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UNITED STATES
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, 2004
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 check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes X No__
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 4, 2004
- ----------------------------- ----------------
Common 9,975,622
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited) - September 30, 2004 and
December 31, 2003
Consolidated Statements of Operations (Unaudited) - Three and nine
months ended September 30, 2004 and 2003
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Unaudited) - Nine Months ended
September 30, 2004
Consolidated Statements of Cash Flows (Unaudited) - Nine Months
ended September 30, 2004 and 2003
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. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
Exhibits
1
FORWARD - LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking
statements" which may be identified by the use of such words as "believe,"
"expect," "anticipate," "should," "planned," "estimated," and "potential."
Examples of forward-looking statements include, but are not limited to,
estimates with respect to our financial condition and results of operation
and business that are subject to various factors which could cause actual
results to differ materially from these estimates. These factors include,
but are not limited to:
* general and local economic conditions;
* changes in interest rates, deposit flows, demand for mortgages and
other loans, real estate values, and competition;
* changes in loan default and charge-off rates;
* changes in accounting principles, policies, or guidelines;
* changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products,
and services.
Any or all of our forward-looking statements in this Quarterly Report
on Form 10-Q and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or
unknown risks and uncertainties. Consequently, no forward-looking
statements can be guaranteed. We disclaim any obligation to subsequently
revise any forward-looking statements to reflect events or circumstances
after the date of such statements, or to reflect the occurrence of
anticipated or unanticipated events.
2
ITEM 1: FINANCIAL STATEMENTS
Westfield Financial, Inc. and Subsidiaries
Consolidated Balance Sheets - Unaudited
(Dollars in thousands except share data)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Cash and due from banks $ 13,556 $ 11,740
Federal funds sold 26,805 15,930
Interest-bearing deposits 118 18,004
-------- --------
Cash and cash equivalents 40,479 45,674
-------- --------
SECURITIES:
Available for sale - at estimated fair value 15,223 25,806
Held to maturity - at amortized cost (estimated
fair value of $77,898 in 2004, and $71,003
in 2004 and 2003) 82,057 69,927
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 74,348 76,177
Held to maturity - at amortized cost (estimated
fair value of $167,165 in 2004, and $191,511
in 2003) 167,898 191,683
FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,237 4,237
LOANS - Net of allowance for loan losses of
$4,988 in 2004 and $4,642 in 2003 373,767 344,980
PREMISES AND EQUIPMENT, Net 11,394 11,774
ACCRUED INTEREST AND DIVIDENDS 3,591 3,555
BANK OWNED LIFE INSURANCE 17,060 16,507
OTHER ASSETS 4,134 4,896
-------- --------
TOTAL ASSETS $794,188 $795,216
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Noninterest-bearing $ 48,276 $ 54,620
Interest-bearing 562,372 577,811
-------- --------
Total deposits 610,648 632,431
-------- --------
CUSTOMER REPURCHASE AGREEMENTS 16,439 12,135
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 45,000 20,000
OTHER LIABILITIES 5,435 5,846
-------- --------
TOTAL LIABILITIES 677,522 670,412
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000
shares authorized, none outstanding at
September 30, 2004, December 31, 2003 - -
Common stock - $.01 par value, 25,000,000
shares authorized, 10,580,000 shares
issued, 9,975,922 and 10,522,300 shares
outstanding at September 30, 2004 and
December 31, 2003, respectively 106 106
Additional paid-in capital 47,390 47,143
Unallocated Common Stock of Employee Stock
Ownership Plan (5,729) (5,837)
Restricted stock unearned compensation (1,681) (2,094)
Retained earnings 89,093 85,794
Accumulated other comprehensive income, net (29) 788
Treasury stock, at cost (604,078 and 57,700
shares at September 30, 2004 and December 31, 2003,
respectively) (12,484) (1,096)
-------- --------
Total stockholders' equity 116,666 124,804
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $794,188 $795,216
======== ========
See accompanying notes to consolidated financial statements.
3
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Operations - Unaudited
(Dollars in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30
2004 2003 2004 2003
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $3,641 $3,883 $10,808 $12,119
Securities and mortgage backed securities 3,147 2,655 9,568 9,238
Consumer loans 284 573 976 2,023
Commercial and industrial loans 1,337 1,036 3,707 2,967
Federal funds sold 87 43 133 152
Marketable equity securities 74 147 262 374
Interest-bearing deposits 7 56 115 185
------ ------ ------- -------
Total interest and dividend income 8,577 8,393 25,569 27,058
------ ------ ------- -------
INTEREST EXPENSE:
Deposits 2,328 3,131 7,245 10,331
Customer repurchase agreements 43 49 142 159
Other borrowings 317 140 736 363
------ ------ ------- -------
Total interest expense 2,688 3,320 8,123 10,853
------ ------ ------- -------
Net interest and dividend income 5,889 5,073 17,446 16,205
PROVISION FOR LOAN LOSSES 200 150 475 500
------ ------ ------- -------
Net interest and dividend income after
provision for loan losses 5,689 4,923 16,971 15,705
------ ------ ------- -------
NONINTEREST INCOME:
Income from bank owned life insurance 187 214 553 573
Service charges and fees 591 496 1,699 1,401
Gain on sales of securities, net - 70 868 183
------ ------ ------- -------
Total noninterest income 778 780 3,120 2,157
------ ------ ------- -------
NONINTEREST EXPENSE:
Salaries and employees benefits 2,614 2,500 7,828 7,397
Occupancy 447 459 1,350 1,343
Computer operations 400 403 1,208 1,200
Stationery, supplies and postage 122 141 394 429
Other 703 812 2,469 3,053
------ ------ ------- -------
Total noninterest expense 4,286 4,315 13,249 13,422
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 2,181 1,388 6,842 4,440
INCOME TAXES 627 337 2,048 2,262
------ ------ ------- -------
NET INCOME $1,554 $1,051 $ 4,794 $ 2,178
====== ====== ======= =======
EARNINGS PER COMMON SHARE:
Basic earnings per share $ 0.16 $ 0.11 $ 0.49 $ 0.22
Diluted earnings per share $ 0.16 $ 0.10 $ 0.48 $ 0.21
See accompanying notes to consolidated financial statements.
4
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - UNAUDITED
(Dollars in thousands, except share data)
Accumulated
Common Stock Restricted Other
---------------- Additional Unallo- Stock Compre- Treasury Stock
Par Paid-In cated Unearned Retained hensive -----------------
Shares Value Capital ESOP Compensation Earnings Income, Net Shares Amount Total
------ ----- ---------- ------- ------------ -------- ----------- ------ ------ -----
Balance at
December 31, 2003 10,580,000 $106 $47,143 $(5,837) $(2,094) $ 85,794 $ 788 (57,700) $ (1,096) $124,804
Comprehensive income:
Net income - - - - - 4,794 - - - 4,794
Unrealized losses
on securities
arising during
the period, net
of tax benefit
of $89 - - - - - - (199) - - (199)
Reclassification
for gains included
in net income,
net of taxes
of $250 - - - - - - (618) - - (618)
--------
Comprehensive income 3,977
Activity related to
common stock issued
as employee incentives - - 247 108 413 - - - - 768
Cash dividends declared - - - - - (1,495) - - - (1,495)
Treasury stock purchased - - - - - - - (546,378) (11,388) (11,388)
---------- ---- ------- ------- ------- -------- ------ -------- -------- --------
Balance at
September 30, 2004 10,580,000 $106 $47,390 $(5,729) $(1,681) $ 89,093 $ (29) (604,078) $(12,484) $116,666
========== ==== ======= ======= ======= ======== ====== ======== ======== ========
Balance at
December 31, 2002 10,580,000 $106 $49,463 $(5,621) $(2,731) $ 84,264 $1,218 - $ - $126,699
Comprehensive income:
Net income - - - - - 2,178 - - - 2,178
Unrealized losses
on securities
arising during
the period, net
of tax benefit
of $278 - - - - - - (502) - - (502)
Reclassification
for gains included
in net income,
net of tax
benefit of $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 - - - - - - - 59,700 (1,134) (1,134)
---------- ---- ------- ------- ------- -------- ------ -------- -------- --------
Balance at
September 30, 2003 10,580,000 $106 $47,473 $(5,427) $(2,224) $ 84,855 $ 598 59,700 $ (1,134) $124,247
========== ==== ======= ======= ======= ======== ====== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
Westfield Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in thousands)
Nine Months
Ended September 30,
2004 2003
---- ----
OPERATING ACTIVITIES:
Net income $ 4,794 $ 2,178
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 475 500
Depreciation of premises and equipment 771 816
Net amortization of premiums and discounts on securities,
mortgage backed securities, and mortgage loans 1,145 2,770
Amortization of deferred compensation 795 713
Net realized securities gains (868) (183)
Deferred income tax provision (benefit) 417 (1,322)
Increase in cash surrender value of bank owned life insurance (553) (508)
Changes in assets and liabilities:
Accrued interest and dividends (36) 188
Other assets 762 624
Other liabilities (411) (1,844)
-------- --------
Net cash provided by operating activities 7,291 3,932
-------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (15,209) (39,362)
Proceeds from calls, maturities and principal collections 3,000 20,078
Securities, available for sale:
Purchases (5,287) (15,796)
Proceeds from sales 11,891 24,518
Proceeds from calls, maturities, and principal collections 3,899 29,987
Mortgage backed securities, held to maturity:
Purchases (19,663) (96,629)
Principal collections 42,690 76,519
Mortgage backed securities, available for sale:
Purchases (36,515) (38,393)
Proceeds from sales 20,325 3,114
Principal collections 17,463 38,737
Purchase of Federal Home Loan Bank of Boston and other stock - (304)
Purchase of residential mortgages (34,127) -
Net other decrease in loans 4,827 10,883
Net purchases of premise and equipment (391) (288)
Purchase of bank owned life insurance - (15,701)
-------- --------
Net cash used in investing activities (7,097) (2,637)
-------- --------
FINANCING ACTIVITIES:
Decrease in deposits (21,783) (2,914)
Increase in customer repurchase agreements 4,304 5,407
Federal Home Loan Bank of Boston advances 25,000 5,000
Purchase of common stock in connection with employee
benefit program (27) (2,002)
Cash dividends paid (1,495) (1,587)
Treasury stock purchased (11,388) (1,134)
-------- --------
Net cash (used in) provided by financing activities (5,389) 2,770
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: (5,195) 4,065
CASH AND CASH EQUIVALENTS
Beginning of period 45,674 56,575
-------- --------
End of period $ 40,479 $ 60,640
======== ========
See accompanying notes to consolidated financial statements.
6
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Westfield Financial, Inc. (the "Company") is a
Massachusetts chartered corporation. The Company has a wholly-owned bank
subsidiary called Westfield Bank (the "Bank") and is the majority-owned
subsidiary of Westfield Mutual Holding Company (the "MHC"). On July 23,
2004 Westfield Bank and MHC completed their conversions from companies
regulated by the Massachusetts Division of Banks or the Federal Reserve
Board to federally-chartered companies regulated by the Office of Thrift
Supervision (the "OTS").
Westfield Bank's deposits are insured to the limits specified by the
Federal Deposit Insurance Corporation (the "FDIC"). Westfield Bank operates
ten branches in Western Massachusetts. Westfield Bank's primary source of
revenue is earnings on loans to small and middle-market businesses and to
residential property homeowners.
Westfield Bank formed a subsidiary, Elm Street Real Estate Investments Inc.
(the "REIT"). The REIT was 99.9% owned by Westfield Bank. In December 2003,
Westfield Bank dissolved the REIT. 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, Westfield 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, Westfield 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, 2004,
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 months ended are not necessarily
indicative of the results of operations for the remainder of the year
ending December 31, 2004. 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, 2003.
Reclassifications - Certain amounts in the prior year financial statements
have been reclassified to conform to the current year presentation.
7
Stock Based Compensation -SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages all entities to adopt a fair value based method
of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees, " whereby compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock-based plans have no
intrinsic value at the grant date, and under Opinion No. 25 no compensation
cost is recognized for them.
The Company has elected to continue with the accounting methodology in
Opinion No. 25 and, as a result, has provided pro forma disclosures of net
income and earnings per share, as if the fair value based method of
accounting had been applied.
In March 2004, FASB issued an exposure draft entitled "Share-Based Payment
- - An Amendment of FASB Statements No. 123 and 95." The FASB-proposed
statement would eliminate the alternative to use Opinion 25's intrinsic
value method of accounting. The proposed statement would require public
companies to recognize the cost of employee services received based upon
the grant-date fair value of those instruments. In September 2004, FASB
voted to delay the effective date for public companies making the proposed
statement effective for fiscal periods beginning after June 15, 2005.
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 and income per share would have been adjusted to the
pro forma amounts indicated below (in thousands, except per share amounts):
Three Months Ended September 30, Nine Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $1,554 $1,051 $4,794 $2,178
Less: Compensation expense
determined under fair value
based method for all awards
net of tax effects (68) (64) (204) (191)
------ ------ ------ ------
Pro forma net income $1,486 $ 987 $4,590 $1,987
====== ====== ====== ======
Net income per share
Basic as reported $ 0.16 $ 0.11 $ 0.49 $ 0.22
Pro forma 0.16 0.10 0.47 0.20
Diluted as reported 0.16 0.10 0.48 0.21
Pro forma 0.15 0.10 0.46 0.20
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model.
2. EARNINGS PER SHARE
Basic earnings per share represents income available to stockholders
divided by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential shares had been
issued or earned.
8
3. 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, dividends from the REIT are no longer
eligible for a dividends-received deduction. As a result of the enactment
of this legislation, the Company 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 included a retroactive
effective date that covered 1999 through 2002. During the first quarter of
2003, the Company accrued an amount of $2.9 million, net of federal benefit
related to the estimated liability at the end of the first quarter 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.
Accordingly, 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 first quarter of 2003.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
Westfield Financial (the "Company") strives to remain a leader in meeting
the financial service needs of the local community and to provide quality
service to the individuals and businesses in the market areas that it has
served since 1853. Historically, Westfield Bank has been a community-
oriented provider of traditional banking products and services to business
organizations and individuals, including products such as residential and
commercial real estate loans, consumer loans and a variety of deposit
products. Westfield Bank meets the needs of its local community through a
community-based and service-oriented approach to banking.
In recent years, in addition to real estate lending, we have adopted a
growth-oriented strategy that has focused on increased emphasis on
commercial lending. Our strategy also calls for increasing deposit
relationships and broadening our product lines and services. We believe
that this business strategy is best for our long term success and
viability, and complements our existing commitment to high quality customer
service. In connection with our overall growth strategy, Westfield Bank
seeks to:
* continue to grow its commercial loan portfolio as a means to
increase the yield on and diversify its loan portfolio and
build transactional deposit account relationships;
* focus on expanding its retail banking franchise, and increasing
the number of households served within its market area; and
* depending on market conditions, refer substantially all of the
fixed-rate residential real estate loans to a third party
mortgage company which underwrites, originates and services
these loans in order to diversify its loan portfolio, increase
fee income and reduce interest rate risk.
You should read our financial results for the quarter ended September 30,
2004 in the context of this strategy.
9
* Net income was $1.6 million, or $0.16 per diluted share, for the
quarter ended September 30, 2004 as compared to $1.1 million, or
$0.11 per diluted share for the same period in 2003. For the nine
months ended September 30, 2004, net income was $4.8 million, or
$0.48 per diluted share as compared to $2.2 million, or $0.21 per
diluted share for the same period in 2003. The results for the first
quarter of the 2003 period included an expense of $2.9 million
representing an estimate of the additional state tax liability,
including interest, relating to the deduction for dividends received
from Westfield Bank's REIT subsidiary for 1999 through 2002. As a
result of an agreement with the Massachusetts Department of Revenue,
the second quarter 2003 financial results include a credit of
approximately $1.45 million, representing a reversal of 50% of the
charge taken in the first quarter of 2003.
* Commercial real estate and commercial and industrial loans increased
$20.1 million, or 9.3% from December 31, 2003 to September 30, 2004.
This is consistent with Westfield Bank's strategic plan, which
emphasizes commercial lending. The continued success of Westfield
Bank's commercial lending is primarily dependent on the local and
national economy.
* Indirect automobile loans decreased $8.5 million, or 53.1% from $16.0
million at December 31, 2003 to $7.5 million at September 30, 2004.
Management curtailed its indirect automobile lending beginning in
fiscal year 2000 due to credit quality concerns, and in the fourth
quarter of 2003, Westfield Bank ceased writing indirect automobile
loans. Although indirect auto loans had higher yields, they also had
higher costs; therefore, Westfield Bank expects minimal impact on
earnings as a result of the discontinuation of the program.
* Residential real estate loans increased $18.2 million to $128.7
million at September 30, 2004 from $110.5 million at December 31,
2003. Westfield Bank purchased $34.1 million in adjustable rate
mortgage loans, which are serviced by the originating institutions.
This was offset by principal payments and payoffs of other
residential real estate loans. Westfield Bank refers its residential
real estate borrowers to a third party mortgage company and
substantially all of Westfield Bank's residential real estate loans
are underwritten, originated and serviced by a third party mortgage
company. Westfield Bank receives a fee from each of these loans
originated. Westfield Bank believes that this program has diversified
its loan portfolio and continues to reduce interest rate risk.
* Net interest and dividend income increased primarily as a result of
lower funding costs. The net interest margin was 3.14% and 3.11% for
the three and nine months ended September 30, 2004, respectively, as
compared to 2.64% and 2.84% for the same periods in 2003,
respectively. Westfield Financial expects net interest and dividend
income to increase in future periods as it continues to emphasize
higher yielding commercial real estate loans and commercial and
industrial loans, while referring residential mortgage loans to a
third party mortgage company. In addition, Westfield Bank continues
to emphasize core deposits over time deposits.
* Core deposits, which include checking, NOW, savings and money market
accounts, increased while time deposits decreased from December 31,
2003 to September 30, 2004. This is consistent with Westfield Bank's
strategy for growing core deposits in order to maintain long-term
relationships with customers and to reduce the cost of funds.
Management believes, however, that a percentage of the growth in core
deposits is due to the low rate environment, i.e. no incentive for
customers to lock up funds in time deposits. In a period of rising
interest rates, the more rate sensitive customers may shift funds
back into time deposits, resulting in a higher cost of funds.
* Fees received from the third party mortgage company were $65,000 for
the nine months ended September 30, 2004 as compared to $301,000 for
the same period in 2003. Higher interest rates resulted in fewer
referrals to the third party mortgage company. Fee income from the
third party mortgage company in the future may be affected by
borrower activity, which generally decreases in a rising interest
rate environment.
10
* Checking account processing fees increased $471,000 for the nine
months ended September 30, 2004 as compared to the same period in
2003. This was as a result of new products and services provided by
Westfield Bank to its checking account customers commencing in the
second quarter of 2004.
* Nonperforming loans increased $683,000 to $2.5 million at September
30, 2004 from $1.8 million at December 31, 2003. This was primarily
due to a single commercial real estate loan relationship of $1.4
million. The loan is fully collateralized based on the estimated fair
market value of the property. This was offset primarily by payments
in full received on other nonperforming loans.
* Gross charge-offs decreased by 35.7% for the nine months ended
September 30, 2004 as compared to the same period in 2003, primarily
as a result of the curtailment of indirect auto loans and the
improved local and national economy.
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 loanbase 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 nonperforming loans expected to result
from existing conditions), collateral values, loan volumes and
concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions
were believed to have had on the collectibility of the loan portfolio.
Although management believes it has established and maintained the
allowance for loan losses at appropriate levels, future adjustments may be
necessary if economic, real estate and other conditions differ
substantially from the current operating environment.
11
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.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
Total assets decreased $1.0 million to $794.2 million at September 30, 2004
from $795.2 million at December 31, 2003.
Securities decreased $24.1 million, or 6.6%, to $339.5 million at September
30, 2004 from $363.6 million at December 31, 2003. The decrease was
primarily the result of the sale of certain mortgage backed securities with
significant paydowns. In addition, equity securities decreased by $8.5
million as a result of selling essentially all of Westfield Bank's common
stock portfolio.
Net loans during the period increased by $28.8 million to $373.8 million at
September 30, 2004 from $345.0 million at December 31, 2003. Commercial
real estate and commercial and industrial loans increased $20.1 million, or
9.3%, to $236.7 million at September 30, 2004 from $216.6 million at
December 31, 2003. This is consistent with Westfield Bank's strategic plan,
which emphasizes commercial lending. The continued success of Westfield
Bank's commercial lending is primarily dependent on the local and national
economy. Residential real estate loans increased $18.2 million to $128.7
million at September 30, 2004 from $110.5 million at December 31, 2003.
Westfield Bank purchased $33.8 million in adjustable rate mortgage loans,
which are serviced by the originating institutions. This was offset by
principal payments and payoffs of other residential real estate loans.
Westfield Bank refers its residential real estate borrowers to a third
party mortgage company and substantially all of Westfield Bank's
residential real estate loans are underwritten, originated and serviced by
a third party mortgage company. Westfield Bank receives a fee from each of
these loans originated. Westfield Bank believes that this program has
diversified its loan portfolio and continues to reduce interest rate risk.
Indirect auto loans decreased by $8.5 million, or 53.1%, from $16.0 million
at December 31, 2003 to $7.5 million at September 30, 2004. Management
curtailed its indirect automobile lending beginning in fiscal year 2000 due
to credit quality concerns, and in the fourth quarter of 2003, Westfield
Bank ceased writing indirect automobile loans. Although indirect auto loans
had higher yields, they also had higher costs; therefore, Westfield Bank
expects minimal impact on earnings as a result of the discontinuation of
the program.
12
Total deposits decreased $21.8 million to $610.6 million at September 30,
2004 from $632.4 million at December 31, 2003. Time deposits decreased
$26.7 million to $307.5 million at September 30, 2004. Core deposits, which
include checking, NOW, savings, and money market accounts, increased by
$4.9 million to $303.1 at September 30, 2004. Westfield Bank's strategic
plan calls for a lesser reliance on time deposit accounts in order to
decrease Westfield Bank's cost of funds.
The decrease in deposits was offset by a $25.0 million increase in Federal
Home Loan Bank borrowings, which totaled $45.0 million at September 30,
2004. Borrowings increased in order to take advantage of the low interest
rate environment. Customer repurchase agreements increased $4.3 million, to
$16.4 million at September 30, 2004 from December 31, 2003. A customer
repurchase agreement is an agreement by Westfield Bank to sell to and
repurchase from the customer an interest in specific securities issued by
or guaranteed by the United States Government. This transaction settles
immediately on a same day basis in immediately available funds. Interest
paid is commensurate with other products of equal interest and credit risk.
All of Westfield Bank's customer repurchase agreements at September 30,
2004 were held by commercial customers.
Stockholders' equity at September 30, 2004 and December 31, 2003 was $116.7
million and $124.8 million, respectively, which represented 14.7% of total
assets as of September 30, 2004 and 15.7% of total assets as of December
31, 2003. The change is primarily comprised of net income of $4.8 million
for the nine months ended September 30, 2004, the repurchase of 546,378
shares of common stock for $11.4 million, and the declaration by the Board
of Directors of dividends of $0.05 per share on January 27, 2004 and April
26, 2004, and a $0.10 per share on July 27, 2004 which aggregated $1.5
million.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2004 AND SEPTEMBER 30, 2003
General
Net income was $1.6 million, or $0.16 per diluted share, for the quarter
ended September 30, 2004 as compared to $1.1 million, or $0.10 per diluted
share, for the same period in 2003.
Net interest and dividend income increased $816,000 to $5.9 million for the
three months ended September 30, 2004 as compared to $5.1 million for the
same period in 2003. There were no gains on sales of securities for the
three months ended September 30, 2004 as compared to $70,000 for the same
period in 2003.
Net Interest and Dividend Income
The following tables set forth the information relating to our average
balance at, and net interest income for, the three months ended September
30, 2004 and 2003 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.
13
Three Months Ended September 30,
2004 2003
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 87 $ 26,353 1.32% $ 43 $ 19,652 0.88%
Investment Securities 3,228 343,792 3.76 2,858 383,509 2.98
Loans 5,262 373,082 5.64 5,492 360,599 6.09
------ -------- ------ --------
Total Interest-Earning Assets $8,577 $743,227 4.62 $8,393 $763,760 4.40
====== ======== ====== ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 68 $ 53,488 0.51 $ 89 $ 44,109 0.81
Savings Accounts 59 47,068 0.50 72 47,626 0.60
Money Market Accounts 330 150,952 0.87 445 156,369 1.14
Time Deposits 1,871 312,130 2.40 2,525 350,466 2.88
Customer Repurchase Agreements
and Borrowings 360 53,807 2.68 189 31,779 2.38
------ -------- ------ --------
Total Interest-Bearing
Liabilities $2,688 $617,445 1.74 $3,320 $630,349 2.11
====== ======== ====== ========
Net Interest Income/Interest
Rate Spread $5,889 2.88% $5,073 2.29%
====== ==== ====== ====
Net Interest Margin 3.14% 2.64%
==== ====
14
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, 2004 compared to
September 30, 2003
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short Term Investments $ 15 $ 29 $ 44
Investment Securities (296) 666 370
Loans 190 (420) (230)
----- ----- -----
Net Change in Income on (91) 275 184
Interest-Earning Assets ----- ----- -----
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 19 (40) (21)
Savings Accounts (1) (12) (13)
Money Market Accounts (15) (100) (115)
Time Deposits (276) (378) (654)
Customer Repurchase Agreements
and Borrowings 131 40 171
----- ----- -----
Net Change in Expense on
Interest-Bearing Liabilities (142) (490) (632)
----- ----- -----
Net Change in Interest Income $ 51 $ 765 $ 816
===== ===== =====
15
Net interest and dividend income increased $816,000 to $5.9 million for the
three months ended September 30, 2004 as compared to $5.1 million for the
same period in 2003. The net interest margin was 3.14% for the three months
ended September 30, 2004 as compared to 2.64% for the same period in 2003.
The increase in the net interest margin was primarily the result of lower
funding costs. The average cost of interest-bearing liabilities decreased
37 basis points to 1.74% for the three months ended September 30, 2004 from
2.11% for same period in 2003. The yield of interest-earning assets
increased 22 basis points to 4.62% for the three months ended September 30,
2004 from 4.40% for same period in 2003. Westfield Financial expects net
interest and dividend income to generally increase in future periods as the
Company continues to emphasize higher yielding commercial real estate loans
and commercial and industrial loans, while referring residential mortgage
loans to a third party mortgage company.
In addition, Westfield Bank continues to emphasize core deposits over time
deposits. The average balance of core deposits, which are checking, NOW,
savings, and money market accounts, decreased $3.5 million to $300.8
million for the three months ended September 30, 2004 from $304.3 million
for the same period in 2003. The average balance of time deposits decreased
$38.4 million to $312.1 million for the three months ended September 30,
2004 from $350.5 million for the same period in 2003. The declining
interest rate environment and the change in Westfield Bank's deposit mix
contributed to the decrease in funding costs. Management believes however,
that a percentage of the decrease in time deposits is due to the low rate
environment, i.e. no incentive for customers to lock up funds in time
deposits. In a period of rising interest rates, the more rate sensitive
customers may shift funds back into time deposits, resulting in a higher
cost of deposits.
Provision for Loan Losses
For the three months ended September 30, 2004, Westfield Bank provided
$200,000 for loan losses, compared to $150,000 for the same period in 2003.
The amount of Westfield Bank provided for the provision for loan losses
during the three months ended September 30, 2004 was based upon changes
that occurred in the loan portfolio during that same period. The provision
for loan losses brings Westfield Bank's allowance for loan losses to a
level determined appropriate by management. The allowance was $5.0 million
at September 30, 2004 and $4.8 million at June 30, 2004. The allowance for
loan losses was 1.32% of total loans at September 30, 2004 and 1.33% at
June 30, 2004.
At September 30, 2004 commercial real estate loans and commercial and
industrial loans increased $1.1 million as compared to June 30, 2004. This
has resulted in an increase in the allowance for loan losses requirement
for commercial real estate loans and commercial and industrial loans.
Westfield Bank considers these types of loans to contain more risk than
conventional residential real estate mortgages. Residential real estate
mortgages increased by $19.0 million during the quarter ended September 30,
2004, resulting in an increase in the allowance requirements for
residential real estate loans. Consumer loans decreased by $2.0 million to
$13.3 million during the quarter ended September 30, 2004, resulting in a
decrease in the allowance for loan losses requirement for consumer loans.
The decline in the allowance requirement for consumer loans partially
offset the increase in the allowance requirement for commercial real estate
loans and commercial and industrial loans, along with the allowance
requirement for residential real estate loans.
Nonperforming loans decreased $130,000 to $2.5 million at September 30,
2004 compared to $2.6 million at June 30, 2004.
As a result of the above factors, management determined that a provision of
$200,000 was appropriate.
16
Noninterest Income
Noninterest income decreased $2,000 to $778,000 for the three months ended
September 30, 2004 from $780,000 in the same period in 2003. There were no
gains on the sale of securities for the quarter ended September 30, 2004 as
compared to $70,000 for the same period in 2003. Checking account
processing fees increased $162,000 to $437,000 for the three months ended
September 30, 2004 from $275,000 in the same period in 2003. The increase
is a result of new products and services provided to Westfield Bank's
checking account customers, commencing in the second quarter of 2004. Fees
received from the third party mortgage company decreased $95,000 to $16,000
for the three months ended September 30, 2004 from $111,000 for the same
period in 2003. Higher interest rates resulted in fewer referrals to the
third party mortgage company. Fee income from the third party mortgage
company in the future may be affected by borrower activity, which generally
decreases in a rising interest rate environment.
Noninterest Expense
Noninterest expense was $4.3 million for the three months ended September
30, 2004 and September 30, 2003. Salaries and benefits increased $114,000
for the three months ended September 30, 2004 as compared to the same
period in 2003. This was primarily the result of normal increases in
salaries and health care costs along with an increase in stock based
benefit plan expenses. Expenses associated with indirect auto loan
processing decreased by $46,000 for the three months ended September 30,
2004 as compared for the same period in 2003. This is a result of
discontinuing the indirect auto loan program. Correspondent bank charges
were $37,000 and $91,000 for the three months ended September 30, 2004 and
2003, respectively. The decrease of $54,000 in correspondent bank charges
is primarily the result of lower investment safekeeping expenses. Westfield
Bank began using a different safekeeping service provider in the third
quarter 2004.
Income Taxes
For the three months ended September 30, 2004, the Company had a tax
provision of $627,000 as compared to $337,000 for the same period in 2003.
This was a result of higher income before income taxes for the three months
ended September 30, 2004 as compared to the same period in 2003.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2004 AND SEPTEMBER 30, 2003
General
Net income was $4.8 million, or $0.48 per diluted share, for the nine
months ended September 30, 2004 as compared to $2.2 million, or $0.21 per
diluted share, for the same period in 2003. The results for the first
quarter of 2003 included an expense of $2.9 million representing an
estimate of the additional state tax liability, including interest,
relating to the deduction for dividends received from Westfield Bank's REIT
subsidiary for 1999 through 2002. As a result of an agreement with the
Massachusetts Department of Revenue, the second quarter 2003 financial
results include a credit of approximately $1.45 million, representing a
reversal of 50% of the charge taken in the first quarter 2003.
Net interest and dividend income increased $1.2 million to $17.4 for the
nine months ended September 30, 2004 as compared to $16.2 million for the
same period in 2003. Net gains on sales of securities were $868,000 for the
nine months ended September 30, 2004 as compared to $183,000 for the same
period in 2003.
17
Net Interest and Dividend Income
The following tables set forth the information relating to our average
balance at, and net interest income for, the nine months ended September
30, 2004 and 2003 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.
Nine Months Ended September 30,
2004 2003
Average Avg Yield/ Average Avg Yield/
Interest Balance Cost Interest Balance Cost
-------- ------- ---------- -------- ------- ----------
(Dollars in thousands)
Interest-Earning Assets
- -----------------------
Short Term Investments $ 133 $ 16,746 1.06% $ 152 $ 20,367 1.00%
Investment Securities 9,945 367,418 3.61 9,797 385,849 3.39
Loans 15,491 363,629 5.68 17,109 355,948 6.41
------- -------- ------- --------
Total Interest-Earning Assets $25,569 $747,793 4.56 $27,058 $762,164 4.73
======= ======== ======= ========
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts $ 180 $ 55,618 0.43 $ 287 $ 42,592 0.90
Savings Accounts 175 48,500 0.48 313 46,846 0.89
Money Market Accounts 1,076 152,985 0.94 1,474 151,303 1.30
Time Deposits 5,814 319,876 2.42 8,257 357,858 3.08
Customer Repurchase Agreements and
Borrowings 878 46,304 2.53 522 28,058 2.48
------- -------- ------- --------
Total Interest-Bearing
Liabilities $ 8,123 $623,283 1.74 $10,853 $626,657 2.31
======= ======== ======= ========
Net Interest Income/Interest
Rate Spread $17,446 2.82% $16,205 2.42%
======= ==== ======= ====
Net Interest Margin 3.11% 2.84%
==== ====
18
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, 2004 compared to
September 30, 2003
Increase (decrease) due to:
Interest-Earning Assets Volume Rate Net
- ----------------------- ------ ---- ---
(Dollars in thousands)
Short Term Investments $ (27) $ 8 $ (19)
Investment Securities (468) 616 148
Loans 369 (1,987) (1,618)
----- ------- -------
Net Change in Income on (126) (1,363) (1,489)
Interest-Earning Assets ----- ------- -------
Interest-Bearing Liabilities
- ----------------------------
NOW Accounts 88 (195) (107)
Savings Accounts 11 (149) (138)
Money Market Accounts 16 (414) (398)
Time Deposits (876) (1,567) (2,443)
Customer Repurchase Agreements
and Borrowings 339 17 356
----- ------- -------
Net Change in Expense on
Interest-Bearing Liabilities (422) (2,308) (2,730)
----- ------- -------
Net Change in Interest Income $ 296 $ 945 $ 1,241
===== ======= =======
19
Net interest and dividend income increased $1.2 million to $17.4 million
for the nine months ended September 30, 2004 as compared to $16.2 million
for the same period in 2003. The net interest margin was 3.11% for the nine
months ended September 30, 2004 as compared to 2.84% for the same period in
2003.
The increase in the net interest margin was primarily the result of lower
funding costs. The average cost of interest-bearing liabilities decreased
57 basis points to 1.74% for the nine months ended September 30, 2004 from
2.31% for same period in 2003. The yield of interest-earning assets
decreased only 17 basis points to 4.56% for the nine months ended September
30, 2004 from 4.73% for same period in 2003. Westfield Financial expects
net interest and dividend income to generally increase in future periods as
it continues to emphasize higher yielding commercial real estate loans and
commercial and industrial loans, while referring residential mortgage loans
to a third party mortgage company.
In addition, Westfield Bank continues to emphasize core deposits over time
deposits. The average balance of core deposits, which are checking, NOW,
savings, and money market accounts, increased $6.5 million to $301.0
million for the nine months ended September 30, 2004 from $294.5 million
for the same period in 2003. The average balance of time deposits decreased
$38.0 million to $319.9 million for the nine months ended September 30,
2004 from $357.9 million for the same period in 2003. The declining
interest rate environment and the shift in Westfield Bank's deposit mix
contributed to the decrease in funding costs. Management believes however,
that a percentage of the growth in core deposits is due to the low rate
environment, i.e. no incentive for customers to lock up funds in time
deposits. In a period of rising interest rates, the more rate sensitive
customers may shift funds back into time deposits, resulting in a higher
cost of deposits.
Provision for Loan Losses
For the nine months ended September 30, 2004, Westfield Bank provided
$475,000 for loan losses, compared to $500,000 for the same period in 2003.
The amount Westfield Bank provided for the provision for loan losses
during the nine months ended September 30, 2004 was based upon changes that
occurred in the loan portfolio during that same period. The provision for
loan losses brings Westfield Bank's allowance for loan losses to a level
determined appropriate by management. The allowance was $5.0 million at
September 30, 2004 and $4.6 million at December 31, 2003. The allowance for
loan losses was 1.32% of total loans at September 30, 2004 and 1.33% at
December 31, 2003.
At September 30, 2004 commercial real estate loans and commercial and
industrial loans increased $20.1 million as compared to December 31, 2003.
Commercial real estate loans and commercial and industrial loans comprised
62.5% of Westfield Bank's loan portfolio as of September 30, 2004 as
compared to 61.9% as of December 31, 2003. This has resulted in an increase
in the allowance for loan losses requirement for commercial real estate
loans and commercial and industrial loans. Westfield Bank considers these
types of loans to contain more risk than conventional residential real
estate mortgages, which increased by $18.2 million during the nine months
ended September 30, 2004. This resulted in an increase in the allowance
requirement for residential real estate loans. Consumer loans decreased by
$9.1 million to $13.3 million at September 30, 2004, resulting in a
decrease in the allowance for loan losses requirement for consumer loans.
The decline in the allowance requirement for consumer loans partially
offset the increase in the allowance requirement for commercial real estate
loans and commercial and industrial loans, along with the allowance
requirement for residential real estate loans.
Nonperforming loans increased $683,000 to $2.5 million at September 30,
2004 compared to $1.8 million at December 31, 2003. The increase in
nonperforming loans was primarily due to a single commercial real estate
loan relationship of $1.4 million. The loan is fully collateralized based
on the estimated fair market value of the property. This was partially
offset by receipt of payments in full of $605,000 on other nonperforming
loans.
As a result of the above factors, management determined that a provision of
$475,000 was appropriate.
20
Noninterest Income
Noninterest income increased $963,000 to $3.1 million for the nine months
ended September 30, 2004 from $2.2 million in the same period in 2003. Net
gains on the sale of securities were $868,000 for the nine months ended
September 30, 2004 as compared to $183,000 for the same period in 2003. The
Company has sold essentially all its common stock portfolio during 2004.
Checking account processing fees increased $471,000 to $1.2 million for the
nine months ended September 30, 2004 from $773,000 for the same period in
2003. The increase was primarily the result of new products and services
provided to Westfield Bank's checking account customers, commencing in the
second quarter of 2004. Fees received from the third party mortgage company
decreased $236,000 to $65,000 for the nine months ended September 30, 2004
as compared to $301,000 for the same period in 2003. Higher interest rates
resulted in fewer referrals to the third party mortgage company. Fee income
from the third party mortgage company in the future may be affected by
borrower activity, which generally decreases in a rising interest rate
environment.
Noninterest Expense
Noninterest expense for the nine months ended September 30, 2004 was $13.2
million as compared to $13.4 million for the same period in 2003. The first
quarter 2003 results included a $328,000 charge for tax-related interest
and penalties regarding the Commonwealth of Massachusetts' REIT
legislation. The tax matter was settled in the second quarter of 2003
resulting in a reversal of $153,000 of the expense. Salaries and benefits
increased $431,000 for the nine months ended September 30, 2004 as compared
to the same period in 2003. This was primarily the result of normal
increases in salaries and health care costs along with an increase in stock
based benefit plan expenses of $150,000. Expenses associated with indirect
auto loan processing decreased by $118,000 for the nine months ended
September 30, 2004 as compared to the same period in 2003. This is a result
of discontinuing the indirect auto loan program.
Income Taxes
For the nine months ended September 30, 2004, the Company had a tax
provision of $2.0 million as compared to $2.3 million for the same period
in 2003. The first quarter of 2003 included the establishment of a
liability of $2.9 million for prior years' state taxes, net of federal tax
effect, relating to the Commonwealth of Massachusetts' REIT legislation as
discussed above. As a result of an agreement with the Massachusetts
Department of Revenue, the second quarter 2003 results include a credit of
approximately $1.45 million, representing a reversal of 50% of the charge
taken in the first quarter of 2003.
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. Westfield Bank also can borrow funds from
the Federal Home Loan Bank based on eligible collateral of loans and
securities. Westfield Bank's maximum additional borrowing capacity from the
Federal Home Loan Bank at September 30, 2004 was approximately $53.0
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.
21
At September 30, 2004, the Company exceeded each of the applicable
regulatory capital requirements. As of September 30, 2004, the most recent
notification from the Office of Thrift Supervision, (the "OTS") categorized
Westfield Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized" Westfield
Bank must maintain minimum total risk-based, Tier 1 risk -based and Tier 1
leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed Westfield Bank's category. The Company's and Westfield Bank's
actual capital ratios as of September 30, 2004 are also presented in the
table.
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
September 30, 2004
Total Capital (to Risk Weighted Assets):
Consolidated $121,654 27.85% $34,945 8.00% N/A -
Bank 87,323 20.36 34,319 8.00 $42,898 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 116,666 26.71 17,472 4.00 N/A -
Bank 82,335 19.19 17,159 4.00 25,739 6.00
Tier 1 Capital (to Average Assets):
Consolidated 116,666 14.67 31,819 4.00 N/A -
Bank 82,335 10.82 30,140 4.00 37,675 5.00
On July 23, 2004, Westfield Bank and the MHC completed their conversions
from companies regulated by the Massachusetts Division of Banks or the
Federal Reserve Board to federally-chartered companies regulated by the
OTS. Westfield Bank, as a federally-chartered savings bank, is subject to
OTS capital requirements rather than Federal Deposit Insurance Corporation
capital requirements. Westfield Bank is considered "well capitalized" under
OTS capital requirements.
See the "Consolidated Statements of Cash Flows" in the Consolidated
Financial Statements included in this Form 10-Q for the sources and uses of
cash flows for operating, investing, and financing activities for the nine
months ended September 30, 2004 and September 30, 2003.
Westfield Bank also has outstanding, at any time, a significant number of
commitments to extend credit and provide financial guarantees to third
parties. These arrangements are subject to strict credit control
assessments. Guarantees specify limits to Westfield Bank's obligations.
Because many commitments and almost all guarantees expire without being
funded in whole or in part, the contract amounts are not estimates of
future cash flows.
22
Westfield Bank is obligated under leases for certain of its branches and
equipment. A summary of lease obligations and credit commitments at
September 30, 2004 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 $ 189 $ 313 $ 162 $ - $ 664
======= ======= ======= ======= ========
BORROWINGS
Federal Home Loan Bank $ 5,000 $25,000 $15,000 $ - $ 45,000
======= ======= ======= ======= ========
CREDIT COMMITMENTS
Available lines of credit $38,717 $ - $ - $19,157 $ 57,874
Other loan commitments 24,567 - - 865 25,432
Letters of credit 4,283 - - 932 5,215
------- ------- ------- ------- --------
Total credit commitments $67,567 $ - $ - $20,954 $ 88,521
======= ======= ======= ======= ========
Grand total $72,756 $25,313 $15,162 $20,954 $134,185
======= ======= ======= ======= ========
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.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Westfield Bank to maintain minimum amounts and
ratios (set forth in the table above) of total and Tier I capital to risk
weighted assets and to average assets. Management believes, as of September
30, 2004, that the Company and Westfield Bank met all capital adequacy
requirements to which they were subject. As of September 30, 2004, the most
recent notification from the Office of Thrift Supervision (the "OTS")
categorized Westfield Bank as well capitalized under the regulatory
framework for prompt corrective action.
On July 23, 2004 Westfield Bank and MHC completed their conversions from
companies regulated by the Massachusetts Division of Banks or the Federal
Reserve Board to federally-chartered companies regulated by the OTS.
Westfield Bank, as a federally-chartered savings bank, is subject to OTS
capital requirements rather than Federal Deposit Insurance Corporation
capital requirements. Westfield Bank is considered "well capitalized" under
OTS capital requirements.
To be categorized as well capitalized, Westfield Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are
no conditions or events since that notification that management believes
have changed Westfield Bank's category.
23
Management uses a simulation model to monitor interest rate risk. This
model reports the net interest income at risk primarily under seven
different interest rate change environments. Specifically, an analysis is
performed of changes in net interest income assuming changes in interest
rates, up 100, 200, 300 and 400 basis points from current rates, along with
down 100 and 200 basis points from current rates, over the one-year time
period. These are compared to an analysis that assumes no change in
interest rates over the one-year period.
The simulation model was most recently run in 2004, as of June 30, 2004, to
project net interest income for twelve months ending June 30, 2005. The
results derived from the simulation model are discussed below.
The changes in interest income and interest expense due to changes in
interest rates reflect the interest sensitivity of our interest earning
assets and interest bearing liabilities. For example, in a rising interest
rate environment, the interest income from an adjustable rate loan will
increase depending on its repricing characteristics while the interest
income from a fixed loan would not increase until the loan was repaid and
reinvested or loaned out at a higher interest rate.
The tables below set forth for the twelve months ended June 30, 2005 the
estimated changes in net interest and dividend income that would result
from incremental changes in interest rates over the applicable period.
For the Twelve Months Ending June 30, 2005
(Dollars in thousands)
-------------------------------------------------
Changes in Net Interest
Interest Rates (Basis and Dividend
Points) Income % Change
--------------------- ------------ --------
400 $26,256 -0.2%
300 26,147 -0.6
200 26,079 -0.9
100 27,350 4.0
0 26,310 N/A
-100 26,805 1.9
-200 26,484 0.7
Market rates were assumed to increase and decrease in even increments over
the twelve month period. The repricing and/or new rates of assets and
liabilities moved in tandem with market rates. However, in certain deposit
products, the use of data from a historical analysis indicated that the
rates on these products would move only a fraction of the rate change
amount.
As interest rates declined during 2001 through 2003, Westfield Bank
experienced an increase in core deposits and a decrease in term deposits.
Banks nationwide have reported this trend as well. With term deposit rates
at such low levels, there is little incentive for bank customers to lock up
funds in term deposits. Management believes that in a rising rate
environment Westfield Bank will experience a shift, by some customers, out
of core deposits and back into term deposits. Based upon analysis,
management has estimated what is believed to be the rate sensitive portion
of the funds currently in core deposits. In scenarios that assume a rising
rate environment of 200 basis points or more, this shift is incorporated
into the balance sheet forecasts.
The Company developed consolidated balance sheet growth projections for the
twelve month period. The same product mix and growth strategy was used for
all rate change simulations, except for the shift into term deposits in
certain scenarios as described in the previous paragraph. Income from tax-
exempt assets is calculated on a fully taxable equivalent basis.
24
Pertinent data from each loan account, deposit account and investment
security was used to calculate future cash flows. The data included such
items as maturity date, payment amount, next repricing date, repricing
frequency, repricing index and spread. Prepayment speed assumptions were
based upon the difference between the account rate and the current market
rate.
Another circumstance that effects the results is that market rates as of
June 30, 2004, the date of the analysis, were near historical lows. In the
three declining rate scenarios, Westfield Bank forecasted that its rates on
some deposit products would not fall as sharply as market rates. For
example, because the rate on regular savings account is 0.50%, it is not
possible for the rate to decrease by 100 basis points or more.
ITEM 4:
CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer
and Chief Financial Officer, has 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 as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during
the Company's last fiscal quarter that has 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
25
Item 2. Unregistered Sales of Equity Securities Use of Proceeeds
The following table sets forth information with respect to purchases made
by the Company of its common stock during the nine months ended September
30, 2004.
Total number of
shares Maximum
purchased as number of shares
Total number part of publicly that may yet be
of shares Average price announced purchased under
Period purchased paid per share($) programs the program
------ ------------ ----------------- ---------------- ----------------
January 2004 - - -
February 2004 12,350 24.16 12,350
March 2004 26,050 24.51 26,050
April 2004 1,450 20.96 1,450
May 2004 160,128 19.82 160,128
June 2004 265,000 20.61 265,000
July 2004 - - -
August 2004 16,100 20.89 16,100
September 2004 65,300 22.22 65,300
Total 546,378 20.85 546,378 427,472
In April 2003, the Company announced that the Board of Directors had
approved a share repurchase program ("Repurchase Program 1") which
authorized the repurchase of up to 529,000 shares. The Repurchase Program
was completed during the third quarter of 2004.
In July 2004, the Company announced that the Board of Directors had
approved a share repurchase program ("Repurchase Program 2") which
authorized the repurchase of up to 502,550 shares. The Repurchase Program
will continue until it is completed.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
26
Item 5. Other Information
a. None
b. None
Item 6. Exhibits
31.1 Rule 13a - 14(a)/15d - 14(a) Certifications.
31.2 Rule 13a - 14(a)/15d - 14(a) Certifications.
32.1 Section 1350 Certifications.
32.2 Section 1350 Certifications.
27
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 9, 2004
28