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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 001-16767
Westfield Financial, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 73-1627673
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
141 Elm Street, Westfield, Massachusetts 01085
(Address of Principal Executive Offices, including zip code)
(413) 568-1911
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$.01 par value per share
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent files pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of March 19, 2002, the registrant had 10,025,450 shares of common stock,
$.01 par value, issued and outstanding. Of such shares outstanding,
5,607,400 shares were held by Westfield Mutual Holding Company, the
registrant's mutual holding company, and 4,418,050 were held by the public
and directors, officers and employees of the registrant.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2002, was $74,020,250. This figure was based on the
closing price as of June 30, 2002 on The American Stock Exchange for a share
of the registrant's common stock, which was $15.50 on June 30, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of Form 10-K - Portions of the Proxy Statement for the Annual
Meeting of Stockholders for the year ended December 31, 2002.
WESTFIELD FINANCIAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002
TABLE OF CONTENTS
ITEM PART I PAGE
1 BUSINESS 2
2 PROPERTIES 39
3 LEGAL PROCEEDINGS 40
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 40
PART II
5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 40
6 SELECTED FINANCIAL DATA 42
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 43
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 61
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 61
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 62
PART III
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 62
11 EXECUTIVE COMPENSATION 62
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 62
13 CERTAIN RELATIONSHIPS AND RELATED TRANSCTIONS 63
14 CONTROLS AND PROCEDURES 63
PART IV
15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 64
SIGNATURES 65
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 68
CERTIFICATION OF CHIEF FINANCIAL OFFICER 69
FORWARD - LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements"
which may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated," and "potential." Examples
of forward-looking statements include, but are not limited to, estimates
with respect to our financial condition and results of operation and
business that are subject to various factors which could cause actual
results to differ materially from these estimates. These factors include,
but are not limited to:
* general and local economic conditions;
* changes in interest rates, deposit flows, demand for mortgages and
other loans, real estate values, and competition;
* changes in accounting principles, policies, or guidelines;
changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products,
and services.
Any or all of our forward-looking statements in this Annual Report on
Form 10-K and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or
known or unknown risks and uncertainties. Consequently, no forward-looking
statements can be guaranteed. We disclaim any obligation to subsequently
revise any forward-looking statements to reflect events or circumstances
after the date of such statements, or to reflect the occurrence of
anticipated or unanticipated events.
1
PART I
ITEM 1. BUSINESS
General. Westfield Financial, Inc. ("Westfield Financial," "Company"
"us," "our," or "we") is a Massachusetts-chartered stock holding company
organized in November 2001 in connection with the reorganization of
Westfield Mutual Holding Company, a Massachusetts chartered mutual holding
company which owns 53% of the outstanding common stock of Westfield
Financial. Westfield Financial serves as the bank holding company for
Westfield Bank, a Massachusetts chartered stock savings bank. Unless the
context otherwise requires, all references herein to Westfield Bank or
Westfield Financial include Westfield Financial and Westfield Bank on a
consolidated basis. Westfield Financial sold 4,972,600 shares of its common
stock to eligible depositors of Westfield Bank. Net proceeds of the stock
offering were $47.7 million. The reorganization of Westfield Mutual Holding
Company and the related stock offering by Westfield Financial were
completed on December 27, 2001. The common stock of Westfield Financial
commenced trading on The American Stock Exchange under the symbol "WFD" on
December 28, 2001.
Westfield Securities Corp., a Massachusetts chartered security
corporation, and Westfield Bank are the only operating subsidiaries of
Westfield Financial. Westfield Securities Corp. was formed in December 2001
by Westfield Financial for the primary purpose of holding qualified
investment securities.
Westfield Bank was formed in 1853 and reorganized into a mutual
holding company structure without a stock offering in 1995. Historically,
Westfield Bank has been a community-oriented provider of banking products
and services to businesses and individuals, including traditional products
such as residential and commercial real estate loans, consumer loans and a
variety of deposit products. In recent years, however, Westfield Bank has
developed and implemented a lending strategy that focuses less on
residential real estate lending and more on servicing commercial customers,
including increased emphasis on commercial and industrial and consumer
lending and deposit relationships, extending its branch network and
broadening its product lines and services.
In addition, beginning on September 1, 2001, Westfield Bank began
referring its residential real estate loan customers to a third party
mortgage company. Under the program, substantially all of Westfield Bank's
residential real estate loans are underwritten and originated by a third
party mortgage company. In connection with this referral program, Westfield
Bank receives fee income for each of the loans originated by the third
party mortgage company. Westfield Bank may purchase residential real estate
loans from the third party mortgage company depending on market conditions.
Westfield Bank believes that this business strategy is best for its long
term success and viability, and complements its existing commitment to high
quality customer service. Westfield Bank operates through 10 banking
offices in Agawam, East Longmeadow, Holyoke, Southwick, Springfield, West
Springfield and Westfield, Massachusetts. It also has three free-standing
ATM locations in Agawam, Feeding Hills and Springfield, Massachusetts.
Westfield Bank's primary deposit gathering area is concentrated in the
communities surrounding these locations and its primary lending area
includes all of Hampden County in western Massachusetts. In addition,
Westfield Bank provides online banking services through its web site.
2
Westfield Bank's revenues are derived principally from interest on
its loans and interest and dividends on its investment securities. Its
primary sources of funds are deposits, scheduled amortization and
prepayments of loan principal and mortgage-backed securities, maturities
and calls of investment securities, and funds provided by operations.
Market Area. Westfield Bank conducts its operations out of the Bank's
main office in Westfield, Massachusetts. It also operates through nine
other banking offices located in Westfield and in the communities of
Agawam, East Longmeadow, Holyoke, Southwick, Springfield and West
Springfield, Massachusetts. Its deposits are gathered from the general
public in these towns and surrounding communities, and its lending
activities are concentrated primarily in Hampden County, Massachusetts.
The City of Westfield is largely suburban and is located in the
Pioneer Valley near the intersection of U.S. Interstates 90 (the
Massachusetts Turnpike) and 91. Interstate 90 is the major east-west
highway that crosses Massachusetts. Interstate 91 is the major north-south
highway that runs directly through the heart of New England. Westfield is
located approximately 90 miles west of Boston, Massachusetts, 70 miles
southeast of Albany, New York and 30 miles north of Hartford, Connecticut.
Westfield's 2001 population was approximately 40,100 and the estimated 2001
population for Hampden County was approximately 456,300.
The economy of Westfield Bank's market area historically has been
supported by a variety of industries. Its primary market area has benefited
from the presence of large employers centered in insurance, health care,
warehouse, manufacturing and education. Among the largest employers
currently in its market area are American Saw, Bay State Health Systems,
Big Y Foods, Friendly Ice Cream Corporation, Hasbro, Mass Mutual Life
Insurance Company, Mestek, Noble Hospital, C&S Wholesale, the University of
Massachusetts, Westfield State College and the Sullivan Paper Company. In
addition, other employment and economic activity is provided by substantial
number of small and medium size businesses in the area.
During the late 1990's, the regional economy in our primary market
area, based on economic indicators, such as unemployment rates, vacancy
rates and household income trends, strengthened, and residential and
commercial real estate values in some areas approached the market values
existing before the economic downturn in the late 1980s.
In recent years, however, the regional economy in Westfield Bank's
primary market area has showed signs of weakening. Unemployment rates in
Westfield Bank's market area have recently increased and Westfield Bank
expects that unemployment rates may increase further as the regional and
national economy weakens. Westfield Bank's future growth opportunities will
be influenced by the growth and stability of the statewide and regional
economies, other demographic population trends and the competitive
environment. Westfield Bank believes that it has developed lending products
and marketing strategies to address the diverse credit-related needs of the
residents in its market area.
As of December 2002, the unemployment rate of Westfield Bank's
primary market area and Massachusetts was 4.9% and 5.5%, respectively,
compared to 3.6% and 3.7%, respectively,
3
in December 2001. From July 2001 to July 2002, the median household income
in Westfield Bank's market area increased by 3.5% to $54,073 compared to
$52,245 as of June 2001. Despite the increase, the median household income
in Westfield Bank's market area is below state and national averages.
Competition. Westfield Bank faces intense competition both in making
loans and attracting deposits. Its primary market area is highly
competitive and it faces direct competition from 24 financial institutions,
many with a local, state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly
larger than and have greater financial resources than Westfield Bank.
Westfield Bank's competition for loans comes principally from commercial
banks, savings institutions, mortgage banking firms, credit unions, finance
companies, mutual funds, insurance companies and brokerage and investment
banking firms. Westfield Bank's most direct competition for deposits has
historically come from commercial banks, savings banks, co-operative banks
and credit unions. Westfield Bank faces additional competition for deposits
from short-term money market funds and other corporate and government
securities funds and from brokerage firms and insurance companies.
Historically, Westfield Bank's most direct competition for deposits has
come from savings, co-operative and commercial banks. In Westfield Bank's
market area, there were approximately ten of the foregoing institutions at
December 31, 2002.
Lending Activities
Loan Portfolio Composition. Westfield Bank's loan portfolio primarily
consists of residential real estate loans, home equity loans, commercial
real estate loans, commercial and industrial loans and consumer loans.
At December 31, 2002, Westfield Bank had total loans of $361.4 million,
of which $157.9 million were residential mortgage loans and home equity loans.
Of this total, 39.6% were adjustable-rate loans and 60.4% were fixed-rate
loans. The remainder of its loans at December 31, 2002 consisted of
commercial real estate loans, commercial and industrial loans, and consumer
loans. Commercial real estate loans outstanding at December 31, 2002
totaled $100.9 million, or 27.92% of total loans. Commercial and industrial
loans outstanding at December 31, 2002 totaled $61.5 million, or 17.01% of
total loans. Consumer loans outstanding on December 31, 2002 totaled $41.1
million, or 11.37% of total loans.
Westfield Bank's loans are subject to federal and state law and
regulations. The interest rates Westfield Bank charges on loans are
affected principally by the demand for loans, the supply of money available
for lending purposes and the interest rates offered by its competitors.
These factors are, in turn, affected by general and local economic
conditions, monetary policies of the federal government, including the
Federal Reserve Board, legislative tax policies and governmental budgetary
matters. The following table presents the composition of Westfield Bank's
loan portfolio in dollar amounts and in percentages of the total portfolio
at the dates indicated.
4
At December 31,
-----------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------- ------------------ ------------------ ----------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Real estate loans:
Residential $146,664 40.59% $199,710 47.86% $250,945 53.64% $250,625 53.29% $239,972 57.47%
Home equity 11,232 3.11 13,041 3.13 13,217 2.83 14,258 3.03 14,858 3.56
Commercial 100,903 27.92 99,425 23.82 92,826 19.84 89,333 18.99 90,026 21.56
-----------------------------------------------------------------------------------------------------
Total real estate loans 258,799 71.62 312,176 74.81 356,988 76.31 354,216 75.31 344,856 82.59
-----------------------------------------------------------------------------------------------------
Other loans:
Commercial and industrial 61,494 17.01 47,012 11.27 37,510 8.02 32,673 6.95 25,353 6.07
Indirect auto 33,848 9.37 52,129 12.49 66,168 14.14 76,006 16.16 38,799 9.30
Consumer, other 7,216 2.00 5,955 1.43 7,171 1.53 7,436 1.58 8,524 2.04
-----------------------------------------------------------------------------------------------------
Total other loans 102,558 28.38 105,096 25.19 110,849 23.69 116,115 24.69 72,676 17.41
-----------------------------------------------------------------------------------------------------
Total loans 361,357 100.00% 417,272 100.00% 467,837 100.00% 470,331 100.00% 417,532 100.00%
Less:
Net deferred loan
origination costs 123 197 128 231 184
Allowance for loan losses (4,325) (3,923) (3,434) (3,118) (2,632)
-------- -------- -------- -------- --------
Total loans, net $357,155 $413,546 $464,531 $467,444 $415,084
======== ======== ======== ======== ========
5
Loan Maturity and Repricing. The following table shows the repricing
dates or contractual maturity dates as of December 31, 2002. The table does
not reflect prepayments or scheduled principal amortization. Demand loans,
loans having no stated maturity, and overdrafts are shown as due in within
one year.
At December 31, 2002
-------------------------------------------------------------------------------
Commercial
Residential Commercial and
Real Estate Home Equity Real Estate Industrial Consumer
Loans Loans Loans Loans Loans Totals
-------------------------------------------------------------------------------
(In thousands)
Amounts due:
Within one year $ 32,236 $11,232 $ 23,705 $ 40,641 $ 2,864 $110,678
------------------------------------------------------------------------------
After one year:
One to three years 16,715 - 21,029 4,487 18,031 60,262
Three to five years 7,936 - 17,065 8,402 18,058 51,461
Five to ten years 33,381 - 34,538 4,719 1,478 74,116
Ten to twenty years 28,696 - 4,058 2,745 - 35,499
Over twenty years 27,700 - 508 500 633 29,341
------------------------------------------------------------------------------
Total due after one year 114,428 - 77,198 20,853 38,200 250,679
------------------------------------------------------------------------------
Total amount due: 146,664 11,232 100,903 61,494 41,064 361,357
------------------------------------------------------------------------------
Less:
Net deferred loan origination
costs (210) 175 - - 158 123
Allowance for loan losses (658) (55) (1,635) (1,460) (517) (4,325)
------------------------------------------------------------------------------
Loans, net $145,796 $11,352 $ 99,268 $60,034 $40,705 $357,155
==============================================================================
The following table presents, as of December 31, 2002, the dollar
amount of all loans contractually due or scheduled to reprice after
December 31, 2003 and whether such loans have fixed interest rates or
adjustable interest rates.
Due After December 31, 2003
----------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Real Estate Loans
Residential $ 95,081 $19,347 $114,428
Commercial 10,217 66,981 77,198
----------------------------------
Total real estate loans 105,298 86,328 191,626
Other Loans
Commercial and industrial 18,534 2,319 20,853
Consumer 38,200 0 38,200
----------------------------------
Total other loans 56,734 2,319 59,053
----------------------------------
Total loans $162,032 $88,647 $250,679
==================================
6
The following table presents our loan originations, purchases, sales
and principal payments for the periods indicated.
For the Year Ended December 31,
-------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Loans:
Balance outstanding at beginning of period $417,272 $467,837 $470,331
Originations:
Real estate loans:
Residential 7,842 46,625 36,291
Home Equity 2,247 10,853 8,246
Commercial 27,746 20,797 26,676
--------------------------------
Total mortgage originations 37,835 78,275 71,213
Commercial and industrial loans 47,844 56,778 78,889
Consumer loans 13,932 21,358 26,415
--------------------------------
Total originations 99,611 156,411 176,517
Purchases of one-to-four family mortgage loans 4,648 18,553 -
--------------------------------
104,259 174,964 176,517
--------------------------------
Less:
Principal repayments, unadvanced funds and
other, net 159,577 163,834 178,003
Loan securitizations - 60,268 -
Loan charge-offs, net 532 1,141 773
Transfers to foreclosed real estate 65 286 235
--------------------------------
Total deductions 160,174 225,529 179,011
--------------------------------
Ending balance $361,357 $417,272 $467,837
================================
7
Residential Mortgage Loans and Originations. Westfield Bank
originates mortgage loans secured by one-to-four family properties that
serve as the primary residence of the owner. Most of its loan originations
are generated by referrals from real estate brokers and builders, its
marketing efforts and existing and walk-in customers. As of December 31,
2002, loans on one-to-four family residential properties accounted for
$146.7 million, or 40.59%, of Westfield Bank's total loan portfolio.
Beginning on September 1, 2001, Westfield Bank began referring its
residential real estate borrowers to a third party mortgage company.
Residential real estate borrowers submit applications to Westfield Bank,
but the loan is closed on the books of the mortgage company. Westfield Bank
receives a fee of 65 basis points for each of these loans originated by the
third party mortgage company. Under the program, substantially all of
Westfield Bank's residential real estate loans are underwritten and
originated by the third party mortgage company, whose underwriting
standards were similar to those of Westfield Bank. In addition, depending
on market conditions, Westfield Bank may purchase residential real estate
loans from the third party mortgage company. Westfield Bank believes that
this program will diversify its loan portfolio and reduce its interest rate
risk.
Westfield Bank also originates residential real estate loans on
either a fixed-rate or adjustable-rate basis, as consumer demand dictates.
The maximum loan-to-value ratios depend on the type of property and the
size of the loan involved. The loan-to-value ratio is the loan amount
divided by the appraised value of the property. The loan-to-value ratio is
a measure commonly used by financial institutions to determine exposure to
risk. The majority of Westfield Bank's real estate loans are originated
with a loan-to-value ratio of 80% or less. Loans originated with loan-to-
value ratios in excess of 80% require the borrower to obtain mortgage
insurance.
Westfield Bank offers adjustable-rate mortgage loans with either a one-
year, three-year or five-year term to the initial repricing date. After
that initial period, the interest rate for each adjustable-rate mortgage
loan generally adjusts annually for the remainder of the term of the
loan. Westfield Bank uses a different number of indices to reprice its
adjustable-rate mortgage loans.
Westfield Bank's residential adjustable-rate mortgage loans generally
are fully amortizing loans with contractual maturities of up to 30 years,
payments due monthly. Its adjustable-rate mortgage loans generally provide
for specified minimum and maximum interest rates, with a lifetime cap and
floor, and a periodic adjustment on the interest rate over the rate in
effect on the date of origination. As a consequence of using caps, the
interest rates on these loans are not generally as rate sensitive as its
cost of funds. The adjustable-rate mortgage loans that Westfield Bank
originates generally are not convertible into fixed-rate loans.
Adjustable-rate mortgage loans generally pose different credit risks
than fixed-rate loans, primarily because as interest rates rise, the
borrower's payments rises, increasing the potential for default. To date,
Westfield Bank has not experienced difficulty with the payment history for
these loans. At December 31, 2002, its loan portfolio included $62.63
million in adjustable-rate residential mortgage loans or 17.33% of its
total loan portfolio, and $95.27 million in fixed-rate residential real
estate loans, or 26.36% of its total loan portfolio.
8
Westfield Bank's home equity lines of credit totaled $11.2 million
and comprised 3.11% of its total loan portfolio at December 31, 2002. These
loans may be originated in amounts of the existing first mortgage, or up to
100% of the value of the property securing the loan. The term to maturity
on Westfield Bank's home equity and home improvement loans may be up to 15
years.
Commercial Real Estate Loans. Westfield Bank originates commercial
real estate loans to finance the purchase of real property, which generally
consists of apartment buildings, business properties, multi-family
investment properties and construction loans to developers of commercial
and residential properties. In underwriting commercial real estate loans,
consideration is given to the property's historic cash flow, current and
projected occupancy, location and physical condition. At December 31, 2002,
Westfield Bank's commercial real estate loan portfolio consisted of 426
loans, totaling $100.9 million, or 27.92% of total loans.
Substantially all of the commercial real estate portfolio consists of
loans which are collateralized by properties in Westfield Bank's normal
lending area. Westfield Bank's commercial real estate loan portfolio is
diverse, and does not have any significant loan concentration by type of
property or borrower. Westfield Bank generally lends up to a maximum loan-
to-value ratio of 80% on commercial properties and requires a minimum debt
coverage ratio of 1.20 times. Its largest commercial real estate loan
relationship had an outstanding balance of $4.9 million at December 31,
2002 which was secured by apartment buildings located in western
Massachusetts.
Westfield Bank also offers construction loans to finance the
construction of commercial properties located in its primary market area.
Westfield Bank had $6.6 million in commercial construction loans and
commitments at December 31, 2002. Of this amount, approximately $5.6
million were loans made to experienced developers with whom Westfield Bank
has an established relationship, $4.1 million of which was to a prominent
developer to fund a single construction project in Springfield,
Massachusetts.
Commercial real estate lending involves additional risks compared
with one-to-four family residential lending. Payments on loans secured by
commercial real estate properties often depend on the successful management
of the properties, on the amount of rent from the properties, or on the
level of expenses needed to maintain the properties. Repayment of such
loans may therefore be adversely affected by conditions in the real estate
market or the general economy. Also, commercial real estate loans typically
involve large loan balances to single borrowers or groups of related
borrowers. In order to mitigate this risk, Westfield Bank monitors its loan
concentration on a quarterly basis and its loan policies generally limit
the amount of loans to a single borrower or group of borrowers.
Because of increased risks associated with commercial real estate
loans, Westfield Bank's commercial real estate loans generally have higher
rates and shorter maturities than residential mortgage loans. Westfield
Bank usually offers commercial real estate loans at adjustable rates tied
to the prime rate or to yields on U.S. Treasury securities. The terms of
such loans generally do not exceed 20 years.
9
Commercial and Industrial Loans. Westfield Bank offers commercial and
industrial loan products and services which are designed to give business
owners borrowing opportunities for modernization, inventory, equipment,
construction, consolidation, real estate, working capital, vehicle
purchases and the financing of existing corporate debt. Westfield Bank
offers business installment loans, vehicle and equipment financing, lines
of credit, equipment leasing and other commercial loans. At December 31,
2002, Westfield Bank's commercial and industrial loan portfolio consisted
of 798 loans, totaling $61.5 million or 17.01% of its total loans. Since
1996, commercial and industrial loans have grown $43.2 million, or 236.1%
from $18.3 to $61.5 million. In addition, Westfield Bank has added five
commercial loan officers and one business development officer since 1997.
Westfield Bank may hire additional commercial loan officers on an as needed
basis in connection with its potential branch expansion.
As part of Westfield Bank's strategy of increasing its emphasis on
commercial lending, Westfield Bank seeks to attract its business customers'
entire banking relationship. All commercial borrowers are required to
maintain a commercial deposit at Westfield Bank. Westfield Bank also
provides complementary commercial products and services, including an
equipment leasing program with a third party vendor, a variety of
commercial deposit accounts, cash management services, sweep accounts, a
broad ATM network and night deposit services. Commercial loan officers are
based in its main and branch offices, and Westfield Bank views its recent
and potential branch expansion as a means of facilitating these commercial
relationships. Westfield Bank intends to use the proceeds of the stock
offering to continue to expand the volume of its commercial business
products and services within its current underwriting standards.
Westfield Bank's commercial loan portfolio does not have any
significant loan concentration by type of property or borrower. The largest
concentration of loans were for industrial and commercial machinery and
computer equipment which comprise approximately 3.36% of the total loan
portfolio. At December 31, 2002, Westfield Bank's largest commercial and
industrial loan relationship was $6.6 million to a company engaged in
precision machining and rapid prototype manufacture of metal parts for sale
to commercial and governmental customers throughout the United States.
Commercial and industrial loans are limited to terms of seven years
but generally have terms of five years or less. Although Westfield Bank
does originate fixed-rate commercial loans, substantially all of its
commercial loans have variable interest rates tied to the prime rate.
Whenever possible, Westfield Bank also collateralizes these commercial and
industrial loans with a lien on commercial real estate. Alternatively,
Westfield Bank may collateralize these loans with a lien on business assets
and equipment. In some cases, both types of liens are required. Westfield
Bank also generally requires the personal guarantee of the business owner.
Interest rates on commercial loans generally have higher yields than
residential or commercial real estate loans.
10
Commercial and industrial loans are generally considered to involve a
higher degree of risk than residential or commercial real estate loans
because the collateral may be in the form of intangible assets and/or
inventory subject to market obsolescence. Commercial and industrial loans
may also involve relatively large loan balances to single borrowers or
groups of related borrowers, with the repayment of such loans typically
dependent on the successful operation and income stream of the borrower.
These risks can be significantly affected by economic conditions. In
addition, business lending generally requires substantially greater
oversight efforts by Westfield Bank's staff compared to residential or
commercial real estate lending. In order to mitigate this risk, Westfield
Bank monitors its loan concentration and its loan policies generally limit
the amount of loans to a single borrower or group of borrowers. Westfield
Bank also utilizes the services of an outside consultant to conduct on-site
credit quality reviews of the commercial and industrial loan portfolio.
Consumer Loans. Consumer loans are generally originated at higher
interest rates than residential and commercial mortgage loans, but they
also generally tend to have a higher credit risk than residential mortgage
loans because they are usually unsecured or secured by rapidly depreciable
assets. Management, however, believes that offering consumer loan products
helps to expand and create stronger ties to Westfield Bank's existing
customer base by increasing the number of customer relationships and
providing cross-marketing opportunities.
Westfield Bank offers a variety of consumer loans to retail customers
in the communities its serves. Examples of its consumer loans include:
* direct and indirect automobile loans;
* secured passbook loans;
* credit lines tied to deposit accounts to provide overdraft
protection; and
* unsecured personal loans.
At December 31, 2002, the consumer loan portfolio totaled $41.1
million or 11.37% of total loans. Westfield Bank's consumer lending will
allow it to diversify its loan portfolio while continuing to meet the needs
of the individuals and businesses that it serves.
Indirect automobile loans currently represent the largest portion of
its consumer loan portfolio, totaling $33.8 million, or 9.37% of its total
loan portfolio and 82.2% of its consumer loan portfolio, at December 31,
2002.
Westfield Bank offers fixed-rate automobile loans in a direct and
indirect basis with terms up to 72 months for new and recent model used
cars and up to 60 months for older model used cars. Westfield Bank
generally will make such loans up to 100% of the retail value shown in the
NADA Used Car Guide. The interest rates offered differ depending on the age
of the automobile and current interest rates offered by competitors.
11
Westfield Bank began offering indirect automobile loans through
automobile dealers approximately eight years ago. Currently, Westfield Bank
maintains contractual relationships with approximately 40 new and used car
dealers located through western Massachusetts and northern Connecticut.
Westfield Bank has a contractual arrangement and outsources a portion of
the origination function and all of the servicing function to a nationally
recognized service provider. The collection and liquidation functions are
handled in-house by Westfield Bank personnel. Indirect auto loans are made
only after an underwriting review and approval under established guidelines
set by Westfield Bank. On loans originated by its automobile dealers,
Westfield Bank compensates the originator based upon the higher interest
rate paid on the loan, up to a maximum of 4%.
For the years ended December 31, 2002 and 2001, Westfield Bank
originated $10.8 million and $17.5 million of automobile loans,
respectively, the majority of which were originated indirectly through the
automobile dealers. The majority of automobile loans are secured by used
automobiles. The indirect automobile loan portfolio grew substantially in
1999 as the result of aggressive pricing and the addition of several new
dealers. Management determined to curtail its indirect lending in fiscal
years 2000 through 2002 to allow the portfolio to become more seasoned, but
may decide to grow the indirect automobile loan portfolio in the future.
Westfield Bank has not sold any of its automobile loans since inception.
Westfield Bank anticipates that in the future it may sell a portion of its
automobile loans in the secondary market for liquidity purposes and to
manage the credit risk of the loan portfolio.
Loans collateralized by rapidly depreciable assets such as
automobiles or that are unsecured entail greater risks than residential
mortgage loans. In such cases, repossessed collateral for a defaulted loan
may not provide an adequate source of repayment of the outstanding loan
balance, since there is a greater likelihood of damage, loss or
depreciation of the underlying collateral. The remaining deficiency often
does not warrant further substantial collection efforts against the
borrower beyond obtaining a deficiency judgment. Further, collections on
these loans are dependent on the borrower's continuing financial stability
and, therefore, are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Repossessed collateral relating to
consumer loans at December 31, 2002 approximated $88,000. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered
on such loans if a borrower defaults.
Loan Approval Procedures and Authority. As established by the
Executive Committee of the Board of Directors, Westfield Bank's lending
policies provide that its mortgage underwriting department may review and
approve mortgage loans up to $500,000. Westfield Bank's underwriting
department also may review and approve home equity loans up to $100,000.
Any loan applications, including mortgage loans, that exceed $500,000 or
$100,000 for home equity loans require approval of the Executive Committee.
For loans requiring board approval, management is responsible for
presenting to the board information about the creditworthiness of a
borrower and the estimated value of the subject property. Generally, the
estimated value of the property must be supported by an independent
appraisal report prepared in accordance with Westfield Bank's appraisal
policy.
12
The following generally describes Westfield Bank's current lending
procedures. Upon receipt of a completed loan application from a prospective
borrower, Westfield Bank must order a credit report and verify other
information. If necessary, Westfield Bank obtains additional financial or
credit related information. Westfield Bank requires an appraisal for all
mortgage loans. Appraisals for mortgage loans are performed by licensed or
certified third-party appraisal firms and are reviewed by Westfield Bank's
lending department. Appraisals for second mortgages or home equity loans
are not required. Rather, a designated employee of Westfield Bank conducts
an inspection of the property. Westfield Bank requires title insurance on
all mortgage loans and certain other loans. Westfield Bank requires
borrowers to obtain hazard insurance. Westfield Bank also requires
borrowers to obtain flood insurance, if applicable, prior to closing. In
addition, Westfield Bank makes available to borrowers the option to advance
funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which it makes disbursements for
items such as real estate taxes, flood insurance, and private mortgage
insurance premiums. Beginning on September 1, 2001, Westfield Bank began
referring its residential real estate loans to a third-party mortgage
company. Residential real estate borrowers submit applications to Westfield
Bank, but the loan is closed on the books of the mortgage company.
Asset Quality. One of Westfield Bank's key operating objectives has
been and continues to be the achievement of a high level of asset quality.
Westfield Bank maintains a large proportion of loans secured by residential
and commercial properties, set sound credit standards for new loan
originations and follow careful loan administration procedures. Westfield
Bank also utilizes the services of an outside consultant to conduct on-site
credit quality reviews of Westfield Bank's commercial and industrial loan
portfolio on an annual basis. These practices and relatively favorable
economic and real estate market conditions have resulted in historically
low delinquency ratios and, in recent years, a low level of nonaccrual
loans. These factors have helped strengthen Westfield Bank's financial
condition.
Delinquent Loans and Foreclosed Assets. Westfield Bank's policies
require that management continuously monitor the status of the loan
portfolio and report to the Board of Directors on a monthly basis. These
reports include information on delinquent loans and foreclosed real estate,
as well as Westfield Bank's actions and plans to cure the delinquent status
of the loans and to dispose of the foreclosed property.
13
The following table presents information regarding non-accrual
mortgage, consumer and other loans, and foreclosed real estate as of the
dates indicated. All loans where the interest payment is 90 days or more in
arrears as of the closing date of each month are placed on non-accrual
status. At December 31, 2002, 2001, and 2000, Westfield Bank had $2.4
million, $2.7 million, and $2.3 million, respectively, of non-accrual
loans. If all non-accrual loans had been performing in accordance with
their terms, Westfield Bank would have earned additional interest income of
$324,000, $263,000 and $191,000 for the years ended December 31, 2002,
2001, and 2000, respectively.
At December 31,
--------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accrual real estate loans:
Residential $1,323 $1,866 $1,180 $ 864 $ 262
Home equity 30 14 113 - -
Commercial real estate 374 536 247 1,496 262
--------------------------------------------------
Total non-accrual real estate loans 1,727 2,416 1,540 2,360 524
Other loans:
Commercial and industrial 530 183 392 35 137
Consumer 126 85 376 356 177
--------------------------------------------------
Total non-accrual consumer and other loans $2,383 $2,684 $2,308 $2,751 $ 838
==================================================
Total nonperforming loans $2,383 $2,684 $2,308 $2,751 $ 838
Foreclosed real estate, net - 176 - - 221
--------------------------------------------------
Total nonperforming assets $2,383 $2,860 $2,308 $2,751 $1,059
==================================================
Nonperforming loans to total loans 0.66% 0.64% 0.49% 0.58% 0.20%
Nonperforming assets to total assets 0.29 0.37 0.33 0.43 0.18
14
Allowance for Loan Losses. The following table presents the activity
in Westfield Bank's allowance for loan losses and other ratios at or for
the dates indicated.
At December 31,
--------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $ 3,923 $ 3,434 $ 3,118 $ 2,632 $ 2,791
Charge-offs:
Residential (36) (16) (12) (19) (292)
Commercial real estate (29) (17) (20) - (8)
Home equity loans - - - - -
Commercial and industrial (241) (26) (42) (5) (156)
Consumer (622) (1,784) (985) (521) (294)
---------------------------------------------------
Total charge-offs (928) (1,843) (1,059) (545) (750)
---------------------------------------------------
Recoveries:
Residential 17 - - 30 90
Commercial real estate - - - 5 95
Home equity loans - - - - 9
Commercial and industrial 16 14 8 18 57
Consumer 363 688 278 135 47
---------------------------------------------------
Total recoveries 396 702 286 188 298
---------------------------------------------------
Net charge-offs (532) (1,141) (773) (357) (452)
Provision for loan losses 934 1,630 1,089 843 293
---------------------------------------------------
Balance at end of period $ 4,325 $ 3,923 $ 3,434 $ 3,118 $ 2,632
===================================================
Total loans receivable(1) $361,357 $417,272 $467,837 $470,331 $417,532
===================================================
Average loans outstanding $398,555 $443,652 $464,917 $443,982 $402,851
===================================================
Allowance for loan losses as a
percent of total loans
receivable 1.20% 0.94% 0.73% 0.66% 0.63%
Net loans charged off a percent of
average loans outstanding 0.13% 0.26% 0.17% 0.08% 0.11%
- --------------------
Does not include deferred fees.
15
Westfield Bank maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio based on ongoing quarterly
assessments of the estimated losses. Westfield Bank's methodology for
assessing the appropriateness of the allowance consists of a review of the
components, which include a specific allowance for identified problem loans
and a formula allowance for current performing loans. Fluctuations in the
balances of impaired loans affect the specific reserve while fluctuations
in volume and concentrations of loans affects the formula reserve and the
allocation of the allowance of the loan losses among loan types.
The specific allowance incorporates the results of measuring
impairment for specifically identified non-homogenous problem loans in
accordance with Statement of Financial Accounting Standards (SFAS) No. 114
"Accounting By Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." In accordance with SFAS No. 114 and No. 118 the specific
allowance reduces the carrying amount of the impaired loans to their
estimated fair value. A loan is recognized as impaired when it is probable
that principal and/or interest are not collectible in accordance with the
loan's contractual terms. A loan is not deemed to be impaired if there is a
short delay in receipt of payment or if, during a longer period of delay,
the Westfield Bank expects to collect all amounts due including interest
accrued at the contractual rate during the period of delay. Measurement of
impairment can be based on the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's observable
market price or the fair value of the collateral, if the loan is collateral
dependent. Measurement of impairment does not apply to large groups of
smaller balance homogenous loans that are collectively evaluated for
impairment such as the Westfield Bank portfolios of home equity loans, real
estate mortgages, installment and other loans.
The formula allowance is calculated by applying loss factors to
outstanding loans by type, excluding loans for which a specific allowance
has been determined. As part of this analysis, each quarter Westfield Bank
prepares an allowance for loan losses worksheet which categorizes the loan
portfolio by risk characteristics such as loan type and loan grade. Changes
in the mix of loans and the internal loan grades affect the amount of the
formula allowance. Loss factors are assigned to each category based on
Westfield Bank's assessment of each category's inherent risk. In
determining the loss factors to apply to each loan category, Westfield Bank
considers historical losses, peer group comparisons, industry data and loss
percentages used by banking regulators for similarly graded loans. Loss
factors may be adjusted for qualitative factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation
date. Loss factors are described as follows:
* Classified loan loss factors are derived from loss percentages
utilized by banking regulators for similarly graded loans. Loss
factors of 3% to 5%, 10% to 15% and 50% to 75% are applied to
the outstanding balance of loans internally classified special
mention, substandard and doubtful, respectively.
* Pass graded loan loss factors are based on actual losses for the
previous twelve quarters adjusted for qualitative factors, 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
and specific industry conditions within portfolio segments that
exist at the balance sheet date. The loss factors are applied to
outstanding loans by loan type.
16
In addition, management employs an independent third party to perform
an annual review of all of Westfield Bank's commercial and industrial loans
with principal balances equal to or greater than $600,000 and commercial
real estate loans in excess of $1,000,000. Another objective was to review
all watch list loans with aggregate balances greater than $100,000 and all
30 day or longer past due commercial loans with balances in excess of
$50,000.
Westfield Bank's methodologies include several factors that are
intended to reduce the difference between estimated and actual losses. The
loss factors that are used to establish the allowance for pass graded loans
are designated to be self-correcting by taking into account changes in loan
classification, loan concentrations and loan volumes and by permitting
adjustments based on management's judgments of qualitative factors as of
the evaluation date. Similarly, by basing the pass graded loan loss factors
on loss experience over the prior three years, the methodology is designed
to take Westfield Bank's recent loss experience into account.
Westfield Bank's allowance methodology has been applied on a
consistent basis. Based on this methodology, Westfield Bank believes that
it has established and maintained the allowance for loan losses at adequate
levels, future adjustments to the allowance for loan losses, however, may
be necessary if economic, real estate and other conditions differ
substantially from the current operating environment resulting in estimated
and actual losses differing substantially. Adjustments to the allowance for
loan losses are charged to income through the provision for loan losses.
A summary of the components of the allowance for loan losses is as
follows:
December 31, 2002 December 31, 2001 December 31, 2000
----------------------------- ---------------------------- ----------------------------
Specific Formula Total Specific Formula Total Specific Formula Total
-------- ------- ----- -------- ------- ----- -------- ------- -----
(In Thousands)
Real estate mortgage
Residential $ - $ 713 $ 713 $ - $ 839 $ 839 $ - $ 859 $ 859
Commercial 17 1,618 1,635 32 1,435 1,467 49 1,187 1,236
Commercial and Industrial 53 1,408 1,461 53 946 999 28 551 579
Consumer - 516 516 - 618 618 - 760 760
--------------------------------------------------------------------------------------------
Total $ 70 $4,255 $4,325 $ 85 $3,838 $3,923 $ 77 $3,357 $3,434
============================================================================================
December 31, 1999 December 31, 1998
----------------------------- -----------------------------
Specific Formula Total Specific Formula Total
-------- ------- ----- -------- ------- -----
Real estate mortgage
Residential $ - $ 682 $ 682 $ - $ 675 $ 675
Commercial 136 1,057 1,193 124 1,220 1,344
Commercial and Industrial - 397 397 - 301 301
Consumer - 846 846 - 312 312
------------------------------------------------------------
Total $136 $2,982 $3,118 $124 $2,508 $2,632
============================================================
17
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Westfield Bank's loan and
foreclosed real estate portfolios and the related allowance for loan losses
and valuation allowance for foreclosed real estate. These agencies,
including the Federal Deposit Insurance Corporation and the Massachusetts
Division of Banks, may require Westfield Bank to adjust the allowance for
loan losses or the valuation allowance for foreclosed real estate based on
their judgments of information available to them at the time of their
examination, thereby adversely affecting Westfield Bank's results of
operations.
For the year ended December 31, 2002, Westfield Bank provided
$934,000 to the allowance for loan losses based on its evaluation of the
items discussed above. Westfield Bank believes that the allowance for loan
losses accurately reflects the level of risk in the current loan portfolio
as of December 31, 2002.
18
Allocation of Allowance for Loan Losses. The following tables set
forth the allowance for loan losses allocated by loan category, the total
loan balances by category, and the percent of loans in each category to
total loans indicated.
At December 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------- -------------------------------- --------------------------------
Percent of Percent of Percent of
Loan Loans in Loan Loans in Loan Loans in
Amount Balances Each Amount Balances Each Amount Balances Each
of Loan by Category to of Loan by Category to of Loan by Category to
Loan Category Loss Category Total Loans Loss Category Total Loans Loss Category Total Loans
- ------------- ------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate - mortgage:
Residential(1) $ 713 157,896 43.70% $ 839 212,751 50.98% $ 859 $264,162 56.47%
Commercial 1,635 100,903 27.92 1,467 99,425 23.83 1,236 92,826 19.84
Commercial loans 1,461 61,494 17.01 999 47,012 11.27 579 37,510 8.02
Consumer loans(2) 516 41,064 11.37 618 58,084 13.92 760 73,339 15.67
---------------------------------------------------------------------------------------------------
Total allowance
for loan losses $4,325 $361,357 100.00% $3,923 $417,272 100.00% $3,434 $467,837 100.00%
===================================================================================================
At December 31,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Percent of Percent of
Loan Loans in Loan Loans in
Amount Balances Each Amount Balances Each
of Loan by Category to of Loan by Category to
Loan Category Loss Category Total Loans Loss Category Total Loans
- ------------- -------------------------------------------------------------------
(Dollars in thousands)
Real estate - mortgage:
Residential(1) $ 682 $264,883 56.32% $ 675 $254,830 61.03%
Commercial 1,193 89,333 18.99 1,344 90,026 21.56
Commercial loans 397 32,673 6.95 301 25,353 6.07
Consumer loans(2) 846 83,442 17.74 312 47,323 11.34
----------------------------------------------------------------
Total allowance
for loan losses $3,118 $470,331 100.00% $2,632 $417,532 100.00%
================================================================
- --------------------
Includes home equity loans.
Excludes passbook loans.
19
Investment Activities The Board of Directors reviews and approves
Westfield Bank's investment policy on an annual basis. The President and
Treasurer, as authorized by the Board, implement this policy based on the
established guidelines within the written policy.
Westfield Bank's investment policy is designed primarily to manage
the interest rate sensitivity of its assets and liabilities, to generate a
favorable return without incurring undue interest rate and credit risk, to
complement its lending activities and to provide and maintain liquidity
within the range established by policy. In determining Westfield Bank's
investment strategies, it considers its interest rate sensitivity, yield,
credit risk factors, maturity and amortization schedules, and other
characteristics of the securities to be held.
Massachusetts-chartered savings banks have authority to invest in
various types of assets, including U.S. Treasury obligations, securities of
various federal agencies, mortgage-backed securities, certain certificates
of deposit of insured financial institutions, repurchase agreements,
overnight and short term loans to other banks, corporate debt instruments,
and equity securities.
Securities Portfolio Westfield Bank classifies securities as held to
maturity or available for sale at the date of purchase. Westfield Bank does
not have any securities classified as trading. Held to maturity securities
are reported at cost, adjusted for amortization of premium and accretion of
discount. Available for sale securities are reported at fair market value.
At December 31, 2002, held to maturity securities totaled $205.3 million,
or 55% of the total securities portfolio, and available for sale
investments totaled $170.3 million, or 45% of Westfield Bank's total
securities portfolio. Westfield Bank classifies U.S. Government securities
and U.S. Government Agency securities as available for sale and held to
maturity. These securities predominately have maturities of less than five
years, although Westfield Bank also invests in adjustable rate securities
with maturities of up to 15 years. Westfield Bank's mortgage-backed
securities, which are directly or indirectly insured or guaranteed by
Freddie Mac, Ginnie Mae or Fannie Mae or are rated AAA, consist of both 30-
year securities and seven-year balloon securities. The latter are so named
because they mature (i.e. balloon) prior to completing their normal 30-year
amortization. The 30-year mortgage backed securities are classified as held
to maturity while the seven year balloon securities are classified as
available for sale. In addition, Westfield Bank has investments in Federal
Home Loan Bank stock and other equity securities.
20
The following table sets forth the composition of Westfield Bank's
securities portfolio at the dates indicated.
At December 31,
-----------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
Securities:
Federal agency obligations $ 70,525 $ 71,376 $ 56,895 $ 57,380 $ 43,188 $ 43,578
Corporate debt securities 26,764 27,314 47,087 48,284 62,352 62,126
-----------------------------------------------------------------------
Total securities 97,289 98,690 103,982 105,664 105,540 105,704
-----------------------------------------------------------------------
Mortgage-backed and mortgage-
related securities:
Ginnie Mae 39,682 40,323 29,233 29,277 9,904 9,907
Fannie Mae 99,231 100,944 59,749 60,825 33,729 33,584
Freddie Mac 88,918 90,302 49,960 50,296 5,685 5,720
Collateralized mortgage
obligations 20,153 20,396 27,973 28,119 10,016 10,233
-----------------------------------------------------------------------
Total mortgage-backed and
mortgage-related securities 247,984 251,965 166,915 168,517 59,334 59,444
-----------------------------------------------------------------------
Marketable equity securities 28,432 27,734 14,320 14,675 8,063 9,744
-----------------------------------------------------------------------
Total securities $373,705 $378,389 $285,217 $288,856 $ 172,937 $174,892
=======================================================================
21
Mortgage-Backed Securities and Mortgage-Related Securities. The
following table sets forth the amortized cost and fair value of Westfield
Bank's mortgage-backed and mortgage-related securities, which are
classified as available for sale or held to maturity at the dates
indicated.
At December 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------- ------------------------------
Amortized Percent of Market Amortized Percent of Market Amortized Percent of Market
Cost Total Value Cost Total Value Cost Total Value
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage-backed and mortgage-
related securities available
for sale:
Ginnie Mae $ 25,762 10.39% $ 26,200 $ 22,018 13.19% $ 22,053 $ 8,610 14.51% $ 8,644
Fannie Mae 22,182 8.95 22,879 35,822 21.46 36,822 29,174 49.17 28,933
Freddie Mac 29,930 12.07 30,481 18,490 11.08 18,553 4,728 7.97 4,770
Collateralized mortgage
obligations 10,771 4.34 10,908 9,578 5.74 9,722 10,016 16.88 10,233
--------------------------------------------------------------------------------------------------
Total mortgage-backed and
mortgage related securities
available for sale 88,645 35.75 90,468 85,908 51.47 87,150 52,528 88.53 52,580
Mortgage-back and mortgage
related securities held
to maturity:
Ginnie Mae 13,920 5.61 14,123 7,215 4.32 7,224 1,294 2.18 1,263
Fannie Mae 77,049 31.07 78,065 23,927 14.34 24,003 4,555 7.68 4,651
Freddie Mac 58,988 23.79 59,821 31,470 18.85 31,743 957 1.61 950
Collateralized mortgage
obligations 9,382 3.78 9,488 18,395 11.02 18,397 - - -
--------------------------------------------------------------------------------------------------
Total mortgage-backed and
mortgage related securities
held to maturity 159,339 64.25 161,497 81,007 48.53 81,367 6,806 11.47 6,864
--------------------------------------------------------------------------------------------------
Total mortgage-backed and
mortgage related securities $247,984 100.00% $251,965 $166,915 100.00% $168,517 $59,334 100.00% $59,444
==================================================================================================
22
Securities Portfolio Maturities. The composition and maturities of
the securities portfolio (debt securities) and the mortgage-backed
securities portfolio at December 31, 2002 are summarized in the following
table. Maturities are based on the final contractual payment dates, and do
not reflect the impact of prepayments or redemptions that may occur.
More than One Year More than Five Years
One Year or Less Through Five Years Through Ten Years More than Ten Years Total Securities
------------------- ------------------- -------------------- ------------------- ---------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
--------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Securities available
for sale:
Federal agency
securities $ 3,505 4.80% $24,297 4.11% $ -- --% $ 4,332 2.74% $ 32,134 $ 32,596 3.93%
Corporate debt
securities 12,992 5.97 3,981 6.71 -- -- 2,222 2.66 19,195 19,512 5.74
------- ------- ------- -------- -------- --------
Total securities 16,497 5.72 28,278 4.48 -- -- 6,554 2.71 51,329 52,108 4.61
------- ------- ------- -------- -------- --------
Mortgage-backed
securities available
for sale:
Ginnie Mae -- -- -- -- -- -- 25,762 4.46 25,762 26,200 4.46
Fannie Mae 40 6.00 -- -- 354 6.22 21,788 5.09 22,182 22,879 5.09
Freddie Mac -- -- 1,174 5.03 -- -- 28,756 4.54 29,930 30,481 4.56
Collateralized
mortgage
obligations -- -- -- -- -- -- 10,771 4.95 10,771 10,908 4.95
------- ------- ------- -------- -------- --------
Total mortgage-back
securities 40 6.00 1,174 5.03 354 6.22 87,077 4.70 88,645 90,468 4.71
------- ------- ------- -------- -------- --------
Total $16,537 5.72 $29,452 4.50 $ 354 6.22 $ 93,631 4.56 $139,974 $142,576 4.67
======= ======= ======= ======== ======== ========
Securities held to
maturity:
Federal agency
securities 1,000 6.80 37,391 3.60 -- -- -- -- 38,391 38,780 3.68
Other debt securities 2,492 7.14 4,997 6.84 80 5.47 -- -- 7,569 7,802 6.92
------- ------- ------- -------- -------- --------
Total investment
securities 3,492 7.04 42,388 3.98 80 5.47 -- -- 45,960 46,582 4.22
------- ------- ------- -------- -------- --------
Mortgage-backed
securities held
to maturity:
Ginnie Mae -- -- 46 8.01 644 5.61 13,230 4.82 13,920 14,123 4.87
Fannie Mae -- -- 172 7.50 12,208 4.94 64,669 5.00 77,049 78,065 5.00
Freddie Mac -- -- 447 4.05 10,128 5.11 48,413 4.99 58,988 59,821 5.00
Collateralized
mortgage
obligations -- -- -- -- -- -- 9,382 5.91 9,382 9,488 5.91
------- ------- ------- -------- -------- --------
Total mortgage-
backed securities -- -- 665 5.22 22,980 5.03 135,694 5.04 159,339 161,497 5.04
------- ------- ------- -------- -------- --------
Total $ 3,492 7.04% $43,053 4.00% $23,060 5.03% $135,694 5.04% $205,299 $208,079 4.86%
======= ======= ======= ======== ======== ========
23
Sources of Funds
General. Deposits, scheduled amortization and prepayments of loan
principal, maturities and calls of investments securities and funds
provided by operations are Westfield Bank's primary sources of funds for
use in lending, investing and for other general purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Deposits. Westfield Bank offers a variety of deposit accounts having
a range of interest rates and terms. Westfield Bank currently offers
regular savings deposits (consisting of passbook and statement savings
accounts), interest-bearing demand accounts, noninterest-bearing demand
accounts, money market accounts and time deposits. Westfield Bank has
expanded the types of deposit products that it offers to include jumbo
certificates of deposit, tiered money market accounts and customer
repurchase agreements to compliment its increased emphasis on attracting
commercial banking relationships.
Deposit flows are influenced significantly by general and local
economic conditions, changes in prevailing interest rates, pricing of
deposits and competition. Westfield Bank's deposits are primarily obtained
from areas surrounding our offices. Westfield Bank relies primarily on
paying competitive rates, service and long-standing relationships with
customers to attract and retain these deposits. Westfield Bank does not use
brokers to obtain deposits.
When Westfield Bank determines its deposit rates, it considers local
competition, U.S. Treasury securities offerings and the rates charged on
other sources of funds. Core deposits (defined as regular accounts, money
market accounts, NOW accounts and demand accounts) represented 42.8% of
total deposits on December 31, 2002 and 40.3% on December 31, 2001. At
December 31, 2002 and December 31, 2001, time deposits with remaining terms
to maturity of less than one year amounted to $265.8 million and $282.2
million, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Net Interest and Dividend
Income" for information relating to the average balances and costs of
Westfield Bank's deposit accounts for the years ended December 31, 2002,
2001, 2000.
24
Deposit Distribution Weighted Average. The following table sets forth
the distribution of Westfield Bank's deposit accounts, by account type, at
the dates indicated.
At December 31,
---------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rates Amount Percent Rates Amount Percent Rates
---------------------------------------------------------------------------------------------
(Dollars in thousands)
Demand deposits (1) $ 54,736 8.34% 0.00% $ 48,247 7.57% 0.00% $ 38,500 6.40% 0.00%
NOW deposits 41,907 6.39 1.07 38,758 6.08 1.69 34,519 5.73 2.37
Regular accounts 44,876 6.84 1.05 42,673 6.70 1.05 42,348 7.04 1.07
Money market accounts 139,543 21.27 1.49 127,085 19.95 2.02 113,787 18.90 3.74
----------------- ----------------- -----------------
Total non-certificated
accounts 281,062 42.84 1.32 256,763 40.30 1.43 229,154 38.07 2.41
----------------- ----------------- -----------------
Time certificates of deposit
Due within 1 year 265,760 40.51 3.33 282,245 44.30 4.44 281,461 46.76 5.76
Over 1 year through 3 years 98,418 15.00 3.91 95,357 14.97 4.93 90,740 15.08 5.94
Over 3 years 10,825 1.65 4.28 2,744 0.43 4.36 541 0.09 5.58
----------------- ----------------- -----------------
Total certificated accounts 375,003 57.16 3.51 380,346 59.70% 4.56 372,742 61.93 5.79
----------------- ----------------- -----------------
Total $656,065 100.00% 2.57% $637,109 100.00% 3.30% $601,896 100.00% 4.51%
================= ================= =================
Includes mortgagor's escrow payments.
C.D. Maturities. At December 31, 2002, Westfield Bank had $80.6
million in time certificates of deposits with balances of $100,000 and over
maturing as follows:
Weighted
Average
Maturity Period Amount Rate
- ----------------------------------------------------------------------------
(Dollars in thousands)
Three months or less $27,520 3.41%
Over three months through six months 11,731 3.42
Over six months through twelve months 19,070 3.54
Over twelve months 22,257 4.10
-------
Total $80,578 3.63%
=======
C.D. Balances by Rates. The following table sets forth, by interest
rate ranges, information concerning Westfield Bank's time certificates of
deposit at the dates indicated.
At December 31, 2002
-------------------------------------------------------------------------------
Period to Maturity
-------------------------------------------------------------------------------
Less than One to Two Two to More than Percent of
One Year Years Three Years Three Years Total Total
-------------------------------------------------------------------------------
(Dollars in thousands)
2.00% and under $ 23,086 $ - $ - $ - $ 23,086 6%
2.01% to 3.00% 96,584 9,180 1,069 - 106,833 28
3.01% to 4.00% 87,451 29,493 11,447 2,689 131,080 35
4.01% to 5.00% 33,666 21,527 14,794 8,136 78,123 21
5.01% and over 24,973 10,908 - - 35,881 10
---------------------------------------------------------------------------
Total $265,760 $71,108 $27,310 $10,825 $375,003 100%
===========================================================================
Borrowings. In addition to deposits, borrowings from the Federal Home
Loan Bank are available as an additional source of funds to finance
Westfield Bank's lending and investing activities. Westfield Bank
traditionally has not relied upon borrowings from the Federal Home Loan
Bank. However, in 2002, Westfield Bank borrowed $15.0 million from the
Federal Home Loan Bank to take advantage of the current yield curve.
25
Westfield Bank offers retail repurchase agreements to commercial
customers and higher balance retail customers. These agreements are direct
obligations of Westfield Bank to repay at maturity or on demand the
purchase price of an undivided interest in a U.S. Government or agency
security owned by Westfield Bank. Since these agreements are not deposits,
they are not insured by the Federal Deposit Insurance Corporation. At
December 31, 2002, such repurchase agreement borrowings totaled $8.7
million.
Personnel
As of December 31, 2002, Westfield Bank had 130 full-time employees
and 26 part-time employees. The employees are not represented by a
collective bargaining unit, and we consider our relationship with our
employees to be excellent.
FEDERAL AND STATE TAXATION
Federal
General. For federal income tax purposes, we report income on the
basis of a taxable year ending December 31, using the accrual method of
accounting, and we are generally subject to federal income taxation in the
same manner as other corporations. Westfield Bank and Westfield Financial
constitute an affiliated group of corporations and, therefore, are eligible
to report their income on a consolidated basis. Because Westfield Mutual
Holding Company owns less than 80% of the common stock of Westfield
Financial, it is not a member of such affiliated group and therefore, must
report its income on a separate return. Westfield Bank and Westfield Mutual
Holding Company are not currently under audit by the IRS.
Distributions. To the extent that Westfield Bank makes "non-dividend
distributions" to Westfield Financial, such distributions will be
considered to result in distributions from unrecaptured tax bad debt
reserve as of December 31, 1987 (our "base year reserve"), to the extent
thereof and then from supplemental reserve for losses on loans, and an
amount based on the amount distributed will be included in income. Non-
dividend distributions include distributions in excess of current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. Dividends paid out of
current or accumulated earnings and profits will not be included in income.
The amount of additional income created from a non-dividend distribution
is equal to the lesser of the base year reserve and supplemental reserve for
losses on loans or an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, in some
situations, approximately one and one-half times the non-dividend
distribution would be includible in gross income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. Westfield Bank
does not intend to pay dividends that would result in the recapture of any
portion of the bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code"), imposes a tax on alternative minimum taxable
income at a rate of 20%. Only 90% of alternative minimum taxable income can
be offset by net operating loss carryovers of which we currently have none.
Alternative minimum taxable income is also adjusted by determining
26
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. We have not
been subject to a tax on alternative minimum taxable income during the past
five years.
Elimination of Dividends; Dividends Received Deduction. Westfield
Financial may exclude from its income 100% of dividends received from
Westfield Bank as a member of the same affiliated group of corporations.
Because Westfield Mutual Holding Company is not a member of such affiliated
group, it does not qualify for such 100% dividends exclusion, but is
entitled to deduct 80% of the dividends it receives from Westfield
Financial so long as it owns more than 20% of the common stock.
State
Westfield Bank files Massachusetts Financial Institution excise tax
returns. Generally, the income of financial institutions in Massachusetts,
which is calculated based on federal taxable income, subject to certain
adjustments, is subject to Massachusetts tax. Westfield Bank is not
currently under audit with respect to its Massachusetts income tax returns
and its state tax returns have not been audited for the past five years.
Westfield Financial is also required to file a Massachusetts income
tax return and is generally subject to a state income tax rate that is the
same tax rate as the tax rate for financial institutions in Massachusetts.
However, Westfield Securities Corp. is taxed at a rate that is currently
lower than income tax rates for savings institutions in Massachusetts.
Massachusetts legislation was signed on March 5, 2003 amending the
corporate tax law affecting the treatment of dividends received form Real
Estate Investment Trusts (REITs). Dividends from the REIT subsidiary are no
longer eligible for a dividends-received deduction. As a result of the
enactment of this legislation, the Company has ceased recording the tax
benefits associated with the dividend received deduction effective for the
2003 tax year.
In addition to the effect on 2003, the legislation includes a
retroactive effective date that reaches back to 2002 and prior years.
Accordingly, the Company recorded an additional liability for prior years
taxes, including interest (net of any federal and state tax deductions
associated with such taxes and interest), relating to the deduction for
dividends received from a REIT of approximately $2.9 million in the first
quarter of 2003.
The Company is reviewing the retroactive effect of the legislation
with its legal advisors and intends to defend vigorously its position that
the deductibility of dividends received from Elm Street was fully compliant
with Massachusetts law at the time.
27
REGULATION
General
Westfield Bank is a Massachusetts-chartered savings bank, and its
deposit accounts are insured up to applicable limits by the Bank Insurance
Fund of the FDIC and by the Depositors Insurance Fund. Westfield Bank is
subject to extensive regulation, examination and supervision by the
Commonwealth of Massachusetts Division of Banks as its primary corporate
regulator, and by the FDIC as the deposit insurer.
Westfield Financial as the bank holding company controlling Westfield
Bank, is subject to the Bank Holding Company Act of 1956, as amended, and
the rules and regulations of the Federal Reserve Board under the Bank
Holding Company Act. Westfield Financial are also subject to the provisions
of the Massachusetts General Laws applicable to savings banks and other
depository institutions and their holding companies (the Massachusetts
banking laws) and the regulations of the Massachusetts Division of Banks
under the Massachusetts banking laws applicable to bank holding companies.
Westfield Financial is also subject to the rules and regulations of the
Securities and Exchange Commission.
Any change in such laws and regulations, whether by the Division, the
FDIC, the Federal Reserve Board, or the Securities and Exchange Commission
or through legislation, could have a material adverse impact on Westfield
Financial and Westfield Bank and their operations and stockholders.
Massachusetts Banking Regulation
Community Reinvestment Act. Westfield Bank is subject to provisions
of the Massachusetts Community Reinvestment Act, which are similar to those
imposed by the federal Community Reinvestment Act with the exception of the
assigned exam ratings. Massachusetts banking law provides for an additional
exam rating of "high satisfactory" in addition to the federal Community
Reinvestment Act ratings of "outstanding," "satisfactory," "needs to
improve" and "substantial noncompliance." The Division is required to
consider a bank's Massachusetts Community Reinvestment Act rating when
reviewing the bank's application to engage in certain transactions,
including mergers, asset purchases and the establishment of branch offices
or automated teller machines, and provides that such assessment may serve
as a basis for the denial of any such application. The Massachusetts
Community Reinvestment Act requires the Division to assess a bank's
compliance with the Massachusetts Community Reinvestment Act and to make
such assessment available to the public. Westfield Bank's latest
Massachusetts Community Reinvestment Act rating, received by letter, dated
October 30 2001, from the Division was a rating of "satisfactory."
Loans-to-One-Borrower Limitations. With specified exceptions, the
total obligations of a single borrower to a Massachusetts chartered savings
bank may not exceed 20% stockholder's equity. A savings bank may lend
additional amounts up to 100% of the bank's retained earnings account if
secured by collateral meeting the requirements of the Massachusetts banking
laws. Westfield Bank currently complies with applicable loans-to-one-
borrower limitations.
28
Dividends. Under the Massachusetts banking laws, a stock savings bank
may, subject to several limitations, declare and pay a dividend on its
capital stock out of the bank's net profits. A dividend may not be
declared, credited or paid by a stock savings bank so long as there is any
impairment of capital stock. No dividend may be declared on the bank's
common stock for any period other than for which dividends are declared
upon preferred stock, except as authorized by the Commissioner. The
approval of the Commissioner is also required for a stock savings bank to
declare a dividend, if the total of all dividends declared by the savings
bank in any calendar year shall exceed the total of its net profits for
that year combined with its retained net profits of the preceding two
years, less any required transfer to surplus or a fund for the retirement
of any preferred stock.
In addition, federal law may also limit the amount of dividends that
may be paid by Westfield Bank. See "- Federal Banking Regulation - Prompt
Corrective Action."
Examination and Enforcement. The Division is required to periodically
examine savings banks at least once every calendar year or at least once
each 1 8-month period if the savings bank qualifies as well capitalized
under the prompt corrective action provisions of the Federal Deposit
Insurance Act. See "- Federal Banking Regulation - Prompt Corrective
Action."
Federal Banking Regulation
Capital Requirements. FDIC regulations require BIF-insured banks,
such as Westfield Bank to maintain minimum levels of capital. The FDIC
regulations define two classes of capital known as Tier 1 and Tier 2
capital.
The FDIC regulations establish a minimum leverage capital requirement
for banks in the strongest financial and managerial condition, with a
rating of 1 (the highest examination rating of the FDIC for banks) under
the Uniform Financial Institutions Rating System, of not less than a ratio
of 3.0% of Tier 1 capital to total assets. For all other banks, the minimum
leverage capital requirement is 4.0%, unless a higher leverage capital
ratio is warranted by the particular circumstances or risk profile of the
depository institution.
The FDIC regulations also require that savings banks meet a risk-
based capital standard. The risk-based capital standard requires the
maintenance of a ratio of total capital (which is defined as the sum of
Tier 1 capital and Tier 2 capital) to risk-weighted assets of at least 8%
and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In
determining the amount of risk-weighted assets, all assets, plus certain
off balance sheet items, are multiplied by a risk-weight of 0% to 100%,
based on the risks the FDIC believes are inherent in the type of asset or
item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to
declines in the economic value of a bank's capital due to changes in
interest rates when assessing the bank's capital adequacy. Under such a
risk assessment, examiners will evaluate a bank's capital for interest rate
risk on a case-by-case basis, with consideration of both quantitative and
qualitative factors.
29
Institutions with significant interest rate risk may be required to
hold additional capital. The agencies also issued a joint policy statement
providing guidance on interest rate risk management, including a discussion
of the critical factors affecting the agencies' evaluation of interest rate
risk in connection with capital adequacy. Westfield Bank was considered
"well-capitalized" under FDIC guidelines at December 31, 2002.
Activity Restrictions on State-Chartered Banks. Section 24 of the
Federal Deposit Insurance Act, as amended (FDIA), which was added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
generally limits the activities and investments of state-chartered FDIC
insured banks and their subsidiaries to those permissible for federally
chartered national banks and their subsidiaries, unless such activities and
investments are specifically exempted by Section 24 or consented to by the
FDIC.
Section 24 provides an exception for investments by a bank in common
and preferred stocks listed on a national securities exchange or the shares
of registered investment companies if
(1) the bank held such types of investments during the 14-month
period from September 30, 1990 through November 26, 1991;
(2) the state in which the bank is chartered permitted such
investments as of September 30, 1991; and
(3) the bank notifies the FDIC and obtains approval from the FDIC
to make or retain such investments. Upon receiving such FDIC
approval, an institution's investment in such equity ecurities
will be subject to an aggregate limit up to the amount of its
Tier 1 capital.
Westfield Bank received approval from the FDIC to retain and acquire
such equity investments subject to a maximum permissible investment equal
to the lesser of 100% of Westfield Bank' Tier 1 capital or the maximum
permissible amount specified by the Banking Act. Section 24 also provides
an exception for majority owned subsidiaries of a bank, but Section 24
limits the activities of such subsidiaries to those permissible for a
national bank, permissible under Section 24 of the FDIA and the FDIC
regulations issued pursuant thereto, or as approved by the FDIC.
Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24
of the FDIC regulations thereunder, an insured bank must seek approval from
the FDIC to make such investment or engage in such activity. The FDIC will
not approve the activity unless the bank meets its minimum capital
requirements and the FDIC determines that the activity does not present a
significant risk to the FDIC insurance funds.
Enforcement. The FDIC has extensive enforcement authority over
insured savings banks, including Westfield Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties,
to issue cease and desist orders and to remove directors and officers. In
general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.
30
The FDIC is required, with certain exceptions, to appoint a receiver
or conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means
having a ratio of tangible capital to total assets of less than 2%. The
FDIC may also appoint a conservator or receiver for a state bank on the
basis of the institution's financial condition or upon the occurrence of
certain events.
Deposit Insurance. Pursuant to FDICIA, the FDIC established a system
for setting deposit insurance premiums based upon the risks a particular
institution poses to its deposit insurance fund. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one
of three capital categories based on the institution's financial
information, as of the most recent quarterly report filed with the
applicable bank regulatory agency prior to the assessment period. The three
capital categories are (1) well capitalized, (2) adequately capitalized and
(3) undercapitalized using capital ratios that are substantially similar to
the prompt corrective action capital ratios discussed below. See "- Federal
Banking Regulation - Prompt Corrective Action" below. The FDIC also assigns
an institution to supervisory subgroup based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds
(which may include, if applicable, information provided by the
institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned.
Any increase in insurance assessments could have an adverse effect on the
earnings of insured institutions, including Westfield Bank.
Under the Deposit Insurance Funds Act of 1996, the assessment base
for the payments on the bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan
Insurance Corporation was expanded to include, beginning January 1, 1997,
the deposits of BIF-insured institutions, such as Westfield Bank. The rate
of assessment for BIF-assessable deposits will be one-fifth of the rate
imposed on deposits insured by the Savings Association Insurance Fund
(SAIF).
Under the FDIA, the FDIC may terminate the insurance of an
institution's deposits upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. The management of Westfield Bank
does not know of any practice, condition or violation that might lead to
termination of deposit insurance.
Transactions with Affiliates of Westfield Bank. Transactions between
an insured bank, such as Westfield Bank, and any of its affiliates is
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate
of a bank is any company or entity that controls, is controlled by or is
under common control with the bank. Currently, a subsidiary of a bank that
is not also a depository institution is not treated as an affiliate of the
bank for purposes of Sections 23A and 23B, but the Federal Reserve Board
has proposed a comprehensive regulation implementing Sections 23A and 23B,
which would establish certain exceptions to this policy.
31
Section 23A:
* limits the extent to which the bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such bank's capital stock and retained
earnings, and limit on all such transactions with all affiliates
to an amount equal to 20% of such capital stock and retained
earnings; and
* requires that all such transactions be on terms that are
consistent with safe and sound banking practices.
The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and other similar types of transactions.
Further, most loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amounts.
In addition, any covered transaction by a bank with an affiliate and any
purchase of assets or services by a bank from an affiliate must be on terms
that are substantially the same, or at least as favorable to the bank, as
those that would be provided to a non-affiliate.
Effective April 1, 2003, the Federal Reserve Board, or FRB, is
rescinding its interpretations of Sections 23A and 23B of the FRA and is
replacing these interpretations with Regulation W. In addition, Regulation
W makes various changes to existing law regarding Sections 23A and 23B,
including expanding the definition of what constitutes an affiliate subject
to Sections 23A and 23B and exempting certain subsidiaries of state-
chartered banks from the restrictions of Sections 23A and 23B.
Under Regulation W, all transactions entered into on or before
December 12, 2002, which either became subject to Sections 23A and 23B
solely because of Regulation W, and all transactions covered by Sections
23A and 23B, the treatment of which will change solely because of
Regulation W, will become subject to Regulation W on July 1, 2003. All
other covered affiliate transactions become subject to Regulation W on
April 1, 2003. The Federal Reserve Board expects each depository
institution that is subject to Sections 23A and 23B to implement policies
and procedures to ensure compliance with Regulation W. We do not expect
that the changes made by Regulation W will have a material adverse effect
on our business.
Community Reinvestment Act. Under the Community Reinvestment Act
(CRA), any insured depository institution, including Westfield Bank has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including
low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community. The
CRA requires the FDIC, in connection with its examination of a savings
bank, to assess the depository institution's record of meeting the credit
needs of its community and to take such record into account in its
evaluation of certain applications by such institution, including
applications for additional branches and acquisitions.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating
system and requires public disclosure of an
32
institution's CRA rating. Westfield Bank received a "satisfactory" rating
on its last CRA exam in December 1999.
Safety and Soundness Standards. Pursuant to the requirements of
FDICIA, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FDIC,
has adopted guidelines establishing general standards relating to internal
controls, information and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, asset quality,
earnings, and compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices to identify
and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound
practice and describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by an executive
officer, employee, director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is
given notice by the FDIC that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the FDIC. If, after
being so notified, a bank fails to submit an acceptable compliance plan or
fails in any material respect to implement an accepted compliance plan, the
FDIC may issue an order directing corrective and other actions of the types
to which a significantly undercapitalized institution is subject under the
"prompt corrective action" provisions of FDICIA. If a bank fails to comply
with such an order, the FDIC may seek to enforce such an order in judicial
proceedings and to impose civil monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
The FDIC, as well as the other federal banking regulators, adopted
regulations governing the supervisory actions that may be taken against
undercapitalized institutions. The regulations establish five categories,
consisting of "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." The severity of the action authorized or required to be
taken under the prompt corrective action regulations increases as a bank's
capital decreases within the three undercapitalized categories. All banks
are prohibited from paying dividends or other capital distributions or
paying management fees to any controlling person if, following such
distribution, the bank would be undercapitalized.
Federal Reserve System
Under Federal Reserve Board regulations, Westfield Bank is required
to maintain noninterest-earning reserves against its transaction accounts.
The Federal Reserve Board regulations generally require that reserves of 3%
must be maintained against aggregate transaction accounts of $42.1 million
or less, subject to adjustment by the Federal Reserve Board, and an initial
reserve of $1.3 million plus 10%, subject to adjustment by the Federal
Reserve Board between 8% and 14%, against that portion of total transaction
accounts in excess of $48.1 million. The first $6.0 million of otherwise
reservable balances, subject to adjustments by the Federal Reserve Board,
are exempted from the reserve requirements. Westfield Bank is in compliance
with these requirements. Because required reserves must be maintained in
the form of either vault cash, a noninterest-bearing account at a Federal
Reserve Bank or a pass-through
33
account as defined by the Federal Reserve Board, the effect of this reserve
requirement is to reduce Westfield Bank's interest-earning assets.
Holding Company Regulation
Federal Regulation. As a bank holding company, Westfield Financial is
required to obtain the prior approval of the Federal Reserve Board to
acquire all, or substantially all, of the assets of any bank or bank
holding company. Prior Federal Reserve Board approval will be required for
Westfield Financial to acquire direct or indirect ownership or control of
any voting securities of any bank or bank holding company if, after giving
effect to such acquisition, it would, directly or indirectly, own or
control more than 5% of any class of voting shares of such bank or bank
holding company.
A bank holding company is required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding
equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such
purchases or redemptions during the preceding 12 months, will be equal to
10% or more of the company's consolidated net worth. The Federal Reserve
Board may disapprove such a purchase or redemption if it determines that
the proposal would constitute an unsafe and unsound practice, or would
violate any law, regulation, Federal Reserve Board order or directive, or
any condition imposed by, or written agreement with, the Federal Reserve
Board. Such notice and approval is not required for a bank holding company
that would be treated as "well capitalized" under applicable regulations of
the Federal Reserve Board, that has received a composite "1" or "2" rating
at its most recent bank holding company inspection by the Federal Reserve
Board, and that is not the subject of any unresolved supervisory issues.
In addition, a bank holding company which does not qualify as a
financial holding company under the Gramm-Leach-Bliley Financial Services
Modernization Act, is generally prohibited from engaging in, or acquiring
direct or indirect control of any company engaged in non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be permissible.
Bank holding companies that do qualify as a financial holding company
may engage in activities that are financial in nature or incident to
activities which are financial in nature. Bank holding companies may
qualify to become a financial holding company if it meets certain criteria
set forth by the Federal Reserve Board.
Under the Federal Deposit Insurance Act, depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in
connection with the default of a commonly controlled depository institution
or any assistance provided by the FDIC to such an institution in danger of
default. This law would potentially be applicable to Westfield Mutual
Holding Company or Westfield Financial if it ever acquired as a separate
subsidiary a depository institution in addition to Westfield Bank.
34
Massachusetts Regulation
Under the Massachusetts banking laws, a company owning or controlling
two or more banking institutions, including a savings bank, is regulated as
a bank holding company. The term "company" is defined by the Massachusetts
banking laws similarly to the definition of "company" under the Bank
Holding Company Act. Each Massachusetts bank holding company:
* must obtain the approval of the Massachusetts Board of Bank
Incorporation before engaging in certain transactions, such as
the acquisition of more than 5% of the voting stock of another
banking institution;
* must register, and file reports, with the Division; and
* is subject to examination by the Division.
Westfield Mutual Holding Company or Westfield Financial will become a
Massachusetts bank holding company if they acquire a second banking
institution and hold and operate it separately from Westfield Bank.
Acquisition of Westfield Financial or Westfield Bank
Federal Restrictions. Under the federal Change in Bank Control Act,
any person (including a company), or group acting in concert, seeking to
acquire 10% or more of the outstanding shares of Westfield Financial's
common stock will be required to submit prior notice to the Federal Reserve
Board, unless the Federal Reserve Board has found that the acquisition of
such shares will not result in a change in control of Westfield Financial.
Under the Change in Bank Control Act, the Federal Reserve Board has 60 days
within which to act on such notices, taking into consideration factors,
including the financial and managerial resources of the acquirer, the
convenience and needs of the communities served by Westfield Financial and
Westfield Bank, and the anti-trust effects of the acquisition. Under the
Bank Holding Company Act, any company would be required to obtain prior
approval from the Federal Reserve Board before it may obtain "control,"
within the meaning of the Bank Holding Company Act, of Westfield Financial.
The term "control" is defined generally under the Bank Holding Company Act
to mean the ownership or power to vote 25% more of any class of voting
securities of an institution or the ability to control in any manner the
election of a majority of the institution's directors. An existing bank
holding company would require FRB approval prior to acquiring more than 5%
of any class of voting stock of Westfield Financial.
Massachusetts Restrictions. Under the Massachusetts banking laws, the
prior approval of the Division is required before any person may acquire a
Massachusetts bank holding company. For this purpose, the term "person" is
defined broadly to mean a natural person or a corporation, company,
partnership, or other forms of organized entities. The term "acquire" is
defined differently for an existing bank holding company and for other
companies or persons. A bank holding company will be treated as "acquiring"
a Massachusetts bank holding company if the bank holding company acquires
more than 5% of any class of the voting shares of the bank holding company.
Any other person will be treated as "acquiring" a Massachusetts bank
holding company if it acquires ownership or control of more than 25% of any
class of the voting shares of the bank holding company.
35
Other Federal Regulation
USA PATRIOT Act
In response to the events of September 11th, President George W. Bush
signed into law the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,
or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the
federal government new powers to address terrorist threats through enhanced
domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. By
way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act
takes measures intended to encourage information sharing among bank
regulatory agencies and law enforcement bodies. Further, certain provisions
of Title III impose affirmative obligations on a broad range of financial
institutions, including banks, thrifts, brokers, dealers, credit unions,
money transfer agents and parties registered under the Commodity Exchange
Act.
Among other requirements, Title III of the USA PATRIOT Act imposes
the following requirements with respect to financial institutions:
* Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at
minimum: (i) internal policies, procedures, and controls, (ii)
specific designation of an anti-money laundering compliance
officer, (iii) ongoing employee training programs, and (iv) an
independent audit function to test the anti-money laundering
program. Interim final rules implementing Section 352 were
issued by the Treasury Department on April 29, 2002. Such rules
state that a financial institution is in compliance with Section
352 if it implements and maintains an anti-money laundering
program that complies with the anti-money laundering regulations
of its federal functional regulator. Westfield Bank is in
compliance with the FDIC's anti-money laundering regulations.
* Pursuant to Section 326, on July 23, 2002 the Secretary of the
Department of Treasury, in conjunction with other bank
regulators, issued a Proposed Rule that provides for minimum
standards with respect to customer identification and
verification. On July 23, 2002, the FDIC and the other federal
bank regulators jointly issued proposed rules to implement
Section 326. The proposed rules require financial institutions
to establish a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts. This identifying information would be essentially the
same information currently obtained by most financial
institutions for individual customers generally. A financial
institution's program would also have to contain procedures to
verify the identity of customers within a reasonable period of
time, generally through the use of the same forms of identity
verification currently in use, such as through driver's
licenses, passports, credit reports and other similar means.
* Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondent accounts in the United States for non-United
States persons or their representatives (including foreign
individuals
36
visiting the United States) to establish appropriate, specific,
and, where necessary, enhanced due diligence policies,
procedures, and controls designed to detect and report money
laundering. Interim rules under Section 312 were issued by the
Treasury Department on July 23, 2002. The interim rules state
that a due diligence program is reasonable if it comports with
existing best practices standards for banks that maintain
correspondent accounts for foreign banks and evidences good
faith efforts to incorporate due diligence procedures for
accounts posing increased risk of money laundering. In addition,
an enhanced due diligence program is reasonable if it comports
with best practices standards and focuses enhanced due diligence
measures on those correspondent accounts posing a particularly
high risk of money laundering based on the bank's overall
assessment of the risk posed by the foreign correspondent bank.
Finally, a private banking due diligence program must be
reasonably designed to detect and report money laundering and
the existence of proceeds of foreign corruption. Such a program
is reasonable if it focuses on those private banking accounts
the present a high risk of money laundering.
* Effective December 25, 2001, financial institutions are
prohibited from establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks (foreign
banks that do not have a physical presence in any country), and
will be subject to certain recordkeeping obligations with
respect to correspondent accounts of foreign banks.
* Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on
Federal Reserve Act and Bank Merger Act applications.
Although we anticipate that we will incur additional expense in
complying with the provisions of the USA PATRIOT Act and the resulting
regulations, management does not expect that such compliance will have a
material impact on our results of operations or financial condition.
The Sarbanes-Oxley Act
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range
of corporate governance and accounting measures for public companies
designed to promote honesty and transparency in corporate America and
better protect investors from the type of corporate wrongdoing that
occurred in Enron, WorldCom and similar companies. The Sarbanes-Oxley Act's
principal legislation includes:
* the creation of an independent accounting oversight board;
* auditor independence provisions which restrict non-audit
services that accountants may provide to their audit clients;
37
* additional corporate governance and responsibility measures,
including the requirement that the chief executive officer and
chief financial officer certify financial statements;
* the forfeiture of bonuses or other incentive-based compensation
and profits from the sale of an issuer's securities by directors
and senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
* an increase the oversight of, and enhancement of certain
requirements relating to audit committees of public companies
and how they interact with the company's independent auditors.
* requirement that audit committee members must be independent and
are absolutely barred from accepting consulting, advisory or
other compensatory fees from the issuer;
* requirement that companies disclose whether at least one member
of the committee is a "financial expert" (as such term will be
defined by the Securities and Exchange Commission) and if not,
why not;
* expanded disclosure requirements for corporate insiders,
including accelerated reporting of stock transactions by
insiders and a prohibition on insider trading during pension
blackout periods;
* a prohibition on personal loans to directors and officers,
except certain loans made by insured financial institutions;
* disclosure of a code of ethics and filing a Form 8-K for a
change or waiver of such code;
* mandatory disclosure by analysts of potential conflicts of
interest; and
* a range of enhanced penalties for fraud and other violations.
Although we anticipate that we will incur additional expense in
complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not expect that such compliance will have a
material impact on our results of operations or financial condition.
Federal Securities Law
Our common stock is registered with the Securities and Exchange
Commission under Section 12(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). We are subject to information, proxy
solicitation, insider trading restrictions, and other requirements under
the Exchange Act.
38
ITEM 2. PROPERTIES
Properties
Westfield Bank currently conducts its business through its 10 banking
offices and two off-site ATMs. As of December 31, 2002, the properties and
leasehold improvements owned by us had an aggregate net book value of $12.9
million.
Year of Lease
or License Deposits as of
Location Ownership Year Opened Expiration December 31, 2002
- --------------------------------------------------------------------------------------
(In thousands)
Main Office:
141 Elm St
Westfield, MA Owned 1964 N/A $219,748
Branch Offices:
206 Park St
W. Springfield, MA Owned 1957 N/A 123,838
655 Main St.
Agawam, MA Owned 1968 N/A 137,439
26 Arnold St.
Westfield, MA Owned 1976 N/A 3,087
300 Southampton Rd.
Westfield, MA Owned 1987 N/A 46,861
462 College Highway
Southwick, MA Owned 1990 N/A 36,648
382 N. Main St.
E. Longmeadow, MA Leased 1997 2007(1) 53,461
1341 Main St.
Springfield, MA Leased 1999 2003(2) 19,728
1642 Northampton St.
Holyoke, MA Owned 2001 N/A 9,107
1342 Liberty St.
Springfield, MA Owned 2001 N/A 6,148
ATMs:
337 N. Westfield St.
Feeding Hills, MA Owned 1988 N/A N/A
830 Suffield St.
Agawam, MA Leased 1997 2002 N/A
516 Carew St.
Springfield, MA Leased 2002 N/A N/A
Does not include two additional five-year options.
Does not include three additional five-year options.
39
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceeding other than
routine legal proceedings occurring in the ordinary course of business.
None of which, in the opinion of management, will have a material effect on
the company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is listed on The American Stock Exchange under the
symbol "WFD." Westfield Mutual Holding Company owns 5,607,400 shares, or
53% of our outstanding common stock. At December 31, 2002, there were
10,154,150 shares of common stock issued and outstanding, and there were
approximately 2,566 holders of record.
The table below shows the high and low sales price during the periods
indicated as well as dividends declared per share. The information set
forth in the table below was provided by the American Stock Exchange.
Price Range Dividends
-------------- ---------
For the Fiscal Year Ended December 31, 2002 High Low
---- ---
Fourth Quarter ended December 31, 2002 15.90 14.34 -
Third Quarter ended September 30, 2002 15.98 12.99 0.05
Second Quarter ended June 30, 2002 16.23 14.46 0.05
First Quarter ended March 31, 2002 14.89 13.00 0.05
Price Range Dividends
-------------- ---------
For the Fiscal Year Ended December 31, 2001 High Low
---- ---
Fourth Quarter ended December 31, 2001 13.88 10.00 -
The stock price information set forth above has been provided by The
American Stock Exchange. High, low, and closing prices and daily trading
volumes are reported in most major newspapers.
40
A quarterly cash dividend of $0.05 per share was declared by the
Board of Directors on March 26, June 28 and September 24, 2002. The
continued payment of dividends also depend upon our debt and equity
structure, earnings, financial condition, need for capital in connection
with possible future acquisitions and other factors, including economic
conditions, regulatory restrictions and tax considerations. We cannot
guarantee that we will pay dividends or that, if paid, that we will not
reduce or eliminate dividends in the future.
The only funds available for the payment of dividends on the capital
stock of Westfield Financial will be cash and cash equivalents held by
Westfield Financial, dividends paid by Westfield Bank to Westfield
Financial, and borrowings. Westfield Bank will be prohibited from paying
cash dividends to Westfield Financial to the extent that any such payment
would reduce Westfield Bank's capital below required capital levels or
would impair the liquidation account to be established for the benefit of
the Westfield Bank's eligible account holders and supplemental eligible
account holders at the time of the reorganization and stock offering.
41
ITEM 6. SELECTED FINANCIAL DATA
The summary information presented below at or for each of the years
presented is derived in part from the consolidated financial statements of
Westfield Financial. The following information is only a summary, and you
should read it in conjunction with our consolidated financial statements
and notes beginning on page F-1.
At December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------
(In thousands)
Selected Financial Condition Data:
Total assets $812,980 $782,732 $694,791 $638,563 $582,551
Loans, net(1) 357,155 413,546 464,531 467,444 415,084
Securities available for sale 79,842 74,184 75,709 53,164 51,570
Securities held to maturity 45,960 45,614 39,461 44,239 40,719
Mortgage backed securities
available for sale 90,468 87,150 52,580 23,568 20,643
Mortgage backed securities
held to maturity 159,339 81,007 6,806 4,507 6,698
Deposits 656,065 637,109 601,896 551,024 508,313
Customer repurchase agreements 8,724 6,061 7,686 3,274 -
Federal Home Loan Bank advances 15,000 - - 5,000 -
Total equity 126,699 131,317 77,755 71,245 66,672
Allowance for loan losses 4,325 3,923 3,434 3,118 2,632
Nonperforming loans 2,383 2,684 2,308 2,751 838
For the Years Ended
December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------
(In thousands)
Selected Operating Data:
Interest and dividend income $ 43,013 $47,543 $46,718 $41,850 $40,784
Interest expense 18,775 25,002 24,535 21,151 21,288
----------------------------------------------------
Net interest and dividend income 24,238 22,541 22,183 20,699 19,496
Provision for loan losses 934 1,630 1,089 843 293
----------------------------------------------------
Net interest and dividend income
after provision for loan losses 23,304 20,911 21,094 19,856 19,203
Total noninterest income (362) 2,517 2,855 1,555 1,203
Total noninterest expense 16,659 15,899 14,684 12,986 12,232
----------------------------------------------------
Income before income taxes 6,283 7,529 9,265 8,425 8,174
Income taxes 2,239 2,512 3,185 2,898 3,062
----------------------------------------------------
Net income. $ 4,044 $ 5,017 $ 6,080 $ 5,527 $ 5,112
====================================================
- --------------------
Loans are shown net of deferred loan fees, allowance for loan losses
and unadvanced loan funds.
42
At or for the Years Ended December 31,
---------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------
Selected Financial Ratios and
Other Data(1)
Performance Ratios:
Return on average assets 0.51% 0.70% 0.92% 0.91% 0.90%
Return on average equity 3.14 6.16 8.04 7.95 7.90
Average equity to average assets 16.23 11.32 11.45 11.50 11.45
Equity to total assets at end of period 15.58 16.78 11.19 11.16 11.44
Average interest rate spread 2.54 2.75 2.91 2.98 2.97
Net interest margin(2) 3.18 3.33 3.51 3.55 3.57
Average interest earning assets to
average interest earning liabilities 125.76 115.77 115.40 115.82 115.45
Total noninterest expense to
average assets 2.10 2.21 2.22 2.15 2.16
Efficiency ratio(3) 65.01 65.62 62.48 59.74 59.88
Regulatory Capital Ratios:
Regulatory tier 1 leverage capital 15.65 17.27 11.51 11.11 11.16
Tier 1 risk-based capital 28.77 28.09 16.33 16.28 16.88
Total risk-based capital 29.78 28.98 17.24 17.32 17.59
Asset Quality Ratios:
Nonperforming loans as a percent of
total loans 0.66 0.64 0.49 0.58 0.20
Nonperforming assets as a percent of
total assets 0.29 0.37 0.33 0.43 0.18
Allowance for loan losses as a percent of
total loans 1.20 0.94 0.73 0.66 0.63
Allowance for loan losses as a percent of
nonperforming assets 181 137 149 113 249
Number of:
Banking offices 10 10 8 8 7
Full-time equivalent employees 146 159 151 150 137
- --------------------
Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios.
Net interest margin represents net interest and dividend income as a
percentage of average interest earning assets.
The efficiency ratio represents the ratio of operating expenses
divided by the sum of net interest and dividend income and
noninterest income less gain on sale of securities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Westfield Financial's consolidated results of operations are
comprised of earnings on investments and the net income recorded by its
principal operating subsidiary, Westfield Bank. Westfield Bank's
consolidated results of operations depend primarily on net interest and
dividend income. Net interest and dividend income is the difference between
the interest income earned on interest-earning assets and the interest paid
on interest-bearing liabilities. Interest-earning assets consist primarily
of residential mortgage loans, commercial mortgage loans, commercial loans,
consumer loans, mortgage-backed securities and investment securities.
Interest-bearing liabilities consist primarily of certificates of deposit,
savings and money market and NOW account deposits, and borrowings from the
Federal Home Loan Bank of Boston. The consolidated results of operations
also depend on provision for loan losses, noninterest income, and
noninterest expense. Noninterest expense includes salaries and employee
benefits, occupancy expenses and other general and administrative expenses.
Noninterest income includes gains (losses) on sales of securities and
securities writedowns and service fees and charges.
43
The consolidated results of operations may also be affected
significantly by economic and competitive conditions in the market area and
elsewhere, including those conditions that influence market interest rates,
government policies and the actions of regulatory authorities. Future
changes in applicable laws, regulations or government policies may
materially affect the results of operations. Furthermore, because Westfield
Bank's lending activity is concentrated in loans secured by residential and
commercial real estate located in Hampden County, Massachusetts, downturns
in this regional economy could have a negative impact on its earnings.
Critical Accounting Policies
Westfield Financial's accounting policies are disclosed in Note 2 to
the Consolidated Financial Statements. The more critical policies given
Westfield Financial's current business strategy and asset/liability
structure are accounting for non performing loans, the allowance for loan
losses and provision for credit loans and the classification of securities
as either held to maturity or available for sale. In addition to the
information disclosure in the Notes to the Consolidated Financial
Statements, Westfield Financial's policy on each of these accounting
policies is described in detail in the applicable sections of Management's
Discussion and Analysis of Financial Condition and results of Operations.
Senior management has discussed the development and selection of these
accounting estimates and the related disclosures with the Audit Committee
of the Company's Board of Directors.
On a quarterly basis, the Company reviews available for sale
investment securities with unrealized depreciation on a judgmental basis to
assess whether the decline is fair value is temporary or other than
temporary. The Company judges whether the decline in value is from company-
specific events, industry developments, general economic conditions or
other reasons. Once the estimated reasons for the decline are identified,
further judgements are required as to whether those conditions are likely
to reverse and, if so, whether that reversal is likely to result in a
recovery of the fair value of the investment in the near term. Unrealized
losses which are not expected to reverse in the near term are charged to
operations.
Securities, including mortgage backed securities, which management
has the positive intent and ability to hold until maturity are classified
as held to maturity and are carried at amortized cost. Securities,
including mortgage-backed securities, which have been identified as assets
for which there is not a positive intent to hold to maturity are classified
as available for sale and are carried at fair value with unrealized gains
and losses, net of income taxes, reported as a separate component of
equity. Accordingly, a misclassification would have a direct effect on
stockholders' equity. Sales or reclassification as available for sale
(except for certain permitted reasons) of held to maturity securities may
result in the reclassification of all such securities to available for
sale. The company has never sold held to maturity securities or
reclassified such securities to available for sale other than in
specifically permitted circumstances. Westfield Financial does not acquire
securities or mortgage backed securities for purposes of engaging in
trading activities.
Westfield Financial's general policy is to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days or
more, or earlier if the loan is considered impaired. Any unpaid amounts
previously accrued on these loans are reversed from income. Subsequent cash
receipts are applied to the outstanding principal balance or to interest
income if,
44
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 auto 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.
The process of evaluating the loan portfolio, classifying loans and
determining the allowance and provision is described in detail on page 16.
Westfield Financial's methodology for assessing the appropriations of the
allowance consists of two key components, which are a specific allowance
for identified problem or impaired loans and a formula allowance for the
remainder of the portfolio. Measurement of impairment can be based on
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 appropriations 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 non performing loans expected to
result from existing condition), collateral values, loan volumes and
concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions
were believed to have had on the collectibility of the loan portfolio.
Although management believes it has established and maintained the
allowance for loan losses at adequate levels, future adjustments may be
necessary if economic, real estate and other conditions differ
substantially from the current operating environment.
Management Strategy
Westfield Bank 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.
In recent years, in addition to real estate lending, we have adopted
a growth-oriented strategy that has focused on increased emphasis on
commercial and consumer lending and deposit relationships, extending our
branch network and broadening our product lines and services. We believe
that this business strategy is best for our long term success and
viability, and complements our existing commitment to high quality customer
service. In connection with our overall growth strategy, Westfield Bank
seeks to:
45
* increase lending to support the continued growth of its
commercial loan portfolio as a means to increase the yield on
and diversify its loan portfolio and build transactional deposit
account relationships;
* continue to focus on consumer lending as a means of diversifying
its loan portfolio;
* continue to focus on expanding its retail banking franchise, and
increasing the number of households served within its market
area;
* depending on market conditions, sell substantially all of the
fixed-rate residential real estate loans that it originates and
invest the proceeds of these sales in commercial and industrial
loans, consumer loans, commercial real estate loans and
investment securities in order to diversify its loan portfolio
and reduce interest rate risk;
* maintain its capital strength and asset quality; and
* meet the needs of its local community through a community-based
and service-orientated approach to banking.
46
Average Balance Sheet and Analysis of Net Interest and Dividend
Income
The following tables set forth information relating to our financial
condition and net interest and dividend income for the years ended December
31, 2002, 2001 and 2000 and reflect the average yield on assets and average
cost of liabilities for the periods indicated. The yields and costs were
derived by dividing income or expense by the average balance of interest-
earning assets or interest-bearing liabilities, respectively, for the
periods shown. Average balances were derived from actual daily balances
over the periods indicated. Interest income includes fees earned from
making changes in loan rates or terms, and fees earned when commercial real
estate loans were prepaid or refinanced.
For the Year Ended December 31,
---------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Short term investments(1) $ 27,162 $ 416 1.53% $ 17,893 $ 562 3.14% $ 10,570 $ 663 6.28%
Securities 337,646 14,562 4.31 212,340 13,190 6.21 154,245 9,971 6.47
Loans(2) 398,555 28,035 7.03 445,987 33,791 7.58 467,665 36,084 7.72
------------------ ------------------ ------------------
Total interest-earning
assets 763,363 43,013 5.63 676,220 47,543 7.03 632,480 46,718 7.39
------------------ ------------------ ------------------
Total noninterest-earning
assets 28,971 43,394 27,691
-------- -------- --------
Total assets $792,334 $719,614 $660,171
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts 40,636 589 1.45% 35,738 770 2.15% 35,071 837 2.38
Savings accounts 44,026 474 1.08 43,965 523 1.19 48,835 509 1.04
Money market deposit accounts 133,622 2,541 1.90 123,085 3,670 2.98 110,051 3,834 3.48
Time certificates of deposit 380,385 14,957 3.93 374,100 19,767 5.28 346,027 18,907 5.46
------------------ ------------------ ------------------
Total interest-bearing
deposits 598,669 18,561 576,888 24,730 4.29 539,984 24,087 4.46
Customer repurchase agreements
and other borrowings 8,332 214 2.57 7,199 272 3.78 8,096 448 5.53
------------------ ------------------ ------------------
Interest-bearing liabilities 607,001 18,775 3.09 584,087 25,002 4.28 548,080 24,535 4.48
------------------ ------------------ ------------------
Noninterest-bearing deposits 48,856 38,737 31,826
Other noninterest-bearing
liabilities 7,883 15,324 4,662
-------- -------- --------
Total noninterest-bearing
liabilities 56,739 54,061 36,488
-------- -------- --------
Total liabilities 663,740 638,148 584,568
Total equity 128,594 81,466 75,603
-------- -------- --------
Total liabilities and equity $792,334 $719,614 $660,171
======== ======== ========
Net interest and dividend
income $24,238 $22,541 $22,183
======= ======= =======
Net interest rate spread(3) 2.54 2.75 2.91
Net interest margin(4) 3.18% 3.33% 3.51%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 125.8x 115.8x 115.4x
- --------------------
Short term investments include Federal Funds Sold.
Loans, including non-accrual loans, are net of deferred loan
origination costs (fees), and unadvanced funds.
Net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
Net interest margin represents net interest and dividend income as a
percentage of average interest earning assets.
47
Rate/Volume Analysis. The following table shows how changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected our interest and dividend income
and interest expense during the periods indicated. Information is provided
in each category with respect to:
(1) interest income changes attributable to changes in volume
(changes in volume multiplied by prior rate);
(2) interest income changes attributable to changes in rate (changes
in rate multiplied by prior volume); and
(3) the net change.
The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
Year Ended December 31, 2002 Year Ended December 31, 2001
Compared to Year Ended Compared to Year Ended
December 31, 2001 December 31, 2000
Increase/(Decrease) Increase/(Decrease)
------------------------------- -------------------------------
Due to Due to
------------------- ---------------
Volume Rate Net Volume Rate Net
-------------------------------------------------------------------
(In thousands)
Interest earning assets:
Short term investments $ 291 $ (437) $ (146) $ 459 $ (560) $ (101)
Investment securities 7,784 (6,412) 1,372 3,755 (536) 3,219
Loans (3,594) (2,162) (5,756) (1,763) (620) (2,293)
-------------------------------------------------------------------
Total interest-earning assets $ 4,481 $(9,011) $(4,530) $ 2,541 $(1,716) $ 825
===================================================================
Interest bearing liabilities:
NOW accounts $ 106 $ (287) $ (181) $ 16 $ (83) $ (67)
Savings accounts 1 (50) (49) (51) 65 14
Money market deposit accounts 314 (1,443) (1,129) 454 (618) (164)
Time certificates of deposit 332 (5,142) (4,810) 1,534 (674) 860
Customer repurchase agreements
and other borrowings 43 (101) (58) (50) (126) (176)
-------------------------------------------------------------------
Total interest bearing
liabilities 796 (7,023) (6,227) 1,903 (1,436) 467
-------------------------------------------------------------------
Change in net interest and
dividend income $ 3,685 $(1,988) $ 1,697 $ 638 $ 280 $ 358
===================================================================
48
Comparison of Financial Condition at December 31, 2002 and December 31, 2001
Consolidated assets increased $30.3 million, or 3.9%, to $813.0
million at December 31, 2002 from $782.7 million at December 31, 2001.
Securities increased $87.6 million, or 30.4%, to $375.6 million at December
31, 2002 from $288.0 million at December 31, 2001. Federal Funds sold
increased $2.9 million to $37.2 million at December 31, 2002 from $34.3
million at December 31, 2001 primarily because of the decrease in net
loans. Net loans during this period decreased by $56.3 million, or 13.6%,
to $357.2 million at December 31, 2002, from $413.5 million at December 31,
2001. Residential loans decreased $54.9 million from $212.8 million at
December 31, 2001 to $157.9 million at December 31, 2002. The decrease is
primarily the result of the current residential loan referral program with
a third party mortgage company. Under this program which commenced on
September 1, 2001, Westfield Bank refers its residential real estate
borrowers to a third party mortgage company and substantially all of the
Bank's residential real estate loans are underwritten, originated and
serviced by a third party mortgage company. The Bank receives a fee of 65
basis points for each of these loans originated. The Bank believes that
this program will diversify its loan portfolio and reduce interest risk. In
2001, Westfield Bank securitized $35.7 million in thirty-year fixed rate
residential mortgage loans and $24.6 million in fifteen year fixed rate
residential mortgage loans with Fannie Mae. This transaction was done to
reduce interest rate risk as well as improve liquidity and enhance the
subsequent saleability of the resulting securities. Because Westfield Bank
retained all beneficial interests in the resulting mortgage backed
securities, the securitization did not result in a material change in total
assets. Commercial and industrial loans increased $14.5 million, or 30.8 %,
for the year ended December 31, 2002.
Asset growth was funded by an increase in deposits of $19.0 million
or 3.0% to $656.1 million at December 31, 2002 from $637.1 million at
December 31, 2001. Demand deposits, NOW and money market accounts increased
$9.6 million and $12.5 million respectively, while regular accounts
increased $2.2 million to $44.9 million at December 31, 2002. Time deposits
decreased $5.3 million to $375.0 million at December 31, 2002 from $380.3
million at December 31, 2001.
Customer repurchase agreements increased $2.6 million or 42.6% to
$8.7 million at December 31, 2002 from $6.1 million at December 31, 2001. 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. Federal Home Loan Bank borrowings increased $15.0 million from
zero at December 31, 2001 to $15.0 million at December 31, 2002 to take
advantage of the current yield curve.
Stockholders' equity at December 31, 2002 and December 31, 2001 was
$126.7 million and $131.3 million, respectively, representing 15.6% and
16.8% of total assets. The change is comprised of net income of $4.0
million for the year ended December 31, 2002, a decrease in net unrealized
gains on securities available for sale of $562,000, net of income taxes,
the recording of the purchase of 380,150 shares of stock for the employee
stock ownership plan amounting to $5.6 million and shares for the
management recognition and retention plan amounting to $2.7
49
million and the declaration by the Board of Directors of three $0.05 per
share cash dividends on March 26, June 28, and September 24, 2002 amounting
to $1.6 million.
Comparison of Operating Results for the Year Ended December 31, 2002
and December 31, 2001.
General
Net income was $4.0 million for the year ended December 31, 2002, a
decrease of $1.0 million, or 20%, compared with net income of $5.0 million
for the year ended December 31, 2001. The decrease was primarily
attributable to net losses from sales and writedowns of certain equity
securities of $1.8 million for 2002 compared with net gains of $830,000 for
the year ended December 31, 2001. Writedowns of certain equity securities
in 2002 resulted from impairment that was determined to be other than
temporary of $2.1 million. The provision for loan losses decreased $696,000
from $1.6 million in 2001 to $934,000 for 2002. Noninterest expense
increased $760,000 while federal and state income taxes decreased $273,000
and net interest and dividend income increased $1.7 million compared with
the prior year.
Interest and Dividend Income
Total interest and dividend income decreased $4.5 million or 9.5% to
$43.0 million for the year ended December 31, 2002 compared with $47.5
million for the same period in 2001. Interest and dividends on securities
increased $1.4 million to $13.6 million from $12.2 million as the company
invested principal paydowns on its residential real estate portfolio in
investment securities. Interest income on loans decreased $5.8 million due
to the decline of loans held in portfolio over the prior period. The
average balance of interest earning assets increased $87.1 million, or
12.9%. However, the yield on earning assets decreased from 7.03% in 2001 to
5.63% for 2002 due to the low interest rate environment.
Interest Expense
Interest expense decreased $6.2 million, or 24.8%, to $18.8 million
for 2002 compared to $25.0 million for 2001. The average balance of total
interest-bearing deposits increased $21.8 million in 2002 to $598.7
million, while the average cost of deposits decreased 119 basis points to
3.09% due to the low interest rate environment. The average balance of
customer repurchase agreements increased $1.1 million from $7.2 million in
2001 to $8.3 million in 2002.
Net Interest and Dividend Income
Net interest and dividend income for 2002 was $24.2 million as
compared with $22.5 million for 2001. Net interest rate spread decreased to
2.54% for 2002 from 2.75% for the prior year. Net interest margin decreased
to 3.18% for 2002 compared with 3.33% for 2001. The decrease in interest
rate spread and net interest margin was primarily the result of the yield
on earning assets falling more than the cost of interest-bearing
liabilities.
50
Provision for Loan Losses
During 2002, Westfield Bank provided $934,000 million for loans
losses, compared to $1.6 million for 2001. The provision for loan losses
brings Westfield Bank's allowance for loan losses to a level determined
appropriate by management based on the methodology discussed under
"Allowance for Loan Losses". The allocation of the provision among loan
types and between the specific and formula components of the allowance for
loan losses is also determined based on the methodology discussed under
"Allowance for Loan Losses". The following factors resulted in an increase
in the provision for 2002 as compared to 2001.
* Loan concentrations - Commercial real estate loans and
commercial and industrial loans increased $16.0 million or
10.9%. Westfield Bank considers these types of loans to contain
more risk than conventional residential mortgages which remained
relatively constant as a percentage of the loan portfolio. These
increases resulted in an increase in the allowance requirements
for commercial real estate and commercial and industrial loans.
These increases were partially offset by a decrease in consumer
loans from $58.0 million at December 31, 2001 to $41.1 million
at December 31, 2002, resulting in a decrease in the allowance
requirement for consumer loans.
* Credit quality - Actual loss experience on loans decreased
significantly with charge-offs totaling $928,000 million in 2002
as compared to $1.8 million in 2001. Net loans charged off as a
percent of average loans outstanding decreased from 0.26% in
2001 to 0.13% in 2002. Non-accrual loans decreased $300,000 from
$2.7 million at December 31, 2001 to $2.4 million at December
31, 2002.
As a result of the detailed allowance for loan loss methodology and
consideration of the above factors, management determined that an decrease
in the provision of $696,000 was appropriate.
The allowance for loan losses at the end of 2002 was 1.20% of total
loans compared with 0.94% at the end of 2001. The increase in the coverage
ratio reflects the changes in the loan portfolio described above.
Noninterest Income
Noninterest income decreased $2.9 million to ($362,000) in 2002 from
$2.5 million for 2001. Included in noninterest income in the year 2002 were
writedown of certain equity securities of $2.5 million. Included in
noninterest in the year 2001 were life insurance proceeds of $300,000. Fees
received from our current residential loan referral program with a third
party mortgage company were $196,000 for the year ended December 31, 2002
compared with $17,000 for the same period in 2001.
Noninterest Expense
Noninterest expense for the year ended December 31, 2002 was $16.7
million compared to $15.9 million for the same period in 2001. Employee
salary and benefits for the year ended December 31, 2002 was $8.9 million
compared to $8.4 million in 2001. For the year ended
51
December 31, 2002, stock based benefit plans expense amounted to $302,000.
Because the Company converted to stock form on December 27, 2001, no stock
based benefit plans expense was recognized in 2001.
Income Taxes
Income taxes decreased $273,000, or 10.9%, to $2.2 million in 2002.
The effective tax rate was 35.6% in 2002 compared to 33.4% for 2001. The
effective tax rate also reflects the utilization of Westfield Securities
Corporation, a qualified securities corporation, and Elm Street Real Estate
Investments, Inc., a wholly-owned subsidiary of Westfield Bank, as a real
estate investment trust.
Massachusetts legislation was signed on March 5, 2003 amending the
corporate tax law affecting the treatment of dividends received form Real
Estate Investment Trusts (REITs). Dividends from the REIT subsidiary are no
longer eligible for a dividends-received deduction. As a result of the
enactment of this legislation, the Company has ceased recording the tax
benefits associated with the dividend received deduction effective for the
2003 tax year.
In addition to the effect on 2003, the legislation includes a
retroactive effective date that reaches back to 2002 and prior years.
Accordingly, the Company recorded an additional liability for prior years
taxes, including interest (net of any federal and state tax deductions
associated with such taxes and interest), relating to the deduction for
dividends received from a REIT of approximately $2.9 million in the first
quarter of 2003.
The Company is reviewing the retroactive effect of the legislation
with its legal advisors and intends to defend vigorously its position that
the deductibility of dividends received from Elm Street was fully compliant
with Massachusetts law at the time.
Comparison of Financial Condition at December 31, 2001 and December 31, 2000
The consolidated assets increased $ 87.9 million, or 12.7%, to $782.7
million at December 31, 2001 from $694.8 million at December 31, 2000.
Securities increased $113.4 million, or 65%, to $288.0 million at December
31, 2001 from $174.6 million at December 31, 2000. Federal Funds sold
increased $24.2 million to $ 34.3 million at December 31, 2001 from $10.0
million at December 31, 2000. Westfield Bank securitized $35.7 million in
thirty-year fixed rate residential mortgage loans and $24.6 million in
fifteen year fixed rate residential mortgage loans with Fannie Mae. This
transaction was done to reduce interest rate risk as well as improve
liquidity and enhance the subsequent saleability of the resulting
securities. Because the Bank retained all beneficial interests in the
resulting mortgage-backed securities, the securitization did not result in
a material change in total assets. Commercial and industrial loans
increased $9.5 million, or 25.3 % for the year ended December 31, 2001.
Asset growth was funded primarily by an increase in deposits of $35.2
million or 5.9% to $637.1 million at December 31, 2001 from $601.9 million
at December 31, 2000 and funds raised in the initial public offering of
Westfield Financial's common stock completed on
52
December 27, 2001. Interest-bearing deposits accounted for $25.5 million of
the growth in total deposits, while demand deposits accounted for $9.7
million.
Customer repurchase agreements decreased $1.6 million or 21.1% to
$6.1 million at December 31, 2001 from $7.7 million at December 31, 2000. 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.
Total equity increased $53.6 million, or 68.9%, to $131.3 million at
December 31, 2001 from $77.8 million at December 31, 2000. The increase was
primarily attributable to funds raised in the initial public offering of
the Westfield Financial's common stock, net income for the year ended
December 31, 2001 and an increase in unrealized gains on investment
securities available for sale of $816,000 for the year ended December 31,
2001.
Comparison of Operating Results for the Year Ended December 31, 2001 and
December 31, 2000.
General
Net income was $5.0 million for the year ended December 31, 2001 a
decrease of $1.1 million, or 17.5%, compared with net income of $6.1
million for the year ended December 31, 2000. The decrease was primarily
attributable to a decrease in gains on sales of securities of $705,000 from
$1.5 million in 2000 to $830,000 in year 2001, and an increase in provision
for loan losses of $541,000. Noninterest expense increased $1.2 million,
while federal and state income taxes decreased $673,000 and net interest
and dividend income increased $358,000 compared with the prior year.
Interest and Dividend Income
Total interest and dividend income increased $825,000 or 1.8% to
$47.5 million for the year ended December 31, 2001 compared with $46.7
million for the same period in 2000. Interest and dividends on securities
increased $3.0 million to $12.2 million from $9.2 million, while interest
income on loans decreased $2.3 million. The average balance of interest
earning assets increased $42.8 million, or 6.8%, however the yield on
earning assets decreased from 7.43% in 2000 to 7.08% for 2001.
Interest Expense
Interest expense increased $467,000 or 1.9%, to $25.0 million for the
2001 compared with $24.5 million for 2000. The average balance of total
interest - bearing deposits increased $36.9 million in 2001 to $576.9
million, while the average cost of deposits decreased 17 basis points to
4.29%. The average balance of customer repurchase agreements decreased
$897,000 from $8.1 million in 2000 to $7.2 million in 2001.
53
Net Interest and Dividend Income
Net interest and dividend income for 2001 was $22.5 million as compared
with $22.2 million for 2000. Net interest rate spread decreased to 2.80%
for 2001 from 2.95% for the prior year. Net interest margin decreased to
3.36% for 2001 compared with 3.53% for 2000. The decrease in interest rate
spread and net interest margin was primarily the result of the increase in
the cost of certificates of deposit.
Provision for Loan Losses
During 2001, Westfield Bank provided $1.6 million for loans losses,
compared to $1.1 million for 2000. The provision for loan losses brings
Westfield Bank's allowance for loan losses to a level determined
appropriate by management based on the methodology discussed under
"Allowance for Loan Losses". The allocation of the provision among loan
types and between the specific and formula components of the allowance for
loan losses is also determined based on the methodology discussed under
"Allowance for Loan Losses". The following factors resulted in an increase
in the provision for 2001 as compared to 2000.
* Loan concentrations - Commercial real estate loans and
commercial and industrial loans increased $16.1 million or
12.4%. Westfield Bank considers these types of loans to contain
more risk than conventional residential mortgages which remained
relatively constant. These increases resulted in an increase in
the allowance requirements for commercial real estate and
commercial and industrial loans. These increases were partially
offset by a decrease in consumer loans from $73.3 million at
December 31, 2000 to $58.1 million at December 31, 2001,
resulting in a decrease in the allowance requirement for
consumer loans.
* Credit quality - Actual loss experience on loans increased
significantly with charge-offs totaling $1.8 million in 2001 as
compared to $1.1 million in 2000. Net loans charged off as a
percent of average loans outstanding increased from 0.17% to
0.26% in 2001. Non-accrual loans increased $376,000 from $2.3
million at December 31, 2000 to $2.7 million at December 31,
2001. The increases in charge-offs and non-accrual loans
increases the loss factors applied to outstanding loans and
results in an increase in the allowance requirement.
As a result of the detailed allowance for loan loss methodology and
consideration of the above factors, management determined that an increase
in the provision of $541,000 was appropriate.
The allowance for loan losses at the end of 2001 was 0.94% of total
loans compared with 0.73% at the end of 2000. The increase in the coverage
ratio reflects the changes in the loan portfolio described above.
Noninterest Income
Noninterest income decreased $338,000 to $2.5 million in 2001 from
$2.9 million for 2000. Security gains were $830,000 for 2001, down from
$1.5 million in 2000. Included in
54
noninterest income in the year 2001 were life insurance proceeds of
$300,000 collected in November of that year.
Noninterest Expense
Total noninterest expense increased $1.2 million, or 8.3%, to $15.9
million in 2001 compared with $14.7 million for the prior year. Salaries
and benefits expense represented $545,000 or 44.9% of the increase. In June
2001, Westfield Bank increased its staffing levels in order to open two new
full service branches. These two new branches were also the reason for the
$366,000 increase in occupancy expense. In May of 2001, Westfield Bank
converted its data processing to a new core system, which accounted for the
$400,000 increase in computer operating expense.
Income Taxes
Income taxes decreased $673,000, or 21.1%, to $2.5 million in 2001.
The effective tax rate was 33.4% in 2001 compared to 34.4% for 2000. The
effective tax rate also reflects the utilization of Westfield Securities
Corporation, a qualified securities corporation, and Elm Street Real Estate
Investments, Inc., a wholly-owned subsidiary of Westfield Bank, as a real
estate investment trust.
Liquidity and Capital Resources
The term "liquidity" refers to our ability to generate adequate
amounts of cash to fund loan originations, loan purchases, deposit
withdrawals and operating expenses. Our primary sources of liquidity are
deposits, scheduled amortization and prepayments of loan principal and
mortgage-backed securities, maturities and calls of investment securities
and funds provided by our operations. Westfield Bank also can borrow funds
from the Federal Home Loan Bank based on eligible collateral of loans and
securities. Outstanding borrowings from the Federal Home Loan Bank at
December 31, 2002 and 2001 were $15 million and zero, respectively. At
December 31, 2002, Westfield Bank's maximum borrowing capacity from the
Federal Home Loan Bank was approximately $99.2 million, net of any
outstanding borrowings. In addition, we may enter into reverse repurchase
agreements with approved broker-dealers. Reverse repurchase agreements are
agreements that allow us to borrow money using our securities as
collateral.
The 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 the 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. The Bank is also obligated under leases for certain of its branches
and equipment. A summary of lease obligations and credit commitments at
December 31, 2002 follows:
55
After 1 Year After 3 Years
Within but Within but within After
1 Year 3 Years 5 Years 5 Years Total
------ ------------ ------------- ------- -----
Lease Obligations
Operating lease obligations $ 181 $182 $96 $ - $ 459
======= ==== === ======= =======
Credit Commitments
Available lines of credit $46,260 $ - $ - $16,177 $62,437
Other loan commitments 992 - - 687 1,679
Letters of Credits 607 - - 693 1,300
------- ---- --- ------- -------
Total $47,859 $ - $ - $17,557 $65,416
======= ==== === ======= =======
Maturing investment securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments of loans
and mortgage-backed securities are strongly influenced by interest rates,
general and local economic conditions and competition in the marketplace.
These factors reduce the predictability of the timing of these sources of
funds.
Our primary investing activities are the origination of commercial
real estate, commercial and industrial and consumer loans, and the purchase
of mortgage-backed and other investment securities. During the year ended
December 31, 2002, Westfield Bank originated loans of approximately $99.6
million, and during the comparable period of 2001, Westfield Bank
originated loans of approximately $156.4 million. Under the Bank's
residential loan referral program which commenced on September 1, 2001,
Westfield Bank refers its residential real estate borrowers to a third
party mortgage company and substantially all of the Bank's residential real
estate loans are underwritten, originated and serviced by a third party
mortgage company. Purchases of securities totaled $270.0 million for the
year ended December 31, 2002 and $198.0 million for the year ended December
31, 2001. At December 31, 2002, Westfield Bank had loan commitments to
borrowers of approximately $3.0 million, and available home equity and
unadvanced lines of credit of approximately $62.4 million.
Deposit flows are affected by the level of interest rates, by the
interest rates and products offered by competitors and by other factors.
Total deposits increased $18.9 million and $35.2 million during the year
ended December 31, of 2002 and 2001, respectively. Time deposit accounts
scheduled to mature within one year were $265.8 million at December 31,
2002. Based on Westfield Bank's deposit retention experience and current
pricing strategy, it anticipates that a significant portion of these
certificates of deposit will remain on deposit. We monitor our liquidity
position frequently and anticipate that we will have sufficient funds to
meet our current funding commitments.
At December 31, 2002, we exceeded each of the applicable regulatory
capital requirements. Our tier 1 leverage capital was $125.0 million, or
15.65% to average assets. Our tier 1 capital to risk weighted assets was
$125.0 million or 28.77%. We had total capital to risk weighted assets of
$129.4 or 29.78%.
56
We do not anticipate any other material capital expenditures during
calendar year 2002, nor do we have any balloon or other payments due on any
long-term obligations or any off-balance sheet items other than the
commitments and unused lines of credit noted above.
Management of Market Risk
As a financial institution, our primary market risk is interest rate
risk since substantially all transactions are denominated in U.S. dollars
with no direct foreign exchange or changes in commodity price exposure.
Fluctuations in interest rates will affect both our level of income and
expense on a large portion of our assets and liabilities. Fluctuations in
interest rates will also affect the market value of all interest earning
assets.
The primary goal of our interest rate management strategy is to limit
fluctuations in net interest income as interest rates vary up or down and
control variations in the market value of assets, liabilities and net worth
as interest rates vary. We seek to coordinate asset and liability decisions
so that, under changing interest rate scenarios, net interest income will
remain within an acceptable range.
To achieve the objectives of managing interest rate risk, Westfield
Bank's Asset and Liability Management Committee meets monthly to discuss
and monitor the market interest rate environment relative to interest rates
that are offered on its products. The Asset and Liability Management
Committee presents periodic reports to the Board of Directors of Westfield
Bank and the Board of Trustees of Westfield Mutual Holding Company at their
regular meetings.
Historically, Westfield Bank's lending activities have emphasized
residential real estate and commercial real estate loans. However, since
1996, Westfield Bank has increased its emphasis on commercial and consumer
lending and deposit relationships. Commercial and industrial loans and
consumer loans have grown 237.0% and 25.6%, respectively, since December
31, 1996. Commercial and industrial loans have also grown 63.9% since
December 31, 2000. The indirect automobile loan portfolio grew
substantially in 1999 as a result of aggressive pricing and the addition of
several new automobile dealers. Management determined to temporarily
curtail its indirect lending in fiscal year 2000 and 2001 to allow the
portfolio to become more seasoned, but may decide to grow the indirect
automobile loan portfolio in the future. We believe that Westfield Bank's
increased emphasis on commercial and consumer lending will allow it to
diversify its loan portfolio while continuing to meet the needs of the
businesses and individuals that it serves.
Westfield Bank's primary source of funds has been deposits,
consisting primarily of time deposits, money market accounts, savings
accounts, demand accounts and NOW accounts, which have shorter terms to
maturity than the loan portfolio. Several strategies have been employed to
manage the interest rate risk inherent in the asset/liability mix,
including but not limited to:
* maintaining the diversity of our existing loan portfolio through
the origination of commercial loans, commercial real estate
loans and consumer loans which typically have variable rates and
shorter terms than residential mortgages; and
* emphasizing investments with expected short-term maturities of
five years or less.
57
In addition, emphasis on commercial and consumer loans has reduced
the average maturity of Westfield Bank's loan portfolio. Moreover, the
actual amount of time before loans are repaid can be significantly affected
by changes in market interest rates. Prepayment rates will also vary due to
a number of other factors, including the regional economy in the area where
the loans were originated, seasonal factors, demographic variables and the
assumability of the loans. However, the major factors affecting prepayment
rates are prevailing interest rates, related financing opportunities and
competition. We monitor interest rate sensitivity so that we can adjust our
asset and liability mix in a timely manner and minimize the negative
effects of changing rates.
Each of the Westfield Bank's sources of liquidity is vulnerable to
various uncertainties beyond the control of the Westfield Bank. Scheduled
loan and security payments are a relatively stable source of funds, while
loan and security prepayments and calls, and deposit flows vary widely in
reaction to market conditions, primarily prevailing interest rates. Asset
sales are influenced by pledging activities, general market interest rates
and unforeseen market conditions. The Westfield Banks's financial condition
is affected by its ability to borrow at attractive rates, retain deposits
at market rates and other market conditions. Management considers the
Westfield Banks's sources of liquidity to be adequate to meet expected
funding needs and also to be responsive to changing interest rate markets.
Net Interest and Dividend Income Simulation. We use a simulation model
to monitor interest rate risk. This model reports the net interest income at
risk primarily under six different interest rate change environments.
Specifically, an analysis is performed of changes in net interest income
assuming changes in interest rates, both up and down 100, 200 and 300 basis
points from current rates over the one year time period following the
current consolidated financial statement.
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 mortgage will
increase depending on its repricing characteristics while the interest
income from a fixed rate loan would not increase until it was repaid and
loaned out at a higher interest rate.
58
The tables below set forth as of December 31, 2002 the estimated
changes in net interest and dividend income that would result from
incremental changes in interest rates over the applicable twelve-month
period.
For the Twelve Months Ending December 31, 2002
(Dollars in thousands)
----------------------------------------------
Changes in Net Interest
Interest Rates and Dividend
(Basis Points) Income % Change
-------------- ------------ --------
300 26,952 4.8%
200 26,571 3.3
100 26,165 1.7
0 25,721 N/A
-100 25,442 -1.2
-200 25,123 -2.3
-300 24,925 -3.1
Market rates were assumed to increase and decrease 100 basis points,
200 basis points, and 300 basis points in even increments over the twelve
month period. The repricing and/or new rates of assets and liabilities
moved in tandem with market rates. However, in certain deposit products,
the use of data from a historical analysis indicated that the rates on
these products would move only a fraction of the rate change amount.
Westfield Bank developed consolidated balance sheet growth
projections for the twelve month period. The same product mix and growth
strategy was used for all rate change scenarios. Income from tax exempt
assets is calculated on a fully taxable equivalent basis.
Pertinent data from each loan account, deposit account and investment
security was used to calculate future cash flows. The data included such
items as maturity date, payment amount, next repricing date, repricing
frequency, repricing index and spread. Prepayment speed assumptions were
based upon the difference between the account rate and the current market
rate.
Another circumstance that affects the results is that market rates
are relatively low. In the three declining rate scenarios, Westfield Bank
forecasted that its rates on some deposit products would not fall as
sharply as market rates. For example, because the rate on regular savings
accounts is 1.05%, it is not possible for the rate to decrease by 200 basis
points or 300 basis points.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No.
145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt" and an amendment of that statement, SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements". SFAS No. 145 also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". SFAS No.
145 amends SFAS No. 13, "Accounting for Leases", to eliminate an
inconsistency between the
59
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions relating to the extinquishment of debt
become effective for financial statements issued for fiscal years beginning
after May 15, 2002. The provisions of this statement relating to lease
modifications are effective for transactions occurring after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". ("SFAS No. 146"). The
statement specifies the accounting for certain employee termination
benefits, contract termination costs and costs to consolidate facilities or
relocate employees and is effective for exit and disposal activities
initiated after December 31, 2002.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions" which became effective October 1, 2002.
SFAS No. 147 removes acquisitions of financial institutions from the scope
of SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" and FASB Interpretation No. 9, "Applying APB Opinions No. 16
and 17. When a Savings and Loan Association or Similar Association is
Acquired in a Business Combination Accounted for by the Purchase Method"
and requires that those transactions be accounted for in accordance with
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". In addition, SFAS No. 147 amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", to
include in its scope long-term customer relationship intangible assets of
financial institutions.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure and amendment to FASB
No. 123", which provides three optional transition methods for entities
that decide to voluntarily adopt the fair value recognition principles of
SFAS No. 123, "Accounting for Stock Issued to Employees", and modifies the
disclosure requirements of that Statement. The Company has not adopted the
fair value recognition principles of SFAS No. 123. The Company has included
the annual disclosures in the consolidated financial statements required by
SFAS No. 148 in this filing and will include the quarterly disclosure
requirements in future quarterly filings.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). The Interpretation
requires certain guarantees to be recorded at fair value and also requires
a guarantor to make new disclosures, even when the likelihood of making
payments under the guarantee is remote. In general, the Interpretation
applies to contracts or indemnification agreements that contingently
require the guarantor to make payments to the guaranteed party based on
changes in an underlying contract that is related to an asset, liability,
or an equity security of the guaranteed party. The recognition provisions
of FIN 45 are effective on a prospective basis for guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim and annual periods ending after
December 15, 2002.
60
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities", which requires an enterprise
to assess if consolidation is appropriate based upon its variable economic
interests in variable interest entities ("VIE's"). The initial
determination of whether an entity is a VIE shall be made on the date at
which an enterprise becomes involved with the entity. An entity is
considered to be an VIE if lacks a sufficient amount of voting equity
interests (e.g. 10% of total assets) that are subject to the risk of loss
or residual return of the entity. An enterprise shall consolidate a VIE if
it has a variable interest that will absorb a majority of the VIE's
expected losses if they occur, receive a majority of the entity's expected
residual returns if they occur or both. A direct or indirect ability to
make decisions that significantly affect the results of the activities of a
VIE is a strong indication that an enterprise has one or both of the
characteristics that would require consolidation of the VIE. Interpretation
46 is effective for new VIE's established subsequent to February 1, 2003
and must be adopted for existing VIE's by July 1, 2003. The Company does
not invest in investment structures that require analysis under this
Interpretation.
The adoption of the effective provisions of these standards did not
have a material effect on the Company's consolidated financial statements.
The adoption of the remaining provisions of these standards is not expected
to have a material effect on its statements.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and accompanying Notes of
Westfield Financial have been prepared in accordance with Accounting
Principles Generally Accepted in the United States of America ("GAAP").
GAAP generally requires the measurement of financial position and operating
results in terms of historical dollars without consideration for changes in
the relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily
monetary in nature. As a result, changes in market interest rates have a
greater impact on performance than do the effects of inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, page 57 - 59, for a discussion of Quantitative and
Qualitative Disclosures About Market Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are incorporated by reference to
the indicated pages of the 2002 Annual Report to Stockholders.
Independent Auditor's Report F-1
Consolidated Balance Sheets as of December 31, 2002 F-2
and 2001.
61
Consolidated Statements of Income for the Years F-3
Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' F-4
Equity for the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years F-5
Ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements F-6 - F-29
All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information included in the Company's Proxy Statement
for the 2003 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference: "Election of Directors," Nominees for
Election as Director," "Continuing Directors", "Executive Officers," and
"Section 16(a) Beneficial Ownership Reporting Compliance.
ITEM 11. EXECUTIVE COMPENSATION
The following information included in the Proxy Statement is
incorporated herein by reference: "Management Salary Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation," "Performance Graph," "Directors' Compensation,"
"Executive Compensation," "Employment Agreements," and "Benefits."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included in the Proxy Statement is
incorporated herein by reference: "Security Ownership of Certain Beneficial
Owners and Management-Principal Shareholders of the Company," and "Security
Ownership of Management."
The following table sets forth the aggregate information of our
equity compensation plans in effect as December 31, 2002.
62
Number of securities
Number of securities remaining available for
To be issued Weighted-average future issuance under
Upon exercise of exercise price of equity compensation plans
Outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
- ------------- -------------------- -------------------- -------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 448,000 $14.39 248,164
Equity compensation
plans not approved by
security holders - - -
------- ------ -------
Total 448,000 $14.39 248,164(1)
======= ====== =======
Reflects 49,260 shares reserved for future grant under the Westfield
Financial, Inc. 2002 Stock Option Plan, 189,800 shares subject to
current restricted stock awards under the Westfield Financial, Inc.
2002 Recognition and Retention Plan ("RRP") and 9,104 shares reserved
for future awards under the RRP.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information included in the Proxy Statement is
incorporated herein by reference: "Compensation of Directors and Executive
Officers - Transactions with Certain Related Persons."
ITEM 14. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report,
management, including the Company's President and Chief Executive Officer
and Senior Vice President and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon, and as of the date of that evaluation,
the President and Chief Executive Officer and Senior Vice President and
Chief Financial Officer concluded that the disclosure controls and
procedures were effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
There were no significant deficiencies or material weaknesses identified in
the evaluation and therefore, no corrective actions were taken.
63
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Listed below are all financial statements and exhibits filed as part
of this report:
a. Financial Statements, Schedules, and Exhibits
(1) The consolidated balance sheets of Westfield Financial, Inc.
and subsidiaries as of December 31, 2002 and 2001 and the
related consolidated statements of income changes in
stockholders equity and cash flows for each of the years in the
three-year period ended December 31, 2002, together with the
related notes and independent auditors' report of Deloitte &
Touche LLP, independent certified public accountants.
(2) Schedules omitted as they are not applicable.
(3) See Exhibit Index.
b. Reports on Form 8-K - none.
Exhibit Description
2.1 Plan of Reorganization and Minority Stock Issuance of
Westfield Mutual Holding Company, as amended. *
3.1 Articles of Organization of Westfield Financial, Inc.*
3.2 Bylaws of Westfield Financial, Inc. *
3.3 Amended and Restated Charter of Westfield Mutual Holding
Company*
3.4 Amended and Restated Bylaws of Westfield Mutual Holding
Company*
4.1 Articles of Organization of Westfield Financial, Inc. (See
Exhibit 3.1)*
4.2 Bylaws of Westfield Financial, Inc. (See Exhibit 3.2)*
4.3 Form of Stock Certificate of Westfield Financial, Inc.*
10.1 Form of Employee Stock Ownership Plan of Westfield
Financial, Inc.*
10.2 Form of the Benefit Restoration Plan of Westfield
Financial, Inc.*
10.3 Form of Employment Agreement between Donald A. Williams
and Westfield Financial, Inc.*
10.4 Form of Employment Agreement between Victor J. Carra and
Westfield Financial, Inc.*
10.5 Form of Employment Agreement between Michael J. Janosco,
Jr. and Westfield Financial, Inc.*
10.6 Form of One Year Change in Control Agreement by and among
certain officers and Westfield Financial, Inc. and
Westfield Bank*
10.7 Form of Directors' Deferred Compensation Plan*
10.8 The SBERA 401(k) Plan adopted by Westfield Bank**
10.9 Amendments to the Employee Stock Ownership Plan of
Westfield Financial, Inc.
21.1 Subsidiaries of the Registrant*
23.1 Consent of Deloitte & Touche LLP
99.1 Certifications pursuant to 18 U.S.C. Section 1350
64
* Incorporated herein by reference to the Registration Statement No.
333-68550, on Form S-1 of Westfield Financial filed with the SEC on
August 28, 2001, as amended.
** Incorporated herein by reference to the Registration Statement No.
333-73132, on Form S-8, filed with the SEC on November 9, 2001, as
amended.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 26, 2002.
WESTFIELD FINANCIAL, INC.
By: /s/ Donald A. Williams
-------------------------------
Donald A. Williams
President and Chief Executive
Officer
65
Pursuant to the requirements of the Securities Act of 1933, as
amended, and any rules and regulations promulgated thereunder, this Annual
Report on Form 10-K, has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Donald A. Williams President, Chief Executive
- ----------------------------- Officer and Director
Donald A. Williams (Principal Executive Officer) March 26, 2002
/s/ Victor J. Carra Executive Vice President and
- ----------------------------- Director March 26, 2002
Victor J. Carra
/s/ Michael J. Janosco, Jr. Chief Financial Officer and
- ----------------------------- Treasurer (Principal
Michael J. Janosco, Jr. Accounting Officer) March 26, 2002
/s/ David C. Colton, Jr. Director March 26, 2002
- -----------------------------
David C. Colton, Jr.
/s/ Robert T. Crowley, Jr. Director March 26, 2002
- -----------------------------
Robert T. Crowley, Jr.
/s/ Thomas J. Howard Director March 26, 2002
- -----------------------------
Thomas J. Howard
/s/ Harry C. Lane Director March 26, 2002
- -----------------------------
Harry C. Lane
/s/ William H. McClure Director March 26, 2002
- -----------------------------
William H. McClure
/s/ Mary C. O'Neil Director March 26, 2002
- -----------------------------
Mary C. O'Neil
/s/ Richard C. Placek Director March 26, 2002
- -----------------------------
Richard C. Placek
66
/s/ Paul R. Pohl Director March 26, 2002
- -----------------------------
Paul R. Pohl
/s/ Charles E. Sullivan Director March 26, 2002
- -----------------------------
Charles E. Sullivan
/s/ Thomas C. Sullivan Director March 26, 2002
- -----------------------------
Thomas C. Sullivan
67
CERTIFICATIONS
I, Donald A. Williams certify that:
1. I have reviewed this annual report on Form 10-K of Westfield
Financial, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2002 By: /s/ Donald A. Williams
-------------------------------
President and Chief Executive
Officer
68
CERTIFICATIONS
I, Michael J. Janosco, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Westfield
Financial, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2002 By: /s/ Michael J. Janosco, Jr.
-------------------------------
Michael J. Janosco, Jr.
Senior Vice President and Chief
Financial Officer
69
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except per Share Amount)
December 31,
---------------------
2002 2001
---- ----
ASSETS
CASH AND DUE FROM BANKS $ 11,975 $ 14,169
FEDERAL FUNDS SOLD 37,233 34,267
INTEREST-BEARING DEPOSITS 7,367 8,599
---------------------
CASH AND CASH EQUIVALENTS 56,575 57,035
---------------------
SECURITIES:
Available for sale - at estimated fair value 79,842 74,184
Held To Maturity - at amortized cost (estimated
fair value of $46,582 in 2002 and $46,155 in 2001) 45,960 45,614
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 90,468 87,150
Held to Maturity - at amortized cost (estimated
fair value of $161,497 in 2002 and $81,367 in 2001) 159,339 81,007
FEDERAL HOME LOAN BANK
OF BOSTON AND OTHER STOCK 3,933 3,634
LOANS - Net of allowance for loan losses
of $4,325 in 2002, and $3,923 in 2001 357,155 413,546
PREMISES AND EQUIPMENT - Net 12,851 13,581
ACCRUED INTEREST AND DIVIDENDS 3,937 4,201
OTHER ASSETS 2,920 2,780
---------------------
TOTAL ASSETS $812,980 $782,732
=====================
LIABILITIES AND EQUITY
LIABILITIES:
DEPOSITS:
Noninterest-bearing $ 54,736 $ 48,247
Interest-bearing 601,329 588,862
---------------------
Total deposits 656,065 637,109
CUSTOMER REPURCHASE AGREEMENTS 8,724 6,061
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 15,000 -
OTHER LIABILITIES 6,492 8,245
---------------------
TOTAL LIABILITIES $686,281 $651,415
---------------------
EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized
none outstanding at December 31, 2002 and 2001 - -
Common stock - $.01 par value, 10,580,000 shares authorized,
10,154,150 and 10,580,000 issued and outstanding at
December 31, 2002 and 2001, respectively 108 106
Additional paid-in capital 49,461 47,623
Unallocated Common Stock of Employee Stock Ownership Plan (5,621) -
Unearned compensation (2,731) -
Retained Earnings 84,264 81,808
Accumulated and other comprehensive income 1,218 1,780
---------------------
Total equity $126,699 $131,317
---------------------
TOTAL LIABILITIES AND EQUITY $812,980 $782,732
=====================
See notes to consolidated financial statements.
F-2
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
Years Ended
December 31,
-----------------------------
2002 2001 2000
---- ---- ----
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $20,166 $24,737 $26,523
Securities and mortgage backed securities 13,591 12,184 9,216
Consumer loans 4,113 5,577 6,306
Commercial and industrial loans 3,756 3,477 3,255
Federal funds sold 416 562 663
Stocks 603 401 386
Interest-bearing deposits 368 605 369
-----------------------------
Total interest and dividend income 43,013 47,543 46,718
-----------------------------
INTEREST EXPENSE:
Deposits 18,561 24,730 24,087
Customer repurchase agreements 213 246 320
Other borrowings 1 26 128
-----------------------------
Total interest expense 18,775 25,002 24,535
-----------------------------
Net interest and dividend income 24,238 22,541 22,183
PROVISION FOR LOAN LOSSES 934 1,630 1,089
-----------------------------
Net interest and dividend income
after provision for loan losses 23,304 20,911 21,094
-----------------------------
NONINTEREST INCOME:
Service charges and fees 1,388 1,687 1,320
Gain (loss) on sales of securities and writedowns (1,750) 830 1,535
-----------------------------
Total noninterest income (362) 2,517 2,855
-----------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 8,906 8,416 7,871
Occupancy 1,799 1,788 1,422
Computer operations 1,534 1,487 1,185
Stationery, supplies and postage 511 574 502
Other 3,909 3,634 3,704
-----------------------------
Total noninterest expense 16,659 15,899 14,684
-----------------------------
INCOME BEFORE INCOME TAXES 6,283 7,529 9,265
INCOME TAXES 2,239 2,512 3,185
-----------------------------
NET INCOME $ 4,044 $ 5,017 $ 6,080
=============================
EARNINGS PER COMMON SHARE:
Basic $ 0.39 N/A N/A
Diluted $ 0.38 N/A N/A
See notes to consolidated financial statements.
F-3
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Accumulated
Additional Other
Common Paid-In Unallocated Unearned Retained Comprehensive
Stock Capital ESOP Compensation Earnings Income Total
------ ---------- ----------- ------------ -------- ------------- -----
BALANCE, JANUARY 1, 2000 $ - $ - $ - $ - $70,711 $ 534 $ 71,245
Comprehensive income:
Net income - - - - 6,080 - 6,080
Unrealized losses on securities arising
during the year, net of tax benefit
of $681 - - - - - (968) (968)
Reclassification for losses included in
net income, net of tax benefit of $734 - - - - - 1,398 1,398
--------
Comprehensive income - - - - - - 6,510
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 - - - - 76,791 964 77,755
Comprehensive income:
Net income - - - - 5,017 - 5,017
Unrealized gains on securities arising
during the year, net of taxes of $681 - - - - - 1,360 1,360
Reclassification of gains included in
net income, net of taxes of $273 - - - - - (544) (544)
---------
Comprehensive income - - - - - - 5,833
Net proceeds from sale of common stock 106 47,723 - - - - 47,829
Capital Distribution to the Parent
Company - (100) - - - - (100)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 106 47,623 - - 81,808 1,780 131,317
Comprehensive income:
Net income - - - - 4,044 - 4,044
Unrealized gains on securities arising
during the year, net of taxes of $911 - - - - - (1,689) (1,689)
Reclassification of gains included in
net income, net of taxes of $623 - - - - - 1,127 1,127
--------
Comprehensive income - - - - - - 3,482
Activity related to common stock issued
as employee incentives 2 2,050 (5,621) (2,731) - - (6,300)
Costs associated with stock conversion - (212) - - - - (212)
Cash dividends declared - - - - (1,588) - (1,588)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $108 $49,461 $(5,621) $(2,731) $84,264 $1,218 $126,699
======================================================================================
See notes to consolidated financial statements.
F-4
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Years Ended December 31,
-----------------------------------
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 4,044 $ 5,017 $ 6,080
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 934 1,630 1,089
Valuation adjustment of other real estate owned (77) 30 -
Other than temporary write-down of securities 2,105 315 -
Depreciation of premises and equipment 1,052 1,100 731
Net amortization of premiums and discounts on
securities, mortgage backed securities and
mortgage loans 1,601 341 (26)
Amortization of deferred compensation 302 - -
Loss (gain) on sale of other real estate owned (62) (15) 7
Gain on sales of securities- net (355) (1,145) (1,535)
Deferred income tax provision (2,843) 2,857 (61)
Changes in assets and liabilities:
Accrued interest and dividends 264 (29) (565)
Other assets 905 (308) 912
Other liabilities (428) (1,044) (566)
-----------------------------------
Net cash provided by operating activities 7,442 8,749 6,066
-----------------------------------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (42,389) (28,099) (15,288)
Proceeds from maturities and principal collections 42,053 22,043 20,052
Securities, available for sale:
Purchases (37,445) (29,421) (33,737)
Proceeds from sales 4,222 6,478 4,799
Proceeds from calls, maturities and
principal collections 23,598 24,466 7,584
Mortgage backed securities, held to maturity:
Purchases (129,145) (89,761) (4,671)
Principal collections 49,839 15,135 2,384
Mortgage backed securities, available for sale:
Purchases (60,975) (50,736) (40,476)
Proceeds from sales 20,214 52,807 6,668
Principal collections 38,236 24,747 5,828
Purchase of Federal Home Loan Bank of Boston
and other stock (299) (188) (90)
Net increase (decrease) in loans 55,484 (10,366) 1,546
Proceeds from sale of other real estate owned 301 72 173
Net purchases of premise and equipment (322) (2,937) (3,886)
-----------------------------------
Net cash used in investing activities (36,628) (65,760) (49,114)
-----------------------------------
FINANCING ACTIVITIES:
Increase deposits 18,956 35,213 50,872
Increase (decrease) in customer repurchase agreements 2,663 (1,625) 4,412
Purchase of common stock in connection with
employee benefit program (6,301) - -
Federal Home Loan Bank of Boston advances, net 15,000 - (5,000)
Net proceeds received from stock offering - 47,829 -
Capital Distribution to the Parent Company - (100) -
Cash dividends paid (1,588) - -
Stock issuance costs (4) - -
-----------------------------------
Net cash provided by financing activities 28,726 81,317 50,284
-----------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (460) 24,306 7,236
CASH AND CASH EQUIVALENTS:
Beginning of year 57,035 32,729 25,493
-----------------------------------
End of year $ 56,575 $ 57,035 $ 32,729
===================================
See notes to consolidated financial statements.
F-5
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
1. REORGANIZATION AND STOCK OFFERING
On December 27, 2001, the Board of Directors of Westfield Mutual
Holding Company ("Mutual Holding Company") completed a plan of
reorganization (the "Plan") whereby the Mutual Holding Company formed
a mid-tier stock holding company ("Westfield Financial, Inc." or the
"Company") and exchanged 100% of the common stock of Westfield Bank
(the "Bank") for a majority interest in Westfield Financial, Inc.
Pursuant to the Plan, shares of Westfield Financial, Inc. were
offered for subscription by depositors with eligible accounts at the
Bank as of specified dates. The Company issued 10,580,000 shares of
Common Stock (par value $0.01 per share) at a price of $10.00 per
share, of which 47% of these shares, or 4,972,600 shares, were sold
to the public, including depositors of the Bank and 53% of these
shares, or 5,607,400 shares, were issued to the Mutual Holding
Company. Net proceeds from the stock offering totaled $47.7 million.
Costs related to the reorganization were charged against the proceeds
from the shares sold in the reorganization. Reorganization costs of
approximately $2.3 million were incurred.
In connection with the reorganization, a "Liquidation Account" was
established in an amount equal to the net worth of the Mutual Holding
Company set forth in its latest consolidated statement of financial
condition contained in the reorganization prospectus. The function
of the Liquidation Account is to establish a priority on liquidation
to the assets of the Company to Eligible Account Holders (as defined
in the Plan) who continue to maintain deposits in the Bank after the
reorganization. In the unlikely event of a complete liquidation of
the Company, and only in such event, each Eligible Account Holder
would receive from the Liquidation Account a liquidation distribution
based on the their proportionate share of the then remaining
qualifying deposits.
Current regulations allow the Bank to pay dividends on its stock if
its regulatory capital would not thereby be reduced below the amount
then required for the aforementioned Liquidation Account. Also,
capital distribution regulations limit the Bank's ability to make
capital distributions which include dividends, stock redemptions and
repurchases and other transactions charged to the capital accounts
based on their capital level and supervisory condition. Federal
regulations also limit any repurchase of the stock for the Bank or
its holding company for three years after reorganization except for
repurchases pursuant to an open-market stock repurchase program with
certain regulatory criteria and approval of the FDIC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation - Westfield Financial,
Inc. (the "Company") is a Massachusetts security corporation. The
Company has a state chartered stock savings bank subsidiary called
Westfield Bank (the "Bank"). The Bank's deposits are insured to the
limits specified by the Federal Deposit Insurance Corporation
("FDIC") and the Deposit Insurance Fund ("DIF"), a corporation formed
by the Massachusetts' legislature. The Bank operates 10 branches in
Western Massachusetts. The Bank's primary source of revenue is
earned from loans to small and middle-market businesses and to
residential property homeowners.
F-6
The Bank formed Westfield Elm Associates, Inc., ("Westfield Elm"), a
wholly owned subsidiary. In addition, Westfield Elm formed two
subsidiaries, Elm Street Real Estate Investments Inc., (the "REIT")
and Elm Street Business Trust (the "MBT"). The REIT is 99.9% owned
by Westfield Elm with the remaining 0.1% owned by other shareholders.
The MBT was 100% wholly owned by Westfield Elm. During 2000, the
Company eliminated Westfield Elm and the MBT to streamline the
overall bank structure.
Westfield Securities Corp., a Massachusetts chartered security
corporation, was formed in 2001 by the Company for the primary
purpose of holding qualified investment securities.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, the Bank, Westfield Securities
Corp., and the REIT. All material intercompany balances and
transactions have been eliminated in consolidation. Certain amounts
in the prior year financial statements have been reclassified to
conform to the current year presentation.
Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of income and expenses for each. Actual results could differ
from those estimates. Estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the fair value of financial instruments and the allowance for loan
losses.
Cash and Cash Equivalents - The Company defines cash on hand, cash
due from banks, federal funds sold and interest bearing deposits
having an original maturity of 90 days or less as cash and cash
equivalents. Cash and due from banks at December 31, 2002 and 2001
includes partially restricted cash of approximately $220,000, and
$3,352,000 respectively, for Federal Reserve Bank of Boston cash
reserve requirements.
Securities and Mortgage Backed Securities - Securities, including
mortgage backed securities, which management has the positive intent
and ability to hold until maturity are classified as held to maturity
and are carried at amortized cost. Securities, including mortgage
backed securities, which have been identified as assets for which
there is not a positive intent to hold to maturity are classified as
available for sale and are carried at fair value with unrealized
gains and losses, net of income taxes, reported as a separate
component of equity. The Company does not acquire securities and
mortgage backed securities for purposes of engaging in trading
activities.
Realized gains and losses on sales of securities and mortgage backed
securities are computed using the specific identification method and
are included in noninterest income. Securities and mortgage backed
securities which have experienced an other than temporary decline in
value are written down to estimated fair value, establishing a new
cost basis with the amount of the write-down included in noninterest
expense as a realized loss. The amortization of premiums and
accretion of discounts is determined by using the level yield method
to the earlier of the call or maturity date.
Other than Temporary Impairment of Securities - On a quarterly basis,
the Company reviews available for sale investment securities with
unrealized depreciation on a judgmental basis to assess whether the
decline is fair value is temporary or other than temporary. The
Company judges whether the decline in value is from company-specific
events, industry developments, general economic conditions or other
reasons. Once the estimated reasons for the decline are identified,
further judgements are required as to whether those conditions are
likely to reverse and, if so, whether that reversal is likely to
result in a recovery of the fair value of the investment in the near
term. Unrealized losses which are not expected to reverse in the
near term are charged to operations.
F-7
Loans - Loans are recorded at the principal amount outstanding.
Interest on loans is calculated using the effective yield method on
daily balances of the principal amount outstanding and is credited to
income on the accrual basis to the extent it is deemed collectible.
The Company's general policy is to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days
or more, or earlier if the loan is considered impaired. Any unpaid
amounts previously accrued on these loans are reversed from income.
Subsequent cash receipts are applied to the outstanding principal
balance or to interest income if, in the judgment of management,
collection of the principal balance is not in question. Loans are
returned to accrual status when they become current as to both
principal and interest and when subsequent performance reduces the
concern as to the collectibility of principal and interest. Loan
fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized as an adjustment to interest income
over the estimated average lives of the related loans. Compensation
to an auto dealer is normally based upon a spread that a dealer adds
on the loan base rate set by the Company. The compensation is paid
to an automobile dealer shortly after the loan is originated. The
Company records the amount as a deferred cost that is amortized over
the life of the loans in relation to the interest paid by the
customer.
Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged to expense.
Loans are charged off against the allowance when management believes
that the collectibility of the principal is unlikely. Recoveries of
amounts previously charged-off are credited to the allowance.
The Bank maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio based on ongoing quarterly assessments
of the estimated losses. The Bank's methodology for assessing the
appropriateness of the allowance consists of two key components,
which are a specific allowance for identified problem loans and a
formula allowance for the remainder of the portfolio. The specific
allowance incorporates the results of measuring impaired loans as
provided in SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures." These accounting
standards prescribe the measurement methods, income recognition and
disclosures related to impaired loans. The formula allowance is
calculated by applying loss factors to outstanding loans by type,
excluding loans for which a specific allowance has been determined.
In determining the loss factors to apply to each loan category,
Westfield Bank considers historical losses, peer group comparisons,
industry data and loss percentages used by banking regulators for
similarly graded loans. Loss factors may be adjusted for qualitative
factors that, in management's judgment, affect the collectibility of
the portfolio as of the evaluation date.
A loan is recognized as impaired when it is probable that principal
and/or interest are not collectible in accordance with the loan's
contractual terms. A loan is not deemed to be impaired if there is a
short delay in receipt of payment or if, during a longer period of
delay, the Company expects to collect all amounts due including
interest accrued at the contractual rate during the period of delay.
Measurement of impairment can be based on present value of expected
future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. This evaluation is
inherently subjective as it requires material estimates that may be
susceptible to significant change. If the fair value of the impaired
loan is less than the related recorded amount, a specific valuation
allowance is established within the allowance for loan losses or a
writedown is charged against the allowance for loan losses if the
impairment is considered to be permanent. Measurement of impairment
does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment such as the Company's
portfolios of home equity loans, real estate mortgages, installment
and other loans.
F-8
The appropriateness of the allowance is also reviewed by management
based upon its evaluation of then-existing economic and business
conditions affecting the key lending areas of the Company and other
conditions, such as new loan products, credit quality trends
(including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and
concentrations, specific industry conditions within portfolio
segments that existed as of the balance sheet date and the impact
that such conditions were believed to have had on the collectibility
of the loan portfolio. There may be other factors that warrant the
Company's consideration in maintaining the allowance at a level
sufficient to cover probable losses. 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.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the loan and
foreclosed real estate portfolios and the related allowance for loan
losses and valuation allowance for foreclosed real estate. These
agencies, including the FDIC and the Massachusetts Division of Banks,
may require adjustment to the allowance for loan losses based on
their judgments of information available to them at the time of their
examination, thereby adversely affecting results of operations.
Management believes that the allowance for loan losses accurately
reflects estimated credit losses for specifically identified loans,
as well as probable credit losses inherent in the remainder of the
portfolio as of the end of the periods presented.
Transfers and Servicing of Financial Assets - Transfers of financial
assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the
Corporation, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Corporation does not
maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Premises and Equipment - Land is carried at cost. Buildings and
equipment are stated at cost, less accumulated depreciation, computed
on either the straight-line or accelerated methods over the estimated
useful lives of the assets, or lease term, if shorter, as follows:
Years
-----
Buildings 39
Leasehold Improvements 20
Furniture and Equipment 3-7
It is general practice to charge the cost of maintenance and repairs
to expense when incurred; major expenditures for betterments are
capitalized and depreciated.
Other Real Estate Owned - Other real estate owned represents property
acquired through foreclosure or deeded to the Company in lieu of
foreclosure. Other real estate owned is recorded at the lower of the
carrying value of the related loan, or the estimated fair value of
the real estate acquired, net of estimated selling costs. Initial
write-downs are charged to the allowance for loan losses at the time
the loan is transferred to other real estate owned. Subsequent
valuations are periodically performed by management and the carrying
value is adjusted by a charge to expense to reflect any subsequent
declines in the estimated fair value. Operating costs associated
with other real estate owned are expensed as incurred.
F-9
Retirement Plans and Employee Benefits - The Company provides a
defined benefit pension plan for eligible employees through
membership in the Savings Banks Employees Retirement Association
("SBERA"). The Company's policy is to fund pension cost as accrued.
Employees are also eligible to participate in a 401(k) plan through
SBERA. Beginning in 2000, the Company began making matching
contributions to this plan at 50% of up to 6% of the employees'
eligible compensation.
The Company currently offers postretirement life insurance benefits
to retired employees. Such postretirement benefits represent a form
of deferred compensation which requires that the cost and obligations
of such benefits are recognized in the period in which services are
rendered.
Income Taxes - The Company uses the asset and liability method for
income tax accounting, whereby, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings per Common Share - Basic earnings per share represents
income available to common stockholders divided by the weighted-
average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be
issued by the Corporation relate solely to outstanding stock awards,
and are determined using the treasury stock method.
Earnings per common share for the year ended December 31, 2002 have
been computed based on the following:
Net income available to common stockholders $ 4,044
=======
Weighted average number of common shares outstanding 10,336
Effect of dilutive stock awards 261
-------
Adjusted weighted average number of common shares outstanding
used to calculate diluted earnings per common shares 10,597
=======
The Common Stock of the Company commenced trading on December 28,
2001. As such, earnings per share data for the year ended 2001 and
prior is not meaningful.
Stock Options - The Company applies APB Opinion No. 25 and related
Interpretations in accounting for stock options. Accordingly, no
compensation cost has been recognized. Had compensation cost for the
Company's stock options been determined based on the fair value at
the grants dates for awards under the plan consistent with the method
prescribed by SFAS No. 123, the Company's net income (in thousands)
and earnings per share would have been adjusted to the pro forma
amounts indicated below:
2002
Net income as reported $4,044
Less: Compensation expense
determined under fair value
based method for all awards,
net of tax effects (129)
------------------------------------------------
Pro forma $3,915
Net income per share
Basic as reported 0.39
Pro forma 0.38
------------------------------------------------
Diluted as reported 0.38
Pro forma 0.37
F-10
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions:
Year Ended
December 31, 2002
-----------------
Dividend yield 1.25%
Expected life in years 10 years
Expected volatility 18%
Risk-free interest rate 1.17
Derivative Financial Instruments - In 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities- Deferral of Effective Date of FASB Statement
No. 133", which establishes accounting and reporting standards for
derivatives, derivative instruments embedded in other contracts and
for hedging activities. In 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for certain
derivatives, derivative instruments embedded in other contracts and
for certain hedging activities. These statements became effective
for the Company on January 1, 2001. The adoption of these statements
had no effect on the Company's consolidated financial statements
because no derivative financial instruments or embedded derivative
financial instruments requiring application of this statement were
outstanding at January 1, 2001 or at any time during the years ended
December 31, 2002 and 2001.
Comprehensive Income - SFAS No. 130, "Reporting Comprehensive
Income", establishes standards for reporting comprehensive income and
its components (revenues, expenses, gains and losses). Components of
comprehensive income are net earnings and all other non-owner changes
in equity. SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other
comprehensive income (loss) separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. The Company's accumulated other comprehensive
income (loss) included in stockholders' equity is comprised
exclusively of net unrealized gains (losses) on securities available
for sale, net of related tax effects.
New Accounting Standards - In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" and an amendment of
that statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". SFAS No. 145 also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers". SFAS No. 145
amends SFAS No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-
leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions relating to the extinquishment of debt
become effective for financial statements issued for fiscal years
beginning after May 15, 2002. The provisions of this statement
relating to lease modifications are effective for transactions
occurring after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". ("SFAS No. 146"). The
statement specifies the accounting for certain employee termination
benefits, contract termination costs and costs to consolidate
facilities or relocate employees and is effective for exit and
disposal activities initiated after December 31, 2002.
F-11
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions" which became effective October 1,
2002. SFAS No. 147 removes acquisitions of financial institutions
from the scope of SFAS No. 72, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions" and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17. When a Savings and Loan
Association or Similar Association is Acquired in a Business
Combination Accounted for by the Purchase Method" and requires that
those transactions be accounted for in accordance with SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". In addition, SFAS No. 147 amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", to
include in its scope long-term customer relationship intangible
assets of financial institutions.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure and amendment to
FASB No. 123", which provides three optional transition methods for
entities that decide to voluntarily adopt the fair value recognition
principles of SFAS No. 123, "Accounting for Stock Issued to
Employees", and modifies the disclosure requirements of that
Statement. The Company has not adopted the fair value recognition
principles of SFAS No. 123. The Company has included the annual
disclosures in the consolidated financial statements required by SFAS
No. 148 in this filing and will include the quarterly disclosure
requirements in future quarterly filings.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The
Interpretation requires certain guarantees to be recorded at fair
value and also requires a guarantor to make new disclosures, even
when the likelihood of making payments under the guarantee is remote.
In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to
make payments to the guaranteed party based on changes in an
underlying contract that is related to an asset, liability, or an
equity security of the guaranteed party. The recognition provisions
of FIN 45 are effective on a prospective basis for guarantees issued
or modified after December 31, 2002. The disclosure requirements are
effective for financial statements of interim and annual periods
ending after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities", which requires an
enterprise to assess if consolidation is appropriate based upon its
variable economic interests in variable interest entities ("VIE's").
The initial determination of whether an entity is a VIE shall be made
on the date at which an enterprise becomes involved with the entity.
An entity is considered to be an VIE if lacks a sufficient amount of
voting equity interests (e.g. 10% of total assets) that are subject
to the risk of loss or residual return of the entity. An enterprise
shall consolidate a VIE if it has a variable interest that will
absorb a majority of the VIE's expected losses if they occur, receive
a majority of the entity's expected residual returns if they occur or
both. A direct or indirect ability to make decisions that
significantly affect the results of the activities of a VIE is a
strong indication that an enterprise has one or both of the
characteristics that would require consolidation of the VIE.
Interpretation 46 is effective for new VIE's established subsequent
to February 1, 2003 and must be adopted for existing VIE's by July 1,
2003. The Company does not invest in investment structures that
require analysis under this Interpretation.
F-12
The adoption of the effective provisions of these standards did not
have a material effect on the Company's consolidated financial
statements. The adoption of the remaining provisions of these
standards is not expected to have a material effect on its
statements.
Reclassifications - Certain reclassifications have been made to prior
year accounts to conform to the current year's presentation.
3. SECURITIES
Securities at December 31, 2002 are summarized as follows:
December 31, 2002
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
(In Thousands)
Held to maturity:
Federal agency obligations $ 38,391 $ 389 $ - $ 38,780
Corporate debt securities 7,569 234 1 7,802
-------------------------------------------------
Total held to maturity 45,960 623 1 46,582
-------------------------------------------------
Available for sale:
Corporate debt securities 19,195 317 - 19,512
Equity securities 28,432 176 874 27,734
Federal agency obligations 32,134 466 4 32,596
-------------------------------------------------
Total available for sale 79,761 959 878 79,842
-------------------------------------------------
Total Securities $125,721 $1,582 $879 $126,424
=================================================
F-13
Securities at December 31, 2001 are summarized as follows:
December 31, 2001
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
(In Thousands)
Held to maturity:
Federal agency obligations $ 30,002 $ 167 $ 26 $ 30,143
Corporate debt securities 15,612 400 - 16,012
-------------------------------------------------
Total held to maturity 45,614 567 26 46,155
-------------------------------------------------
Available for sale:
Corporate debt securities 31,475 797 - 32,272
Equity securities 14,320 1,228 873 14,675
Federal agency obligations 26,893 366 22 27,237
-------------------------------------------------
Total available for sale 72,688 2,391 895 74,184
-------------------------------------------------
Total Securities $118,302 $2,958 $921 $120,339
=================================================
The amortized cost and fair value of debt securities at December 31,
2002, by maturity, are shown below. Actual maturities may differ
from contractual maturities because certain issues have the right to
call or repay obligations.
December 31, 2002
-----------------------
Amortized Estimated
Cost Fair Value
-----------------------
(In Thousands)
Held to maturity:
Due in one year or less $ 3,492 $ 3,568
Due after one year through five years 42,388 42,935
Due after five years through ten years 80 79
Due after ten years - -
---------------------
Total held to maturity $45,960 $46,582
=====================
Available for sale:
Due in one year or less $16,497 $16,768
Due after one year through five years 28,278 28,701
Due after five years through ten years - -
Due after ten years 6,554 6,639
---------------------
Total available for sale $51,329 $52,108
=====================
Gross gains of $422,991, $952,674, and $1,878,716 and gross losses
$897,337, $477,334, and $328,395 were recorded on securities during
the years ended December 31, 2002, 2001, and 2000, respectively.
During 2002 and 2001, the Company realized losses of $2,105,000 and
$315,000, respectively, for other than temporary impairments in
value.
F-14
Securities with a par value of $15,000,000 and $12,000,000 were
pledged as collateral to the Federal Reserve Bank of Boston at
December 31, 2002 and 2001, respectively.
Unrealized gains (losses) on securities available for sale, net of
tax was $51,000 and $973,000 at December 31, 2002 and 2001,
respectively.
4. MORTGAGE BACKED SECURITIES
Mortgage backed securities at December 31, 2002 are summarized as
follows:
December 31, 2002
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
(In Thousands)
Held to Maturity:
Fannie Mae $ 77,049 $1,038 $ 22 $ 78,065
Freddie Mac 58,988 860 27 59,821
Ginnie Mae 13,920 226 23 14,123
Collaterized Mortgage Obligations 9,382 110 4 9,488
-------------------------------------------------
Total held to maturity 159,339 2,234 76 161,497
-------------------------------------------------
Available for sale:
Fannie Mae 22,182 697 - 22,879
Freddie Mac 29,930 551 - 30,481
Ginnie Mae 25,762 438 - 26,200
Collaterized Mortgage Obligations 10,771 142 5 10,908
-------------------------------------------------
Total available for sale 88,645 1,828 5 90,468
-------------------------------------------------
Total Mortgage Backed Securities $247,984 $4,062 $ 81 $251,965
================================================
Mortgage backed securities at December 31, 2001 are summarized as
follows:
December 31, 2001
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
(In Thousands)
Held to Maturity:
Fannie Mae $ 23,927 $ 165 $ 89 $ 24,003
Freddie Mac 31,470 399 126 31,743
Ginnie Mae 7,215 58 49 7,224
Collaterized Mortgage Obligations 18,395 103 101 18,397
-------------------------------------------------
Total held to maturity 81,007 725 365 81,367
-------------------------------------------------
Available for sale:
Fannie Mae 35,822 1,029 29 36,822
Freddie Mac 18,490 117 54 18,553
Ginnie Mae 22,018 113 78 22,053
Collaterized Mortgage Obligations 9,578 155 11 9,722
-------------------------------------------------
Total available for sale 85,908 1,414 172 87,150
-------------------------------------------------
Total Mortgage Backed Securities $166,915 $2,139 $537 $168,517
================================================
F-15
Collateralized Mortgage Obligations ("CMO's") - CMOs include traunches
of AAA investment grade and consist of high quality mortgage
obligations.
Gross gains of $849,703, $833,147 and $15,781 and gross losses of
$20,544, $162,697 and $31,365 were recorded on mortgage backed
securities during the years ended December 31, 2002, 2001 and 2000
respectively.
Unrealized gains (losses) on securities available for sale, net of
tax was $1,167,000 and $807,000 at December 31, 2002 and 2001,
respectively.
5. LOANS
Loans consisted of the following amounts as of:
December 31,
---------------------
2002 2001
------ --------------
(In Thousands)
Residential real estate $157,896 $212,751
Commercial and industrial 61,494 47,012
Commercial real estate 100,903 99,425
Consumer 41,064 58,084
---------------------
Total Loans 361,357 417,272
Unearned premiums and deferred
loan fees and costs, net 123 197
Allowance for loan losses (4,325) (3,923)
---------------------
$357,155 $413,546
=====================
The following table summarizes information regarding impaired loans:
Years Ended
December 31,
----------------------
2002 2001
----------------------
(Dollars in Thousands)
Recorded investment in impaired loans, period end $1,974 $1,944
Allowance for impaired loans 70 85
Years Ended
December 31,
--------------------------
2002 2001 2000
--------------------------
(Dollars in Thousands)
Average recorded investment in impaired loans $2,008 $1,612 $1,394
Income recorded during the period for impaired loans 130 163 97
Income recorded on cash basis during the period for impaired loans 143 155 92
There were no restructured loans at December 31, 2002, 2001 and 2000.
Nonaccrual loans at December 31, 2002, December 31, 2001 and 2000 and
related interest income are summarized as follows:
F-16
Years Ended
December 31,
--------------------------
2002 2001 2000
--------------------------
(Dollars in Thousands)
Amount $2,383 $2,684 $2,308
Interest income that would have been
recorded under the original contract terms 324 263 191
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid balances of
these loans totaled $70,284,971 and $97,616,627 at December 31, 2002
and 2001, respectively. Service fee income of $75,972, $119,605, and
$119,927 was recorded for the years ended December 31, 2002, 2001,
and 2000, respectively.
Loan Securitization - On June 1, 2001, the Company securitized
residential real estate mortgages with a recorded value of
approximately $60 million. The Company retained servicing
responsibilities and all beneficial interests in the resulting
mortgage backed securities. The Company has not committed to sell any
of the retained mortgage backed securities before or during the
securitization process. The resulting mortgage backed securities in
the amount of $19.7 and $1.5 million are included in the balance
sheet caption Mortgage Backed Securities - Available for Sale as of
December 31, 2001 and 2002, respectively. No securitizations were
done in 2002.
The Company's servicing assets are recorded at fair value at the time
the asset is acquired. The fair value is based upon the net present
value of future cash flows of the net servicing revenue. Assumptions
used in determining fair value include service fee revenue, float
revenue, escrow revenue, servicing expense, and estimated life of the
underlying loans. The fair value of the asset is recalculated
quarterly to determine possible impairment. In 2002 the Company
recorded an impairment writedown of $253,000, to reduce the carrying
value of the servicing assets as of December 31, 2002 to $212,000.
The servicing asset is amortized in proportion to the estimated net
servicing revenue of the loans.
6. ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses is as
follows:
Years Ended
December 31,
----------------------------
2002 2001 2000
--------------------------
(Dollars in Thousands)