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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission file number 001-16767
Westfield Financial, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 73-1627673
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
141 Elm Street, Westfield, Massachusetts 01086
(Address of principal executive offices)
(Zip Code)
(413) 568-1911
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No[ ].
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No[X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Outstanding at
Class May 9, 2003
----- --------------
Common 10,213,110
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - March 31, 2003 and
December 31, 2002
Consolidated Statements of Operations (Unaudited) - Three months
ended March 31, 2003 and 2002.
Consolidated Statements of Changes in Equity (Unaudited) -Three
Months ended March 31, 2003
Consolidated Statements of Cash Flows (Unaudited) - Three Months
ended March 31, 2003 and 2002
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
Exhibits
1
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in Thousands Except Share Data)
March 31 December 31
2003 2002
-------- -----------
ASSETS
Cash and due from Banks $ 16,261 $ 11,975
Federal funds sold 20,940 37,233
Interest-bearing deposits 19,707 7,367
-------- --------
CASH AND CASH EQUIVALENTS 56,908 56,575
-------- --------
SECURITIES:
Available for sale-at estimated fair value 52,329 79,842
Held to maturity-at amortized cost (estimated fair value
of $56,996 in 2003, and $46,582 in 2002) 56,453 45,960
MORTGAGE BACKED SECURITIES:
Available for sale-at estimated fair value 84,684 90,468
Held to maturity-at amortized cost (estimated fair value
of $174,914 in 2003, and $161,497 in 2002) 173,237 159,339
FEDERAL HOME LOAN BANK OF
BOSTON AND OTHER STOCK 4,237 3,933
LOANS - Net of allowance for loan losses of $4,238 in 2003
and $4,325 in 2002 346,713 357,155
PREMISES AND EQUIPMENT, NET 12,696 12,851
ACCRUED INTEREST AND DIVIDENDS 4,354 3,937
CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE 15,701 -
OTHER ASSETS 7,662 2,920
-------- --------
TOTAL ASSETS $814,974 $812,980
======== ========
LIABILITIES AND EQUITY
LIABILITIES
DEPOSITS:
Noninterest bearing $ 54,508 $ 54,736
Interest bearing 604,177 601,329
-------- --------
Total deposits 658,685 656,065
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 11,066 8,724
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 15,000 15,000
OTHER LIABILITIES 7,959 6,492
-------- --------
TOTAL LIABILITIES 692,710 686,281
-------- --------
EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding - -
Common stock - $.01 par value, 10,580,000 shares authorized
10,213,110 and 10,199,850 shares issued
at March 31, 2003 and December 31, 2002, respectively 106 108
Additional paid-in capital 50,153 50,140
Unallocated Common Stock of Employee Stock Ownership Plan (5,427) (5,621)
Unearned Compensation (2,489) (2,731)
Retained Earnings 82,130 84,264
Restricted shares reserved for benefit
plans - 174,400 shares at March 31, 2003
and 45,700 shares at December 31, 2002 (2,681) (679)
Accumulated other comprehensive income, net 472 1,218
-------- --------
Total Equity 122,264 126,699
-------- --------
TOTAL LIABILITIES AND EQUITY $814,974 $812,980
======== ========
See accompanying notes to unaudited consolidated financial statements
2
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Operations - Unaudited
(Dollars in Thousands Except Share Data)
Three Months
Ended March 31
2003 2002
---- ----
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $ 4,257 $ 5,306
Securities and mortgage backed securities 3,551 3,494
Consumer loans 777 1,143
Commercial and industrial loans 888 851
Federal funds sold 56 101
Stocks 95 117
Interest bearing deposits 49 95
------- -------
Total interest and dividend income 9,673 11,107
------- -------
INTEREST EXPENSE:
Deposits 3,791 4,969
Customer repurchase agreements 55 43
Other borrowings 111 -
------- -------
Total interest expense 3,957 5,012
Net interest and dividend income 5,716 6,095
PROVISION FOR LOAN LOSSES 200 300
------- -------
Net interest and dividend income after
provision for loan losses 5,516 5,795
------- -------
NONINTEREST INCOME:
Bank owned life insurance 164 -
Service charges and fees 460 379
Securities gains (losses), net 60 (248)
------- -------
Total noninterest income 684 131
------- -------
NONINTEREST EXPENSE:
Salaries and employees benefits 2,406 2,346
Occupancy 439 421
Computer operations 400 363
Stationery, supplies, and postage 151 114
Other 1,233 1,032
------- -------
Total noninterest expense 4,629 4,276
------- -------
INCOME BEFORE INCOME TAXES 1,571 1,650
INCOME TAXES 3,177 563
------- -------
NET (LOSS) INCOME $(1,606) $ 1,087
======= =======
Basic and diluted (loss) earnings per share $ (0.16) $ 0.10
Average shares outstanding 10,104,737 10,494,900
See accompanying notes to unaudited consolidated financial statements
3
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - UNAUDITED
(Dollars in Thousands)
Restricted Accumulated
Additional Shares Other
Common Paid-In Unallocated Unearned Retained Reserved For Comprehensive
Stock Capital ESOP Compensation Earnings Benefit Plans Income Total
------ ---------- ----------- ------------ -------- ------------- ------------- -----
Balance at January 1, 2003 $108 $50,140 $(5,621) $(2,731) $ 84,264 $ (679) $1,218 $126,699
Comprehensive loss:
Net loss - - - - (1,606) - - (1,606)
Unrealized losses on
securities arising
during the period,
net of tax benefit
of $391 - - - - - - (707) (707)
Reclassification for
gains included in
net income net of
taxes $(21) - - - - - - (39) (39)
--------
Comprehensive loss (2,352)
Activity related to common
stock issued as employee
incentives (2) 13 194 242 - (2,002) - (1,555)
Cash dividends declared - - - - (528) - - (528)
---- ------- ------- ------- -------- ------- ------ --------
Balance at March 31, 2003 $106 $50,153 $(5,427) $(2,489) $(82,130) $(2,681) $ 472 $122,264
==== ======= ======= ======= ======== ======= ====== ========
See accompanying notes to unaudited financial statements
4
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in Thousands)
Three Months
Ended March 31,
2003 2002
---- ----
OPERATING ACTIVITIES
Net (loss) income $ (1,606) $ 1,087
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Provision for loan losses 200 300
Valuation adjustment of other real estate owned - (77)
Depreciation of premises and equipment 270 263
Net amortization of premiums and discounts on securities,
mortgage backed securities and mortgage loans 544 89
Loss on sale of securities-net 60 248
Deferred income tax provision (1,065) (3,677)
Changes in assets and liabilities:
Accrued interest and dividends (417) (26)
Bank owned life insurance (15,701) -
Other assets (3,353) 203
Other liabilities 1,560 2,521
-------- --------
Net cash (used in) provided by operating activities (19,508) 930
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (14,496) (4,996)
Proceeds from calls, maturities and principal collections 4,005 11,029
Securities, available for sale:
Purchases (4,221) (23,098)
Proceeds from sales 20,264 549
Proceeds from calls, maturities and principal collections 10,882 5,119
Mortgage backed securities, held to maturity
Purchases (33,626) (18,256)
Principal collections 19,333 7,940
Mortgage backed securities, available for sale
Purchases (8,230) (13,268)
Proceeds from sales 3,174 -
Principal collections 10,050 9,101
Purchase of Federal Home Loan Bank of Boston and other stock (304) (299)
Net increase in loans 10,246 9,297
Proceeds from sale of other real estate owned - 37
Net purchases of premises and equipment (115) (73)
-------- --------
Net cash provided by (used in) investing activities 16,962 (16,918)
-------- --------
FINANCING ACTIVITIES:
Increase in deposits 2,620 3,886
Increase in customer repurchase agreements 2,342 1,405
Purchase of common stock in connection with employee
benefit plans (2,002) -
Cash dividends paid (528) -
Stock issuance costs - (97)
Other changes in equity associated with employee benefit plans 447 -
-------- --------
Net cash provided by financing activities 2,879 5,194
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 333 (10,794)
CASH AND CASH EQUIVALENTS
Beginning of period 56,575 57,035
-------- --------
End of period $ 56,908 $ 46,241
======== ========
See accompanying notes to unaudited consolidated financial statements
5
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation - Westfield Financial, Inc.
is a Massachusetts chartered 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 Depositors Insurance Fund ("DIF"), a
corporation formed by the Massachusetts legislature. The Bank operates ten
branches in Western Massachusetts. The Bank's primary source of revenue is
earned by making loans to small and middle-market businesses and to
residential property homeowners.
The Bank formed a wholly owned subsidiary, Elm Street Real Estate
Investments Inc. (the "REIT"). The REIT is 99.9% owned by the Bank.
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 ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of income and
expenses for each. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the fair value of financial
instruments and the allowance for loan losses.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial condition as of March 31, 2003, and the results of operations,
changes in stockholders' equity, comprehensive (loss) income and cash flows
for the three-month periods ended March 31, 2003 and 2002. The results of
operations for the three-months ended March 31, 2003 are not necessarily
indicative of the results of operations for the remainder of the year
ending December 31, 2003. Certain information and disclosures not normally
included in financial statements prepared in accordance with "U.S. GAAP"
have been omitted pursuant to the rules and regulations of the Securities
and Exchange Commission.
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Areas in the
accompanying financial statements where estimates are significant include
the determination of fair value of financial instruments and the allowance
for loan losses.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements as of and
for the year ended December 31, 2002.
6
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 became effective for exit and disposal activities
initiated after December 31, 2002.
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 became effective on a prospective basis for guarantees issued or
modified after December 31, 2002. The disclosure requirements became
effective for financial statements of interim and annual periods ended
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 ("VIEs"). 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 a VIE if it 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 No. 46 became effective for new
VIEs established subsequent to February 1, 2003 and must be adopted for
existing VIEs 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 unaudited consolidated financial
statements as of March 31, 2003. The adoption of the remaining provisions
of these standards is not expected to have a material effect on its
consolidated financial statements.
2. (LOSS) EARNINGS PER SHARE
Basic (loss) earnings per share represents income available to stockholders
divided by the weighted average number of common shares outstanding during
the period. Diluted (loss) earnings per share reflects additional common
shares that would have been outstanding if dilutive potential shares had been
issued or earned.
At March 31, 2003, 448,000 options to purchase common stock granted under the
Company's stock option plan but not yet exercised and 189,800 contingently
returnable restricted shares are antidilutive due to the loss from operations,
and therefore not considered for the diluted (loss) earnings per share
calculation. At March 31, 2002 there were no potentially dilutive common
shares included in diluted earnings per share as there were no potential
common shares outstanding.
7
3. 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, as amended by
SFAS No. 148 the Company's net loss (in thousands) and loss per share would
have been adjusted to the pro forma amounts indicated below:
Three Months Ended
March 31, 2003
--------------
Net loss as reported $(1,606)
Less: Compensation expense
Determined under fair value
based method for all awards,
net of tax effects (56)
--------------------------------------------
Pro forma $(1,662)
Net loss per share
Basic and diluted as reported $ (0.16)
Pro forma (0.16)
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.
Three Months Ended
March 31, 2003
--------------
Dividend yield 1.25%
Expected life in years 10 years
Expected volatility 18%
Risk-free interest rate 4.00%
There were no stock options outstanding as of March 31, 2002.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward Looking Statements - This Quarterly Report on Form 10-Q contains
certain statements that may be considered forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those projected in
the forward-looking statements. Important factors that might cause such a
difference include: changes in national or regional economic conditions;
changes in loan default and charge-off rates; reductions in deposit levels
necessitating increased borrowing to fund loans and investments; changes in
interest rates; changes in the size and the nature of the Company's
competition; and changes in the assumptions used in making such forward-
looking statements.
8
CRITICAL ACCOUNTING POLICIES
Westfield Financial's critical policies given its current business strategy
and asset/liability structure are revenue recognition on loans, the
accounting for allowance for loan losses and provision for credit loans,
the classification of securities as either held to maturity or available
for sale, and the evaluation of securities for other than temporary
impairment. 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.
Westfield Financial's general policy is to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days or
more, or earlier if the loan is considered impaired. Any unpaid amounts
previously accrued on these loans are reversed from income. Subsequent
cash receipts are applied to the outstanding principal balance or to
interest income if, in the judgement 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.
Westfield Financial's methodology for assessing the appropriateness of the
allowance consists of two key components, which are a specific allowance
for identified problem or impaired loans and a formula allowance for the
remainder of the portfolio. Measurement of impairment can be based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent. This
evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change. The appropriateness of the
allowance is also reviewed by management based upon its evaluation of then-
existing economic and business conditions affecting the key lending areas
of Westfield Financial and other conditions, such as new loan products,
credit quality trends (including trends in 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 appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ
substantially from the current operating environment.
Securities, including mortgage backed securities, which management has the
positive intent and ability to hold until maturity are classified as held
to maturity and are carried at amortized cost. Securities, including
mortgage-backed securities, which have been identified as assets for which
there is not a positive intent to hold to maturity are classified as
available for sale and are carried at fair value with unrealized gains and
losses, net of income taxes, reported as a separate component of equity.
Accordingly, a misclassification would have a direct effect on
stockholders' equity. Sales or reclassification as available for sale
(except for certain permitted reasons) of held to maturity securities may
result in the reclassification of all such securities to available for
sale. 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.
On a quarterly basis, the Company reviews available for sale investment
securities with unrealized depreciation on a judgmental basis to assess
whether the decline in fair value is temporary or other than temporary.
The Company evaluates 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 determined to be other than temporary are charged to
operations.
9
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2003 AND DECEMBER 31, 2002
Total assets increased $2.0 million to $815.0 million at March 31, 2003
from $813.0 million at December 31, 2002. Securities decreased $8.9
million, or 2.4%, to $366.7 million at March 31, 2003 from $375.6 million
at December 31, 2002. Federal funds sold decreased from $37.2 million at
December 31, 2002 to $20.9 million at March 31, 2003. Net loans during
this period decreased by $10.5 million, or 2.9%, to $346.7 million at March
31, 2003, from $357.2 million at December 31, 2002. This decrease is
primarily the result of our current residential real estate loan referral
program with 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. Commercial and
industrial loans increased $10.1 million from $62.0 million at December 31,
2002 to $72.1 million at March 31, 2003. During the quarter ended March
31, 2003 the Bank invested $15.7 million in Bank Owned Life Insurance
(BOLI).
Asset growth was funded primarily by an increase of $2.6 million in
deposits, to $658.7 million at March 31, 2003 from $656.1 million at
December 31, 2002. Customer repurchase agreements increased $2.4 million
to $11.1 million at March 31, 2003 from $8.7 million at December 31, 2002.
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 totaled $15.0 million at
March 31, 2003 and December 31, 2002.
Stockholder's equity at March 31, 2003 and December 31, 2002 was $122.3
million and $126.7 million, respectively, which represented 15.0% and 15.6%
of total assets. The change is comprised of a net loss of $1.6 million for
the quarter ended March 31, 2003, a decrease in net unrealized gains on
securities available for sale of $746,000 net of income taxes, the
recording of the purchase of 128,700 shares of common stock for the Company's
stock benefit plans amounting to $2.0 million and the declaration by the
Board of Directors of a $0.05 per share, or $528,000, cash dividend paid on
March 3, 2003.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003
AND MARCH 31, 2002
General
The Company reported a net loss of $1.6 million or $0.16 per basic and
diluted share compared to net income of $1.1 million or $0.10 per basic
and diluted share for the same period in 2002.
The loss for the quarter ended March 31, 2003 was the result of
Massachusetts legislation that was signed on March 5, 2003 amending the
corporate tax law affecting the treatment of dividends received form Real
Estate Trusts (REITs). Dividends from REIT subsidiaries 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 of its REIT subsidiary
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 deductions taken for dividends received from
the REIT subsidiary of approximately $2.9 million in the first quarter of
2003.
Westfield Financial's first quarter results included an accrual of $2.9
million ($0.29 per basic share) representing an estimate of the additional
state tax liability, including interest, relating to the deduction for
dividends received from the Bank's REIT subsidiary for 2002 and prior
years.
The Company is reviewing the retroactive effect of the legislation with its
legal advisors and intends to vigorously defend its position that the
deductibility of dividends received from the REIT was fully compliant with
Massachusetts law at the time.
10
Interest and Dividend Income
Total interest and dividends decreased $1.4 million, or 12.6%, to $9.7
million compared with $11.1 million for the same period in 2002. Interest
and dividends on securities increased $57,000 to $3.6 million due to the
increased average balance of securities and lower yields in such securities
for the three months ended March 31, 2003 from $3.5 million for the three
months ended March 31, 2002. Interest income on loans decreased $1.4
million due to the lower balance of loans and the lower interest rate
environment.
The average balance of interest earning assets increased $12.8 million, or
1.7%. However the yield on interest earning assets decreased from 5.90% for
the quarter ended March 31, 2002 to 5.05% for the quarter ended March 31,
2003.
Interest Expense
Interest expense decreased $1.0 million, or 20.0%, to $4.0 million for the
three months ended March 31, 2003 from $5.0 million for the same period in
2002. The average balance of total interest bearing deposits increased
$11.7 million to $601.0 million for the quarter ended March 31, 2003 from
$589.3 million for the quarter ended March 31, 2002, while the average cost
of deposits decreased 84 basis points to 2.53%. The average balance of
customer repurchase agreements and FHLB borrowings increased $19.1 million
from $6.5 million for the three months ended March 31, 2002 to $25.6
million for the three months ended March 31, 2003 while the average cost
decreased 7 basis points to 2.59%. This resulted in a $123,000 increase in
the interest paid on customer repurchase agreements and Federal Home Loan
Bank borrowings.
Net Interest and Dividend Income
Net interest and dividend income for the three months ended March 31, 2003
was $5.7 million as compared to $6.1 million for 2002. Net interest rate
spread decreased from 2.54% at March 31, 2002 to 2.53% at March 31, 2003.
Provision for Loan Losses
For the three month ended March 31, 2003, Westfield Bank provided $200,000
for loan losses, compared to $300,000 for the same period in 2002. The
provision for loan losses brings Westfield Bank's allowance for loan losses
to a level determined appropriate by management. The allowance for loan
losses at March 31, 2003 was $4.2 million as compared to $4.3 million at
December 31, 2002. The allowance for loan losses at the end of March 31,
2003 was 1.21% of total loans compared with 1.20% at the end of 2002.
Commercial real estate and commercial and industrial loans increased $11.9
million or 7.2% for the quarter ending March 31, 2003. Westfield Bank
considers these types of loans to contain more risk than conventional
residential mortgages, which declined by $17.1 million or 10.9% for the
quarter ended March 31, 2003. This resulted in an increase in the
allowance requirements for commercial real estate and commercial and
industrial loans and a decrease for residential real estate loans.
Consumer loans decreased from $41.2 million at December 31, 2002 to $35.9
million at March 31, 2003 resulting in a decrease in the allowance
requirement for consumer loans. Nonaccrual loans remained relatively
constant at $2.2 million for March 31, 2003 and $2.4 million for December
31, 2002.
As a result of the detailed allowance methodology and consideration of the
above factors, management determined that an increase in the provision of
$200,000 was appropriate.
Noninterest Income
Noninterest income increased $553,000 to $684,000 for the three months
ended March 31, 2003 from $131,000 for the three months ended March 31,
2002. Security gains were $60,000 for the quarter ended March 31, 2003
compared to a net loss of $248,000 for the same period in 2002. The net
loss in 2002 included a writedown of $304,000 of certain equity securities
whose impairment was determined to be other than temporary. Also included
in the increase was the result of income on Bank Owned Life Insurance of
$164,000 for the quarter ended March 31, 2003 as compared to $0 for the
quarter ended March 31, 2002 and commissions received of $85,000 for the
quarter ended March 31, 2003 from the Bank's current residential loan
program with a third party mortgage company as compared to $36,000 for the
same period in 2002.
11
Noninterest Expense
Noninterest expense for the three months ended March 31, 2003 was $4.6
million compared with $4.3 million for the same period in 2002. This was
primarily the result of a $328,000 charge in 2003 to set up an accrual for
interest related to the Commonwealth of Massachusetts REIT legislation as a
result of the late taxes paid for years 1999 - 2002.
Income Taxes
Federal and state income taxes for the three months ended March 31, 2003
were $3.2 million compared to $563,000 for the same period in 2002. This
increase was the result of establishing a liability for prior years' state
taxes, net of federal tax effect, relating to the Commonwealth of
Massachusetts REIT legislation.
The following tables set forth information relating to our average balance
and net interest income at and for the three months ending March 31, 2003
and 2002 and reflect the average yield on assets and average cost of
liabilities for the periods indicated. Yields and costs are derived by
dividing interest income by the average balance of interest-earning assets
and interest expense by the average balance of interest-bearing liabilities
for the periods shown. Average balances are derived from actual daily
balances over the periods indicated. Interest income includes fees earned
from making changes in loan rates or terms and fees earned when real estate
loans were prepaid or refinanced.
Three Months Ending March 31:
2003 2002
---- ----
Average Avg Yield/ Average Avg/Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 56 $ 21,415 1.05% $ 101 $ 24,231 1.67%
Investment Securities 3,695 389,976 3.79 3,706 318,085 4.66
Loans 5,922 354,414 6.68 7,300 410,661 7.11
------ -------- ------- --------
Total Interest-Earning Assets $9,673 $765,805 5.05% $11,107 $752,977 5.90%
====== ======== ==== ======= ======== ====
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 103 $ 41,315 1.00% $ 159 $ 38,363 1.66%
Savings Accounts 118 46,698 1.01 110 42,559 1.03
Money Market Accounts 530 145,059 1.46 635 128,104 1.98
Time Deposits 3,040 367,907 3.31 4,065 380,251 4.28
Repo's and Borrowings 166 25,596 2.59 43 6,466 2.66
------ -------- ------- --------
Total Interest-Bearing Liabilities $3,957 $626,575 2.53% $ 5,012 $595,743 3.37%
------ -------- ------- --------
Net Interest Income/Interest Rate Spread $5,716 2.53% $ 6,095 2.54%
====== ---- ======= ----
Net Interest Margin 3.03% 3.27%
---- ----
12
The following table shows how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected the Company's interest income and interest expense during the
periods indicated. Information is provided in each category with respect
to:
* Interest income changes attributable to changes in volume (changes in
volume multiplied by prior rate);
* Interest income changes attributable to changes in rate (changes in
rate multiplied by current volume); and
* The net change.
The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes
due to rate.
Three Months Ended March 31, 2003 compared to March 31, 2002
Increase (decrease) due to:
(Dollars in thousands)
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
Short Term Investments $ (12) $ (33) $ (45)
Investment Securities 838 (849) (11)
Loans (1,000) (378) (1,378)
------- ------- -------
Net Change in Income on
Interest-Earning Assets (174) (1,260) (1,434)
------- ------- -------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 12 (68) (56)
Savings Accounts 11 (3) 8
Money Market Accounts 84 (189) (105)
Time Deposits (132) (893) (1,025)
Repo's and Borrowings 127 (4) 123
------- ------- -------
Net Change in Expense on
Interest-Bearing Liabilities 102 (1,157) (1,055)
------- ------- -------
Net Change in Interest Income $ (276) $ (103) $ (379)
======= ======= =======
13
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to the Company's ability to generate adequate
amounts of cash to fund loan originations, loan purchases, withdrawals of
deposits and operating expenses. The Company's primary sources of
liquidity are deposits, scheduled amortization and prepayments of loan
principal and mortgage backed securities, maturities and calls of
investment securities and funds provided by operations. The Bank also can
borrow funds from the Federal Home Loan Bank based on eligible collateral
of loans and securities. The Bank's maximum borrowing capacity form the
Federal Home Loan Bank at March 31, 2003 was approximately $79.9 million.
Liquidity management is both a daily and long term function of business
management. The measure of a Company's liquidity is its ability to meet
its cash commitments at all times with available cash or by conversion of
other assets to cash at a reasonable price. Loan repayments and maturing
investment securities are a relatively predictable source of funds.
However, deposit flow, calls of investment securities and repayments of
loans and mortgage-backed securities are strongly influenced by interest
rates, general and local economic conditions and competition in the
marketplace. These factors reduce the predictability of the timing of
these sources of funds. Management believes that the Company has
sufficient liquidity to meet its current operating needs.
At March 31, 2003, the Company exceeded each of the applicable regulatory
capital requirements. The Company's leverage Tier 1 capital was $121.3
million, or 28.12% of risk-weighted assets, and 15.05% of average assets.
The Company had a risk-based total capital of $125.6 million and a risk-
based capital ratio of 29.12%.
See the "Consolidated Statements of Cash Flows" in the Unaudited
Consolidated Financial Statements included in this Form 10-Q for the
sources and uses of cash flows for operating and financing activities for
the three months ended March 31, 2003 and March 31, 2002.
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 obligated under leases for certain of its branches and
equipment. At March 31, 2003 the Company's lease obligations and credit
commitments were $61.1 million.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital to risk weighted
assets and to average assets. Management believes, as of March 31, 2003,
the Company and the Bank met all capital adequacy requirements to which
they were subject. As of March 31, 2003, the most recent notification from
the Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Management believes that there have been no significant changes in market
risk since December 31, 2002 as discussed in the Company's most recent Form
10-K filed for the year ended December 31, 2002.
14
ITEM 4:
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer and Chief Financial Officer of the
Company evaluated the disclosure controls and procedures of the
Company, as defined in Rule 13a-14(c) promulgated pursuant to the
Exchange Act, as of March 31, 2003 and concluded that the Company's
disclosure controls and procedures were effective to ensure that the
information required to be disclosed by the Company in its reports
filed pursuant to the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal
controls subsequent to March 31, 2003, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Part II - Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Company's Chief Executive Officer and Chief Financial Officer
have furnished statements relating to its Form 10-Q for the quarter
ended March 31, 2003 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes - Oxley Act of 2002. The
statements are attached hereto as Exhibit 99.1.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On March 5, 2003, the Company filed a current report on Form
8-K announcing the accrual of a REIT related state tax
liability.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Westfield Financial, Inc.
(Registrant)
By: /s/ Donald A. Williams
------------------------------------
Donald A. Williams
President/Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael J. Janosco, Jr.
--------------------------------------
Michael J. Janosco, Jr.
Vice President/Chief Financial Officer
(Principal Accounting Officer)
May 14, 2003
16
CERTIFICATIONS
I, Donald A. Williams certify that:
1. I have reviewed this quarterly report on Form 10-Q of Westfield
Financial, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly 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 quarterly report whether or not there were 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: May 14, 2003 /s/ Donald A. Williams
-------------------------------------
Donald A. Williams
President and Chief Executive Officer
17
CERTIFICATIONS
I, Michael J. Janosco, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Westfield
Financial, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly 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 quarterly report whether or not there were 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: May 14, 2003 /s/ Michael J. Janosco, Jr.
------------------------------------
Michael J. Janosco, Jr.
Senior Vice President and Chief
Financial Officer
18