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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 September 30, 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 November 7, 2003
----- ----------------
Common 10,520,300
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - September 30, 2003 and
December 31, 2002
Consolidated Statements of Operations (Unaudited) - Three and nine
months ended September 30, 2003 and 2002
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Nine Months ended
September 30, 2003
Consolidated Statements of Cash Flows (Unaudited) - Nine Months
ended September 30, 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
Exhibits
1
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in thousands except share data)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Cash and due from banks $ 14,091 $ 11,975
Federal funds sold 7,592 37,233
Interest-bearing deposits 38,957 7,367
-------- --------
CASH AND CASH EQUIVALENTS 60,640 56,575
-------- --------
SECURITIES:
Available for sale-at estimated fair value 41,505 79,842
Held to maturity-at amortized cost (estimated
fair value of $66,412 in 2003, and $46,582 in 2002) 65,254 45,960
MORTGAGE BACKED SECURITIES:
Available for sale-at estimated fair value 85,095 90,468
Held to maturity-at amortized cost (estimated
fair value of $178,220 in 2003, and $161,497 in 2002) 177,470 159,339
FEDERAL HOME LOAN BANK OF
BOSTON AND OTHER STOCK 4,237 3,933
LOANS - Net of allowance for loan losses of $4,467 in 2003
and $4,325 in 2002 345,705 357,155
PREMISES AND EQUIPMENT, NET 12,328 12,851
ACCRUED INTEREST AND DIVIDENDS 3,749 3,937
CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE 16,209 -
OTHER ASSETS 3,985 2,920
-------- --------
TOTAL ASSETS $816,177 $812,980
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest bearing $ 55,895 $ 54,736
Interest bearing 597,256 601,329
-------- --------
Total deposits 653,151 656,065
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 14,131 8,724
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 20,000 15,000
OTHER LIABILITIES 4,648 6,492
-------- --------
TOTAL LIABILITIES 691,930 686,281
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares authorized,
none outstanding - -
Common stock - $.01 par value, 25,000,000 shares authorized,
10,580,000 issued, and 10,520,300 and 10,580,000 outstanding
at September 30, 2003 and December 31, 2002, respectively 106 106
Additional paid-in capital 47,473 49,463
Unallocated common stock of employee stock ownership plan (5,427) (5,621)
Unearned compensation (2,224) (2,731)
Retained earnings 84,855 84,264
Accumulated other comprehensive income, net 598 1,218
Treasury stock, at cost (59,700 shares at September 30, 2003
And none at December 31, 2002) (1,134) -
-------- --------
Total stockholders' equity 124,247 126,699
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $816,177 $812,980
======== ========
See accompanying notes to unaudited consolidated financial statements
2
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Income - Unaudited
(Dollars in thousands except share data)
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $ 3,883 $ 4,987 $ 12,119 $ 15,475
Securities and mortgage backed securities 2,655 3,391 9,238 10,302
Consumer loans 573 1,000 2,023 3,214
Commercial and industrial loans 1,036 1,025 2,967 2,846
Federal funds sold 43 100 152 270
Stocks 147 155 374 438
Interest bearing deposits 56 87 185 272
---------- ---------- ---------- ----------
Total interest and dividend income 8,393 10,745 27,058 32,817
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 3,131 4,758 10,331 14,300
Customer repurchase agreements 49 59 159 160
Other borrowings 140 - 363 -
---------- ---------- ---------- ----------
Total interest expense 3,320 4,637 10,853 14,460
---------- ---------- ---------- ----------
Net interest and dividend income 5,073 6,108 16,205 18,357
PROVISION FOR LOAN LOSSES 150 234 500 734
---------- ---------- ---------- ----------
Net interest and dividend income after
provision for loan losses 4,923 5,874 15,705 17,623
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Bank owned life insurance 214 - 573 -
Net service charges and writedowns of
servicing assets 496 417 1,401 1,179
Gain (loss) on sales/writedowns of securities, net 70 (139) 183 (896)
---------- ---------- ---------- ----------
Total noninterest income 780 278 2,157 283
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employees benefits 2,500 2,286 7,397 6,932
Occupancy 459 472 1,343 1,352
Computer operations 403 387 1,200 1,162
Stationery, supplies and postage 141 127 429 372
Other 812 948 3,053 2,947
---------- ---------- ---------- ----------
Total noninterest expense 4,315 4,220 13,422 12,765
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,388 1,932 4,440 5,141
INCOME TAXES 337 661 2,262 1,755
---------- ---------- ---------- ----------
NET INCOME $ 1,051 $ 1,271 $ 2,178 $ 3,386
========== ========== ========== ==========
Basic earnings per share $ 0.11 $ 0.12 $ 0.22 $ 0.33
Basic weighted average shares outstanding 10,008,874 10,298,797 10,050,423 10,403,483
Diluted earnings per share $ 0.10 $ 0.12 $ 0.21 $ 0.33
Diluted weighted average shares outstanding 10,199,074 10,298,797 10,187,177 10,403,483
See accompanying notes to unaudited consolidated financial statements.
3
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - UNAUDITED
(Dollars in thousands, except share data)
Common Stock Accumulated
------------- Additional Other
Par Paid-In Unallocated Unearned Retained Comprehensive Treasury Stock
Shares Value Capital ESOP Compensation Earnings Income, Net Shares Amount Total
------ ----- ---------- ----------- ------------ -------- ------------- ------ ------ ------
Balance at January 1, 2003 10,580 $106 $49,463 $(5,621) $(2,731) $84,264 $1,218 - $ - $126,699
Comprehensive income:
Net income - - - - 2,178 - - - 2,178
Change in unrealized
gain on securities
arising during the
period, net of tax
benefit of $278 - - - - - (502) - - (502)
Reclassification for
gains included in
net income net of
taxes $(65) - - - - - (118) - - (118)
--------
Comprehensive income 1,558
Activity related to
common stock issued
as employee incentives - - (1,990) 194 507 - - - - (1,289)
Cash dividends declared - - - - (1,587) - - - (1,587)
Treasury stock purchased - - - - - - - (60) (1,134) (1,134)
------ ---- ------- ------- ------- ------- ------ --- ------- --------
Balance at September 30,
2003 10,580 $106 $47,473 $(5,427) $(2,224) $84,855 $ 598 (60) $(1,134) $124,247
====== ==== ======= ======= ======= ======= ====== === ======= ========
See accompanying notes to unaudited consolidated financial statements
4
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Nine Months
Ended September,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income $ 2,178 $ 3,386
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 500 734
Valuation adjustment of other real estate owned - (139)
Non-cash employee benefit plan expense 713 -
Depreciation of premises and equipment 816 784
Net amortization of premiums and discounts on securities,
mortgage backed securities, and mortgage loans 2,770 699
Net realized securities gains/loss or writedowns of securities (183) 896
Deferred income tax benefit (1,322) (2,895)
Changes in assets and liabilities:
Accrued interest and dividends 188 184
Other assets 624 512
Other liabilities (1,844) 322
-------- --------
Net cash provided by operating activities 4,440 4,483
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (39,362) (13,996)
Proceeds from calls, maturities, and principal collections 20,078 23,045
Securities, available for sale:
Purchases (15,796) (29,316)
Proceeds from sales 24,518 4,222
Proceeds from calls, maturities, and principal collections 29,987 20,069
Mortgage backed securities, held to maturity:
Purchases (96,629) (79,510)
Principal collections 76,519 28,610
Mortgage backed securities, available for sale:
Purchases (38,393) (44,724)
Proceeds from sales 3,114 20,214
Principal collections 38,737 27,372
Purchase of Federal Home Loan Bank of Boston and other stock (304) (299)
Net increase in loans 10,883 26,352
Proceeds from sale of other real estate owned - 301
Net purchases of premises and equipment (288) (236)
Bank owned life insurance (16,209) -
-------- --------
Net cash used in investing activities (3,145) (17,896)
-------- --------
FINANCING ACTIVITIES:
(Decrease) increase in deposits (2,914) 15,885
Increase in customer repurchase agreements 5,407 3,867
Federal Home Loan Bank of Boston advances, net 5,000 -
Purchase of common stock in connection with employee benefit plans (2,002) (5,621)
Cash dividends paid (1,587) (1,058)
Treasury stock purchased (1,134) -
Stock issuance costs - (53)
-------- --------
Net cash provided by financing activities 2,770 13,020
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,065 (393)
CASH AND CASH EQUIVALENTS
Beginning of period 56,575 57,035
-------- --------
End of period $ 60,640 $ 56,642
======== ========
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 - Westfield Financial, Inc. (the "Company") 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
earnings on loans to small and middle-market businesses and to residential
property homeowners.
On September 23, 2003 the Company adopted an amended plan of charter
conversion pursuant to which the Bank, and Westfield Mutual Holding Company
(the "MHC") will convert to federal charters.
The Bank formed a 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.
In 2003, the Bank formed another subsidiary which is wholly owned, Elm
Street Securities Corporation, a Massachusetts chartered security
corporation 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., Elm
Street Securities Corporation, and the REIT. All material intercompany
balances and transactions have been eliminated in consolidation.
Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of income and
expenses for each. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the fair value of financial
instruments and the allowance for loan losses.
Basis of Presentation - In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial condition as of September 30, 2003,
and the results of operations, changes in stockholders' equity and
comprehensive income and cash flows for the interim periods presented. The
results of operations for the three and nine months ended September 30,
2003 are not necessarily indicative of the results of operations for the
remainder of the year ending December 31, 2003. Certain information and
disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements as of and
for the year ended December 31, 2002.
Reclassifications - Certain amounts in the prior year financial statements
have been reclassified to conform to the current year presentation.
6
Stock Based Compensation -The Company applies APB Opinion No. 25 and
related Interpretations in accounting for stock based compensation 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 grant dates for awards under the plans consistent with the
method prescribed by SFAS No. 123, as amended by SFAS No. 148, the
Company's net income (in thousands) and income per share would have been
adjusted to the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
Net income as reported $1,051 $2,178
Less: Compensation expense
determined under fair value
based method for all awards,
net of tax effects (64) (191)
------ ------
Pro forma $ 987 $1,987
====== ======
Net income per share
Basic as reported $ 0.11 $ 0.22
Pro forma 0.10 0.20
Diluted as reported 0.10 0.21
Pro forma 0.10 0.20
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.
Nine Months Ended
September 30, 2003
------------------
Dividend yield 1.21%
Expected life in years 10 years
Expected volatility 15%
Risk-free interest rate 3.58%
There were no stock options outstanding as of September 30, 2002.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
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 was required to be
adopted for existing VIEs on July 1, 2003. The effective date of
Interpretation No. 46 has been deferred to October 1, 2003.
7
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS No. 149), which amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The provisions of SFAS No. 149 are
generally effective for contracts entered into or modified after June 30,
2003 and are to be applied prospectively.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS No.
150), which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires an issuer to classify certain instruments as
liabilities (or assets in some circumstances) which may have previously
been classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. Certain provisions of SFAS No.150 related to the application of
paragraphs 9 and 10 have been deferred indefinitely.
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 September 30, 2003. The adoption of the remaining
provisions of these standards is not expected to have a material effect on
its consolidated financial statements.
3. EARNINGS PER SHARE
Basic earnings per share represents income available to stockholders
divided by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential shares had been
issued or earned.
For the period ended September 30, 2002 there were no potentially dilutive
common shares included in diluted earnings per share as there were no
potential common shares outstanding.
4. MASSACHUSETTS TAX LEGISLATION
As a result of Massachusetts legislation signed on March 5, 2003 amending
the corporate tax law affecting the treatment of dividends received from
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. During the first
quarter of 2003, the Company accrued an amount of $2.9 million, net of
federal benefit related to the REIT. As a result of an agreement with the
Massachusetts Department of Revenue, the Company paid 50% of the amount
including interest that would have been owed. The payment is deductible for
federal tax purposes. The Company's second quarter 2003 financial results
include a credit of approximately $1.45 million, representing a reversal of
50% of the charge taken in the fist quarter of 2003.
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
8
in the size and the nature of the Company's competition; and changes in the
assumptions used in making such forward-looking statements. The Company
disclaims 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.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies given its current business
strategy and asset/liability structure are revenue recognition on loans,
the accounting for allowance for loan losses and provision for loan losses,
the classification of securities as either held to maturity or available
for sale, and the evaluation of securities for other than temporary
impairment.
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 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 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 consumer.
The Company'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 the Company and other conditions, such as new loan products, credit
quality trends (including trends in non performing loans expected to result
from existing conditions), collateral values, loan volumes and
concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions
were believed to have had on the collectibility of the loan portfolio.
Although management believes it has established and maintained the
allowance for loan losses at appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ
substantially from the current operating environment.
Securities, including mortgage backed securities, which management has the
positive intent and ability to hold until maturity, are classified as held
to maturity and are carried at amortized cost. Securities, including
mortgage-backed securities, which have been identified as assets for which
there is not a positive intent to hold to maturity are classified as
available for sale and are carried at fair value with unrealized gains and
losses, net of income taxes, reported as a separate component of equity.
Accordingly, a misclassification would have a direct effect on
stockholders' equity. Sales or reclassification as available for sale
(except for certain permitted reasons) of held to maturity securities may
result in the reclassification of all such securities to available for
sale. The Company has not 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 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 SEPTEMBER 30, 2003 AND DECEMBER 31,
2002
Total assets increased $3.2 million to $816.2 million at September 30, 2003
from $813.0 million at December 31, 2002. Securities decreased $6.3
million, or 1.7%, to $369.3 million at September 30, 2003 from $375.6
million at December 31, 2002. Federal funds sold decreased from $37.2
million at December 31, 2002 to $7.6 million at September 30, 2003. Net
loans during this period decreased by $11.5 million, or 3.2%, to $345.7
million at September 30, 2003, from $357.2 million at December 31, 2002 due
to a decrease in residential reeal estate loans and indirect auto loans,
partially offset by increases in commercial real estate loans and
commercial and industrial loans. Residential real estate loans decreased
$41.3 million to $116.6 million at September 30, 2003 from $157.9 million
at December 30, 2003. This decrease is primarily the result of our current
residential real estate loan program with a third party mortgage company.
Under the program which went into effect in September 2001, substantially
all of the Bank's residential real estate loans are underwritten and
originated by a third party mortgage company. In connection with this
program, the Bank receives fee income for each of the loans originated by
the third party mortgage company. The Bank may purchase residential real
estate loans from the third party mortgage company depending on market
conditions. To date, the Bank has not purchased a significant amount of
loans from the third party mortgage company. Indirect auto loans decreased
$14.2 million to $19.6 million while commercial real estate loans increased
$27.8 million to $128.7 million and commercial and industrial loans
increased $16.8 million to $78.3 million at September 30, 2003 from $61.5
million at December 31, 2002, respectively. During the nine month period
ended September 30, 2003, the Bank invested $16.2 million in Bank Owned
Life Insurance (BOLI). The Bank purchased BOLI as a means to offset
employee benefit costs. A substantial number of employees are covered by
BOLI policies.
Total deposits amounted to $653.2 million at September 30, 2003 and $656.1
million at December 31, 2002. Customer repurchase agreements increased $5.4
million to $14.1 million at September 30, 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 (FHLB)
borrowings totaled $20.0 million at September 30, 2003 and $15.0 million at
December 31, 2002. The Bank borrowed $5 million in the quarter ended
September 30, 2003 to take advantage of the current yield curve.
Stockholders' equity at September 30, 2003 and December 31, 2002 was $124.2
million and $126.7 million, respectively, which represented 15.2% and 15.6%
of total assets. The change is primarily comprised of net income of $2.2
million for the nine months ended September 30, 2003, a decrease in net
unrealized gains on securities available for sale of $620,000 net of income
taxes, the recording of the purchase of 128,700 shares of common stock for
the Company's Recognition and Retention Plan amounting to $2.0 million, the
purchase of 59,700 shares of treasury stock amounting to $1.1 million and
the declaration by the Board of Directors of a $0.05 per share dividend on
January 28, 2003, April 22, 2003, and July 22, 2003 amounting to $1.6
million.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2003 AND SEPTEMBER 30, 2002
General
The Company reported net income of $1.1 million or $0.10 per diluted share
compared to net income of $1.3 million or $0.12 per diluted share for the
same period in 2002.
Interest and dividend income decreased by $2.3 million and interest expense
decreased by $1.3 million resulting in a decrease in net interest and
dividend income of $1.0 million. This was partially offset by an increase
in noninterest income of $502,000 and a decrease of $324,000 in income
taxes for the quarter ended September 30, 2003.
Interest and Dividend Income
Total interest and dividends decreased $2.3 million, or 21.9%, to $8.4
million compared with $10.7 million for the same period in 2002. Interest
and dividends on securities decreased $775,000 to $2.9 million for the
three months ended September 30, 2003 from $3.6 million for the three
months ended September 30, 2002. The average balance on securities
increased; however, a decrease in the yield on securities caused total
interest and dividend income to decline. Interest income on loans decreased
$1.5 million due to the lower balance of loans and the lower interest rate
environment.
10
The average balance of interest earning assets decreased $3.6 million and
the yield on interest earning assets decreased from 5.60% for the quarter
ended September 30, 2002 to 4.40% for the quarter ended September 30, 2003.
Interest Expense
Interest expense decreased $1.3 million, or 28.4%, to $3.3 million for the
three months ended September 30, 2003 from $4.6 million for the same period
in 2002. The average balance of total interest bearing deposits decreased
$4.8 million to $598.6 million for the quarter ended September 30, 2003
from $603.4 million for the quarter ended September 30, 2002, while the
average cost of deposits decreased 94 basis points to 2.09%. The average
balance of customer repurchase agreements and FHLB borrowings increased
$22.6 million from $9.1 million for the three months ended September 30,
2002 to $31.8 million for the three months ended September 30, 2003 while
the average cost decreased 20 basis points to 2.38%. This resulted in a
$130,000 increase in the interest paid on customer repurchase agreements
and FHLB borrowings.
Net Interest and Dividend Income
Net interest and dividend income for the three months ended September 30,
2003 was $5.1 million as compared to $6.1 million for 2002. Net interest
rate spread decreased from 2.57% at September 30, 2002 to 2.29% at
September 30, 2003.
Provision for Loan Losses
For the three months ended September 30, 2003, the Bank provided $150,000
for loan losses, compared to $234,000 for the same period in 2002. The
provision for loan losses brings the Bank's allowance for loan losses to a
level determined appropriate by management. The allowance for loan losses
was $4.5 million at September 30, 2003 and $4.3 million at June 30, 2003.
The allowance for loan losses at the end of September 30, 2003 was 1.28% of
total loans compared with 1.17% at June 30, 2003.
For the quarter ended September 30, 2003, commercial real estate loans
increased $4.3 million while commercial and industrial loans decreased $4.3
million as compared to the quarter ended June 30, 2003. Commercial real
estate and commercial and industrial loans comprised 59.1% of the Bank's
loan portfolio as of the quarter ended September 30, 2003 as compared to
55.8% as of the quarter ended June 30, 2003. This has resulted in an
increase to the allowance requirement for commercial real estate loans and
commercial and industrial loans. The Bank considers these types of loans to
contain more risk than conventional residential mortgages which declined by
$16.7 million or 12.5% for the quarter ended September 30, 2003. Consumer
loans decreased by $4.4 million to $26.5 million at September 30, 2003
resulting in a decrease in the allowance requirement for consumer loans.
The declines in the allowance requirement for residential mortgages and
consumer loans partially offset the increase in the allowance requirement
for commercial real estate and commercial and industrial loans. Nonaccrual
loans decreased $139,000 to $1.9 million at September 30, 2003 from $2.1
million at June 30, 2003.
As a result of the above factors, management determined that a provision of
$150,000 was appropriate.
Noninterest Income
Noninterest income increased $502,000 to $780,000 for the three months
ended September 30, 2003 from $278,000 for the three months ended September
30, 2002. Security gains were $70,000 for the quarter ended September 30,
2003 compared to a net loss of $139,000 for the same period in 2002. The
net loss in 2002 included a writedown of $414,000 of certain equity
securities whose impairment was determined to be other than temporary. Also
included in the increase was income on BOLI of $214,000 for the quarter
ended September 30, 2003 as compared to $0 for the quarter ended September
30, 2002 and commissions received from the Bank's residential loan program
with a third party mortgage company of $111,000 for the quarter ended
September 30, 2003 as compared to $28,000 for the same period in 2002.
11
Noninterest Expense
Noninterest expense for the three months ended September 30, 2003 was $4.3
million compared with $4.2 million for the same period in 2002. This was
primarily due to an increase in salaries expenses of $43,000 as a result of
normal salary increases and an increase in stock based benefit plan expense
of $139,000. These expenses were partially offset by a decrease in
advertising expense of $44,000 and a decrease in contribution expense of
$42,000.
Income Taxes
For the three months ended September 30, 2003, the Company had tax
provisions of $337,000 compared to $661,000 for the same period in 2002.
The effective tax rates for the three months ended September 30, 2003 and
2002 were 24.3% and 34.2%, respectively. The decrease in the tax rate for
the three months ended September 30, 2003 was primarily the result of the
formation of Elm Street Securities Corporation, a Massachusetts chartered
security corporation, the income of which is taxed at a lower rate by the
Massachusetts Department of Revenue (the "DOR"). Also attributing to the
decrease in the tax rate for the 2003 period was the purchase of BOLI and
new investments in municipal bonds as well as industrial revenue bonds.
The following tables set forth the information relating to our average
balance and net interest income at and for the three months ended September
30, 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 and terms and fees earned when real
estate loans are prepaid or refinanced.
Three Months Ended September 30,
2003 2002
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 43 $ 19,652 0.88% $ 100 $ 23,844 1.68%
Investment Securities 2,858 383,509 2.98 3,633 340,892 4.26
Loans 5,492 360,599 6.09 7,012 402,594 6.97
------ -------- ------- --------
Total Interest-Earning Assets $8,393 $763,760 4.40 $10,745 $767,330 5.60
====== ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 89 $ 44,109 0.81% $ 143 $ 41,157 1.39%
Savings Accounts 72 47,626 0.60 129 44,361 1.16
Money Market Accounts 445 156,369 1.14 653 135,690 1.92
Time Deposits 2,525 350,466 2.88 3,653 382,196 3.82
Repurchase Agreements and Borrowings 189 31,779 2.38 59 9,132 2.58
------ -------- ------- --------
Total Interest-Bearing Liabilities $3,320 $630,349 2.11 $ 4,637 $612,536 3.03
====== ======== ======= ========
Net Interest Income/Interest Rate Spread $5,073 2.29% $ 6,108 2.57%
====== ==== ======= ====
Net Interest Margin 2.64% 3.11%
==== ====
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 September 30, 2003 compared to September 30, 2002
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short Term Investments $ (18) $ (39) $ (57)
Investment Securities 454 (1,229) (775)
Loans (731) (789) (1,520)
----- ------- -------
Net Change in Income on
Interest-Earning Assets (295) (2,057) (2,352)
----- ------- -------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 10 (64) (54)
Savings Accounts 9 (66) (57)
Money Market Accounts 100 (308) (208)
Time Deposits (303) (825) (1,128)
Repurchase Agreements and Borrowings 146 (16) 130
----- ------- -------
Net Change in Expense on
Interest-Bearing Liabilities (38) (1,279) (1,317)
----- ------- -------
Change in Net Interest Income $(257) $ (778) $(1,035)
===== ======= =======
13
COMPARISON OF OPERATING RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002
General
The Company reported net income of $2.2 million or $0.21 per diluted share
compared to net income of $3.4 million or $0.33 per diluted share for the
same period in 2002. Interest and dividend income decreased by $5.8 million
and interest expense decreased by $3.6 million resulting in a decrease to
net interest income of $2.2 million. This was partially offset by an
increase in noninterest income of $1.9 million.
As previously reported the Company entered into an agreement with the
Massachusetts Department of Revenue to settle the issue related to taxes
owed on dividends received from the Bank's REIT subsidiary in 2002 and
prior tax years. Under the agreement, the Company paid 50% of the amount
including interest that would have been owed under legislation that was
enacted in March 2003. The payment is a deductible expense for federal tax
purposes. This resulted in a charge of approximately $1.45 million for
state taxes, interest, and penalties, net of federal tax benefit.
Interest and Dividend Income
Total interest and dividend income decreased $5.8 million or 17.5% to $27.1
million for nine months ended September 30, 2003 compared to $32.8 million
for the same period in 2002. Interest and dividends on securities decreased
$1.2 million to $9.8 million, while interest income on loans decreased $4.4
million.
The decrease in interest and dividend income on securities was the result
of a $53.9 million increase in the average balance of securities from
$331.9 million for the nine months ended September 30, 2002 to $385.8
million for the same period in 2003; however, a decrease of 103 basis
points in the average yield on securities from 4.42% for the period in 2002
to 3.39% for the same period in 2003 caused interest and dividend income on
securities to decline.
The decrease in interest income on loans was primarily the result of a $3.2
million decrease in interest on residential real estate loans. This was the
result of a decrease in the average balance of residential real estate
loans from $192.9 million for the nine months ended September 30, 2002 to
$137.4 million for the same period in 2003 due to our residential real
estate loan program with a third party mortgage company. In addition,
interest on consumer loans decreased by $1.2 million. This was primarily
the result of a decrease in average balances from $51.6 million for the
nine months ended on September 30, 2002 to $33.5 million for the same
period in 2003 due to management's decision to curtail indirect automobile
loan originations. Interest income from commercial real estate loans and
commercial and industrial loans decreased $43,000 for the nine months ended
September 30, 2003 as compared to the same period in 2002. The average
balance of commercial real estate loans and commercial industrial loans
increased $22.8 million to $185.0 million for the nine months ended
September 30, 2003 as compared to $162.2 million for the same period in
2002. This was offset by a decrease in the average yield on these loans.
Interest Expense
Interest expense for the nine months ended September 30, 2003 decreased
$3.6 million from the comparable 2002 period. This was attributable to a
decrease in average cost of interest-bearing liabilities of 88 basis points
from 3.19% for the nine months ended September 20, 2002 to 2.31% for the
same period in 2003, partially offset by an increase of $22.2 million in
the average balance of total interest-bearing liabilities.
Net Interest and Dividend Income
Net interest and dividend income for the nine months ended September 30,
2003 decreased $2.2 million or 11.7% from $18.4 million in 2002 to $16.2
million in 2003. The net interest rate spread, the difference between the
average yield on average interest earning assets and the average cost of
average total interest bearing liabilities, decreased 15 basis points to
2.42% for 2003 from 2.57% for 2002. The net interest margin, which is net
interest and dividend income divided by average total interest earning
assets, decreased 34 basis points to 2.84% for 2003 from 3.18% for the
prior year comparable period.
14
Provision for Loan Losses
During the nine months ended September 30, 2003, the Bank provided $500,000
for loan losses, compared to $734,000 for the comparable 2002 period. The
provision for loan losses brings the Bank's allowance for loan losses to a
level determined appropriate by management. The allowance for loan losses
was $4.5 million at September 30, 2003 and $4.3 million at December 31,
2002.
Commercial real estate and commercial and industrial loans at September 30,
2003 were $207.1 million, an increase of $44.7 million or 27.5% from
December 31, 2002. Management considers these types of loans to contain
more risk than conventional residential mortgages, which declined by $41.1
million or 26.1% from December 31, 2002 to September 30, 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 $26.5 million at September 30, 2003 resulting in a decrease in
the allowance requirement for consumer loans. The declines in the allowance
requirement for residential mortgages and consumer loans partially offset
the increase in the allowance requirement for commercial real estate and
commercial and industrial loans. Nonaccrual loans decreased $444,000 to
$1.9 million at September 30, 2003 from $2.4 million at December 31, 2002.
As a result of the detailed allowance methodology and consideration of the
above factors, management determined that a provision for loan losses of
$500,000 was appropriate.
The allowance for loan losses at the end of September 30, 2003 was 1.28% of
total loans compared with 1.20% at December 31, 2002. The increase in the
average ratio reflects the changes in the loan portfolio described above.
Noninterest Income
Noninterest income includes service fees on deposit accounts, other service
charges and net gains and losses on sale and writedowns of securities.
Total noninterest income increased $1.9 million to $2.2 million for the
nine months ended September 30, 2003 from $283,000 for the nine months
ended September 30, 2002. Net gain from sales of securities for the nine
months ended September 30, 2003 were $183,000 as compared to net losses
from sales and writedowns of securities of $896,000 for the nine months
ended September 30, 2002. Included in the net loss for the 2002 period was
a writedown of certain equity securities whose impairment was determined to
be other than temporary of $1.3 million and a net gain on sales of
securities of $355,000. Income from BOLI was $573,000 for the nine months
ended September 30, 2003 as compared to - 0 - in the same period in 2002.
Noninterest Expense
Total noninterest expense increased $657,000, or 5.1%, to $13.4 million for
the nine months ended September 30, 2003 compared with $12.8 million for
the prior year. Salaries and benefits increased $465,000, or 6.7% to $7.4
million for the nine months ended September 30, 2003 compared to $6.9
million for the 2002 period, reflecting normal salary increases and
additional costs associated with the Company's stock benefit plans. Other
expenses were $3.1 million reflecting an increase of $106,000, or 3.6%.
Income Taxes
Income taxes expense increased $507,000, or 28.9%, to $2.3 million for the
nine months ended September 30, 2003. The effective tax rates for the nine
months ended September 30, 2003 and 2002 were 50.9% and 34.1%,
respectively. This increase was primarily the result of an agreement with
the DOR to settle the issue related to taxes owed on dividends received
from the Bank's REIT subsidiary in 2002 and prior tax years. Under the
agreement, the Company paid 50% of the amount including interest that would
have been owed under legislation that was enacted in March 2003. The
payment is a deductible expense for federal tax purposes.
During the first quarter of 2003, the Company accrued an amount of $2.9
million, net of federal benefit related to the REIT. As a result of the
settlement with the DOR, the Company's second quarter financial results
include a credit of approximately $1.45 million, representing a reversal of
50% of the charge taken in the first quarter.
15
The increase in the tax rate due to the REIT for the nine month period
ending September 30, 2003 was partially offset by the effect of the
formation of Elm Street Securities Corporation, a Massachusetts chartered
security corporation, the income of which is taxed at a lower rate by the
DOR. Also offsetting the increase in the tax rate was the purchase of BOLI
and new investments in municipal bonds as well as industrial revenue bonds.
The following tables set forth information relating to our average balance
and net interest income at and for the nine months ended September 30, 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.
Nine Months Ended September 30,
2003 2002
---- ----
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 152 $ 20,367 1.00% $ 270 $ 21,511 1.67%
Investment Securities 9,797 385,849 3.39 11,012 331,884 4.42
Loans 17,109 355,948 6.41 21,535 406,701 7.06
------- -------- ------- --------
Total Interest-Earning Assets $27,058 $762,164 4.73 $32,817 $760,096 5.76
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 287 $ 42,592 0.90% $ 472 $ 39,926 1.58%
Savings Accounts 313 46,846 0.89 356 43,792 1.08
Money Market Accounts 1,474 151,303 1.30 1,943 131,660 1.97
Time Deposits 8,257 357,858 3.08 11,529 381,005 4.03
Repurchase Agreements and Borrowings 522 28,058 2.48 160 8,057 2.65
------- -------- ------- --------
Total Interest-Bearing Liabilities $ 10,853 $626,657 2.31 $14,460 $604,440 3.19
======== ======== ======= ========
Net Interest Income/Interest Rate Spread $ 16,205 2.42% $18,357 2.57%
======== ==== ======= ====
Net Interest Margin 2.84% 3.18%
==== ====
16
The following table shows how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected 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.
Nine Months Ended September 30, 2003 compared to September 30, 2002
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short Term Investments $ (14) $ (104) $ (118)
Investment Securities 1,791 (3,006) (1,215)
Loans (2,688) (1,738) (4,426)
------- ------- -------
Net Change in Income on (911) (4,848) (5,759)
------- ------- -------
Interest-Earning Assets
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 32 (217) (185)
Savings Accounts 25 (68) (43)
Money Market Accounts 290 (759) (469)
Time Deposits (700) (2,572) (3,272)
Repurchase Agreements and Borrowings 397 (35) 362
------- ------- -------
Net Change in Expense on
Interest-Bearing Liabilities 44 (3,651) (3,607)
------- ------- -------
Change in Net Interest Income $ (955) $(1,197) $(2,152)
======= ======= =======
17
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
FHLB based on eligible collateral of loans and securities. The Bank's
maximum additional borrowing capacity form the FHLB at September 30, 2003
was approximately $12.1 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 September 30, 2003, the Company exceeded each of the applicable
regulatory capital requirements. The Company's leverage Tier 1 capital was
$123.6 million, or 27.96% of risk-weighted assets, and 15.12% of average
assets. The Company had a risk-based total capital of $128.3 million and a
risk-based capital ratio of $29.01%.
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, investing, and financing
activities for the nine months ended September 30, 2003 and September 30,
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. A summary of lease obligations and credit commitments at
September 30, 2003 is shown below:
After 1 Year After 3 Years
Within but Within but Within After
1 Year 3 Years 5 Years 5 Years Total
(In thousands)
LEASE OBLIGATIONS
Operating lease obligations $ 165 $303 $148 $ - $ 616
======= ==== ==== ======= =======
CREDIT COMMITMENTS
Available lines of credit $36,444 $ - $ - $12,844 $49,288
Other loan commitments 30,967 - - 964 31,931
Letters of Credits 6,298 - - 803 7,101
------- ---- ---- ------- -------
Total $73,709 $ - $ - $14,611 $88,320
======= ==== ==== ======= =======
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
18
RECENT DEVELOPMENTS
On September 23, 2003, the Boards of Directors of the Company and the Bank
and Board of Trustees of Westfield Mutual Holding Company ("MHC") adopted
an amended Plan of Charter Conversion pursuant to which the Bank and the
MHC will convert to Federal Charters.
Under the Plan of Charter Conversion, the MHC will convert from
Massachusetts- chartered company regulated by the Massachusetts Division of
Banks and the Federal Reserve Board to a federally-chartered company
regulated by the Office of Thrift Supervision (the "OTS"). The Company will
remain a Massachusetts corporation but will register as a savings and loan
holding company regulated by the OTS. Also pursuant to the Plan of Charter
Conversion, the Bank will convert from a Massachusetts-chartered savings
bank regulated by the Massachusetts Division of Banks and the Federal
Deposit Insurance Corporation to a federal savings bank regulated by the
OTS.
The Board of Directors of the Company and the Bank and the Board of
Trustees of the MHC believe that the Charter Conversion will, among other
things, allow the MHC to waive the receipt of dividends paid by the
Company; provide the Company with additional flexibility to make stock
repurchases; and reduce the number of regulators of the organization from
three to one.
The Plan of Charter Conversion is subject to the regulatory approval of the
OTS and the Massachusetts Division of Banks and the Board of Corporators of
the MHC.
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 September 30,
2003, that the Company and the Bank met all capital adequacy requirements
to which they were subject. As of September 30, 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 uses 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.
The changes in interest income and interest expense due to changes in
interest rates reflect the interest sensitivity of our interest earning
assets and interest bearing liabilities. For example, in a rising interest
rate environment, the interest income from an adjustable rate loan will
increase depending on its repricing characteristics while the interest
income from a fixed loan would not increase until the loan was repaid and
reinvested or loaned out at a higher interest rate.
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.
19
The tables below set forth as of June 30, 2003 (the date of latest
available data) the estimated changes in fully taxable equivalent 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 June 30, 2004
(Dollars in thousands)
----------------------------------------------
Changes in Net Interest and
Interest Rates Dividend Income % Change
----------------------------------------------
300 $22,274 1.1%
200 22,169 0.6
100 22,086 0.3
0 22,026 N/A
-100 21,873 -0.7
-200 21,927 -0.4
-300 22,168 0.6
Management believes that there have been no significant changes in market
risk since December 31, 2002.
ITEM 4:
CONTROLS AND PROCEDURES
The Company's President and Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e), as of the end of the period covered by this report. Based upon
the evaluation, the President and Chief Executive Officer 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 within the
time periods specified in the rules and terms of the Securities and
Exchange Commission.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter
materially affected, or that is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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
20
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Organization of Westfield Financial, Inc.
(incorporated by reference to Exhibit 3.1 of the Form S-1, as
filed with the Sec on August 28, 2001).
3.2 Bylaws of Westfield Financial, Inc. (incorporated by
reference to Exhibit 3.2 of the Form S-1, as filed with the Sec
on August 28, 2001).
31.1 Certifications pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K
On July 23, 2003, the Company filed a current report on Form
8-K announcing earnings for the second quarter of fiscal year
2003.
On September 4, 2003, the Company filed a current report on
Form 8-K announcing the adoption of a plan of charter
conversion pursuant to which, the Company, the Bank, and
Westfield Mutual Holding Company will convert to federal
charters.
On November 4, 2003, the Company filed a current report on Form
8-K announcing earnings for the third fiscal quarter of 2003.
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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)
November 14, 2003
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