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 June 30, 2005 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 August 2, 2005 - ------------ -------------- Common 9,954,512
TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) - June 30, 2005 and December 31, 2004 Consolidated Statements of Operations (Unaudited) - Three and six months ended June 30, 2005 and 2004 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income (Unaudited) - Six Months ended June 30, 2005 Consolidated Statements of Cash Flows (Unaudited) - Six Months ended June 30, 2005 and 2004 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 Westfield Financial, Inc. and Subsidiaries Consolidated Balance Sheets - Unaudited (Dollars in thousands except share data) <TABLE> <CAPTION> June 30, December 31, 2005 2004 ---- ---- <s> <c> <c> ASSETS Cash and due from banks $ 13,708 $ 13,961 Federal funds sold 18,139 31,964 Interest-bearing deposits 5,125 5,122 -------- -------- Cash and cash equivalents 36,972 51,047 -------- -------- SECURITIES: Available for sale - at estimated fair value 16,943 14,968 Held to maturity - at amortized cost (estimated fair value of $73,810 in June 2005, and $71,654 in December 2004) 73,266 71,298 MORTGAGE BACKED SECURITIES: Available for sale - at estimated fair value 73,079 73,316 Held to maturity - at amortized cost (estimated fair value of $167,839 in June 2005, and $174,051 in December 2004) 169,278 175,302 FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 4,237 4,237 LOANS - Net of allowance for loan losses of $5,341 in June 2005 and $5,277 in December 2004 388,489 368,601 PREMISES AND EQUIPMENT - Net 11,276 11,505 ACCRUED INTEREST AND DIVIDENDS 3,713 3,551 BANK OWNED LIFE INSURANCE 19,407 17,248 OTHER ASSETS 5,623 5,830 -------- -------- TOTAL ASSETS $802,283 $796,903 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES DEPOSITS: Noninterest-bearing $ 42,821 $ 48,305 Interest-bearing 574,861 564,316 -------- -------- Total deposits 617,682 612,621 -------- -------- CUSTOMER REPURCHASE AGREEMENTS 13,655 14,615 FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 45,000 45,000 OTHER LIABILITIES 6,326 6,616 -------- -------- TOTAL LIABILITIES 682,663 678,852 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2005, and December 31, 2004 - - Common stock - $.01 par value, 25,000,000 shares authorized, 10,580,000 shares issued, 9,954,512 shares outstanding at June 30, 2005, and December 31, 2004 106 106 Additional paid-in capital 47,766 47,659 Unallocated Common Stock of Employee Stock Ownership Plan (5,277) (5,427) Restricted stock unearned compensation (1,292) (1,543) Retained earnings 91,720 90,399 Accumulated other comprehensive income, net (382) (122) Treasury stock, at cost (625,488 shares at June 30, 2005, and December 31, 2004) (13,021) (13,021) -------- -------- Total stockholders' equity 119,620 118,051 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $802,283 $796,903 ======== ======== </TABLE> 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) <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30 2005 2004 2005 2004 ---- ---- ---- ---- <s> <c> <c> <c> <c> INTEREST AND DIVIDEND INCOME: Residential and commercial real estate loans $ 3,929 $ 3,577 $ 7,723 $ 7,166 Securities and mortgage backed securities 3,214 3,103 6,405 6,421 Consumer loans 165 296 360 692 Commercial and industrial loans 1,563 1,233 2,970 2,370 Federal funds sold 181 29 352 46 Marketable equity securities 102 76 191 188 Interest-bearing deposits and other short term investments 22 58 52 108 ---------- ----------- ---------- ----------- Total interest and dividend income 9,176 8,372 18,053 16,991 ---------- ----------- ---------- ----------- INTEREST EXPENSE: Deposits 2,836 2,386 5,398 4,917 Customer repurchase agreements 80 48 130 98 Other borrowings 363 250 713 419 ---------- ----------- ---------- ----------- Total interest expense 3,279 2,684 6,241 5,434 ---------- ----------- ---------- ----------- Net interest and dividend income 5,897 5,688 11,812 11,557 PROVISION FOR LOAN LOSSES 125 125 265 275 ---------- ----------- ---------- ----------- Net interest and dividend income after provision for loan losses 5,772 5,563 11,547 11,282 ---------- ----------- ---------- ----------- NONINTEREST INCOME: Income from bank owned life insurance 168 189 346 366 Service charges and fees 625 699 1,194 1,109 Gain on sales of securities, net 18 389 19 868 ---------- ----------- ---------- ----------- Total noninterest income 811 1,277 1,559 2,343 ---------- ----------- ---------- ----------- NONINTEREST EXPENSE: Salaries and employees benefits 2,747 2,577 5,475 5,214 Occupancy 485 454 956 903 Computer operations 401 386 794 808 Stationery, supplies and postage 121 149 265 272 Other 1,044 914 1,891 1,766 ---------- ----------- ---------- ----------- Total noninterest expense 4,798 4,480 9,381 8,963 ---------- ----------- ---------- ----------- INCOME BEFORE INCOME TAXES 1,785 2,360 3,725 4,662 INCOME TAXES 373 727 802 1,422 ---------- ----------- ---------- ----------- NET INCOME $ 1,412 $ 1,633 $ 2,923 $ 3,240 ========== =========== ========== =========== EARNINGS PER COMMON SHARE: Basic earnings per share $ 0.15 $ 0.17 $ 0.31 $ 0.33 Average shares outstanding 9,503,801 9,826,377 9,501,441 9,903,953 Diluted earnings per share $ 0.15 $ 0.16 $ 0.30 $ 0.32 Diluted average shares outstanding 9,720,266 10,016,749 9,719,148 10,119,972 </TABLE> 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) <TABLE> <CAPTION> Accumulated Common Stock Restricted Other ---------------- Additional Unallo- Stock Comprehensive Treasury Stock Par Paid-In cated Unearned Retained Income (Loss), ------------------ Shares Value Capital ESOP Compensation Earnings Net Shares Amount Total ------ ----- ---------- ------- ------------ -------- -------------- ------ ------ ----- <s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c> Balance at December 31, 2004 10,580,000 $106 $47,659 $(5,427) $(1,543) $90,399 $(122) (625,488) $(13,021) $118,051 Comprehensive income: Net income - - - - - 2,923 - - - 2,923 Unrealized losses on securities arising during the year, net of tax benefit of $181 - - - - - - (260) - - (260) -------- Total comprehensive income 2,663 -------- Activity related to common stock issued as employee incentives - - 107 150 251 - - - - 508 Cash dividends declared - - - - - (1,602) - - - 1,602 ---------- ---- ------- ------- ------- ------- ----- -------- -------- -------- Balance at June 30, 2005 10,580,000 $106 $47,766 $(5,277) $(1,292) $91,720 $(382) (625,488) $(13,021) $119,620 ========== ==== ======= ======= ======= ======= ===== ======== ======== ======== 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 - - - - - 3,240 - - - 3,240 Unrealized losses on securities arising during the period, net of tax benefit of $362 - - - - - - (811) - - (811) Reclassification for gains included in net income, net of tax benefit of $250 - - - - - - (618) - - (618) -------- Total comprehensive income 1,811 -------- Activity related to common stock issued as employee incentives - - 247 108 276 - - - - 631 Cash dividends declared - - - - - (1,051) - - - (1,051) Treasury stock purchased - - - - - - - (464,978) (9,602) (9,602) ---------- ---- ------- ------- ------- ------- ----- -------- -------- -------- Balance at June 30, 2004 10,580,000 $106 $47,390 $(5,729) $(1,818) $87,983 $(641) (522,678) $(10,698) $116,593 ========== ==== ======= ======= ======= ======= ===== ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements.
5 Westfield Financial, Inc. and Subsidiaries Consolidated Statements of Cash Flows - Unaudited (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30, 2005 2004 ---- ---- <s> <c> <c> OPERATING ACTIVITIES: Net income $ 2,923 $ 3,240 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 265 275 Depreciation of premises and equipment 488 540 Net amortization of premiums and discounts on securities, mortgage backed securities, and mortgage loans 526 876 Amortization of unearned compensation 590 735 Net realized securities gains (19) (868) Deferred income tax benefit - (484) Increase in cash surrender value of bank owned life insurance (346) (366) Changes in assets and liabilities: Accrued interest and dividends (162) (25) Other assets (227) 1,700 Other liabilities 325 2 -------- -------- Net cash provided by operating activities 4,363 5,625 -------- -------- INVESTING ACTIVITIES: Securities, held to maturity: Purchases (10,015) (9,311) Proceeds from maturities and principal collections 8,000 2,000 Securities, available for sale: Purchases (6,161) (5,091) Proceeds from sales 3,833 11,891 Proceeds from calls, maturities, and principal collections 365 2,671 Mortgage backed securities, held to maturity: Purchases (17,165) (15,096) Principal collections 22,897 30,045 Mortgage backed securities, available for sale: Purchases (28,944) (26,453) Proceeds from sales 16,941 20,325 Principal collections 11,641 11,763 Purchase of residential mortgages (807) (12,032) Net other decrease (increase) in loans (19,368) 619 Purchases of premise and equipment (259) (327) Purchase of bank owned life insurance (1,813) 0 -------- -------- Net cash (used in) provided by investing activities (20,855) 11,004 -------- -------- FINANCING ACTIVITIES: Increase (decrease) in deposits 5,061 (12,082) Decrease in customer repurchase agreements (960) (416) Federal Home Loan Bank of Boston advances - 15,000 Purchase of common stock in connection with employee benefit program (82) (104) Cash dividends paid (1,602) (1,051) Treasury stock purchased - (9,602) -------- -------- Net cash provided by (used in) financing activities 2,417 (8,255) -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS: (14,075) 8,374 Beginning of period 51,047 45,674 -------- -------- End of period $ 36,972 $ 54,048 ======== ======== </TABLE> 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 federally 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"). 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. 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 June 2005, the Company's Board of Directors voted to dissolve Westfield Securities Corp. in order to streamline operations. This dissolution of Westfield Securities Corp. is expected to be completed in the third quarter 2005. 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 June 30, 2005, 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, 2005. 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, 2004. Reclassifications - Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
7 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 and income per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts): <TABLE> <CAPTION> Three Months Ended June 30, Six Months Ended June 30, 2005 2004 2005 2004 ---- ---- ---- ---- <s> <c> <c> <c> <c> Net income as reported $1,412 $1,633 $2,923 $3,240 Less: Compensation expense determined under fair value based method for all awards net of tax effects (68) (68) (136) (136) ------ ------ ------ ------ Pro forma net income $1,344 $1,565 $2,787 $3,104 ====== ====== ====== ====== Net income per share Basic as reported $ 0.15 $ 0.17 $ 0.31 $ 0.33 Pro forma 0.14 0.16 0.29 0.31 Diluted as reported $ 0.15 0.16 $ 0.30 0.32 Pro forma 0.14 0.16 0.29 0.31 </TABLE> 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. 3. PENSION AND OTHER BENEFITS The following table provides information regarding net benefit costs for the period shown: <TABLE> <CAPTION> Pension Benefits Other Benefits ---------------- -------------- Three months ended June 30, 2005 2004 2005 2004 ---- ---- ---- ---- <s> <c> <c> <c> <c> Service cost $ 157 $ 137 $ 8 $ 6 Interest cost 127 116 11 10 Expected return on assets (131) (113) - - Transaction obligation (3) (3) 2 2 Actuarial loss 6 2 - - ----- ----- --- --- Net periodic pension cost $ 156 $ 139 $21 $18 ===== ===== === ===
8 <CAPTION> Pension Benefits Other Benefits ---------------- -------------- Six months ended June 30, 2005 2004 2005 2004 ---- ---- ---- ---- <s> <c> <c> <c> <c> Service cost $313 $274 $15 $12 Interest cost 253 232 21 19 Expected return on assets (262) (226) - - Transaction obligation (6) (6) 5 5 Actuarial loss 11 4 - - ---- ---- --- --- Net periodic pension cost $309 $278 $41 $36 ==== ==== === === </TABLE> The company plans to contribute the amount required to meet the minimum funding standards under Internal Revenue code Section 412. Additional contributions will be made as deemed appropriate by management in conjunction with the plan's actuaries. For the year 2005, the preliminary estimated contribution is approximately $509,000. As of June 30, 2005 no contribution had been made. 4. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, "Share-based Payment (Revised 2004)" ("SFAS 123R"), which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. SFAS 123R allows the use of valuation models other than the Black-Scholes model prescribed in SFAS 123. Therefore, the pro forma costs of stock option expense estimated in Note 1 using the Black- Scholes option pricing model may not be representative of the costs recognized by the Company upon adoption of SFAS 123R. The Company is still in the process of analyzing the cost of stock options under SFAS 123R. On April 14, 2005, the Securities and Exchange Commission delayed the effective date for SFAS 123R, which allows companies to implement the statement at the beginning of their first fiscal year beginning after June 15, 2005, which would be January 1, 2006 for the Company. On March 29, 2005, the Securities and Exchange Commission ("SEC") Staff issued Staff Accounting Bulletin No. 107 ("SAB 107"). SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC rules and regulations and provides the SEC staff's view regarding the valuation of share-based payment arrangements for public companies. The provisions of FAS 123R and SAB 107 do not have an impact on the Company's results of operations at the present time. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview 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, the 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. The Bank meets the needs of its local community through a community-based and service-oriented approach to banking.
9 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, the 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 June 30, 2005 in the context of this strategy. * Net income was $1.4 million, or $0.15 per diluted share, for the quarter ended June 30, 2005 as compared to $1.6 million, or $0.16 per diluted share for the same period in 2004. The second quarter results included net gains from the sale of securities of $389,000 for the three months ended June 30, 2004. This was primarily the result of the Company selling its common stock portfolio in 2004. Net gains from sales of securities for the three months ended June 30, 2005 were $18,000. * For the six months ended June 30, 2005, net income was $2.9 million, or $0.30 per diluted share as compared to $3.2 million, or $0.32 per diluted share for the same period in 2004. The 2004 results included net gains from the sale of securities of $868,000 for the six months ended June 30, 2004. This was primarily the result of the Company selling its common stock portfolio in 2004. Net gains from sales of securities for the six months ended June 30, 2005 were $19,000. * Commercial real estate and commercial and industrial loans increased $30.3 million, or 12.7% from December 31, 2004 to June 30, 2005. This is consistent with the Bank's strategic plan, which emphasizes commercial lending. The continued success of the Bank's commercial lending is primarily dependent on the local and national economy. * Residential real estate loans decreased $7.7 million to $115.5 million at June 30, 2005 from $123.2 million at December 31, 2004. The Bank refers its residential real estate borrowers to a third party mortgage company and substantially all of the Bank's residential real estate loans are underwritten, originated and serviced by a third party mortgage company. The Bank receives a fee from each of these loans originated. The 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 a higher yield on interest-earning assets. The net interest margin was 3.13% and 3.17% for the three and six months ended June 30, 2005, respectively, as compared to 3.04% and 3.11% for the same periods in 2004, respectively. The Company 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.
10 * Total deposits increased $5.1 million from $612.6 million at December 31, 2004 to $617.7 million at June 30, 2005. The increase in deposits was primarily the result of an increase of $12.7 term deposits, which were $325.8 million at June 30, 2005. The rates paid on term deposits have increased over the past several months. Some customers have shifted funds out of core deposits, which generally pay lower rates, and into term deposits. Management feels that in a period of rising rates, the more rate sensitive customers will continue to move funds into term deposits, resulting in a higher cost of deposits. * Nonperforming loans were $2.1 million at June 30, 2005 and $2.2 million December 31, 2004. * Charge-offs increased by $138,000 from $273,000 for the six months ended June 30, 2004 to $411,000 for the six months ended June 30, 2005. This was primarily the result of an increase of $289,000 in charge offs of commercial and industrial loans, which was partially offset by a decrease of $151,000 in consumer loans. The decrease in charge offs of consumer loans is mainly the result of the discontinuation of the indirect auto loan program. 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 judgment of management, collection of principal balance is not in question. Loans are returned to accrual status when they become current as to both principal and interest and when subsequent performance reduces the concern as to the collectibility of principal and interest. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans. Compensation to an auto dealer is normally based upon a spread that a dealer adds on the loan base rate set by Westfield Financial. The compensation is paid to an automobile dealer shortly after the loan is originated. Westfield Financial records the amount as a deferred cost that is amortized over the life of the loans in relation to the interest paid by the consumer. The 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 never sold held to maturity securities or reclassified such securities to available for sale other than in specifically permitted circumstances. The Company does not acquire securities or mortgage-backed securities for purposes of engaging in trading activities. On a quarterly basis, the Company reviews available for sale investment securities with unrealized depreciation on a judgmental basis to assess whether the decline in fair value is temporary or other than temporary. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2005 AND DECEMBER 31, 2004 Total assets increased $5.4 million to $802.3 million at June 30, 2005 from $796.9 million at December 31, 2004. Securities decreased $2.3 million to $332.6 million at June 30, 2005 from $334.9 million at December 31, 2004. Net loans during the period increased by $19.9 million to $388.5 million at June 30, 2005 from $368.6 million at December 31, 2004. Commercial real estate and commercial and industrial loans increased $30.3 million, or 12.7%, to $269.4 million at June 30, 2005 from $239.1 million at December 31, 2004. This is consistent with the Bank's strategic plan, which emphasizes commercial lending. The continued success of the Bank's commercial lending is primarily dependent on the local and national economy. Residential real estate loans decreased $7.7 million to $115.5 million at June 30, 2005 from $123.2 million at December 31, 2004. The Bank refers its residential real estate borrowers to a third party mortgage company and substantially all of the Bank's residential real estate loans are underwritten, originated and serviced by a third party mortgage company. The Bank receives a fee from each of these loans originated. The Bank believes that this program has diversified its loan portfolio and continues to reduce interest rate risk. Total deposits increased $5.1 million to $617.7 million at June 30, 2005 from $612.6 million at December 31, 2004. Time deposits increased $12.7 million to $325.8 million at June 30, 2005. Core deposits which include checking, NOW, savings, and money market accounts, decreased by $7.6 million to $291.9 at June 30, 2005. The rates paid on term deposits have increased over the past several months. Some customers have shifted funds out of core deposits, which generally pay lower rates, and into term deposits. Management feels that in a period of rising rates the more rate sensitive customers will continue to move funds into term deposits, resulting in a higher cost of deposits. Federal Home Loan Bank borrowings totaled $45.0 million at June 30, 2005 and December 31, 2004. Customer repurchase agreements decreased $0.9 million, to $13.7 million at June 30, 2005 from December 31, 2004. A customer repurchase agreement is an agreement by the 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 the Bank's customer repurchase agreements at June 30, 2005 were held by commercial customers.
12 Stockholders' equity at June 30, 2005 and December 31, 2004 was $119.6 million and $118.1 million, respectively, which represented 14.9% of total assets as of June 30, 2005 and 14.8% of total assets as of December 31, 2004. The change is primarily comprised of net income of $2.9 million for the six months ended June 30, 2005, and the declaration by the Board of Directors of dividends of $0.10 per share on January 27, 2005 and April 26, 2005, as well as the declaration of a special dividend of $0.20 per share on April 26, 2005, all of which aggregated $1.6 million. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004 General Net income was $1.4 million, or $0.15 per diluted share, for the quarter ended June 30, 2005 as compared to $1.6 million, or $0.16 per diluted share, for the same period in 2004. The second quarter 2004 results included net gains from the sale of securities of $389,000 for the three months ended June 30, 2004. This was primarily the result of the Company selling its common stock portfolio in 2004. Net gains from sale of securities for the three months ended June 30, 2005 were $18,000. Net interest and dividend income increased $209,000 to $5.8 million for the three months ended June 30, 2005 as compared to $5.6 million for the same period in 2004. 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 June 30, 2005 and 2004 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 <TABLE> <CAPTION> Three Months Ended June 30, 2005 2004 Average Avg Yield/ Average Avg Yield/ Interest Balance Cost Interest Balance Cost -------- ------- ---------- -------- ------- ---------- (Dollars in thousands) <s> <c> <c> <c> <c> <c> <c> Interest-Earning Assets - ----------------------- Short Term Investments $ 203 $ 28,361 2.86% $ 29 $ 15,152 0.77% Investment Securities 3,316 343,307 3.86 3,237 376,415 3.44 Loans 5,657 384,696 5.88 5,106 359,970 5.67 ------ -------- ------ -------- Total Interest-Earning Assets $9,176 $756,364 4.85 $8,372 $751,537 4.46 ====== ======== ====== ======== Interest-Bearing Liabilities - ---------------------------- NOW Accounts $ 75 $ 60,421 0.50% $ 57 $ 42,807 0.53% Savings Accounts 55 43,902 0.50 54 47,603 0.45 Money Market Accounts 553 147,834 1.50 373 153,754 0.97 Time Deposits 2,153 318,568 2.70 1,902 319,303 2.38 Customer Repurchase Agreements and Borrowings 443 62,720 2.83 298 47,182 2.53 ------ -------- ------ -------- Total Interest-Bearing Liabilities $3,279 $633,445 2.07 $2,684 $610,649 1.76 ====== ======== ====== ======== Net Interest Income/Interest Rate Spread $5,897 2.78% $5,688 2.70% ====== ==== ====== ==== Net Interest Margin 3.13% 3.04% ==== ==== </TABLE> 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.
14 <TABLE> <CAPTION> Three Months Ended June 30, 2005 compared to June 30, 2004 Increase (decrease) due to: Interest-Earning Assets Volume Rate Net - ----------------------- ------ ---- --- (Dollars in thousands) <s> <c> <c> <c> Short Term Investments $ 25 $ 149 $174 Investment Securities (285) 364 79 Loans 351 200 551 ----- ----- ---- Net Change in Income on Interest-Earning Assets 91 713 804 ----- ----- ---- Interest-Bearing Liabilities - ---------------------------- NOW Accounts 23 (5) 18 Savings Accounts (4) 5 1 Money Market Accounts (14) 194 180 Time Deposits (4) 255 251 Customer Repurchase Agreements and Borrowings 98 47 145 ----- ----- ---- Net Change in Expense on Interest-Bearing Liabilities 99 496 595 ----- ----- ---- Change in Net Interest Income $ (8) $ 217 $209 ===== ===== ==== </TABLE> Net interest and dividend income increased $209,000 to $5.8 million for the three months ended June 30, 2005 as compared to $5.6 million for the same period in 2004. The net interest margin was 3.13% for the three months ended June 30, 2005 as compared to 3.04% for the same period in 2004. The increase in the net interest margin was primarily the result of a higher yield on interest-earning assets. The yield of interest-earning assets increased 39 basis points to 4.85% for the three months ended June 30, 2005 from 4.46% for same period in 2004. 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. The average cost of interest-bearing liabilities increased 31 basis points to 2.07% for the three months ended June 30, 2005 from 1.76% for same period in 2004. The increase in the average cost of interest-bearing liabilities was primarily due to an increase in the cost of money market accounts and term deposits resulting from the rising interest rate environment. As the rates on term deposits have increased over the past several months, some customers have shifted funds out of core deposits, which generally pay lower rates, and into term deposits. In a period of rising interest rates, the more rate sensitive customers will continue to shift funds back into time deposits, resulting in a higher cost of deposits.
15 Provision for Loan Losses The Bank provided $125,000 for loan losses for the three months ended June 30, 2005 and also the three months ended June 30, 2004. The amount that the Bank provided for the provision for loan losses during the three months ended June 30, 2005 was based upon the changes that occurred in the loan portfolio during the same period. The provision for loan losses brings the Bank's allowance for loan losses to a level determined appropriate by management. The allowance was $5.3 million at both June 30, 2005 and March 31, 2005. The allowance for loan losses was 1.36% of total loans at June 30, 2005 and 1.40% at March 31, 2005. At June 30, 2005 commercial real estate loans and commercial and industrial loans increased $20.3 million as compared to March 31, 2005. Commercial real estate loans and commercial and industrial loans comprised 68.4% of the Bank's loan portfolio as of June 30, 2005 as compared to 66.0% as of March 31, 2005. This has resulted in an increase in the allowance for loan losses 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 real estate mortgages, which decreased by $2.9 million during the quarter ended June 30, 2005. Consumer loans decreased $1.0 million to $8.8 million at June 30, 2005, resulting in a decrease in the allowance for loan losses requirement for consumer loans. The decline in the allowance requirement for residential real estate loans and consumer loans partially offset the increase in the allowance requirement for commercial real estate loans and commercial and industrial loans. In addition, nonperforming loans decreased $89,000 to $2.1 million at June 30, 2005 compared to $2.2 million at March 31, 2005. This was primarily the result of payments in full on nonperforming loans. As a result of the above factors, management determined that a provision of $125,000 was appropriate. Noninterest Income Noninterest income decreased $466,000 to $811,000 for the three months ended June 30, 2005 from $1.3 million in the same period in 2004. Net gains on the sale of securities were $18,000 for the quarter ended June 30, 2005 as compared to $389,000 for the same period in 2004. The Company had sold essentially all its common stock portfolio as of June 30, 2004. Checking account processing fees decreased $93,000 to $430,000 for the three months ended June 30, 2005 from $523,000 in the same period in 2004. The decrease in the 2005 period is primarily the result of reduced activity in this program. Fee income from commercial letters of credit was $41,000 for the three months ended June 30, 2005, as compared to none for the same period in 2004. Noninterest Expense Noninterest expense was $4.8 million for the three months ended June 30, 2005 and $4.5 million for the three months ended June 30, 2005. Salaries and benefits increased $170,000 for the three months ended June 30, 2005 as compared to the same period in 2004. This was primarily the result of normal increases in salaries and health care costs along with an increase in stock based benefit plan expenses. Income Taxes For the three months ended June 30, 2005, the Company had a tax provision of $373,000 as compared to $727,000 for the same period in 2004. This was the result of lower income before taxes and an increase from tax-exempt assets.
16 COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004 General Net income was $2.9 million, or $0.30 per diluted share, for the six months ended June 30, 2005 as compared to $3.2 million, or $0.32 per diluted share, for the same period in 2004. The 2004 results included net gains from the sale of securities of $868,000 for the six months ended June 30, 2004. This was primarily the result of the Company selling its common stock portfolio in 2004. Net gains from the sale of securities for the six months ended June 30, 2005 were $19,000. Net interest and dividend income increased $255,000 to $11.8 million for the six months ended June 30, 2005 as compared to $11.6 million for the same period in 2004. Net Interest and Dividend Income The following tables set forth the information relating to our average balance at, and net interest income for, the six months ended June 30, 2005 and 2004 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. <TABLE> <CAPTION> Six Months Ended June 30, 2005 2004 Average Avg Yield/ Average Avg Yield/ Interest Balance Cost Interest Balance Cost -------- ------- ---------- -------- ------- ---------- (Dollars in thousands) <s> <c> <c> <c> <c> <c> <c> Interest-Earning Assets - ----------------------- Short Term Investments $ 404 $ 31,344 2.58% $ 46 $ 11,890 0.77% Investment Securities 6,596 341,414 3.86 6,717 379,320 3.54 Loans 11,053 379,491 5.83 10,228 358,850 5.70 ------- -------- ------- -------- Total Interest-Earning Assets $18,053 $752,249 4.80 $16,991 $750,060 4.53 ======= ======== ======= ======== Interest-Bearing Liabilities - ---------------------------- NOW Accounts $ 146 $ 59,122 0.49% $ 111 $ 41,809 0.53% Savings Accounts 109 44,057 0.49 116 49,225 0.47 Money Market Accounts 1,003 147,472 1.36 747 154,013 0.97 Time Deposits 4,139 316,778 2.61 3,943 323,792 2.44 Customer Repurchase Agreements and Borrowings 844 61,902 2.73 517 42,510 2.43 ------- -------- ------- -------- Total Interest-Bearing Liabilities $ 6,241 $629,331 1.98 $ 5,434 $611,349 1.78 ======= ======== ======= ======== Net Interest Income/Interest Rate Spread $11,812 2.82% $11,557 2.75% ======= ==== ======= ==== Net Interest Margin 3.17% 3.11% ==== ==== </TABLE>
17 The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected 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. <TABLE> <CAPTION> Six Months Ended June 30, 2005 compared to June 30, 2004 Increase (decrease) due to: Interest-Earning Assets Volume Rate Net - ----------------------- ------ ---- --- (Dollars in thousands) <s> <c> <c> <c> Short Term Investments $ 75 $ 283 $ 358 Investment Securities (671) 550 (121) Loans 588 237 825 ----- ------ ------ Net Change in Income on Interest-Earning Assets (8) 1,070 1,062 ----- ------ ------ Interest-Bearing Liabilities - ---------------------------- NOW Accounts 46 (11) 35 Savings Accounts (12) 5 (7) Money Market Accounts (32) 288 256 Time Deposits (85) 281 196 Customer Repurchase Agreements and Borrowings 236 91 327 ----- ------ ------ Net Change in Expense on Interest-Bearing Liabilities 153 654 807 ----- ------ ------ Change in Net Interest Income $(161) $ 416 $ 255 ===== ====== ====== </TABLE>
18 Net interest and dividend income increased $255,000 to $11.8 million for the six months ended June 30, 2005 as compared to $11.6 million for the same period in 2004. The net interest margin was 3.17% for the six months ended June 30, 2005 as compared to 3.11% for the same period in 2004. The increase in the net interest margin was primarily the result of a higher yield on interest-earning assets. The yield of interest-earning assets increased 27 basis points to 4.80% for the six months ended June 30, 2005 from 4.53% for same period in 2004. 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. The average cost of interest-bearing liabilities increased 20 basis points to 1.98% for the six months ended June 30, 2005 from 1.78% for same period in 2004. The increase in the average cost of interest-bearing liabilities was primarily due to an increase in the cost of money market accounts and term deposits resulting from the rising interest rate environment. As the rates on term deposits have increased over the past several months, some customers have shifted funds out of core deposits, which generally pay lower rates, and into term deposits. In a period of rising interest rates, the more rate sensitive customers will continue to shift funds back into time deposits, resulting in a higher cost of deposits. Provision for Loan Losses The Bank provided $265,000 for loan losses for the six months ended June 30, 2005 and $275,000 for the six months ended June 30, 2004. The amount that Westfield Bank provided for the provision for loan losses during the six months ended June 30, 2005 was based upon the changes that occurred in the loan portfolio during the same period. The provision for loan losses brings the Bank's allowance for loan losses to a level determined appropriate by management. The allowance was $5.3 million at both June 30, 2005 and December 31, 2004. The allowance for loan losses was 1.36% of total loans at June 30, 2005 and 1.40% at December 31, 2004. At June 30, 2005 commercial real estate loans and commercial and industrial loans increased $30.3 million as compared to December 31, 2004. Commercial real estate loans and commercial and industrial loans comprised 68.4% of the Bank's loan portfolio as of June 30, 2005 as compared to 63.1% as of December 31, 2004. This has resulted in an increase in the allowance for loan losses 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 real estate mortgages, which decreased by $7.7 million during the quarter ended June 30, 2005. Consumer loans decreased $2.8 million to $8.8 million at June 30, 2005, resulting in a decrease in the allowance for loan losses requirement for consumer loans. The decline in the allowance requirement for residential real estate loans and consumer loans partially offset the increase in the allowance requirement for commercial real estate loans and commercial and industrial loans. Nonperforming loans decreased $56,000 to $2.1 million at June 30, 2005 compared to $2.2 million at December 31, 2004. This was primarily the result of payments in full on nonperforming loans. As a result of the above factors, management determined that a provision of $265,000 was appropriate. Noninterest Income Noninterest income decreased $784,000 to $1.6 million for the six months ended June 30, 2005 from $2.3 million in the same period in 2004. Net gains on the sale of securities were $19,000 for the six months ended June 30, 2005 as compared to $868,000 for the same period in 2004. The Company had sold essentially all its common stock portfolio as of June 30, 2004.
19 Checking account processing fees increased $4,000 to $820,000 for the six months ended June 30, 2005 from $816,000 for the same period in 2004. Fee income from commercial letters of credit was $41,000 for the six months ended June 30, 2005, as compared to none for the six months ended June 30, 2004. Fees received from the third party mortgage company decreased $12,000 to $36,000 for the six months ended June 30, 2004 as compared to $48,000 for the same period in 2004. Higher interest rates resulted in fewer referrals to the third party mortgage company. Fee income from the third party mortgage company in the future will be affected by borrower activity, which generally decreases in a rising interest rate environment. Noninterest Expense Noninterest expense for the six months ended June 30, 2005 was $9.4 million as compared to $9.0 million for the same period in 2004. Salaries and benefits increased $261,000 for the six months ended June 30, 2005 as compared to the same period in 2004. This was primarily the result of normal increases in salaries and health care costs along with an increase in stock based benefit plan expenses. Advertising expenses increased $197,000 to $297,000 for the six months ended June 30, 2005 as compared to $100,000 for the comparable 2004 period. Income Taxes For the six months ended June 30, 2005, the Company had a tax provision of $802,000 as compared to $1.4 million for the same period in 2004. This was the result of a decrease in income before taxes and an increase in income from the tax-exempt assets. LIQUIDITY AND CAPITAL RESOURCES The term "liquidity" refers to the Company's ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. The Company's primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage backed securities, maturities and calls of investment securities and funds provided by operations. The Bank also can borrow funds from the Federal Home Loan Bank ("FHLB") of Boston based on eligible collateral of loans and securities. The Bank's maximum additional borrowing capacity from the FHLB at June 30, 2005 was approximately $27.5 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.
20 At June 30, 2005, the Company exceeded each of the applicable regulatory capital requirements. As of June 30, 2005 the most recent notification from the Office of Thrift Supervision (the "OTS") 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 as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital ratios as of June 30, 2005 and December 31, 2004 are also presented in the tables. <TABLE> <CAPTION> 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) <s> <c> <c> <c> <c> <c> <c> June 30, 2005 Total Capital (to Risk Weighted Assets): Consolidated $125,185 26.21% $38,212 8.00% N/A - Bank 90,644 19.25 37,665 8.00 47,081 10.00% Tier 1 Capital (to Risk Weighted Assets): Consolidated 119,844 25.09 19,106 4.00 N/A - Bank 85,430 18.15 18,832 4.00 28,249 6.00 Tier 1 Capital (to Adjusted Total Assets): Consolidated 119,844 14.93 32,109 4.00 N/A - Bank 85,430 11.11 30,748 4.00 38,435 5.00 December 31, 2004 Total Capital (to Risk Weighted Assets): Consolidated $123,222 26.90% $36,650 8.00% N/A - Bank 87,916 19.49 36,091 8.00 45,114 10.00% Tier 1 Capital (to Risk Weighted Assets): Consolidated 117,945 25.75 18,325 4.00 N/A - Bank 82,639 18.32 18,046 4.00 27,069 6.00 Tier 1 Capital (to Adjusted Total Assets): Consolidated 117,945 14.69 32,125 4.00 N/A - Bank 82,639 10.85 30,452 4.00 38,065 5.00 </TABLE> On July 23, 2004 the 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"). The Bank, as a federally-chartered savings bank, is subject to OTS capital requirements rather than FDIC capital requirements. The 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 six months ended June 30, 2005 and June 30, 2004.
21 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 branches and equipment. A summary of lease obligations and credit commitments at June 30, 2005 is shown below: <TABLE> <CAPTION> After 1 Year After 3 Years Within but Within but Within After 1 Year 3 Years 5 Years 5 Years Total ------ ------------ ------------- ------- ----- (In thousands) <s> <c> <c> <c> <c> <c> LEASE OBLIGATIONS Operating lease obligations $ 197 $ 247 $ 109 $ 37 $ 590 ======= ======= ======= ======= ======== BORROWINGS Federal Home Loan Bank $10,000 $25,000 $10,000 $ - $ 45,000 ======= ======= ======= ======= ======== CREDIT COMMITMENTS Available lines of credit $35,510 $ - $ - $12,765 $ 48,275 Other loan commitments 17,884 8,932 - - 26,816 Letters of credit 4,278 - - 904 5,182 ------- ------- ------- ------- -------- Total credit commitments $57,672 $ 8,932 $ - $13,669 $ 80,273 ------- ------- ------- ------- -------- Grand total $67,869 $34,179 $10,109 $13,706 $125,863 ======= ======= ======= ======= ======== </TABLE> 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 the 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 June 30, 2005, that the Company and the Bank met all capital adequacy requirements to which they were subject. As of June 30, 2005, the most recent notification from the Office of Thrift Supervision 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. Specifically, net interest income is measured in one scenario that assumed no change in interest rates, and six scenarios where interest rates increase 100, 200, 300, and 400 basis points, and decrease 100 and 200 basis points, respectively, from current rates over the one year time period following the current consolidated financial statement. Income from tax-exempt assets is calculated on a fully taxable equivalent basis.
22 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. 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 as of 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. <TABLE> <CAPTION> For the Twelve Months Ending June 30, 2006 (Dollars in thousands) ------------------------------------------ Net Interest Changes in and Interest Rates Dividend (Basis Points) Income % Change ------------- ------------ -------- <s> <c> <c> 400 26,798 -1.5% 300 26,811 -1.5% 200 27,064 -0.6% 100 27,213 0.0% 0 27,219 0.0% -100 27,567 1.3% -200 26,972 -0.9% </TABLE> Management believes that there have been no significant changes in market risk since December 31, 2004. The income simulation analysis was based upon a variety of assumptions. These assumptions include but are not limited to balance sheet growth, asset mix, prepayment speeds, the timing and level of interest rates, and the shape of the yield curve. As market conditions vary from the assumptions in the income simulation analysis, actual results will differ. As a result, the income simulation analysis does not serve as a forecast of net interest income, nor do the calculations represent any actions that management may undertake in response to changes in interest rates. ITEM 4: CONTROLS AND PROCEDURES Management, including 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 to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
23 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 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table sets forth information with respect to purchases made by the Company of its common stock during the three months ended June 30, 2005. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------ Total number of shares Maximum purchased as number of shares Total number of part of publicly that may yet be shares Average price announced purchased under Period purchased paid per share($) programs the program - ------------------------------------------------------------------------------------------ <s> <c> <c> <c> <c> April 2005 - - - - ------------------------------------------------------------------------------------------ May 2005 - - - - ------------------------------------------------------------------------------------------ June 2005 - - - - ------------------------------------------------------------------------------------------ Total - - - 406,062 - ------------------------------------------------------------------------------------------ </TABLE> 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. There were no sales by the Company of unregistered securities during the three months ended June 30, 2005. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of shareholders on May 20, 2005 (the "Meeting"). The sole proposal submitted to the shareholders of the meeting was the election of four candidates to the Board of Directors. The number of votes cast with respect to this matter is as follows: Nominee For Withheld ------- --- -------- Robert T. Crowley, Jr. 9,114,947 7,193 Harry C. Lane 9,114,772 7,368 William H. McClure 9,113,432 8,708 Paul R. Pohl 9,115,432 6,708 There was no broker non-votes or abstentions on this proposal. The following directors' terms of office continued after the meeting: David C. Colton, Jr. Charles E. Sullivan Victor J. Carra Thomas C. Sullivan Mary C. O'Neil Donald A. Williams Richard C. Placek ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS The following exhibits are furnished with this report: 2.1 Plan of Reorganization and Minority Stock Issuance of Westfield Mutual Holding Company, as amended. * 3.1 Articles of Organization of Westfield Financial, Inc.* 3.2 Bylaws of Westfield Financial, Inc. * 3.3 Amended and Restated Charter of Westfield Mutual Holding Company* 3.4 Amended and Restated Bylaws of Westfield Mutual Holding Company* 4.1 Articles of Organization of Westfield Financial, Inc. (See Exhibit 3.1)* 4.2 Bylaws of Westfield Financial, Inc. (See Exhibit 3.2)* 4.3 Form of Stock Certificate of Westfield Financial, Inc.* 10.1 Form of Employee Stock Ownership Plan of Westfield Financial, Inc.* 10.2 Form of the Benefit Restoration Plan of Westfield Financial, Inc.*
25 10.3 Form of Employment Agreement between Donald A. Williams and Westfield Financial, Inc.* 10.4 Form of Employment Agreement between Victor J. Carra and Westfield Financial, Inc.* 10.5 Form of Employment Agreement between Michael J. Janosco, Jr. and Westfield Financial, Inc.* 10.6 Form of One Year Change in Control Agreement by and among certain officers and Westfield Financial, Inc. and Westfield Bank* 10.7 Form of Directors' Deferred Compensation Plan* 10.8 The SBERA 401(k) Plan adopted by Westfield Bank** 10.9 Amendments to the Employee Stock Ownership Plan of Westfield Financial, Inc.*** 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. <FN> * Incorporated herein by reference to the Registration Statement No. 333-68550 on Form S-1 filed with the SEC on August 28, 2001, as amended. ** Incorporated herein by reference to the Registration Statement No. 333-73132 on Form S-8 filed with the SEC on November 9, 2001, as amended. *** Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC on March 31, 2003. </FN>
26 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. By: /s/ Donald A. Williams -------------------------------- Donald A. Williams Chairman/Chief Executive Officer (Principal Executive Officer) By: /s/ Michael J. Janosco, Jr. -------------------------------- Michael J. Janosco, Jr. Vice President/Chief Financial Officer (Principal Accounting Officer) August 9, 2005
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