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, 2007 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer Accelerated filer X Non-accelerated filer --- --- --- Indicate by check mark whether the registrant is a shell company. Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Outstanding at Class August 2, 2007 - ----------------------------------- ---------------------------------- Common Stock, par value $0.01 31,926,587
TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements of Westfield Financial, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) - June 30, 2007 and December 31, 2006 Consolidated Statements of Income (Unaudited) - Three and six months ended June 30, 2007 and 2006 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income (Unaudited) - Six Months ended June 30, 2007 and 2006 Consolidated Statements of Cash Flows (Unaudited) - Six Months ended June 30, 2007 and 2006 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 1A. Risk Factors 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". These forward-looking statements are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," and similar expressions are intended to identify forward-looking statements. These forward-looking statements may be subject to significant known and unknown risks, uncertainties, and other factors, including, but not limited to, changes in the real estate market or local economy, changes in interest rates, changes in laws and regulations to which we are subject, and competition in our primary market area. Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Westfield Financial undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 2
PART 1 ITEM 1. FINANCIAL STATEMENTS Westfield Financial, Inc. and Subsidiaries Consolidated Balance Sheets - Unaudited (Dollars in thousands, except share data) <TABLE> <CAPTION> June 30, December 31, 2007 2006 ---- ---- <S> <C> <C> ASSETS Cash and due from banks $ 21,004 $ 51,645 Federal funds sold 63,844 97,659 Interest-bearing deposits and other short term investments 237 5,204 ---------- -------- Cash and cash equivalents 85,085 154,508 ---------- -------- SECURITIES: Available for sale - at estimated fair value 52,296 41,687 Held to maturity - at amortized cost (estimated fair value of $97,321 at June 30, 2007 and $76,938 in December 31, 2006) 99,048 77,299 MORTGAGE-BACKED SECURITIES: Available for sale - at estimated fair value 173,665 126,942 Held to maturity - at amortized cost (estimated fair value of $161,408 at June 30, 2007 and $160,709 at December 31, 2006) 164,081 163,093 FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 5,575 4,246 LOANS - Net of allowance for loan losses of $5,674 at June 30, 2007 and $5,437 at December 31, 2006 394,726 385,184 PREMISES AND EQUIPMENT - Net 13,181 12,247 ACCRUED INTEREST AND DIVIDENDS 5,509 4,502 BANK-OWNED LIFE INSURANCE 31,731 20,619 OTHER ASSETS 6,732 6,502 ---------- -------- TOTAL ASSETS $1,031,629 $996,829 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES DEPOSITS: Noninterest-bearing $ 49,444 $ 42,383 Interest-bearing 580,824 585,083 ---------- -------- Total deposits 630,268 627,466 ---------- -------- CUSTOMER REPURCHASE AGREEMENTS 20,279 17,919 FEDERAL HOME LOAN BANK OF BOSTON ADVANCES 80,000 55,000 OTHER LIABILITIES 7,797 7,036 ---------- ------- TOTAL LIABILITIES 738,344 707,421 ---------- -------- COMMITMENTS AND CONTINGENCIES (page 23) STOCKHOLDERS' EQUITY: Preferred stock - $.01 par value, 5,000,000 shares authorized, none outstanding at June 30, 2007 and December 31, 2006 - - Common stock - $.01 par value, 75,000,000 shares authorized, 31,926,587 shares Issued and outstanding at June 30, 2007, 82,034,500 shares authorized, 34,717,000 shares issued, 31,924,257 shares outstanding at December 31, 2006 319 274 Additional paid-in capital 209,281 201,736 Unallocated Common Stock of Employee Stock Ownership Plan (11,864) (4,835) Unearned compensation (363) (405) Retained earnings 96,985 93,364 Accumulated and other comprehensive loss (1,073) (726) ---------- -------- Total stockholders' equity 293,285 289,408 ---------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,031,629 $996,829 ========== ======== See accompanying notes to consolidated financial statements. </TABLE> 3
Westfield Financial, Inc. and Subsidiaries Consolidated Statements of Income - Unaudited (Dollars in thousands, except per share data) <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30 2007 2006 2007 2006 ---- ---- ---- ---- <S> <C> <C> <C> <C> INTEREST AND DIVIDEND INCOME: Residential and commercial real estate loans $ 4,377 $ 4,558 $ 8,809 $ 8,662 Debt securities, taxable 5,389 3,474 9,947 6,784 Commercial and industrial loans 2,069 1,905 3,993 3,623 Debt securities, tax-exempt 327 307 635 615 Marketable equity securities 160 118 307 227 Federal funds sold 620 117 1,936 328 Consumer loans 90 102 181 215 Interest-bearing deposits and other short term investments 27 32 95 88 ---------- ---------- ---------- ---------- Total interest and dividend income 13,059 10,613 25,903 20,542 ---------- ---------- ---------- ---------- INTEREST EXPENSE: Deposits 4,923 4,207 9,719 7,875 Customer repurchase agreements 136 82 273 158 Other borrowings 587 413 977 819 ---------- ---------- ---------- ---------- Total interest expense 5,646 4,702 10,969 8,852 ---------- ---------- ---------- ---------- Net interest and dividend income 7,413 5,911 14,934 11,690 PROVISION FOR LOAN LOSSES 75 200 175 275 ---------- ---------- ---------- ---------- Net interest and dividend income after provision for loan losses 7,338 5,711 14,759 11,415 ---------- ---------- ---------- ---------- NONINTEREST INCOME: Income from bank-owned life insurance 324 199 591 394 Service charges and fees 650 684 1,202 1,342 ---------- ---------- ---------- ---------- Total noninterest income 974 883 1,793 1,736 ---------- ---------- ---------- ---------- NONINTEREST EXPENSE: Salaries and employees benefits 3,290 2,989 6,604 5,988 Occupancy 578 526 1,167 1,021 Computer operations 361 370 713 765 Stationery, supplies and postage 127 137 253 254 Other 1,225 882 2,150 1,670 ---------- ---------- ---------- ---------- Total noninterest expense 5,581 4,904 10,887 9,698 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 2,731 1,690 5,665 3,453 INCOME TAXES 826 430 1,740 879 ---------- ---------- ---------- ---------- NET INCOME $ 1,905 $ 1,260 $ 3,925 $ 2,574 ========== ========== ========== ========== EARNINGS PER COMMON SHARE: Basic earnings per share $ 0.06 $ 0.04 $ 0.13 $ 0.08 Average shares outstanding 30,120,536 30,547,810 30,107,957 30,544,387 Diluted earnings per share $ 0.06 $ 0.04 $ 0.13 $ 0.08 Diluted average shares outstanding 30,575,244 31,103,863 30,625,328 31,103,797 See accompanying notes to consolidated financial statements. </TABLE> 4
<TABLE> <CAPTION> WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - UNAUDITED (Dollars in thousands, except share data) Common Stock Restricted Accumulated ------------------ Additional Stock Other Par Paid-In Unallocated Unearned Retained Comprehensive Shares Value Capital ESOP Compensation Earnings (Loss) Total ------ ----- ---------- ----------- ------------ -------- ------------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2006 9,728,912 $274 $201,736 $ (4,835) $(405) $93,364 $ (726) $289,408 Comprehensive income: Net income - - - - - 3,925 - 3,925 Unrealized losses on securities arising during the year, net of tax benefit of $244 - - - - - - (347) (347) -------- Comprehensive income 3,578 -------- Exchange of common stock pursuant to reorganization (9,728,912 shares exchanged at a 3.28138 ratio for 31,923,903 shares) 21,458,991 38 (358) - - - - (320) Capital contribution pursuant to dissolution of Mutual Holding Company - - - - - 2,713 - 2,713 Share-based compensation - - 538 331 42 - - 911 Purchase of ESOP Shares 736,000 7 7,353 (7,360) - - - - Issuance of common stock in connection with stock option exercises 2,684 - 12 - - - - 12 Cash dividends declared ($.10 per share) - - - - - (3,017) - (3,017) ---------- ---- -------- -------- ----- ------- ------- -------- Balance at June 30, 2007 31,926,587 319 209,281 (11,864) (363) 96,985 (1,073) 293,285 ========== ==== ======== ======== ===== ======= ======= ======== Balance at December 31, 2005 9,754,757 98 30,120 (5,127) (861) 92,789 (1,177) 115,842 Comprehensive income: Net income - - - - - 2,574 - 2,574 Unrealized losses on securities arising during the period, net of tax benefit of $362 - - - - - - (620) (620) -------- Total comprehensive income 1,954 -------- Activity related to common stock issued as employee incentives - - 252 146 211 - - 609 Common stock repurchases - - (1,583) - - - - (1,583) Issuance of common stock connection with stock option exercises - - 815 - - (280) - 535 Cash dividends declared ($.50 per share) - - - - - (1,888) - (1,888) ---------- ---- -------- -------- ----- ------- ------- -------- Balance at June 30, 2006 9,754,757 $ 98 $ 29,604 $ (4,981) $(650) $93,195 $(1,797) $115,469 ========== ==== ======== ======== ===== ======= ======= ======== See accompanying notes to consolidated financial statements. </TABLE> 5
Westfield Financial, Inc. and Subsidiaries Consolidated Statements of Cash Flows - Unaudited (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30, 2007 2006 ---- ---- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 3,925 $ 2,574 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 175 275 Depreciation of premises and equipment 509 530 Net amortization of premiums and discounts on securities, mortgage-backed securities, and mortgage loans 186 339 Share-based compensation expense 1,247 836 Excess tax benefit from share-based compensation (34) - Loss on sale of fixed assets - 2 Deferred income tax benefit - (188) Increase in cash surrender value of bank-owned life insurance (591) (393) Changes in assets and liabilities: Accrued interest and dividends (1,007) (433) Other assets 49 6 Other liabilities 761 423 -------- -------- Net cash provided by operating activities 5,220 3,971 -------- -------- INVESTING ACTIVITIES: Securities, held to maturity: Purchases (31,758) (10,087) Proceeds from maturities and principal collections 10,000 8,000 Securities, available for sale: Purchases (16,171) (10,190) Proceeds from calls, maturities, and principal collections 5,293 3,000 Mortgage-backed securities, held to maturity: Purchases (20,342) (18,018) Principal collections 19,196 17,533 Mortgage-backed securities, available for sale: Purchases (63,808) (16,263) Principal collections 16,759 12,674 Purchase of residential mortgages (741) (10,548) Net other (increase) decrease in loans (8,992) 2,621 Purchase of Federal Home Loan Bank of Boston stock (1,546) - Proceeds from sale of Federal Home Loan Bank of Boston stock 217 - Purchases of premises and equipment (1,443) (1,091) Proceeds from sale of fixed assets - 10 Purchase of bank-owned life insurance (10,521) - -------- -------- Net cash used in investing activities (103,857) (22,359) -------- -------- FINANCING ACTIVITIES: Increase in deposits 2,802 12,675 Increase (decrease) in customer repurchase agreements 2,360 (37) Repayment of Federal Home Loan Bank of Boston advances (17,465) - Federal Home Loan Bank of Boston advances 42,465 - Cash dividends paid (3,017) (1,888) Exchange of common stock pursuant to reorganization (320) - Capital contribution pursuant to dissolution of MHC 2,713 - Treasury stock purchased - (1,583) Issuance of common stock in connection with stock option exercises 12 - Reissuance of treasury stock in connection with stock option exercises - 535 Purchase of common stock in connection with employees benefit program (336) (227) -------- -------- Net cash provided by financing activities 29,214 9,475 -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS: (69,423) (8,913) Beginning of period 154,508 26,456 -------- -------- End of period $ 85,085 $ 17,543 ======== ======== See accompanying notes to consolidated financial statements. </TABLE> 6
WESTFIELD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - Westfield Financial, Inc. was organized as a Massachusetts-chartered stock holding company in November 2001 in connection with the reorganization of Westfield Mutual Holding Company, a federally-chartered mutual holding company. As part of the reorganization, Westfield Financial offered for sale 47% of its common stock. The remaining 53% of Westfield Financial's shares were issued to Westfield Mutual Holding Company. The reorganization and related stock offering were completed on December 27, 2001. On January 3, 2007, Westfield Financial completed its stock offering in connection with the second step conversion of Westfield Mutual Holding Company. As part of the conversion, New Westfield Financial, Inc. succeeded Westfield Financial as the stock holding company of Westfield Bank, and Westfield Mutual Holding Company was dissolved. In the stock offering, a total of 18,400,000 shares representing Westfield Mutual Holding Company's ownership interest in Westfield Financial were sold by New Westfield Financial in a subscription offering, community offering and syndicated offering. In addition, each outstanding share of Westfield Financial as of January 3, 2007 was exchanged for 3.28138 new shares of New Westfield Financial common stock. New Westfield Financial, Inc. changed its name to Westfield Financial, Inc. effective January 3, 2007. Westfield Financial has a federally-chartered stock savings bank subsidiary called Westfield Bank. Westfield Bank's deposits are insured to the limits specified by the Federal Deposit Insurance Corporation ("FDIC"). Westfield Bank operates eleven 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. Elm Street Securities Corporation and WFD Securities Corporation, Massachusetts-chartered security corporations, were formed by Westfield Financial for the primary purpose of holding qualified investment securities. The conversion was accounted for as a reorganization in corporate form with no change in the historical basis of Westfield Financial's assets, liabilities, and equity. All references to the number of shares outstanding, including references for purposes of calculating per share amounts, are restated to give retroactive recognition to the exchange ratio applied in the conversion. Principles of Consolidation - The consolidated financial statements include the accounts of Westfield Financial, Westfield Bank, Elm Street Securities Corporation, WFD Securities Corporation and prior to its dissolution, Westfield Securities Corporation. 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. 7
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, as well as any adjustment to income that would result form the assumed issuance. Per share amounts related to periods prior to the date of completion of the conversion (January 3, 2007) have been restated to give retroactive recognition to the exchange ratio applied in the conversion (3.28138). Potential common shares that may be issued by Westfield Financial relate solely to outstanding stock awards and options and are determined using the treasury stock method. Earnings per common share for the three and six months ended June 30, 2007 and 2006, have been computed based on the following: <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, 2007 2006 2007 2006 ---- ---- ---- ---- (In thousands, except per share data) <S> <C> <C> <C> <C> Net income available to common stock holders $ 1,905 $ 1,260 $ 3,925 $ 2,574 ======= ======= ======= ======= Weighted average number of common stock outstanding 30,120 30,548 30,108 30,544 Effect of dilutive stock awards and options 455 556 517 559 ------- ------- ------- ------- Adjusted weighted average number of common shares outstanding used to calculate diluted earnings per common share 30,575 31,104 30,625 31,103 ======= ======= ======= ======= Basic earnings per share $ .06 $ .04 $ .13 $ .08 Diluted earnings per share $ .06 $ .04 $ .13 $ .08 </TABLE> 3. SHARE-BASED COMPENSATION Under Westfield Financial's 2002 Stock Option Plan and 2007 Stock Option Plan, Westfield Financial may grant options to its directors, officers, and employees for up to 1,631,682 shares and 1,560,101 shares, respectively, of common stock. Both incentive stock options and non-statutory stock options may be granted under the plan. The exercise price of each option equals the market price of Westfield Financial's stock the date of grant with a maximum term of ten years. All options currently outstanding vest at 20% per year. In May 2007, the remaining 150,155 shares available for issuance under the 2002 Stock Option Plan were fully allocated and no shares are currently available for future grants. The 2007 Stock Option Plan was approved by the shareholders at the annual meeting of shareholders on July 19, 2007. To date, no awards have been granted from the 2007 Stock Option Plan. Westfield Financial adopted Statement of Financial Accounting Standard No. 123(R), "Share-Based Payment" ("SFAS 123 (R)"), on January 1, 2006 using the "modified prospective" method. Under this method, awards that are granted, modified, or settled after December 31, 2005 are measured and accounted for in accordance with SFAS 123(R). Also, under this method, expense is recognized for awards that were granted prior to January 1, 2006, based on the fair value determined at the grant date under SFAS 123, (Accounting for Stock-Based Compensation" ("SFAS 123"). 8
The adoption of SFAS 123(R) by Westfield Financial resulted in additional share-based compensation expense of $84,000 and $73,000, and a related tax benefit of $18,000 and $17,000 for the three months ended June 30, 2007 and 2006, respectively. Additional share-based compensation was $157,000 and $146,000, with a related tax benefit of $35,000 and $34,000 for the six months ended June 30, 2007 and 2006, respectively. As of June 30, 2007 the compensation cost of unvested stock options amounted to $410,000 with a related tax benefit of $37,000. A summary of the status of Westfield Financial's stock options at June 30, 2007 is presented below: Weighted Average Shares Exercise Price ------ ---------------- Balance of December 31, 2006 1,217,050 $ 4.43 Shares Granted 150,155 10.11 Shares Exercised (2,684) 4.39 --------- Balance of June 30, 2007 1,364,521 $ 5.06 ========= Information pertaining to options outstanding at June 30, 2007 is as follows: <TABLE> <CAPTION> Aggregate Intrinsic Weighted Average Aggregate Intrinsic Exercise Number Value of Outstanding Remaining Number Value of Exercisable Price Outstanding Shares Contractual Life Exercisable Shares - -------- ----------- -------------------- ---------------- ----------- -------------------- (in thousands) (in thousands) <S> <C> <C> <C> <C> <C> $ 4.39 1,197,960 $6,685 5.1 Years 952,194 $5,313 7.52 8,203 20 7.7 Years 1,641 4 7.62 8,203 19 6.7 Years 3,281 8 10.11 150,155 (21) 10.0 Years - - --------- ------ ------- ------ 1,364,521 $6,703 957,116 $5,325 ========= ====== ======= ====== </TABLE> 4. STOCK AWARDS Under Westfield Financial's Recognition and Retention Plan dated November 1, 2002, Westfield Financial may grant stock awards to its directors, officers and employees for up to 652,664 shares of common stock. In May 2007, all remaining shares under the plan were fully allocated and no shares are currently available for future grants. Westfield Financial applies SFAS 123(R) in accounting for stock awards. The stock allocations, based on the market price at the date of grant, are recorded as unearned compensation. Unearned compensation is amortized over the vesting period. Westfield Financial recorded compensation cost related to the stock awards of approximately $125,000 and $245,000 for the three and six months ended June 30, 2007, respectively. Compensation cost related to stock awards was approximately $119,000 and $238,000 for the three and six months ended June 30, 2006. 5. EMPLOYEE STOCK OWNERSHIP PLAN In January 2002, Westfield Financial established an Employee Stock Ownership Plan (the "ESOP") for the benefit of each employee that has reached the age of 21 and has completed at least 1,000 hours of service in the previous twelve-month period. As part of the conversion, Westfield Financial provided a loan to the Westfield Financial Employee Stock Ownership Plan Trust which was used to purchase 8%, or 1,305,359 shares, of Westfield Financial's outstanding stock in the open market. In January 2007, as part of the second step stock conversion, Westfield Financial provided a loan to the Westfield Financial Employee Stock Ownership Plan Trust which was used to purchase 4.0%, or 736,000 shares, of the 18,400,000 shares of common stock sold in the offering. The 2002 and 2007 loans bear interest equal to 8.0% and provide for annual payments of interest and principal. 9
At June 30, 2007 the remaining principal balance is payable as follows: Years Ending December 31 (In thousands) ------------ -------------- 2007 $ 447 2008 447 2009 447 2010 447 2011 447 Thereafter 10,161 ------- $12,396 ======= Westfield Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loans. The loans are secured by the shares purchased, which are held in a suspense account for allocation among the participants as the loans are paid. Total compensation expense applicable to the ESOP amounted to $252,000 and $511,000 for the three and six months ended June 30, 2007 and $113,000 and $227,000 for the three and six months ended June 30, 2006. 6. PENSION AND OTHER BENEFITS The following table provides information regarding net benefit costs for the period shown: Pension Benefits Other Benefits ---------------- -------------- Three months ended June 30, ---------------------------------- (in thousands) 2007 2006 2007 2006 ---- ---- ---- ---- Service cost $ 175 $ 181 $ 8 $ 7 Interest cost 145 150 12 12 Expected return on assets (162) (149) 0 0 Transaction obligation (3) (3) 2 2 Actuarial loss 0 11 0 1 ----- ----- --- --- Net periodic pension cost $ 155 $ 190 $22 $22 ===== ===== === === Pension Benefits Other Benefits ---------------- -------------- Six months ended June 30, ---------------------------------- (in thousands) 2007 2006 2007 2006 ---- ---- ---- ---- Service cost $ 351 $ 362 $16 $15 Interest cost 291 300 25 24 Expected return on assets (323) (298) 0 0 Transition obligation (6) (6) 4 5 Actuarial loss (1) 22 0 2 ----- ----- --- --- Net periodic pension cost $ 312 $ 380 $45 $46 ===== ===== === === 10
Westfield Financial 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 2007, the preliminary estimated contribution is approximately $690,000. As of June 30, 2007 no contribution had been made. 7. SUBSEQUENT EVENTS Westfield Financial held its Annual Meeting of Shareholders on July 19, 2007 (the "Meeting"). The Westfield Financial 2007 Stock Option Plan and 2007 Recognition and Retention Plan were both approved at the Meeting. Under the 2007 Stock Option Plan, Westfield Financial has been authorized to grant 1,560,101 stock options to its directors, officers and other key employees. To date, no options have been awarded from the 2007 Stock Option Plan. Under the 2007 Recognition and Retention Plan, Westfield Financial has been authorized to grant 624,041 shares of common stock to its directors, officers and other key employees. To date, no shares have been awarded from the 2007 Recognition and Retention Plan. 8. RECENT ACCOUNTING PRONOUNCEMENTS In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement is effective for Westfield Bank on January 1, 2008, with early adoption permitted and is not expected to have a material impact on Westfield Bank's consolidated financial statements. In September 2006, the FASB ratified EITF 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." This issue addresses accounting for split-dollar life insurance arrangements whereby the employer purchases a policy to insure the life of an employee, and separately enters into an agreement to split the policy benefits between the employer and the employee. This EITF states that an obligation arises as a result of a substantive agreement with an employee to provide future postretirement benefits. Under EITF 06-4, the obligation is not settled upon entering into an insurance arrangement. Since the obligation is not settled a liability should be recognized in accordance with applicable authoritative guidance. EITF 06-4 is effective for Westfield Bank's 2008 fiscal year and Westfield Bank is in the process of evaluating the potential impacts of adopting EITF 06-4 on its consolidated financial statements. In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which provides companies with an option to report selected financial assets and liabilities at fair value. Statement No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies and choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for Westfield Bank on January 1, 2008, with early adoption permitted for fiscal 2007, provided that Westfield Bank also adopts Statement No. 157 for fiscal 2007. Management is in the process of evaluating the potential impacts of adopting SFAS No. 159 on its consolidate financial statements. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview Westfield Financial 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. On January 3, 2007, Westfield Financial completed its stock offering in connection with the second step conversion of Westfield Mutual Holding Company. As part of the conversion, New Westfield Financial, Inc. succeeded Westfield Financial as the stock holding company of Westfield Bank, and Westfield Mutual Holding Company was dissolved. In the stock offering, a total of 18,400,000 shares representing Westfield Mutual Holding Company's ownership interest in Westfield Financial were sold by New Westfield Financial in a subscription offering, community offering and syndicated offering. In addition, each outstanding share of Westfield Financial as of January 3, 2007 was exchanged for 3.28138 new shares of New Westfield Financial common stock. New Westfield Financial, Inc. changed its name to Westfield Financial, Inc. effective January 3, 2007. Proceeds, net of stock issuance costs, were approximately $171.2 million. Westfield Financial has adopted a growth-oriented strategy that has focused on increased commercial lending. Westfield Financial's strategy also calls for increasing deposit relationships and broadening its product lines and services. Westfield Financial believes that this business strategy is best for its long term success and viability, and complements its existing commitment to high quality customer service. In connection with its overall growth strategy, Westfield Bank seeks to: o continue to grow its commercial and industrial and commercial real estate loan portfolio by targeting businesses in its primary market area and in northern Connecticut as a means to increase the yield on and diversify its loan portfolio and build transactional deposit account relationships; o focus on expanding its retail banking franchise, and increasing the number of households served within its market area; and o 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. Please review our financial results for the quarter ended June 30, 2007 in the context of this strategy. o Net income was $1.9 million, or $0.06 per diluted share, for the quarter ended June 30, 2007 compared to $1.3 million, or $0.04 per diluted share for the same period in 2006. For the six months ended June 30, 2007, net income was $3.9 million, or $0.13 per diluted share, compared to $2.6 million, or $0.08 per diluted share, for the same period in 2006. 12
o Net interest income was $7.4 million for the three months ended June 30, 2007 and $5.9 million for the same period in 2006. Net interest income was $14.9 million for the six months ended June 30, 2007 and $11.7 million for the same period in 2006. The increase in net interest income was mainly due to an increase in average earning assets as a result of funds raised in the second step stock offering. The net interest margin, on a tax equivalent basis, was 3.25% and 3.31% for the three and six months, respectively, ended June 30, 2007, compared to 3.19% in both the same periods in 2006. o Total assets increased $34.8 million to $1.0 billion at June 30, 2007 from $996.8 million at December 31, 2006. Investment securities increased $80.1 million, to $489.1 million at June 30, 2007 from $409.0 million at December 31, 2006. Cash and cash equivalents decreased $69.4 million, to $85.1 million at June 30, 2007 from $154.5 million at December 31, 2006. The decrease in cash and cash equivalents was the result of using funds to purchase investment securities. o Net loans increased by $9.6 million to $394.7 million at June 30, 2007 from $385.1 million at December 31, 2006. This was primarily the result of an increase in commercial and industrial loans of $14.2 million to $114.6 million at June 30, 2007 from $100.4 million at December 31, 2006. o Residential real estate loans decreased $2.4 million to $107.5 million at June 30, 2007 from $109.9 million at December 31, 2006. Since September 2001, Westfield Bank has referred substantially all of the originations of its residential real estate loans to a third party mortgage company. Residential real estate borrowers submit applications to Westfield Bank, but the loan is approved by and closed on the books of the mortgage company. The third party mortgage company owns the servicing rights and services the loans. Westfield Bank retains no residual ownership interest in these loans. o Asset growth was funded primarily through a $25.0 million increase in Federal Home Loan Bank borrowing, which totaled $80.0 million at June 30, 2007 and $55.0 million at December 31, 2006. o Total deposits increased $2.8 million to $630.3 million at June 30, 2007 from $627.5 million at December 31, 2006. NOW and checking accounts increased $9.8 million to $132.6 million at June 30, 2007 from $122.8 million at December 31, 2006. Money market accounts decreased $8.3 million to $86.2 million at June 30, 2007. Time deposits decreased $2.2 million to $371.8 million at June 30, 2006. o Customer repurchase agreements were $20.3 million at June 30, 2007 and $17.9 million at December 31, 2006. All of Westfield Bank's customer repurchase agreements at June 30, 2007 were held by commercial customers. o Nonperforming loans were $1.0 million both at June 30, 2007 and December 31, 2006. This represents 0.25% and 0.26% of total loans at June 30, 2007 and December 31, 2006, respectively. Charge-offs decreased by $489,000 to $45,000 for the six months ended June 30, 2007 from $534,000 for the six months ended June 30, 2006. o The allowance for loan losses was $5.7 million at June 30, 2007 and $5.4 million at December 31, 2006. This represents 1.42% of total loans at June 30, 2007 and 1.39% of total loans at December 31, 2006. At these levels, the allowance for loan losses as a percentage of nonperforming loans was 563% at June 30, 2007 and 529% at December 31, 2006. o Stockholders' equity at June 30, 2007 and December 31, 2006 was $293.3 million and $289.4 million, respectively, which represented 28.4% of total assets as of June 30, 2007 and 29.0% of total assets as of December 31, 2006. 13
o Noninterest expense for the three months ended June 30, 2007 was $5.6 million, compared to $4.9 million for the same period in 2006. Noninterest expense for the six months ended June 30, 2007 was $10.9 million, compared to $9.7 million for the same period in 2006. Salaries and benefits increased $301,000 and $616,000 for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2006. The increase in salaries and benefits primarily the result normal increases in this area, an increase in expense related to the Employee Stock Ownership Plan, along with hiring new employees. Much of the new hiring was associated with the opening of a new Westfield Bank branch during the second quarter of 2007. CRITICAL ACCOUNTING POLICIES Westfield Financial'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. Westfield Financial's general policy is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more, or earlier if the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the 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. Westfield Financial's methodology for assessing the appropriateness of the allowance consists of two key components, which are a specific allowance for identified problem or impaired loans and a formula allowance for the remainder of the portfolio. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The appropriateness of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of Westfield Financial and other conditions, such as new loan products, credit quality trends (including trends in 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. 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. Westfield Financial has never sold held to maturity securities or reclassified such securities to available for sale other than in specifically permitted circumstances. Westfield Financial does not acquire securities or mortgage-backed securities for purposes of engaging in trading activities. 14
On a quarterly basis, Westfield Financial 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, 2007 AND DECEMBER 31, 2006 Total assets increased $34.8 million to $1.0 billion at June 30, 2007 from $996.8 million at December 31, 2006. Securities and mortgage-backed securities increased $80.1 million, to $489.1 million at June 30, 2007 from $409.0 million at December 31, 2006. Cash and cash equivalents decreased $69.4 million to $85.1 million at June 30, 2007 from $154.5 million at December 31, 2006. The decrease in cash and cash equivalents was the result of investing offering proceeds in investment securities and loans. Net loans increased by $9.6 million to $394.7 million at June 30, 2007 from $385.1 million at December 31, 2006. This was primarily the result of an increase in commercial and industrial loans of $14.2 million to $114.6 million at June 30, 2007 from $100.4 million at December 31, 2006. Commercial real estate loans decreased $1.7 million, to $172.8 million at June 30, 2007 from $174.5 million at December 31, 2006. This was primarily due to a single commercial relationship that divested real estate holdings and paid off loans totaling $10.2 million. This was partially offset by new commercial real estate loan originations. Residential real estate loans decreased $2.4 million to $107.4 million at June 30, 2007 from $109.9 million at December 31, 2006. Since September 2001, Westfield Bank has referred substantially all of the originations of its residential real estate loans to a third party mortgage company. Residential real estate borrowers submit applications to Westfield Bank, but the loan is approved by and closed on the books of the mortgage company. The third party mortgage company owns the servicing rights and services the loans. Westfield Bank retains no residual ownership interest in these loans. Asset growth was funded primarily through a $25.0 million increase in Federal Home Loan Bank borrowings, which totaled $80.0 million at June 30, 2007 and $55.0 million at December 31, 2006. Total deposits increased $2.8 million to $630.3 million at June 30, 2007 from $627.5 million at December 31, 2006. NOW and checking accounts increased $9.8 million to $132.6 million at June 30, 2007 from $122.8 million at December 31, 2006. Money market accounts decreased $8.3 million to $86.2 million at June 30, 2007. Time deposits decreased $2.2 million to $371.8 million at June 30, 2006. Customer repurchase agreements were $20.3 million at June 30, 2007 and $17.9 million at December 31, 2006. All of Westfield Bank's customer repurchase agreements at June 30, 2007 were held by commercial customers. 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 June 30, 2007 were held by commercial customers. Stockholders' equity at June 30, 2007 and December 31, 2006 was $293.3 million and $289.4 million, respectively, representing 28.4% and 29.0% of total assets, respectively. 15
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006 General Net income was $1.9 million, or $0.06 per diluted share, for the quarter ended June 30, 2007 as compared to $1.3 million, or $0.04 per diluted share, for the same period in 2006. Net interest and dividend income was $7.4 million for both the three months ended June 30, 2007 and $5.9 million for 2006. 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, 2007 and 2006 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. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets. <TABLE> <CAPTION> Three Months Ended June 30, 2007 2006 ------------------------------------ ------------------------------------ Average Avg Yield/ Average Avg Yield/ Interest Balance Cost Interest Balance Cost -------- ------- ---------- -------- ------- ---------- (Dollars in thousands) Interest-Earning Assets - ----------------------- <S> <C> <C> <C> <C> <C> <C> Short Term Investments $ 647 $ 49,751 5.20% $ 149 $ 12,278 4.85% Investment Securities 5,960 492,629 4.84 4,059 365,300 4.44 Loans 6,574 389,075 6.76 6,604 390,125 6.77 ------- -------- ------- -------- Total Interest-Earning Assets $13,181 $931,455 5.66% $10,812 $767,703 5.63% ======= ======== ======= ======== Interest-Bearing Liabilities - ---------------------------- NOW Accounts $ 341 $ 80,813 1.69% $ 223 $ 73,655 1.21% Savings Accounts 59 37,866 0.62 50 40,323 0.50 Money Market Accounts 346 87,367 1.58 422 110,824 1.52 Time Deposits 4,177 372,924 4.48 3,512 368,121 3.82 Customer Repurchase Agreements and Borrowings 723 73,830 3.92 495 60,444 3.28 ------- -------- ---- ------- -------- Total Interest-Bearing Liabilities $ 5,646 $652,800 3.46% $ 4,702 $653,367 2.88% ======= ======== ======= ======== Net Interest Income/Interest Rate Spread $ 7,535 2.20% $ 6,110 2.75% ======= ==== ======= ==== Net Interest Margin (1) 3.25% 3.19% ==== ==== (1) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average interest earning assets. </TABLE> 16
The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected Westfield Financial's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: o Interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); o Interest income changes attributable to changes in rate (changes in rate multiplied by current volume); and o 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 June 30, 2007 compared to June 30, 2006 Increase (decrease) due to: -------------------------------------------- Interest-Earning Assets Volume Rate Net - ----------------------- ------ ---- --- (Dollars in thousands) Short Term Investments $ 455 $ 43 $ 498 Investment Securities 1,415 486 1,901 Loans (18) (12) (30) ------ ------ ------ Net Change in Income on Interest-Earning Assets 1,852 517 2,369 ------ ------ ------ Interest-Bearing Liabilities - ---------------------------- NOW Accounts 22 96 118 Savings Accounts (3) 12 9 Money Market Accounts (89) 13 (76) Time Deposits 46 619 665 Customer Repurchase Agreements and Borrowings 110 118 228 ------ ------ ------ Net Change in Expense on Interest-Bearing Liabilities 86 858 944 ------ ------ ------ Change in Net Interest Income $1,766 $ (341) $1,425 ====== ====== ====== Net interest and dividend income increased $1.5 million to $7.4 million for the three months ended June 30, 2007 from $5.9 million in the same period in 2006. The net interest margin, on a tax equivalent basis, was 3.25% for the three months ended June 30, 2007 as compared to 3.19% for the same period in 2006. The increase in net interest income was mainly due to a $163.8 million increase in average earning assets as a result of funds raised in the second step stock offering. Average earning assets were $931.5 million for the three months ended June 30, 2007 compared to $767.7 for the same period in 2006. As a result, interest and dividend income increased $2.4 million to $13.2 million for the six months ended June 30, 2007 from $10.8 million for same period in 2006. The yield of interest-earning assets increased 3 basis points to 5.66% for the three months ended June 30, 2007 from 5.63% for same period in 2006. 17
The increase in interest income was partially offset by an increase of $944,000 in interest expense. The average cost of interest-bearing liabilities increased 58 basis points to 3.46% for the three months ended June 30, 2007 from 2.88% for same period in 2006. The increase in the average cost of interest-bearing liabilities was primarily due to an increase in the cost of time deposits resulting from the rising interest rate environment. Provision for Loan Losses The appropriations of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of Westfield Bank 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. The amount that Westfield Bank provided for the provision for loan losses during the three months ended June 30, 2007 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include a decrease in net charge offs, tempered by an increase in commercial and industrial loans and commercial real estate loans. After evaluating these factors, Westfield Bank provided $75,000 for loan losses for the three months ended June 30, 2007, compared to $200,000 for the same period in 2006. The allowance was $5.7 million at June 30, 2007 and $5.6 million at March 31, 2007. The allowance for loan losses was 1.42% of total loans at June 30, 2007 and 1.45% at March 31, 2007. For the three months ended June 30, 2007, Westfield Bank recorded net recoveries of $46,000 compared to net charge-offs of $377,000 for the three months ended June 30, 2006. The 2007 period was comprised of recoveries of $71,000 for the three months ended June 30, 2007, partially offset by charge-offs of $25,000 for the same period. The 2006 period was comprised of charge-offs of $510,000 for the three months ended June 30, 2006, partially offset by recoveries of $133,000 for the same period. At June 30, 2007, commercial and industrial loans increased $12.6 million to $114.6 million compared to March 31, 2007. Westfield Bank considers these types of loans to contain more credit risk and market risk than both commercial real estate loans and conventional residential real estate mortgages. Commercial real estate loans increased by $7.2 million, while residential real estate mortgages decreased by $1.5 million during the quarter ended June 30, 2007. Nonperforming loans were unchanged at $1.0 million at both June 30, 2007 and at March 31, 2007. Although management believes it has established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. Noninterest Income Noninterest income increased $91,000 to $974,000 for the three months ended June 30, 2007 from $883,000 in the same period in 2006. Income from bank-owned life insurance increased $125,000 to $324,000 for the three months ended June 30, 2007 compared to $199,000 in the same period in 2006. This was primarily the result of the purchase of an additional $10.0 million of bank-owned life insurance in the first quarter of 2007. Net checking account processing fee income decreased $46,000 to $416,000 for the three months ended June 30, 2007, compared to $462,000 for the same period in 2006. 18
Noninterest Expense Noninterest expense for the three months ended June 30, 2007 was $5.6 million, compared to $4.9 million for the same period in 2006. Salaries and benefits increased $301,000 to $3.3 million for the three months ended June 30, 2007 compared to $3.0 million for the same period in 2006. The increase in salaries and benefits was primarily the result of normal increases, an increase in expense related to the ESOP, and the hiring of new employees. Much of the new hiring was associated with the opening of a new Westfield Bank branch during the second quarter of 2007. Advertising and marketing expense increased $137,000 to $280,000 for the three months ended June 30, 2007 compared to $143,000 for the same period in 2006. Also, charitable contributions increased $93,000 to $212,000 for the three months ended June 30, 2007 compared to $119,000 for the same period in 2006. For advertising and marketing expense, as well as charitable contributions, management authorized a larger portion of the anticipated annual expenditures in the three months ended June 30, 2007. Income Taxes For the three months ended June 30, 2007, Westfield Financial had a tax provision of $826,000 compared to $430,000 for the same period in 2006. The effective tax rate was 30.2% for the three months ended June 30, 2007 and 25.4% for the same period in 2006. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006 General Net income was $3.9 million, or $0.13 per diluted share, for the six months ended June 30, 2007 as compared to $2.6 million, or $0.08 per diluted share, for the same period in 2006. Net interest and dividend income was $14.9 million for the six months ended June 30, 2007 compared to $11.7 million for the same period in 2006. 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, 2007 and 2006 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. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets. 19
<TABLE> <CAPTION> Six Months Ended June 30, 2007 2006 ------------------------------------ ------------------------------------ Average Avg Yield/ Average Avg Yield/ Interest Balance Cost Interest Balance Cost -------- ------- ---------- -------- ------- ---------- (Dollars in thousands) Interest-Earning Assets - ----------------------- <S> <C> <C> <C> <C> <C> <C> Short Term Investments $ 2,031 $ 77,153 5.26% $ 416 $ 18,402 4.52% Investment Securities 11,055 460,530 4.80 7,951 362,550 4.39 Loans 13,059 386,313 6.76 12,582 383,822 6.56 ------- -------- ------- -------- Total Interest-Earning Assets $26,145 $923,996 5.66% $20,949 $764,774 5.48% ======= ======== ======= ======== Interest-Bearing Liabilities - ---------------------------- NOW Accounts $ 660 $ 79,983 1.65% $ 383 $ 71,381 1.07% Savings Accounts 107 39,108 0.55 101 40,589 0.49 Money Market Accounts 695 89,487 1.55 905 117,532 1.54 Time Deposits 8,257 373,420 4.42 6,486 359,757 3.61 Customer Repurchase Agreements and Borrowings 1,250 66,313 3.77 977 59,783 3.27 ------- -------- ------- -------- Total Interest-Bearing Liabilities $10,969 $648,311 3.38% $ 8,852 $649,042 2.73% ======= ======== ======= ======== Net Interest Income/Interest Rate Spread $15,176 2.28% $12,097 2.75% ======= ==== ======= ==== Net Interest Margin (1) 3.31% 3.19% ==== ==== (1) Net interest margin represents tax equivalent net interest and dividend income as a percentage of average interest earning assets. </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 Westfield Financial's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: o Interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); o Interest income changes attributable to changes in rate (changes in rate multiplied by current volume); and o 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. 20
Six Months Ended June 30, 2007 compared to June 30, 2006 Increase (decrease) due to: ------------------------------------------ Interest-Earning Assets Volume Rate Net - ----------------------- ------ ---- --- (Dollars in thousands) Short Term Investments $1,328 $ 287 $1,615 Investment Securities 2,149 955 3,104 Loans 82 395 477 ------ ------ ------ Net Change in Income on Interest-Earning Assets 3,559 1,637 5,196 ------ ------ ------ Interest-Bearing Liabilities - ---------------------------- NOW Accounts 46 231 277 Savings Accounts (4) 10 6 Money Market Accounts (216) 6 (210) Time Deposits 246 1,525 1,771 Customer Repurchase Agreements and Borrowings 107 166 273 ------ ------ ------ Net Change in Expense on Interest-Bearing Liabilities 179 1,938 2,117 ------ ------ ------ Change in Net Interest Income $3,380 $ (301) $3,079 ====== ====== ====== Net interest and dividend income increased $3.2 million to $14.9 million for the six months ended June 30, 2007 from $11.7 million in the same period in 2006. The net interest margin, on a tax equivalent basis, was 3.31% for the six months ended June 30, 2007 as compared to 3.19% for the same period in 2006. The increase in net interest income was mainly due to a $159.2 million increase in average earning assets as a result of funds raised in the second step stock offering. Average earning assets were $924.0 million for the six months ended June 30, 2007 compared to $764.8 million for the same period in 2006. As a result, interest and dividend income increased $5.2 million to $26.1 million for the six months ended June 30, 2007 from $20.9 million for same period in 2006. The yield of interest-earning assets increased 18 basis points to 5.66% for the six months ended June 30, 2007 from 5.48% for same period in 2006. The increase in interest income was partially offset by an increase of $2.1 million in interest expense. The average cost of interest-bearing liabilities increased 65 basis points to 3.38% for the six months ended June 30, 2007 from 2.73% for same period in 2006. The increase in the average cost of interest-bearing liabilities was primarily due to an increase in the cost of time deposits resulting from the rising interest rate environment. Provision for Loan Losses The appropriations of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of Westfield Bank 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. 21
The amount that Westfield Bank provided for the provision for loan losses during the three months ended June 30, 2007 was based upon the changes that occurred in the loan portfolio during that same period. The changes in the loan portfolio, described in detail below, include a decrease in net charge offs, a decrease in real estate loans, tempered by an increase in commercial and industrial loans and commercial real estate loans. After evaluating these factors, Westfield Bank provided $175,000 for loan losses for the six months ended June 30, 2007, compared to $275,000 for the same period in 2006. The allowance was $5.7 million at June 30, 2007 and $5.4 million at December 31, 2006. The allowance for loan losses was 1.42% of total loans at June 30, 2007 and 1.39% at March December 31, 2006. For the six months ended June 30, 2007, Westfield Bank recorded net recoveries of $62,000 compared to net charge-offs of $345,000 for the six months ended June 30, 2006. The 2007 period was comprised of recoveries of $107,000 for the six months ended June 30, 2007, partially offset by charge-offs of $45,000 for the same period. The 2006 period was comprised of charge-offs of $534,000 for the six months ended June 30, 2006, partially offset by recoveries of $189,000 for the same period. At June 30, 2007, commercial and industrial loans increased $14.2 million to $114.6 million compared to December 31, 2006. Westfield Bank considers these types of loans to contain more credit risk and market risk than both commercial real estate loans and conventional residential real estate mortgages. Commercial real estate loans decreased by $1.6 million and residential real estate mortgages decreased by $2.4 during the six months ended June 30, 2007. Nonperforming loans were unchanged at $1.0 million at both June 30, 2007 and at December 31, 2006. Although management believes it has established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. Noninterest Income Noninterest income increased $57,000 to $1.8 million for the six months ended June 30, 2007 from $1.7 million in the same period in 2006. Income from bank-owned life insurance increased $197,000 to $591,000 for the six months ended June 30, 2007 compared to $394,000 in the same period in 2006. This was primarily the result of the purchase of an additional $10.0 million of bank-owned life insurance in the first quarter of 2007. Net checking account processing fee income decreased $125,000 to $801,000 for the six months ended June 30, 2007, compared to $926,000 for the same period in 2006. Noninterest Expense Noninterest expense for the six months ended June 30, 2007 was $10.9 million, compared to $9.7 million for the same period in 2006. Salaries and benefits increased $616,000 to $6.6 million for the six months ended June 30, 2007 compared to $6.0 million for the same period in 2006. Salaries increased $515,000 primarily the result of hiring new employees and normal increases in expenses related to employee salaries and benefits. Much of the new hiring was associated with the opening of a new Westfield Bank branch during the second quarter of 2007. In addition, expense related to the ESOP increased $284,000 compared to the same period in 2006. This was primarily the result of a new employee stock ownership program which was formed upon completion of the second step stock conversion. 22
Advertising and marketing expense increased $165,000 to $407,000 for the six months ended June 30, 2007 compared to $242,000 for the same period in 2006. For advertising and marketing expense, management authorized a larger portion of the anticipated annual expenditures in the six months ended June 30, 2007. Income Taxes For the six months ended June 30, 2007, Westfield Financial had a tax provision of $1.7 million compared to $879,000 for the same period in 2006. The effective tax rate was 30.7% for the six months ended June 30, 2007 and 25.5% for the same period in 2006. LIQUIDITY AND CAPITAL RESOURCES The term "liquidity" refers to Westfield Financial's ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. Westfield Financial'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 ("FHLB") of Boston based on eligible collateral of loans and securities. Westfield Bank's maximum additional borrowing capacity from the FHLB at June 30, 2007 was approximately $52.4 million. Liquidity management is both a short-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 Westfield Financial has sufficient liquidity to meet its current operating needs. At June 30, 2007, Westfield Bank exceeded each of the applicable regulatory capital requirements. As of June 30, 2007 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 tables. There are no conditions or events since that notification that management believes have changed Westfield Bank's categorization. Westfield Bank's actual capital ratios as of June 30, 2007 and December 31, 2006 are also presented in the tables. 23
<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, 2007 Total Capital (to Risk Weighted Assets): Consolidated $299,845 53.54% $44,804 8.00% N/A - Bank 213,665 39.45 43,325 8.00 54,157 10.00% Tier 1 Capital (to Risk Weighted Assets): Consolidated 294,171 52.53 22,402 4.00 N/A - Bank 207,991 38.41 21,663 4.00 32,494 6.00 Tier 1 Capital (to Adjusted Total Assets): Consolidated 294,171 28.48 41,313 4.00 N/A - Bank 207,991 21.92 37,961 4.00 47,452 5.00 Tangible Equity (to Tangible Assets): Consolidated N/A - N/A - N/A - Bank 207,991 21.92 18,981 2.00 N/A - December 31, 2006 Total Capital (to Risk Weighted Assets): Consolidated $295,404 55.39% $42,662 8.00% N/A - Bank 119,266 22.70 42,029 8.00 52,536 10.00% Tier 1 Capital (to Risk Weighted Assets): Consolidated 289,967 54.37 21,331 4.00 N/A - Bank 113,856 21.67 21,014 4.00 31,522 6.00 Tier 1 Capital (to Adjusted Total Assets): Consolidated 289,967 29.07 39,905 4.00 N/A - Bank 113,856 11.88 38,327 4.00 47,908 5.00 Tangible Equity (to Tangible Assets): Consolidated N/A - N/A - N/A - Bank 113,856 11.88 19,163 2.00 N/A - </TABLE> 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. 24
Westfield Bank is obligated under leases for certain branches and equipment. A summary of lease obligations and credit commitments at June 30, 2007 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 $ 364 $ 728 $ 698 $ 6,892 $ 8,682 ======== ======= ======= ======= ======== BORROWINGS Federal Home Loan Bank $ 25,000 $35,000 $15,000 $ 5,000 $ 80,000 ======== ======= ======= ======= ======== CREDIT COMMITMENTS Available lines of credit $ 48,274 $ - $ - $13,248 $ 61,522 Other loan commitments 45,743 8,937 - - 54,680 Letters of credit 7,659 - - 588 8,247 -------- ------- ------- ------- -------- Total credit commitments $101,676 $ 8,937 $ - $13,836 $124,449 -------- ------- ------- ------- -------- Grand total $127,040 $44,665 $15,698 $25,728 $213,131 ======== ======= ======= ======= ======== </TABLE> OFF-BALANCE SHEET ARRANGEMENTS Westfield Financial does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on Westfield Financial'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 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 June 30, 2007, that Westfield Bank met all capital adequacy requirements to which it was subject. As of June 30, 2007, the most recent notification from 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. There are no conditions or events since the most recent OTS notification that management believes have changed Westfield Bank's categorization. 25
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, net interest income is measured in one scenario that assumes no change in interest rates, and six scenarios where interest rates increase 100, 200 and 300 basis points, and decrease 100, 200 and 300 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. 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 table below sets forth as of June 30, 2007 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, 2008 (Dollars in thousands) -------------------------------------------- Changes in Net Interest Interest Rates and Dividend (Basis Points) Income % Change -------------- ------------ -------- 300 34,585 -0.8% 200 34,769 -0.3% 100 35,225 1.1% 0 34,858 - -100 34,767 -0.3% -200 34,046 -2.3% -300 33,063 -5.1% Management believes that there have been no significant changes in market risk since December 31, 2006. 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 Westfield Financial's Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Westfield Financial'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 Chairman 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 Westfield Financial files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to Westfield Financial's management, including Westfield Financial's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 26
There have been no changes in Westfield Financial's internal control over financial reporting identified in connection with the evaluation that occurred during Westfield Financial's last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, Westfield Financial's internal control over financial reporting. Part II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in Westfield Financial's Form 10-K for the year ended December 31, 2006. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS There were no purchases made by Westfield Financial of its common stock during the three months ended June 30, 2007. There were no sales by Westfield Financial of unregistered securities during the three months ended June 30, 2007. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Westfield Financial held its Annual Meeting of Shareholders on July 19, 2007 (the "Meeting"). All the proposals submitted to the shareholders at the Meeting were approved. The proposals submitted to shareholders and the tabulation of the votes for each proposal is as follows: 1. Election of three candidates to the Board of Directors The number of votes cast with respect to this matter is as follows: Nominee For Withheld ------- --- -------- Victor J. Carra 19,353,170 8,089,596 Richard C. Placek 26,746,772 695,994 Charles E. Sullivan 26,918,549 524,217 There were no broker non-votes or abstentions on this proposal. The following directors' terms of office continued after the Meeting: David C. Colton, Jr. Robert T. Crowley, Jr. Harry C. Lane William H. McClure Mary C. O'Neil Paul R. Pohl Donald A. Williams 27
2. Approval of the Westfield Financial, Inc. 2007 Stock Option Plan The number of votes cast with respect to this matter was as follows: For Against Abstain --- ------- ------- 20,199,036 1,187,229 221,770 There were 5,834,731 broker held non-voted shares represented at the Meeting with respect to this matter. 3. Approval of the Westfield Financial, Inc. 2007 Recognition and Retention Plan. The number of votes cast with respect to this matter was as follows: For Against Abstain --- ------- ------- 20,112,537 1,271,608 223,889 There were 5,834,731 broker held non-voted shares represented at the Meeting with respect to this matter: ITEM 5. OTHER INFORMATION a. None b. None ITEM 6. EXHIBITS The following exhibits are furnished with this report: Exhibit Description - ------- ----------- 2.1 Amended and Restated Plan of Conversion and Stock Issuance of Westfield Mutual Holding Company, Westfield Financial, Inc. and Westfield Bank.(1) 3.1 Articles of Organization of Westfield Financial, Inc.(2) 3.2 Bylaws of Westfield Financial, Inc.(2) 4.1 Form of Stock Certificate of Westfield Financial, Inc.(1) 10.1 Form of Employee Stock Ownership Plan of Westfield Financial, Inc.(3) 10.2 Amendments to the Employee Stock Ownership Plan of Westfield Financial, Inc.(4) 10.3 Form of Director's Deferred Compensation Plan.(5) 10.4 The 401(k) Plan adopted by Westfield Bank.(6) 10.5 Form of Benefit Restoration Plan of Westfield Financial, Inc.(5) 10.6 Form of Amended and Restated Deferred Compensation Agreement with Donald A. Williams.(5) 10.7 Form of Employment Agreement between Donald A. Williams and Westfield Bank.(1) 10.8 Form of Employment Agreement between Michael J. Janosco, Jr. and Westfield Bank.(1) 10.9 Form of Employment Agreement between James C. Hagan and Westfield Bank.(1) 10.10 Form of Employment Agreement between Donald A. Williams and New Westfield Financial, Inc.(1) 10.11 Form of Employment Agreement between Michael J. Janosco, Jr. and New Westfield Financial, Inc.(1) 10.12 Form of Employment Agreement between James C. Hagan and New Westfield Financial, Inc.(1) 10.13 Form of One Year Change in Control Agreement by and among certain officers and New Westfield Financial, Inc. and Westfield Bank.(1) 10.14 Agreement between Westfield Bank and Village Mortgage Company.(1) 31.1 Rule 13a-14(a)/15d-14(a) Certifications 32.1 Section 1350 Certifications 28
- ----------- (1) Incorporated by reference to the Registration Statement No. 333-137024 on Form S-1 filed with the Securities and Exchange Commission on August 31, 2006, as amended. (2) Incorporated by reference to the Form 8-K filed with the Securities and Exchange Commission on January 5, 2007. (3) Incorporated herein by reference to the Registration Statement No. 333-68550 on Form S-1 filed with the Securities and Exchange Commission on August 28, 2001, as amended. (4) Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003. (5) Incorporated by reference to the Form 8-K filed with the Securities and Exchange Commission on December 22, 2005. (6) Incorporated herein by reference to the Post-Effective Amendment No. 1 to the Registration Statement No. 333-73132 on Form S-8 filed with the Securities and Exchange Commission on April 28, 2006. 29
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, 2007 30