAL LIABILITIES 800,042 753,252
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
None outstanding at September 30, 2008 and December 31, 2007 - -
Common stock - $.01 par value, 75,000,000 shares authorized, 31,383,188
shares issued and outstanding at September 30, 2008, and 31,933,549
shares issued and outstanding at December 31, 2007 313 319
Additional paid-in capital 205,257 209,497
Unallocated common stock of Employee Stock Ownership Plan (11,070) (11,542)
Restricted stock unearned compensation (4,741) (5,493)
Retained earnings 87,155 92,702
Accumulated other comprehensive (loss) income (3,603) 1,049
---------- ----------
Total stockholders' equity 273,311 286,532
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,073,353 $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 Nine Months
Ended September 30, Ended September 30,
2008 2007 2008 2007
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Debt securities, taxable $ 5,952 $ 5,813 $ 18,539 $ 15,760
Residential and commercial real estate loans 4,711 4,621 13,952 13,430
Commercial and industrial loans 2,133 2,240 6,057 6,233
Debt securities, tax-exempt 351 334 1,030 969
Federal funds sold 158 502 543 2,437
Marketable equity securities 121 151 452 458
Consumer loans 78 89 247 270
Interest-bearing deposits and other short-term
Investments - 2 1 98
---------- ---------- ---------- ----------
Total interest and dividend income 13,504 13,752 40,821 39,655
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 3,551 4,989 11,686 14,708
Short-term borrowings 204 178 768 452
Long-term debt 1,650 1,006 4,606 1,983
---------- ---------- ---------- ----------
Total interest expense 5,405 6,173 17,060 17,143
---------- ---------- ---------- ----------
Net interest and dividend income 8,099 7,579 23,761 22,512
PROVISION FOR LOAN LOSSES 275 50 690 225
---------- ---------- ---------- ----------
Net interest and dividend income after
provision for loan losses 7,824 7,529 23,071 22,287
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Income from bank-owned life insurance 359 331 1,002 923
Service charges and fees 605 594 1,768 1,795
Gain on sales of securities, net 486 39 805 39
Other than temporary impairment of securities (651) - (961) -
---------- ---------- ---------- ----------
Total noninterest income 799 964 2,614 2,757
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employees benefits 3,662 3,484 10,759 10,088
Occupancy 593 591 1,819 1,758
Professional fees 356 336 1,203 1,081
Data processing 422 344 1,276 1,056
Stationery, supplies and postage 111 122 360 375
Other 639 474 1,883 1,879
---------- ---------- ---------- ----------
Total noninterest expense 5,783 5,351 17,300 16,237
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,840 3,142 8,385 8,807
INCOME TAXES 793 970 2,357 2,710
---------- ---------- ---------- ----------
NET INCOME $ 2,047 $ 2,172 $ 6,028 $ 6,097
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.07 $ 0.07 $ 0.21 $ 0.20
Weighted average shares outstanding 29,199,300 29,785,103 29,325,236 29,999,156
Diluted earnings per share $ 0.07 $ 0.07 $ 0.20 $ 0.20
Weighted average diluted shares outstanding 29,587,936 30,248,763 29,758,968 30,498,623
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) Income Total
-------- ----- ---------- ---- ------------ -------- ------------- -----
Balance at December 31, 2007 31,933,549 $319 $209,497 $(11,542) $(5,493) $92,702 $ 1,049 $286,532
Comprehensive income:
Net income - - - - - 6,028 - 6,028
Unrealized losses on
securities arising during
the period, net of tax
benefit of $2,951 - - - - - - (4,730) (4,730)
Reclassification for losses
included in net income,
net of tax benefit of $78 - - - - - - 78 78
--------
Total comprehensive income 1,376
--------
Share-based compensation - - 737 472 752 - - 1,961
Common stock repurchased (983,471) (10) (9,769) - - - - (9,779)
Issuance of common stock in
connection with stock
option exercises 433,110 4 4,447 - - (2,550) - 1,901
Excess tax benefits in
connection with stock
option exercises - - 345 - - - - 345
Cash dividends declared
($0.30 per share) - - - - - (9,025) - (9,025)
---------- ---- -------- -------- ------- ------- ------- --------
Balance at September 30, 2008 31,383,188 $313 $205,257 $(11,070) $(4,741) $87,155 $(3,603) $273,311
========== ==== ======== ======== ======= ======= ======= ========
Balance at December 31, 2006 9,728,912 $274 $201,736 $ (4,835) $ (405) $93,364 $ (726) $289,408
Total comprehensive income
Net income - - - - - 6,097 - 6,097
Unrealized gains on
securities arising during
the period, net of tax
benefit of $468 - - - - - - 865 865
Reclassification for gains
included in net income,
net of tax of $16 - - - - - - (23) (23)
--------
Total comprehensive income - - - - - - - 6,939
--------
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 - - 500 492 460 - - 1,452
Issuance of restricted stock - - 5,815 - (5,815) - - -
Purchase of ESOP shares 736,000 7 7,353 (7,360) - - - -
Purchase of common stock in
connection with recognition
and retention plan - - (6,075) - - - - (6,075)
Issuance of common stock in
connection with stock
option exercises 2,684 - 12 - - - - 12
Cash dividends declared
($0.15 per share) - - - - - (4,527) - (4,527)
---------- ---- -------- -------- ------- ------- ------- --------
Balance at September 30, 2007 31,926,587 $319 $208,983 $(11,703) $ (5,760) $97,647 $ 116 $289,602
========== ==== ======== ======== ========= ======= ======= ========
See accompanying notes to consolidated financial statements.
5
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Nine Months
Ended September 30,
2008 2007
---- ----
OPERATING ACTIVITIES:
Net income $ 6,028 $ 6,097
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 690 225
Depreciation of premises and equipment 889 801
Net amortization of premiums and discounts on securities,
mortgage-backed securities, and mortgage loans 140 264
Share-based compensation expense 1,961 1,452
Excess tax benefit in connection with stock option exercises (345) -
Gains on sales of securities, net (805) (39)
Other than temporary impairment of securities 961 -
Deferred income tax benefit (135) (56)
Income from bank-owned life insurance (1,002) (923)
Changes in assets and liabilities:
Accrued interest and dividends 643 (1,174)
Other assets (1,006) 112
Other liabilities (1,152) 6,958
-------- ---------
Net cash provided by operating activities 6,867 13,717
-------- ---------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (1,094) (41,738)
Proceeds from maturities and principal collections 23,000 10,000
Securities, available for sale:
Purchases (17,291) (26,226)
Proceeds from sales 15,242 15,111
Proceeds from calls, maturities, and principal collections 14,992 15,059
Mortgage-backed securities, held to maturity:
Purchases (23,726) (44,298)
Principal collections 28,091 30,764
Mortgage-backed securities, available for sale:
Purchases (80,114) (99,473)
Proceeds from sales 43,802 272
Principal collections 35,278 25,636
Purchase of Federal Home Loan Bank of Boston stock (936) (2,581)
Proceeds from redemption of Federal Home Loan Bank of Boston stock - 217
Purchase of residential mortgages (1,366) (1,634)
Net other increase in loans (41,000) (15,521)
Purchases of premises and equipment (335) (1,750)
Purchase of bank-owned life insurance (2,000) (10,520)
-------- ---------
Net cash used in investing activities (7,457) (146,682)
-------- ---------
FINANCING ACTIVITIES:
Decrease in deposits (16,638) (13,297)
Net change in short-term borrowings 1,425 2,904
Repayment of long-term debt (15,000) (15,000)
Proceeds from long-term debt 78,500 65,000
Cash dividends paid (9,025) (4,527)
Exchange of common stock pursuant to reorganization - (320)
Capital contribution pursuant to dissolution of MHC - 2,713
Common stock repurchased (9,779) -
Issuance of common stock in connection with stock option exercises 1,901 12
Excess tax benefit in connection with stock option exercises 345 -
Purchase of common stock in connection with retention and recognition plan - (6,075)
-------- ---------
Net cash provided by financing activities 31,729 31,410
-------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS: 31,139 (101,555)
Beginning of period 37,623 154,508
-------- ---------
End of period $ 68,762 $ 52,953
======== =========
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 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.
7
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 September 30, 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 and nine
months ended September 30, 2008 are not necessarily indicative of the results
of operations for the remainder of the year ended 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. These unaudited
consolidated interim 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
adjusted income that would result from the assumed issuance. Potential common
shares that may be issued by Westfield Financial related solely to outstanding
stock awards and options and are determined using the treasury's stock method.
Earnings per common share for the three and nine months ended September 30,
2008 and 2007 have been computed based on the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
---- ---- ---- ----
(In thousands, except per share data)
Net income available to common stockholders $ 2,047 $ 2,172 $ 6,028 $ 6,097
======= ======= ======= =======
Weighted average number of common shares outstanding 29,199 29,785 29,325 29,999
Effect of dilutive shares awards and options 389 464 434 500
------- ------- ------- -------
Adjusted weighted average number of common stock
outstanding used to calculate diluted earnings
per common share 29,588 30,249 29,759 30,499
======= ======= ======= =======
Basic earnings per share $ 0.07 $ 0.07 $ 0.21 $ 0.20
Diluted earnings per share $ 0.07 $ 0.07 $ 0.20 $ 0.20
Stock options and awards that would have an antidilutive effect on diluted
earnings per share are excluded from the calculation. At September 30, 2008 and
2007, 1,501,857 shares were antidilutive.
8
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 September 30, 2008, 208,399 shares were
available for future grants. No shares were granted during the three and nine
months ended September 30, 2008. In August 2007, 559,000 shares of common stock
were granted under the 2007 Recognition and Retention Plan. As of September 30,
2008, 65,041 shares were available for future grants. No shares were granted in
the three and nine months ended September 30, 2008.
Westfield Financial applies Statement of Financial Accounting Standard No.
123(R), "Share Based Payment" ("SFAS 123(R)" or the "Statement") 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 stock awards of approximately $252,000 and $216,000 for three
months ended September 30, 2008 and 2007, respectively, and $752,000 and
$460,000 for the nine months ended September 30, 2008 and 2007, respectively.
Westfield Financial applies SFAS 123(R) in accounting for stock options. SFAS
123(R) permits entities to use any option-pricing model that meets the fair
value objective in the Statement. Westfield Financial uses the binomial model
for its adoption of this statement to determine that fair value of stock
options granted. Expense is recognized for stock options based on the fair
value determined at the grant date. Westfield Financial recorded compensation
costs relating to stock options of $175,000 and $88,000, with a related tax
benefit of $45,000 and $21,000 for the three months ended September 30, 2008
and 2007, respectively. Westfield Financial recorded compensation costs
relating to stock options of $520,000 and $245,000, with a related tax benefit
of $135,000 and $50,000 for the nine months ended September 30, 2008 and 2007,
respectively.
4. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Westfield Bank utilizes short-term borrowings and long-term debt as additional
sources 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
$15.0 million and $18.5 million at September 30, 2008 and December 31, 2007,
respectively. Customer repurchase agreements were $21.7 million at September
30, 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 September 30, 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 September
30, 2008, Westfield Bank had $120.0 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.
9
5. PENSION AND POSTRETIREMENT LIFE INSURANCE BENEFITS
The following provides information regarding net benefit costs for the period
shown:
Postretirement Life
Pension Benefits Insurance Benefits
Three months ended Three months ended
September 30, September 30,
------------------ -------------------
(In thousands)
2008 2007 2008 2007
---- ---- ---- ----
Service cost $ 175 $ 175 $ - $ 8
Interest cost 162 145 6 12
Expected return on assets (190) (162) - -
Transaction obligation (3) (3) - 2
Actuarial loss (10) - - -
----- ----- ---- ----
Net periodic pension cost $ 134 $ 155 $ 6 $ 22
===== ===== ==== ====
Postretirement Life
Pension Benefits Insurance Benefits
Nine months ended Nine months ended
September 30, September 30,
------------------ -------------------
(In thousands)
2008 2007 2008 2007
---- ---- ---- ----
Service cost $ 525 $ 526 $ - $ 23
Interest cost 486 436 17 37
Expected return on assets (570) (485) - -
Transaction obligation (9) (9) - 6
Actuarial loss (29) (1) 1 -
----- ----- ---- ----
Net periodic pension cost $ 403 $ 467 $ 18 $ 66
===== ===== ==== ====
Westfield Bank maintains a pension plan for its eligible employees. Westfield
Financial plans to contribute to the pension plan the amount required to meet
the minimum funding standards under Section 412 of the Internal Revenue Code.
Additional contributions will be made as deemed appropriate by management in
conjunction with the pension plan's actuaries. As of September 30, 2008,
Westfield Financial made a contribution of $486,000 for the year 2008.
Westfield Financial does not expect to make any additional contributions in
2008.
In 2007, Westfield Financial curtailed its postretirement life insurance
benefits for active employees to offset rising compensation costs.
10
6. FAIR VALUE OF ASSETS AND LIABILITIES
Effective January 1, 2008, Westfield Financial adopted Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements", which provides a
framework for measuring fair value under U.S. GAAP.
Westfield Financial 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.
Westfield Financial did not elect fair value treatment for any financial assets
or liabilities upon adoption.
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
September 30, 2008
----------------------------------------
Level 1 Level 2 Level 3 Total
------- ------- ------- -----
(In thousands)
Assets
Securities available for sale $6,178 $ 17,236 $ - $ 23,414
-
Mortgage-backed securities
available for sale - 201,189 - 201,189
------ -------- ------- --------
Total assets $6,178 $218,425 $ - $224,603
====== ======== ======= ========
Also, Westfield Financial 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 writedowns 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 for the
three and nine months ended September 30, 2008.
Three Months Nine Months
Ended Ended
At September 30, 2008 September 30, 2008 September 30, 2008
--------------------- ------------------ ------------------
(In thousands)
Total Total
Level 1 Level 2 Level 3 Gains (Losses) Gains (Losses)
------- ------- ------- -------------- --------------
Loans $ - $1,817 $ - $ - $ (126)
---- ------ ---- ---- -------
Total assets $ 39 $1,817 $ - $ - $(1,087)
==== ====== ==== ==== =======
The amount of loans represents the carrying value and related writedown and
valuation allowance of impaired loans for which adjustments are based on the
estimated fair value of the underlying collateral. The resulting losses were
recognized in earnings through the provision for loan losses.
11
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141 (revised), "Business Combinations" ("SFAS 141R"). This
Statement replaces FASB Statement No. 141 ("SFAS 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
SFAS 141R 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 SFAS
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. SFAS 141R 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. SFAS 141R also requires an acquirer to recognize assets acquired and
liabilities assumed arising from contractual contingencies as of the
acquisition date, while SFAS 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 SFAS 141R, 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 SFAS 141. Further, SFAS 141R 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. SFAS 141R 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. Management has determined that the
adoption of this Statement will not have a material impact on Westfield
Financial's consolidated financial statements.
In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 amends Accounting Research Bulletin ("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. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008.
In October, 2008, the FASB issued FASB Staff Position No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157 in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 was effective
immediately upon issuance, and includes prior periods for which financial
statements have not been issued. Westfield Financial applied the guidance
contained in FSP 157-3 in determining fair values at September 30, 2008, and it
did not have a material impact on the consolidated financial statements.
12
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 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 September 30, 2008 in
the context of this strategy.
You should read our financial results for the quarter ended September 30, 2008
in the context of this strategy.
o Net income was $2.0 million, or $0.07 per diluted share, for the
quarter ended September 30, 2008 compared to $2.2 million, or $0.07
per diluted share for the same period in 2007. For the nine months
ended September 30, 2008, net income was $6.0 million, or $0.20 per
diluted share compared to $6.1 million, or $0.20 per diluted share
for the same period in 2007. Both the three months and nine months
ended September 30, 2008 showed an increase in net interest income;
however this was offset by increased noninterest expenses and an
increase in the provision for loan losses.
o Net interest income increased $520,000 to $8.1 million for the
three months ended September 30, 2008 compared to $7.6 million for
the same period in 2007. The net interest margin, on a tax
equivalent basis, was 3.29% for the three months ended September
30, 2008, compared to 3.18% for the same period in 2007. For the
nine months ended September 30, 2008, net interest income increased
$1.3 million to $23.8 million, compared to $22.5 million for the
same period in 2007. The net interest margin, on a tax equivalent
basis, was 3.24% and 3.27% for the nine months ended September 30,
2008 and 2007, respectively. The increase in net interest income
was primarily due to increases in average earning assets of $40.2
million and $63.2 million for the three and nine months ended
September 30, 2008, respectively.
13
o Net loans increased by $41.6 million, to $456.5 million at
September 30, 2008 from $414.9 million at December 31, 2007. The
increase in net loans was primarily the result of an increase in
commercial and industrial loans and commercial real estate loans.
Commercial and industrial loans increased $26.7 million to $143.2
million at September 30, 2008 from $116.5 million at December 31,
2007. Commercial real estate loans increased $24.8 million to
$214.8 million at September 30, 2008 from $190.0 million at
December 31, 2007.
o The financial results for the three and nine months ended September
30, 2008 also include a net loss of $165,000 and $156,000,
respectively, on the sale and writedown of securities. Westfield
Financial recorded writedowns on preferred stock issued by Freddie
Mac of $310,000 in the first quarter of 2008 and $651,000 in the
third quarter of 2008, for a total of $961,000. Freddie Mac was
placed into conservatorship by the United States Treasury in
September 2008. Westfield Financial's book value remaining on
preferred stock issued by Freddie Mac was $39,000 at September 30,
2008. The writedown was partially offset by net gains of $486,000
and $805,000 for the three and nine months ended September 30,
2008, respectively, on the sale of other investment securities.
o Nonperforming loans increased $2.0 million to $3.2 million at
September 30, 2008 compared to $1.2 million at December 31, 2007.
This represents 0.69% of total loans at September 30, 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.
CRITICAL ACCOUNTING POLICIES
Westfield Financial's critical accounting policies, given its current business
strategy and asset/liability structure, are revenue recognition on loans and
investments, 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: (i) a specific allowance for
identified problem or impaired loans and (ii) a formula 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.
14
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.
On a quarterly basis, Westfield Financial reviews available for sale investment
securities with unrealized depreciation on a judgmental basis to assess whether
the decline in fair value is temporary or other than temporary. Declines in the
fair value of held to maturity and available for sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. In estimating other than temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of Westfield Financial
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
Total assets increased $33.6 million to $1.1 billion at September 30, 2008 from
$1.0 billion at December 31, 2007. Cash and cash equivalents increased $31.2
million to $68.8 million at September 30, 2008 from $37.6 million at December
31, 2007. The increase in cash and cash equivalents was the result of an
increase of $33.2 million in federal funds sold to $54.2 million at September
30, 2008 from $21.0 million at December 31, 2007. Westfield Financial's federal
funds sold represent short term loans, maturing in one day, to well-capitalized
banks. Management felt it prudent to keep a higher amount of cash equivalent
assets on hand during the recent period of turmoil in the financial markets.
Net loans increased by $41.6 million to $456.5 million at September 30, 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 $26.7 million to $143.2 million at September 30,
2008 from $116.5 million at December 31, 2007. Commercial real estate loans
increased $24.8 million to $214.8 million at September 30, 2008 from $190.0
million at December 31, 2007. Owner occupied commercial real estate loans
totaled $94.9 million and $90.4 million at September 30, 2008 and December 31,
2007, respectively, while non-owner occupied commercial real estate loans
totaled $119.9 million and $99.6 million at September 30, 2008 and December 31,
2007, respectively. The increases in commercial and industrial and commercial
real estate loans were due to increased loan originations to commercial
customers within Westfield Financial's market area.
Residential real estate loans decreased $8.2 million to $99.9 million at
September 30, 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. Westfield Bank does
not originate or hold subprime mortgage loans.
Investment securities decreased $46.0 million to $476.8 million at September
30, 2008 from $522.8 million at December 31, 2007. Investment securities
decreased as a portion of the funds received from sales, calls, maturities and
principal pay downs were used to originate loans and increase federal funds
sold.
15
Asset growth was funded primarily through a $63.5 million increase in long-term
debt, which totaled $168.5 million at September 30, 2008. This was primarily
due to $48.5 million in new long-term debt, in the form of securities sold
under repurchase agreements with an approved broker-dealer, at September 30,
2008. Current interest rates permit Westfield Financial to earn a spread by
borrowing funds and reinvesting in loans and securities.
Long-term debt, which includes FHLB advances and securities sold under
repurchase agreements with an original maturity of one year or more, were
$168.5 million at September 30, 2008 and $105.0 million at December 31, 2007.
As of September 30, 2008, FHLB advances comprised $120.0 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.
Short-term borrowings were $36.7 million at September 30, 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 $15.0 million at September 30, 2008 and
$18.4 million at December 31, 2007. Customer repurchase agreements were $21.7
million at September 30, 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 September 30, 2008 were held
by commercial customers.
Total deposits decreased $16.7 million to $586.0 million at September 30, 2008
from $602.7 million at December 31, 2007. The decrease in total deposits was
due to a decrease in time deposits and money market accounts, partially offset
by an increase in regular savings and checking accounts. Management placed less
emphasis on gathering time deposits in favor of using other types of funding,
such as borrowings, to control funding costs.
Time deposits decreased $29.1 million to $324.2 million at September 30, 2008.
Money market accounts decreased $11.0 million to $63.6 million at September 30,
2008. The decreases in time deposits and money market accounts were partially
offset by increases of $18.4 million in regular savings accounts and $5.1
million in checking accounts. The increases in both regular savings accounts
and checking accounts were fueled by new products with higher interest rates
than Westfield Financial's other comparable products.
Stockholders' equity at September 30, 2008 and December 31, 2007 was $273.3
million and $286.5 million, respectively, representing 25.5% and 27.6% of total
assets, respectively. The decrease in stockholders' equity is comprised of the
repurchase of 983,471 shares for $9.8 million and the payment of regular and
special dividends amounting to $9.0 million, partially offset by net income of
$ 6.0 million for the nine months ended September 30, 2008. In January 2008,
the Board of Directors voted to authorize the commencement of a repurchase
program which authorized Westfield Financial to repurchase up to 3,194,000
shares, or ten percent of its outstanding shares of common stock. The
repurchase of 983,471 shares was partially offset by the reissuance of 433,110
shares in connection with stock option exercises. All of the stock options
exercised during the nine months ended September 30, 2008 were granted in 2002.
16
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
AND SEPTEMBER 30, 2007
General
Net income was $2.0 million, or $0.07 per diluted share, for the quarter ended
September 30, 2008 compared to $2.2 million, or $0.07 per diluted share, for
the same period in 2007. Net interest and dividend income was $8.1 million for
the three months ended September 30, 2008 and $7.6 million for the same period
in 2007.
Net Interest and Dividend Income
The following tables set forth the information relating to our average balance
and net interest income for the three months ended September 30, 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 annualized 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.
The interest rate spread is the difference between the total average yield on
interest-earning assets and the cost of interest-bearing liabilities. Net
interest margin represents tax-equivalent net interest and dividend income as a
percentage of average interest earning assets. 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, 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 September 30,
2008 2007
------------------------------------ ------------------------------------
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short-term investments $ 158 $ 33,390 1.89% $ 504 $ 38,780 5.20%
Investment securities 6,542 508,210 5.15 6,372 510,771 4.99
Loans 6,958 456,407 6.10 6,984 408,256 6.84
------- -------- ------- --------
Total interest-earning assets $13,658 $998,007 5.47% $13,860 $957,807 5.79%
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW accounts $ 328 $ 86,203 1.52% $ 355 $ 80,935 1.75%
Savings accounts 211 63,906 1.32 97 41,855 0.93
Money market accounts 189 65,613 1.15 341 83,217 1.64
Time deposits 2,823 322,038 3.51 4,196 368,301 4.56
Short-term borrowings and long-term debt 1,854 204,011 3.64 1,184 109,328 4.33
------- -------- ------- --------
Total interest-bearing liabilities $ 5,405 $741,771 2.91% $ 6,173 $683,636 3.61%
======= ======== ======= ========
Less: Tax-equivalent adjustment (154) (108)
Net interest income/interest rate spread $ 8,099 2.56% $ 7,579 2.18%
======= ==== ======= ====
Net interest margin 3.29% 3.18%
==== ====
17
The following table shows how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected Westfield Financial's tax-equivalent interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to:
o Interest income changes attributable to changes in volume (changes in
volume multiplied by prior rate);
o Interest income changes attributable to changes in rate (changes in
rate multiplied by current volume); and
o The net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
Three Months Ended September 30, 2008
Compared to September 30, 2007
Increase (decrease) due to:
-------------------------------------
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short-term investments $ (70) $ (276) $ (346)
Investment securities (32) 202 170
Loans 824 (850) (26)
------ ------- -------
Net change in income on
Interest-earning assets 722 (924) (202)
------ ------- -------
Interest-Bearing Liabilities
- ----------------------------
NOW accounts 23 (50) (27)
Savings accounts 51 63 114
Money market accounts (72) (80) (152)
Time deposits (527) (846) (1,373)
Short-term borrowings and long-term debt 1,025 (355) 670
------ ------- -------
Net change in expense on
interest-bearing liabilities 500 (1,268) (768)
------ ------- -------
Change in net interest income $ 222 $ 344 $ 566
====== ======= =======
Net interest and dividend income increased $520,000 to $8.1 million for the
three months ended September 30, 2008 from $7.6 million for the same period in
2007. The net interest margin, on a tax- equivalent basis, was 3.29% for the
three months ended September 30, 2008 compared to 3.18% for the same period in
2007. Net interest and dividend income increased primarily as a result of a
decrease in interest expense of $768,000 to $5.4 million for the three months
ended September 30, 2008 from $6.2 million for the same period in 2007. The
average cost of interest-bearing liabilities decreased 70 basis points to 2.91%
for the three months ended September 30, 2008 from 3.61% for the same period in
2007. The decrease in the average cost of interest-bearing liabilities was
primarily due to the falling interest rate environment. Management placed less
emphasis on gathering time deposits in order to take advantage of other sources
of lower-cost funding, such as short-term borrowings and long-term debt, to
control funding costs.
18
The decrease in interest expense was partially offset by a decrease of $202,000
in tax-equivalent interest and dividend income for the three months ended
September 30, 2008 to $13.7 million from $13.8 million for the same period in
2007. The yield on interest-earning assets, on a tax-equivalent basis,
decreased 32 basis points to 5.47% for the three months ended September 30,
2008 from 5.79% for the same period in 2007 due to the falling interest rate
environment. The average balance of interest-earning assets increased $40.2
million to $998.0 million for the three months ended September 30, 2008
compared to $957.8 million for the same period in 2007.
Provision for Loan Losses
The amount that Westfield Financial provided for the provision for loan losses
during the three months ended September 30, 2008 was based upon the changes
that occurred in the loan portfolio during that same period as well as the
general weakening of the national economy. The changes in the loan portfolio,
described in detail below, include an increase in commercial and industrial
loans and commercial real estate loans, tempered by a decrease in residential
real estate loans. After evaluating these factors, Westfield Financial provided
$275,000 for loan losses for the three months ended September 30, 2008,
compared to $50,000 for the same period in 2007. The allowance was $6.4 million
at September 30, 2008 and $6.1 million at June 30, 2008. The allowance for loan
losses was 1.38% of total loans at September 30, 2008 and 1.39% of total loans
at June 30, 2008.
Commercial and industrial loans increased $11.2 million during the quarter
ended September 30, 2008. Westfield Financial 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 $11.7 million during the
quarter ended September 30, 2008 to $214.8 million. At September 30, 2008,
residential real estate loans decreased $559,000 to $9.9 million compared to
June 30, 2008.
Net recoveries were $6,000 for the three months ended September 30, 2008. This
was comprised of charge-offs of $11,000 offset by recoveries of $17,000. Net
recoveries were $69,000 for the three months ended September 2007. This was
comprised of recoveries of $83,000 offset by charge-offs of $14,000.
Although management believes it has established and maintained the allowance
for loan losses at adequate levels, future adjustments may be necessary if
economic, real estate and other conditions differ substantially from the
current operating environment.
Noninterest Income
Noninterest income decreased $165,000 to $799,000 for the three months ended
September 30, 2008 from $964,000 in the same period in 2007. The decrease in
noninterest income was the result of a net loss of $165,000 on the sale and
writedown of securities. Westfield Financial recorded a writedown of $651,000
on its Freddie Mac preferred stock for the three months ended September 30,
2008. Freddie Mac was placed into conservatorship by the United States Treasury
in September 2008. Westfield Financial's book value remaining on preferred
stock issued by Freddie Mac was $39,000 at September 30, 2008. The writedown
was partially offset by net gains of $486,000 on the sale of other investment
securities for the three months ended September 30, 2008.
Westfield Financial recorded a net gain of $39,000 on the sale of securities
for the three months ended September 30, 2007. There were no writedowns related
to investment securities for the same period in 2007.
19
Noninterest Expense
Noninterest expense for the three months ended September 30, 2008 was $5.8
million compared to $5.4 million for the same period in 2007. Salaries and
benefits increased $178,000 to $3.7 million for the three months ended
September 30, 2008 compared to $3.5 million for the same period in 2007. The
increase in salaries and benefits for the three months ended September 30, 2008
was primarily the result of an increase of $111,000 in expenses related to
share-based compensation, due to new grants of restricted stock and stock
options late in the third quarter of 2007.
In addition, charitable contributions increased $101,000 to $116,000 for the
three months ended September 30, 2008 compared to $15,000 for the same period
in 2007. Management elected to distribute a larger dollar amount of
contributions in the third quarter of 2008, whereas in 2007, the majority of
the contributions were made in the first six months of the year.
Income Taxes
For the three months ended September 30, 2008, Westfield Financial had a tax
provision of $793,000 compared to $970,000 for the same period in 2007. The
effective tax rate was 27.9% for the three months ended September 30, 2008 and
30.9% for the same period in 2007.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
AND SEPTEMBER 30, 2007
General
Net income was $6.0 million, or $0.20 per diluted share, for the nine months
ended September 30, 2008 as compared to $6.1 million, or $0.20 per diluted
share, for the same period in 2007. Net interest and dividend income was $23.8
million for the nine months ended September 30, 2008, compared to $22.5 million
for the same period in 2007.
Net Interest and Dividend Income
The following tables set forth the information relating to our average balance
and net interest income for the nine months ended September 30, 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 annualized 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.
The interest rate spread is the difference between the total average yield on
interest-earning assets and the cost of interest-bearing liabilities. Net
interest margin represents tax-equivalent net interest and dividend income as a
percentage of average interest earning assets. 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, 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.
20
Nine Months Ended September 30,
2008 2007
------------------------------------ ------------------------------------
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---- -------- ------- ----
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short-term investments $ 544 $ 31,779 2.28% $ 2,535 $ 64,221 5.26%
Investment securities 20,343 530,296 5.11 17,421 477,461 4.86
Loans 20,362 436,537 6.22 20,038 393,708 6.79
------- -------- ------- --------
Total interest-earning assets $41,249 $998,612 5.51% $39,994 $935,390 5.70%
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW accounts $ 947 $ 86,681 1.46 $ 1,016 $ 80,304 1.69
Savings accounts 553 57,995 1.27 204 40,033 0.68
Money market accounts 608 69,195 1.17 1,035 87,374 1.58
Time deposits 9,578 332,213 3.84 12,453 371,695 4.47
Short-term borrowings and long-term debt 5,374 190,159 3.77 2,435 80,809 4.02
------- -------- ------- --------
Total interest-bearing liabilities $17,060 $736,243 3.09% $17,143 $660,215 3.46%
======= ======== ======= ========
Less: Tax-equivalent adjustment (428) (339)
Net interest income/interest rate spread $23,761 2.42% $22,512 2.24%
======= ==== ======= ====
Net interest margin 3.24% 3.27%
==== ====
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 tax-equivalent 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.
21
Nine Months Ended September 30, 2008
Compared to September 30, 2007
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short-term investments $(1,281) $ (710) $(1,991)
Investment securities 1,928 994 2,922
Loans 2,180 (1,856) 324
------- ------- -------
Net change in income on
interest-earning assets 2,827 (1,572) 1,255
------- ------- -------
Interest-Bearing Liabilities
- ----------------------------
NOW accounts 81 (150) (69)
Savings accounts 92 257 349
Money market accounts (215) (212) (427)
Time deposits (1,323) (1,552) (2,875)
Short-term borrowings and
long-term debt 3,295 (356) 2,939
------- ------- -------
Net change in expense on
interest-bearing liabilities 1,930 (2,013) (83)
------- ------- -------
Change in net interest income $ 897 $ 441 $ 1,338
======= ======= =======
Net interest and dividend income increased $1.2 million to $23.8 million for
the nine months ended September 30, 2008 from $22.5 million for the same period
in 2007. The net interest margin, on a tax- equivalent basis, was 3.24% for the
three months ended September 30, 2008 as compared to 3.27% for the same period
in 2007. Interest and dividend income, on a tax-equivalent basis, increased
$1.2 million to $41.2 million for the nine months ended September 30, 2008 from
$40.0 million for the same period in 2007. The increase in interest and
dividend income was mainly due to a $63.2 million increase in average interest
earning assets. Average interest earning assets were $998.6 million for the
nine months ended September 30, 2008 compared to $935.4 million for the same
period in 2007. The yield on interest-earning assets decreased 19 basis points
to 5.51% for the nine months ended September 30, 2008 from 5.70% for same
period in 2007.
Interest expense was $17.1 million for the nine months ended September 30, 2008
and 2007, respectively. The average cost of interest-bearing liabilities
decreased 37 basis points to 3.09% for the nine months ended September 30, 2008
from 3.46% for same period in 2007 primarily due to the falling interest rate
environment. The decrease in the cost of interest-bearing liabilities was
partially offset by an increase in the average balance of short-term borrowings
and long-term debt of $109.4 million to $332.2 million for the nine months
ended September 30, 2008 from $80.8 million for the same period in 2007.
Management placed less emphasis on gathering time deposits in order to take
advantage of other sources of lower-cost funding, such as short-term borrowings
and long-term debt, to control funding costs.
22
Provision for Loan Losses
The amount that Westfield Financial provided for the provision for loan losses
during the nine months ended September 30, 2008 was based upon the changes that
occurred in the loan portfolio during that same period as well as a general
weakening of the national economy. The changes in the loan portfolio, described
in detail below, include increases in commercial and industrial loans and
commercial real estate loans, and an increase in nonperforming and impaired
loans due to the deterioration of one commercial relationship, tempered by a
decrease in residential real estate loan balances. After evaluating these
factors, Westfield Financial provided $690,000 for loan losses for the nine
months ended September 30, 2008, compared to $225,000 for the same period in
2007. The allowance was $6.4 million at September 30, 2008 and $5.7 million at
December 31, 2007. The allowance for loan losses was 1.38% of total loans at
September 30, 2008 and 1.36% of total loans at December 31, 2007.
Commercial and industrial loans increased $26.7 million to $143.2 million at
September 30, 2008. Commercial real estate loans increased $24.8 million during
the quarter ended September 30, 2008 to $214.8 million. At September 30, 2008,
residential real estate loans decreased $8.2 million to $99.9 million compared
to December 31, 2007.
Nonperforming loans were $3.2 million at September 30, 2008 compared to $1.2
million at December 31, 2007. Nonperforming loans as a percentage of total
loans were 0.69% at September 30, 2008 and 0.29% at December 31, 2007. The
increase was primarily 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 $1.6 million to $1.8 million at September 30, 2008
primarily 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.
Net charge-offs were $8,000 for the nine months ended September 30, 2008. This
was comprised of charge-offs of $62,000 offset by recoveries of $54,000. Net
recoveries for the nine months ended September 30, 2007 were $131,000. This was
comprised of recoveries of $190,000 offset by charge-offs of $59,000.
Although management believes it has established and maintained the allowance
for loan losses at adequate levels, future adjustments may be necessary if
economic, real estate and other conditions differ substantially from the
current operating environment.
Noninterest Income
Noninterest income decreased $143,000 to $2.6 million for the nine months ended
September 30, 2008 from $2.8 million in the same period in 2007. The decrease
in noninterest income was the result of a net loss of $156,000 on the sale and
writedown of securities. Westfield Financial recorded a writedown of $310,000
in the first quarter of 2008 and $651,000 in the third quarter of 2008 on its
Freddie Mac preferred stock, for a total of $961,000. Freddie Mac was placed
into conservatorship by the United States Treasury in September 2008. Westfield
Financial's book value remaining on preferred stock issued by Freddie Mac was
$39,000 at September 30, 2008. The writedown was partially offset by net gains
of $805,000 on the sale of other investment securities for the nine months
ended September 30, 2008. Westfield Financial recorded a net gain of $39,000 on
the sale of securities for the nine months ended September 30, 2007. There were
no writedowns related to investment securities for the same period in 2007.
In addition, net checking account processing fee income decreased $156,000 to
$1.0 million for the nine months ended September 30, 2008 compared to $1.2
million for the same period in 2007. Both decreases were partially offset by an
increase in income from bank-owned life insurance of $79,000 to $1.0 million
for the nine months ended September 30, 2008 compared to $923,000 in the same
period in 2007.
23
Noninterest Expense
Noninterest expense for the nine months ended September 30, 2008 was $17.3
million compared to $16.2 million for the same period in 2007. Salaries and
benefits increased $671,000 million to $10.8 million for the nine months ended
September 30, 2008 compared to $10.1 million for the same period in 2007. This
was primarily the result of expenses related to share-based compensation, which
increased $509,000 for the nine months ended September 30, 2008 as a result of
new grants of restricted stock and stock options late in the third quarter of
2007. In addition, data processing expense increased $220,000 to $1.3 million
for the nine months ended September 30, 2008 compared to $1.1 million for the
same period in 2007. This was the result of an increased use of software
applications and enhanced computer functionality in Westfield Financial's
computer information systems.
Income Taxes
For the nine months ended September 30, 2008, Westfield Financial had a tax
provision of $2.4 million compared to $2.7 million for the same period in 2007.
The effective tax rate was 28.1% for the nine months ended September 30, 2008
and 30.8% for the same period in 2007.
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
September 30, 2008 was approximately $184.5 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.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008, or EESA,
was signed into law providing for, among other things, $700 billion in funding
to the U.S. Treasury to purchase troubled assets from financial institutions.
On October 14, 2008, the Treasury, the Federal Reserve Board, and the Federal
Deposit Insurance Corporation issued a joint statement announcing additional
steps aimed at stabilizing the financial markets, including a $250 billion
voluntary Capital Purchase Program, or CPP, that allows qualifying financial
institutions to sell preferred shares to the Treasury. Institutions that
participate in the CPP are restricted in their ability to make future stock
repurchases and to increase dividend payments to shareholders for a period of
three years. Westfield Financial's Board of Directors and management is
evaluating the benefits and drawbacks of participation in the CPP, reviewing
these analyses with the Company's financial and legal advisors, and is still
evaluating the decision to apply for funds under the CPP.
At September 30, 2008, Westfield Financial exceeded each of the applicable
regulatory capital requirements. As of September 30, 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 as
of September 30, 2008 are also presented in the table.
24
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
September 30, 2008
Total Capital (to Risk Weighted Assets):
Consolidated $283,093 45.06% $50,261 8.00% N/A -
Bank 224,910 36.53 49,258 8.00 $61,572 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 276,685 44.04 25,131 4.00 N/A -
Bank 218,593 35.50 24,629 4.00 36,943 6.00
Tier 1 Capital (to Adjusted Total Assets):
Consolidated 276,685 25.65 43,146 4.00 N/A -
Bank 218,593 21.28 40,891 4.00 51,114 5.00
Tangible Equity (to Tangible Assets):
Consolidated N/A - N/A - N/A -
Bank 218,593 21.28 15,334 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 Total 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 -
25
Westfield Bank also has outstanding, at any time, a significant number of
commitments to extend credit and provide financial guarantees to third parties.
These arrangements are subject to strict credit control assessments. Guarantees
specify limits to Westfield Bank's obligations. Because many commitments and
almost all guarantees expire without being funded in whole or in part, the
contract amounts are not estimates of future cash flows.
Westfield Bank is obligated under leases for certain of its branches and
equipment. A summary of lease obligations and credit commitments at September
30, 2008 follows:
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 $ 519 $ 1,005 $ 833 $10,767 $ 13,124
======== ======= ======= ======= ========
BORROWINGS
Federal Home Loan Bank $ 55,000 $55,000 $20,000 $ 5,000 $135,000
Securities sold under
repurchase agreements - - - 48,500 48,500
-------- ------- ------- ------- --------
Total borrowings $ 55,000 $55,000 $20,000 $53,500 $183,500
======== ======= ======= ======= ========
CREDIT COMMITMENTS
Available lines of credit $ 59,801 $ - $ - $14,725 $ 74,526
Other loan commitments 25,699 2,190 - - 27,889
Letters of credit 5,953 - - 243 6,196
-------- ------- ------- ------- --------
Total credit commitments $ 91,453 $ 2,190 $ - $14,968 $108,611
======== ======= ======= ======= ========
Grand total $146,972 $58,195 $20,833 $79,235 $305,235
======== ======= ======= ======= ========
OFF-BALANCE SHEET ARRANGEMENTS
Westfield Financial does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on Westfield
Financial's condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative measures established by regulation to ensure capital adequacy
require Westfield Bank to maintain minimum amounts and ratios (set forth in the
table above) of total and Tier I capital to risk weighted assets and to average
assets. Management believes, as of September 30, 2008, that Westfield Bank met
all capital adequacy requirements to which it was subject. As of September 30,
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 the most recent OTS notification that management
believes have changed Westfield Bank's categorization.
26
Management uses a simulation model to monitor interest rate risk. This model
reports the net interest income at risk primarily under seven different
interest rate change environments. Specifically, net interest income is
measured in one scenario that assumed no change in interest rates, and six
scenarios where interest rates increase 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 September 30, 2008 the estimated changes in
net interest and dividend income that would result from incremental changes in
interest rates over the applicable period.
For the Twelve Months Ending September 30, 2009
(Dollars in thousands)
-----------------------------------------------
Changes in Net Interest
Interest Rates (Basis and Dividend
Points) Income % Change
--------------------- ------------ --------
300 $32,748 0.5%
200 32,540 -0.1%
100 32,373 -0.7%
0 32,588 0.0%
-100 31,998 -1.8%
-200 30,999 -4.9%
-300 29,934 -8.1%
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 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 the 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 accounting officer, as appropriate to allow timely decisions
regarding required disclosure.
27
There have been no changes in the Westfield Financial's internal control over
financial reporting identified in connection with the evaluation that occurred
during Westfield Financial's last fiscal quarter that have materially affected,
or that are 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
For a summary of risk factors relevant to our operations, see Part I, Item 1A,
"Risk Factors" in our 2007 Annual Report on Form 10-K. There are no material
changes in risk factors relevant to our operations, except as discussed below.
Changes in the national and local economy may affect our future growth
possibilities.
Our current market area is principally located in Hampden County,
Massachusetts. Our future growth opportunities depend on the growth and
stability of our regional economy and our ability to expand our market area. A
downturn in our local economy may limit funds available for deposit and may
negatively affect our borrowers' ability to repay their loans on a timely
basis, both of which could have an impact on our profitability.
We are operating in a challenging and uncertain economic environment, both
nationally and locally. Since 2007, housing market conditions in our market
area have deteriorated, as evidenced by reduced levels of sales, increasing
inventories of houses on the market, declining house prices and an increase in
the length of time houses remain on the market.
On October 3, 2008, President Bush signed the Emergency Economic Stabilization
Act of 2008, or the EESA, into law in response to the financial crises
affecting the banking system and financial markets. Pursuant to the EESA, the
U.S. Treasury has the authority to, among other things, purchase up to $700
billion of troubled assets (including mortgages, mortgage-backed securities and
certain other financial instruments) from financial institutions for the
purpose of stabilizing and providing liquidity to the U.S. financial markets.
On October 14, 2008, the Treasury, the Federal Reserve Board and the Federal
Deposit Insurance Corporation (the "FDIC") issued a joint statement announcing
additional steps aimed at stabilizing the financial markets.
No assurance can be given that the foregoing or any other governmental program
will improve market and economic conditions, or that such conditions will not
result in a decrease in our interest income, a decrease in fee income from our
relationship with a third party mortgage company, an increase in our
non-performing loans, an increase in our provision for loan losses or an
adverse impact on our loan losses.
The FDIC's proposed increase in deposit insurance premiums will increase our
non-interest expense.
The FDIC recently adopted a restoration plan and issued a notice of proposed
rulemaking and request for comment that would initially raise the assessment
rate schedule, uniformly across all four risk categories into which the FDIC
assigns insured institutions, by seven basis points (annualized) of insured
deposits beginning on January 1, 2009. Under the proposed plan, beginning with
the second quarter of 2009, the initial base assessment rates will range from
10 to 45 basis points depending on an institution's risk category, with
adjustments resulting in increased assessment rates for institutions with a
significant reliance on secured liabilities and brokered deposits. Under the
proposal the FDIC may continue to adopt actual rates that are higher without
further notice-and-comment rulemaking subject to certain limitations.
28
If the FDIC determines that assessment rates should be increased, institutions
in all risk categories could be affected. The FDIC has exercised this authority
several times in the past and could continue to raise insurance assessment
rates in the future. The increased deposit insurance premiums proposed by the
FDIC will result in an increase in our non-interest expense.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES USE OF PROCEEDS
There were no purchases made by Westfield Financial of its common stock during
the three months ended September 30, 2008.
There were no sales by Westfield Financial of unregistered securities during
the three months ended September 30, 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
29
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 One-Year Change of 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 on August 31,
2006, as amended.
(2) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007.
(3) Incorporated herein by reference to the Registration Statement No.
333-68550 on Form S-1 filed with the Securities and Exchange Commission
on August 28, 2001, as amended.
(4) Incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 2002 filed with the Securities and Exchange Commission
on March 31, 2003.
(5) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on December 22, 2005.
(6) Incorporated herein by reference to the Post-Effective Amendment No. 1 to
the Registration Statement No. 333-73132 on Form S-8 filed with the
Securities and Exchange Commission on April 28, 2006.
(7) Incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on October 29, 2007.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westfield Financial, Inc.
(Registrant)
By: /s/ Donald A. Williams
--------------------------------------------
Donald A. Williams
Chairman/Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael J. Janosco Jr.
--------------------------------------------
Michael J. Janosco, Jr.
Vice President/Chief Financial Officer
(Principal Accounting Officer)
November 7, 2008
31