SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------------- FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 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. Proposed Holding Company for Westfield Bank (Exact name of registrant as specified in its charter) Massachusetts Applied for (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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Outstanding at Class December 21, 2001 - -------------------------------- ---------------------------------- None None
TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements of Westfield Mutual Holding Company & Subsidiaries Consolidated Balance Sheets (Unaudited) - September 30, 2001 and December 31, 2000 Consolidated Statements of Income (Unaudited) - Three and nine months ended September 30, 2001 and September 30, 2000 Consolidated Statements of Changes in Equity (Unaudited) Nine Months ended September 30, 2001 Consolidated Statements of Cash Flows (Unaudited) - Nine Months ended September 30, 2001 and September 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Reports on Form 8-K Signatures 1
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES Consolidated Balance Sheet - Unaudited (Dollars in Thousands) <TABLE> <CAPTION> September 30, December 31, 2001 2000 ------------- ------------ <S> <C> <C> ASSETS Cash and Due From Banks $ 13,260 $ 17,733 Federal Funds Sold 15,793 10,020 Interest-Bearing Deposits 24,114 4,976 ---------- ---------- Cash and cash equivalents 53,167 32,729 ---------- ---------- SECURITIES: Available for sale-at estimated fair value 66,192 75,709 Held to maturity-at amortized cost (estimated fair value 25,635 39,461 Of $26,365 in 2001, and $39,739 in 2000) MORTGAGE BACKED SECURITIES: Available for sale-at estimated fair value 71,776 52,580 Held to maturity-at amortized cost (estimated fair value 51,590 6,806 Of $52,148 in 2001, and $6,864 in 2000). FEDERAL HOME LOAN BANK OF BOSTON AND OTHER STOCK 3,634 3,446 LOANS - Net of allowance for loan losses of $3,754 in 2001, 427,583 464,531 And $3,434 in 2000 PREMISES AND EQUIPMENT, NET 13,624 11,744 ACCRUED INTEREST AND DIVIDENDS 3,900 4,172 DEFERRED INCOME TAX ASSET, NET 1,261 1,326 OTHER ASSETS 3,253 2,287 ---------- ---------- TOTAL ASSETS $ 721,615 $ 694,791 ---------- ---------- LIABILITIES AND EQUITY LIABILITIES: DEPOSITS: Noninterest bearing $ 44,343 $ 38,500 Interest bearing 582,768 563,396 ---------- ---------- Total deposits 627,111 601,896 CUSTOMER REPURCHSE AGREEMENTS 6,352 7,686 OTHER LIABILITIES 6,189 7,454 ---------- ---------- Total Liabilities 639,652 617,036 ---------- ---------- EQUITY: Retained Earnings 80,627 76,791 Accumulated and other comprehensive income 1,336 964 ---------- ---------- Total Equity 81,963 77,755 ---------- ---------- TOTAL LIABILITIES AND EQUITY $ 721,615 $ 694,791 ---------- --------- </TABLE> See the accompanying notes to unaudited consolidated financial statements 2
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES Consolidated Statements of Income - Unaudited (Dollars in Thousands) <TABLE> <CAPTION> Three Months Nine Months Ended Sept, 30 Ended Sept, 30 2001 2000 2001 2000 ---- ---- ---- ----- <S> <C> <C> <C> <C> INTEREST AND DIVIDEND INCOME: Residential and commercial real estate loans $ 5,745 $ 6,709 $ 18,952 $ 19,773 Securities and mortgage backed securities 3,332 2,446 8,943 6,518 Consumer loans 1,388 1,570 4,308 4,795 Commercial and Industrial Loans 940 857 2,671 2,406 Federal Funds Sold 54 158 342 488 Stocks 100 106 301 275 Interest Bearing Deposits 138 77 455 211 ------- -------- -------- -------- Total Interest and Dividend income 11,697 11,923 35,972 34,466 ------- -------- -------- -------- INTEREST EXPENSE: Deposits 5,914 6,237 19,187 17,449 Customer Repurchase Agreements 49 84 200 216 Other Borrowings 26 16 26 128 ------- -------- -------- -------- Total Interest Expense 5,989 6,337 19,413 17,793 ------- -------- -------- -------- Net interest and dividend income 5,708 5,586 16,559 16,673 PROVISION FOR LOAN LOSSES 530 150 1,130 900 ------- -------- -------- -------- Net interest and dividend income after provision for loan losses 5,178 5,436 15,429 15,773 ------- -------- -------- -------- NONINTEREST INCOME: Service charges and fees 355 345 1,024 989 Gain on sales of securities, net 452 49 622 729 ------- -------- -------- -------- Total noninterest income 807 394 1,646 1,718 ------- -------- -------- -------- NONINTEREST EXPENSE: Salaries and employees benefits 1,909 1,825 5,680 5,268 Occupancy 501 348 1,311 1,057 Computer operations 360 291 1,111 892 Stationery, supplies, and postage 130 123 435 362 Other 863 1,260 2,722 2,878 ------- -------- -------- -------- Total noninterest expense 3,763 3,847 11,259 10,457 ------- -------- -------- -------- INCOME BEFORE INCOME TAXES 2,222 1,983 5,816 7,034 INCOME TAXES 758 677 1,980 2,424 ------- -------- -------- -------- NET INCOME $ 1,464 $ 1,306 $ 3,836 $ 4,610 ------- -------- -------- -------- </TABLE> See the accompanying notes to unaudited consolidated financial statements. 3
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - UNAUDITED (Dollars in Thousands) <TABLE> <CAPTION> Accumulated Other Retained Comprehensive Earnings Income Total <S> <C> <C> <C> Balance, January 1, 2001 $ 76,791 $ 964 $ 77,755 Comprehensive income Net income 3,836 - 3,836 Unrealized net gains on securities and mortgage backed securities Arising during the year, net of taxes of $450 - 518 518 Reclassification for gains included in net income, net of taxes of $76 (146) (146) -------- Comprehensive income 4,208 --------- -------- -------- Balance, September 30, 2001 80,627 1,336 81,963 --------- -------- -------- </TABLE> See the accompanying notes to unaudited consolidated financial statements. 4
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (Dollars in Thousands) <TABLE> <CAPTION> Nine Months Ended Sept 30, 2001 2000 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Net Income $ 3,836 $ 4,610 Adjustments to reconcile net income to net cash provided by operating activities Provision for Loan Losses 1,130 900 Depreciation of premises and equipment 781 545 Net amortization of premiums and discounts on 70 13 securities, mortgage backed securities and mortgage loans. Loss (gain) on sale of other real estate owned (17) (26) Stock Dividend Distributions (43) - Gain on sale of mortgage loans - - Gain on sales of securities - net (622) (729) Deferred income tax provision 437 795 Changes in assets and liabilities: Accrued interest and dividends 272 (503) Other assets (1,220) 253 Other liabilities 662 221 --------- --------- Net cash provided by operating activities 5,286 5,637 --------- --------- INVESTING ACTIVITIES: Securities, held to maturity: Purchases (7,099) (15,288) Proceeds from calls, maturities and principal collections 20,909 14,040 Securities, available for sale: Purchases (16,692) (28,339) Proceeds from sales 4,700 1,543 Proceeds from calls, maturities and principal collections 20,167 6,500 Mortgage backed securities, held to maturity Purchases (54,638) (4,671) Principal collections 9,791 1,761 Mortgage backed securities, available for sale Purchases (23,749) (26,206) Proceeds from sales 47,574 1,669 Principal collection 18,355 3,786 Purchase of Federal Home Loan Bank owned (188) (90) And other stock Loans, net (23,406) 3,716 Proceeds from sale of other real estate owned 89 144 Net purchases of premises and equipment (2,660) (1,574) --------- --------- Net cash used in investing activities (6,847) (43,009) --------- --------- FINANCING ACTIVITIES: Increase in Deposits 23,329 36,377 Increase (decrease) in customer repurchase agreements (1,334) 3,523 Federal Home Loan Bank of Boston advances, net - (5,000) preferred stock 4 (4) --------- --------- Net cash provided by financing activities 21,999 34,896 NET INCREASE (DECREASE IN CASH AND CASH EQUIVALENTS) CASH AND CASH EQUIVALENTS 20,438 (2,476) Beginning of year 32,729 25,495 --------- --------- End of year $ 53,167 $ 23,019 --------- --------- </TABLE> See the accompanying notes to unaudited consolidated financial statements 5
WESTFIELD MUTUAL HOLDING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - Westfield Mutual Holding Company (the "Company") is a Massachusetts security corporation. The Company has a state chartered stock savings bank subsidiary called Westfield Bank (the "Bank). The Bank's deposits are insured to the limits specified by the Federal Deposit Insurance Corporation ("FDIC") and the Deposit Insurance Fund ("DIF"), a corporation formed by the Massachusetts' legislature. The Bank operates seven branches in Western Massachusetts. The Bank's primary source of revenue is earned by providing loans to small and middle-market businesses and to residential property homeowners. The Bank has formed Westfield Elm Associates, Inc., ("Westfield Elm"), a wholly owned subsidiary. In addition, Westfield Elm has formed two subsidiaries, Elm Street Real Estate Investments Inc., (the "REIT") and Elm Street Business Trust (the "MBT"). The REIT is 99.9% owned by Westfield Elm with the remaining .1% owned by other shareholders. The MBT was 100% wholly owned by Westfield Elm. During 2000, the Company eliminated Westfield Elm and the MBT to streamline the overall bank structure. The unaudited consolidated interim financial statements of the MHC and subsidiaries presented herein should be read in conjunction with the consolidated financial statements of the MHC for the year ended December 31, 2000, included in the Registration Statement on Form S-1, as amended, as filed with the Securities and Exchange Commission on August 28, 2001 and declared effective on November 9, 2001 (the "Registration Statement") of Westfield Financial, Inc. (the "Company"), the proposed holding company for the Bank. The financial statements of the Company and its wholly owned subsidiary, Westfield Securities Corp., a Massachusetts security corporation, have been omitted because neither the Company nor Westfield Securities Corp. had been formed, issued any stock, had any liabilities or conducted any business as of September 30, 2001. Plan of Reorganization and Stock Offering - On June 19, 2001, the Board of Trustees of the Company and the Board of Directors of Westfield Bank approved a plan of reorganization (the "Plan") whereby the Company will form a mid-tier stock holding company ("Westfield Financial, Inc.") and exchange 100% of the common stock of the Bank for a majority interest in Westfield Financial, Inc. Pursuant to the Plan, shares of Westfield Financial, Inc. are expected to be offered initially for subscription by depositors with eligible accounts at the Bank as of specified dates and if available, the tax qualified employee benefit plans of Westfield Bank, which will provide retirement benefits to the Company's employees. The common stock will be offered at $10.00 per share. The Company will offer between 3,196,000 and 4,324,000 shares. At least the minimum number of shares offered in the reorganization must be sold. Any stock not purchased in the subscription offering will be sold in a community offering to be commenced simultaneously with the subscription offering. Principles of Consolidation - The unaudited consolidated financial statements include the accounts of the Company, the Bank, and the REIT. All material intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the unaudited consolidated financial statements presented herein reflect all adjustments (consisting only of normal adjustments) necessary for a fair presentation. Interim results are not necessarily indicative of results to be expected for the entire year. 6
The Company believes that the disclosures are adequate to make the information presented not misleading. However, results for the periods presented are not necessarily indicative of the results to be expected for the entire 2001 fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Westfield Mutual Holding Co. as of and for the year ending December 31, 2000 and notes thereto. Recent Accounting Pronouncements - In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization, the reclassification of certain existing recognized intangibles as goodwill, the reassessment of the useful lives of existing recognized intangibles and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires a transitional goodwill impairment test six months from the date of adoption. 7
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets, and the associated asset retirement costs. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121 and portions of APB Opinion No. 30. This statement addresses the recognition of an impairment loss for long-lived assets to be held and used, or disposed of by sale or otherwise. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim period within those fiscal years. 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITON AND RESULTS OF OPERATIONS. Forward Looking Statements - This Quarterly Report on Form 10-Q contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Westfield Mutual Holding Company's actual results could differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include: changes in national or regional economic conditions; changes in loan default and charge-off rates; reductions in deposit levels necessitating increased borrowing to fund loans and investments; changes in interest rates; changes in the size and the nature of the Company's competition; and changes in the assumptions used in making such forward-looking statements. The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of Westfield Mutual Holding Co. and related notes included in this report. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 Total assets increased $26.8 million, or 3.9%, to $721.6 million at September 30, 2001 from $694.8 million at December 31, 2000. On June 1, 2001, Westfield Bank securitized $35.7 million in thirty year fixed rate residential mortgage loans and $24.6 million in fifteen year fixed rate residential mortgage loans with Fannie Mae. This transaction was done to reduce interest rate risk as well as improve liquidity and enhance the subsequent saleability of the resulting securities. Because the dollar value of the securitized loans equaled the value of the underlying loans, the securitization did not result in a material change in total assets. Deposits increased $25.2 million to $627.1 million at September 30, 2001 from $601.9 million at December 31, 2000. Interest-bearing deposits accounted for $19.4 million of the growth in total deposits, while demand deposits accounted for $5.8 million. Total equity increased $4.2 million, or 5.4%, to $82.0 million at September 30, 2001 from $77.8 million at December 31, 2000. This was primarily the result of the net income of $3.8 million. The Company does not believe that the adoption of these pronouncements will have a significant impact on its financial position of results of operations. 8
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 General Net income was $3.8 million for the nine months ended September 30, 2001, a decrease of $774,000, or 16.8%, compared with net income of $4.6 million for the 2000 comparable period. The decrease was primarily attributable to an increase of $802,000 in non-interest expenses and an increase of $230,000 in the provision for loan losses. The decrease was partially offset by a reduction in federal and state taxes of $444,000 compared with the same period in the prior year. Interest and Dividend Income Total interest and dividend income increased $1.5 million or, 4.4%, to $36.0 million for the 2001 period compared with $34.5 million in 2000. Interest and dividends on securities increased $2.5 million to $10 million from $7.5 million, while interest income on loans decreased $1.0 million. The increase in interest and dividends on securities was due primarily to a $61.8 million increase in the average balance of securities from $151.9 million at September 30, 2000 to $213.7 million at September 30, 2001. The decrease in interest income on loans was primarily the result of a $1.0 million decrease in interest on residential real estate loans. This was the result of a decrease in the average balance of residential real estate loans from $263.2 million for the nine months ended September 30, 2000 to $243.9 million for the same period in 2001 due to the securitization of fixed rate mortgages mentioned in "Comparison of Financial Condition." Interest Expense Total interest expense for the nine months ended September 30, 2001 increased $1.6 million from the comparable 2000 period. This was attributable to an increase of $37.8 million in the average balance of total interest bearing liabilities in 2001 from $542.5 million for the September 30, 2000 period to $580.2 million for the comparable period in 2001. The increase in average yield/cost of interest bearing liabilities from 4.37% for the 2000 period as compared to 4.46% for the comparable period in 2001 also contributed to the increase in interest expense. Net Interest and Dividend Income Net interest and dividend income for the nine months ended September 30, 2001 decreased $114,000, or 0.68%, from $16.7 million in 2000 to $16.6 million in 2001. The net interest rate spread - the difference between the average yield on average total interest earning assets and the average cost of average total interest bearing liabilities - decreased 26 basis points to 2.66% for 2001 from 2.92% for the prior year comparable period. The net interest margin, which is net interest and dividend income divided by average total interest earning assets, decreased 25 basis points to 3.28% for 2001 from 3.53% for the prior year comparable period. 9
Provision for Loan Losses During the nine months ended September 30, 2001, Westfield Bank provided $1.1 million for loan losses, compared to $900,000 for the comparable 2000 period. The following factors resulted in an increase in the provision for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000: o Loan Concentrations - Commercial and industrial loans increased $13.5 million, or 37.6%, to $49.4 million at September 30, 2001 as compared to $35.9 million at September 30, 2000. Commercial real estate loans also increased $2.6 million from $89.9 million at September 30, 2000 to $92.5 million at September 30, 2001. This was offset by a decrease in residential real estate and consumer loans at $41.9 million and $11.2 million, respectively. o Credit Quality - Classified loans at September 30, 2001 were $11.4 million as compared to $8.2 million at September 30, 2000. Net charge-offs for the nine months ended September 30, 2001 and 2000 were $810,000 and $589,000, respectively. At September 30, 2001, the allowance for loan losses as a percentage of total loans was 0.88% as compared with 0.74% at September 30, 2000. Noninterest Income Noninterest income includes service fees on deposit accounts, other service charges and net gains on sales of securities. Total noninterest income decreased $72,000, or 4.2%, to $1.6 million for nine months ended September 30, 2001 compared to $1.7 million for the 2000 period. The 2001 amount includes gains on sales of securities of $622,000 as compared to $729,000 for the 2000 period. Noninterest Expense Total noninterest expense increased $802,000, or 7.7%, to $11.3 million during 2001 compared with $10.5 million for the prior year. Salaries and employee benefits increased $412,000, or 7.8%, to $5.7 million for 2001 compared with $5.3 million for the 2000 period, reflecting normal salary increases and additional staffing costs associated with the hiring and training of additional employees to staff the new Liberty Street, Springfield branch and Northampton Street, Holyoke, branch which both opened in June 2001. Occupancy expense increased $254,000 from $1,057,000 in 2000 to $1,311,000 during the 2001 period. This was primarily the result of the abandonment of previous improvements in connection with the replacement of our West Springfield branch with a new facility, which was placed in service in August 2001. Income Taxes Income tax expense decreased $444,000 or 18.3%, to $2.0 million for 2001, resulting in an effective tax rate of 34% for the nine months ended September 30, 2001, which was the same effective tax rate for the 2000 comparable period. The effective tax rate also reflects the utilization of Westfield Mutual Holding Company as a qualified securities corporation and Elm Street Real Estate Investments, Inc., a wholly-owned subsidiary of Westfield Bank, as a real estate investment trust. 10
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 General Net income was $1.5 million for the three months ended September 30, 2001, an increase of $158,000, or 12.1%, compared with net income of $1.3 million for the 2000 period. The increase was primarily attributable to an increase of $122,000 in net interest and dividend income, a decrease of $84,000 in noninterest expenses and an increase of $413,000 in other income, primarily due to an increase in security gains. These increases were partially offset by an increase of $380,000 in the provision for loan losses. Interest and Dividend Income Total interest and dividend income decreased $226,000 or, 1.9%, to $11.7 million for the 2001 period compared with $11.9 million in the comparable period 2000. Interest and dividends on securities increased $837,000 to $3.6 million from $2.8 million, while interest income on loans decreased $1.1 million. The increase in interest and dividends on securities was due primarily to a $63.3 million increase in the average balance of securities from $172.0 million for the three months ended September 30, 2000 to $235.3 million for the comparable 2001 period. The decrease in interest income on loans was primarily the result of a $961,000 decrease in interest on residential real estate loans. This was the result of a decrease in the average balance of residential real estate loans from $262.2 million for the three months ended September 30, 2000 to $216.3 million for the same period in 2001 due to the securitization of fixed rate mortgages mentioned in "Comparison of Financial Condition." The average balance of indirect automobile loans decreased $10.5 million from $69.6 million in the 2000 period to $59.1 million in 2001. Interest Expense Total interest expense for the three months ended September 30, 2001 decreased $348,000 from the comparable 2000 period to $6.0 million. The decrease was due to a decrease in the average balance of total interest bearing liabilities for the three month period in 2001 of $25.2 million, and a decrease in average yield/cost of interest bearing liabilities from 4.56% for the 2000 period as compared to 4.11% for the comparable period in 2001. Net Interest and Dividend Income Net interest and dividend income for the three months ended September 30, 2001 increased $122,000, or 2.2%, from $5.6 million in 2000 to $5.7 million for 2001. The net interest rate spread - the difference between the average yield on average total interest earning assets and the average cost of average total interest bearing liabilities - decreased 1 basis point from 2.81% for 2000 to 2.80% for 2001. The net interest margin, which is net interest and dividend income divided by average total earning assets, decreased 8 basis points to 3.38% for 2001 from 3.46% for the year comparable period. 11
Provision for Loan Losses During the three months ended September 30, 2001, Westfield Bank provided $530,000 for loan losses, compared to $150,000 for the comparable 2000 period. The following factors resulted in an increase in the provision for the three months ended September 30, 2001 compared to the three months ended September 30, 2000: o Loan Concentrations - Commercial and industrial loans increased $13.5 million, or 37.6%, to $49.4 million at September 30, 2001 as compared to $35.9 million at September 30, 2000. Commercial real estate loans also increased $2.6 million from $89.9 million at September 30, 2000 to $92.5 million at September 30, 2001. This was offset by a decrease in residential real estate and consumer loans at $41.9 million and $11.2 million, respectively. o Credit Quality - Classified loans at September 30, 2001 were $11.4 million as compared to $8.2 million at September 30, 2000. Net charge-offs for the three months ended September 30, 2001 and 2000 were $346,000 and $143,000, respectively. At September 30, 2001, the allowance for loan losses as a percentage of total loans was 0.88%, as compared with 0.74%, at September 30, 2000. Noninterest Income Noninterest income includes service fees on deposit accounts, other service charges and net gains on sales of securities. Total non-interest income increased $413,000, or 104.8%, to $807,000 for the three months ended September 30, 2001 compared to $394,000 for the comparable 2000 period. The 2001 amount includes gains on sales of securities of $452,000 as compared to $49,000 for the 2000 period. Noninterest Expense Total noninterest expense decreased $84,000, or 2.2%, to $3,763,000 for the three months ended September 30, 2001 compared with $3,847,000 for the prior year. Salaries and employee benefits increased $84,000, or 4.6%, to $1.9 million for 2001 compared with $1.8 million for the 2000 period, reflecting normal salary increases and additional staffing costs associated with the hiring and training of additional employees to staff the new Liberty Street, Springfield branch and Northampton Street, Holyoke branch which both opened in June 2001. Occupancy expense increased $153,000 from $348,000 in 2000 to $501,000 during the three month period ended September 30, 2001. This was a result of a write-off of the abandonment of previous improvements in connection with the replacement of our West Springfield branch with a new facility, which was placed in serve in August 2001. Other noninterest expenses decreased $397,000 primarily as a result of a decrease in customer bank account service charges, bad checks and ATM network expense. Income Taxes Income tax expense increased $81,000, or 12.0%, to $758,000 for the three months ended September 30, 2001, resulting in an effective tax rate of 34% for the period, which is the same effective tax rate as the comparable 2000 period. The effective tax rate also reflects the utilization of Westfield Mutual Holding Company as a qualified securities corporation and Elm Street Real Estate Investments, Inc., a wholly-owned subsidiary of Westfield Bank, as a real estate investment trust. The following tables set for the information relating to our average balance and net interest income at and for the nine months ending September 30, 2001 and 2000 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 of terms and fees earned when real estate loans were prepaid or refinanced. 12
<TABLE> <CAPTION> 2001 2000 ---- ---- Average Avg Yield/ Average Avg Yield/ Interest Balance Cost Interest Balance Cost -------- ------- ---- -------- -------- ---- <S> <C> <C> <C> <C> <C> <C> Interest-Earning Assets - ----------------------- Residential Real Estate Loans $13,117 $243,848 7.17 $14,160 $263,228 7.17 Comm and C & I Loans 8,506 137,376 8.26 8,019 124,838 8.57 Other Loans, Including Indirect Auto 4,308 69,233 8.30 4,795 79,741 8.02 Securities and Mortgage-backed Sec and Interest Bearing Deposits 9,699 213,673 6.05 7,003 51,886 6.15 Federal Funds Sold 342 9,532 4.78 489 10,458 6.22 - ------------------------------------- ------------------------ ------------------------ Total Interest-Bearing Assets 35,972 673,662 7.12 34,466 630,051 7.29 Interest-Bearing Liabilities - ---------------------------- Savings Accounts 346 44,090 1.05 393 49,858 1.05 Money Market & NOW 3,564 155,291 3.06 3,389 144,227 3.13 Time Deposits 15,277 373,492 5.45 13,668 340,098 5.36 Repo's and Borrowings 226 7,398 4.07 343 8,295 5.51 - ------------------------------------- ------------------------ -------------------- Total Interest-Bearing Liabilities 19,413 580,271 4.46 17,793 542,478 4.37 Net Interest Income/Int Rate Spread 16,559 2.66% $16,673 2.92% ======================================= ============================== Net Interest Margin 3.28% 3.53% ==== ==== </TABLE> 13
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: 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 prior 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. <TABLE> <CAPTION> Interest-Earning Assets Volume Rate Net - ----------------------- ------ ---- --- <S> <C> <C> <C> Residential Real Estate Loans (1,044) 1 (1,043) Comm'l and C & I Loans 813 (326) 487 Other Loans, Including Indirect Auto (632) 145 (487) Securities and Mortgage-backed Sec 2,848 (152) 2,696 Federal Funds Sold (44) (103) (147) - -------------------------------------------------------------------------------------------------------- Net Change in Income on 1,941 (435) 1,506 Interest-Earning Assets Interest-Bearing Liabilities - ---------------------------- Savings Accounts (45) (2) (47) Money Market & NOW 260 (85) 175 Certificate Accounts 1,339 270 1,609 Repo's and Borrowings (37) (80) (117) - -------------------------------------------------------------------------------------------------------- Net Change in Expense on 1,517 103 1,620 Interest-Bearing Liabilities Net Change in Interest Income 424 (538) (114) </TABLE> 14
LIQUIDITY AND CAPITAL RESOURCES The term "liquidity" refers to the Company's ability to generate adequate amounts of cash to fund loan originations, loan purchases, withdrawals of deposits and operating expenses. The Company's primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage backed securities, maturities and calls of investment securities and funds provided by operations. The Bank also can borrow funds from the Federal Home Loan Bank based on eligible collateral of loans and securities. The Bank's maximum borrowing capacity form the Federal Home Loan Bank at September 30, 2001 was approximately $270 million. Liquidity management is both a daily and long term function of business management. The measure of a Company's liquidity is its ability to meet its cash commitments at all times with available cash or by conversion of other assets to cash at a reasonable price. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flow, calls of investment securities and repayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Management believes that the Company has sufficient liquidity to meet its current operating needs. At September 30, 2001, the Company exceeded each of the applicable regulatory capital requirements. The Company's leverage Tier 1 capital was $79.6 million, or 17.4% of risk-weighted assets, and 11.3% of average assets. The Company had a risk-based total capital of $83.3 million and a risk-based capital ratio of 18.2%. See the "Consolidated Statements of Cash Flows" in the Unaudited Consolidated Financial Statements included in this Form 10-Q for the sources and uses of cash flows for operating and financing activities for the nine months ended September 30, 2001 and September 30, 2000. 15
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative information about market risk is presented in the Registration Statement on Form S-1 as filed by the Company with the Securities and Exchange Commission (the "Commission") on August 28, 2001 as amended and declared effective by the Commission on November 9, 2001 16
Part II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Westfield Financial, Inc. (Registrant) By: /s/ Donald A. Williams _________________________________________ Donald A. Williams President/Chief Executive Officer (Principal Executive Officer) By: /s/ Michael J. Janosco, Jr. _________________________________________ Michael J. Janosco, Jr. Vice President/Chief Financial Officer (Principal Accounting Officer) December 21, 2001 17