WESTERN NEW ENGLAND BANCORP, INC.
10-Ks and 10-Qs
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Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
Commission
File No.: 001-16767
Westfield
Financial, Inc.
(Exact
name of registrant as specified in its charter)
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Massachusetts
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73-1627673
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(State or other jurisdiction
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(I.R.S. Employer Identification No.)
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of incorporation or organization)
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141 Elm
Street, Westfield, Massachusetts 01085
(Address
of principal executive offices, including zip code)
(413)
568-1911
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.01 par value per
share
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The NASDAQ Global Select
Market
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the
Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
¨
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
¨
No
x
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 12 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 has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
proceeding 12 months (or for such shorter period that the registrant was
required to submit and post such filed). Yes
¨
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. Large accelerated filer
¨
Accelerated
filer
x
Non-accelerated
filer
¨
Smaller
reporting company
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o
No
x
.
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2009, was $280,056,641. This amount was
based on the closing price as of June 30, 2009 on The NASDAQ Global Select
Market for a share of the registrant’s common stock, which was $9.06 on June 30,
2009.
As of
March 6, 2010, the registrant had 31,218,960 shares of common stock, $0.01 per
value, issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders are
incorporated by reference into Part II and Part II of this
report.
WESTFIELD
FINANCIAL, INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED
DECEMBER
31, 2009
TABLE
OF CONTENTS
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ITEM
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PAGE
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PART
I
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1
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BUSINESS
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2
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1A
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RISK
FACTORS
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25
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1B
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UNRESOLVED
STAFF COMMENTS
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28
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2
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PROPERTIES
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28
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3
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LEGAL
PROCEEDINGS
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29
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4
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RESERVED
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29
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PART
II
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5
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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30
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6
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SELECTED
FINANCIAL DATA
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33
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7
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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35
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7A
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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50
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8
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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50
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9
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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50
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9A
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CONTROLS
AND PROCEDURES
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50
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9B
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OTHER
INFORMATION
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51
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PART
III
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10
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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52
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11
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EXECUTIVE
COMPENSATION
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52
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12
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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52
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13
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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52
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14
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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52
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PART
IV
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15
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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53
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SIGNATURES
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FORWARD
- LOOKING STATEMENTS
We may,
from time to time, make written or oral “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements contained in our filings with the Securities and Exchange Commission
(the “SEC”), our reports to shareholders and in other communications by us. This
Annual Report on Form 10-K contains “forward-looking statements” which may be
identified by the use of such words as “believe,” “expect,” “anticipate,”
“should,” “planned,” “estimated,” and “potential.” Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operation and business that are subject to
various factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to:
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·
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changes
in the real estate market or local
economy;
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·
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changes
in interest rates;
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·
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changes
in laws and regulations to which we are subject;
and
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·
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competition
in our primary market area.
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Any or
all of our forward-looking statements in this Annual Report on Form 10-K, and in
any other public statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Consequently, no forward-looking statements can be
guaranteed. We disclaim any obligation to subsequently revise any
forward-looking statements to reflect events or circumstances after the date of
such statements, or to reflect the occurrence of anticipated or unanticipated
events.
Unless the context indicates otherwise,
all references in this prospectus to “Westfield Financial,” “we,” “us,” “our
company,” “corporation” and “our” refer to Westfield Financial, Inc. and its
subsidiaries (including the Bank, Elm Street Securities Corporation and WFD
Securities, Inc.) References to the “Bank” are to Westfield Bank, our wholly
owned bank subsidiary.
1
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ITEM
1.
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BUSINESS
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General.
Westfield
Financial is a Massachusetts-chartered stock holding company and the parent
company of Westfield Bank (the “Bank”). Westfield Financial was formed in 2001
in connection with the reorganization of the company’s federally-chartered
mutual holding company with the second step conversation being completed in
2007. The Bank was formed in 1853 and is a federally-chartered
savings bank regulated by the Office of Thrift Supervision. As a
community bank, we focus on servicing commercial customers, including commercial
and industrial lending and commercial deposit relationships. We
believe that this business focus is best for our long term success and
viability, and complements our existing commitment to high quality customer
service.
Elm
Street Securities Corporation, a Massachusetts-chartered corporation, was formed
by us for the primary purpose of holding qualified investment
securities. In February 2007, we formed WFD Securities, Inc., a
Massachusetts-chartered corporation, for the primary purpose of holding
qualified investment securities. In October 2009, we formed WB Real
Estate Holdings, LLC, a Massachusetts-chartered limited liability company, for
the primary purpose of holding real property acquired as security for debts
previously contracted by the Bank.
Market
Area.
We operate 11 banking offices in Agawam, East
Longmeadow, Holyoke, Southwick, Springfield, West Springfield and Westfield,
Massachusetts. We also have eight free-standing ATM locations in Feeding Hills,
Springfield, West Springfield and Westfield, Massachusetts. Our
primary deposit gathering area is concentrated in the communities surrounding
these locations and our primary lending area includes all of Hampden County in
western Massachusetts. In addition, we provide online banking
services through our website located at
www.westfieldbank.com
.
The
markets served by our branches are primarily suburban in character, as we
operate only one office in Springfield, the Pioneer Valley’s primary urban
market. Westfield, Massachusetts, is located in the Pioneer Valley
near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike) and
91. The Pioneer Valley of western Massachusetts encompasses the fourth largest
metropolitan area in New England. The Springfield Metropolitan area
covers a relatively diverse area ranging from densely populated urban areas,
such as Springfield, to outlying rural areas.
Competition.
We
face intense competition both in making loans and attracting
deposits. Our primary market area is highly competitive and we face
direct competition from approximately 21 financial institutions, many with a
local, state-wide or regional presence and, in some cases, a national
presence. Many of these financial institutions are significantly
larger than us and have greater financial resources. Our competition for loans
comes principally from commercial banks, savings institutions, mortgage banking
firms, credit unions, finance companies, mutual funds, insurance companies and
brokerage and investment banking firms. Historically, our most direct
competition for deposits has come from savings and commercial banks. We face
additional competition for deposits from internet-based institutions, credit
unions, brokerage firms and insurance companies.
Lending
Activities
Loan Portfolio
Composition.
Our loan portfolio
primarily consists of commercial and industrial loans, commercial real estate
loans, residential real estate loans, home equity loans, and consumer
loans.
At
December 31, 2009, we had total loans of $476.4 million, of which 67.8% were
adjustable rate loans and 33.2% were fixed rate loans. Commercial
real estate loans and commercial and industrial loans totaled $374.1 million and
$377.8 million, respectively. The remainder of our loans at December
31, 2009 consisted of residential real estate loans, home equity loans and
consumer loans. Residential real estate and home equity loans
outstanding at December 31, 2009 totaled $99.1 million. Consumer
loans outstanding at December 31, 2009 were $3.3 million.
The
interest rates we charge on loans are affected principally by the demand for
loans, the supply of money available for lending purposes and the interest rates
offered by our competitors. These factors are, in turn, affected by
general and local economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies and
governmental budgetary matters. The following table presents the
composition of our loan portfolio in dollar amounts and in percentages of the
total portfolio at the dates indicated.
2
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At
December 31,
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2009
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2008
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2007
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2006
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2005
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Percent
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Percent
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Percent
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Percent
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Percent
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Amount
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of
Total
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Amount
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of
Total
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Amount
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of
Total
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Amount
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of
Total
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Amount
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of
Total
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(
Dollars
in
thousands)
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Real
estate loans:
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Commercial
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$ | 229,061 | 48.08 | % | $ | 223,857 | 46.61 | % | $ | 189,964 | 45.22 | % | $ | 174,556 | 44.74 | % | $ | 169,564 | 44.17 | % | ||||||||||||||||||||
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Residential
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64,299 | 13.50 | 62,810 | 13.08 | 72,170 | 17.18 | 79,308 | 20.33 | 82,279 | 21.43 | ||||||||||||||||||||||||||||||
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Home
equity
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34,755 | 7.29 | 35,562 | 7.40 | 35,940 | 8.56 | 30,232 | 7.75 | 24,639 | 6.42 | ||||||||||||||||||||||||||||||
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Total
real estate loans
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328,115 | 68.87 | 322,229 | 67.09 | 298,074 | 70.96 | 284,096 | 72.82 | 276,482 | 72.02 | ||||||||||||||||||||||||||||||
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Other
loans:
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Commercial
and industrial
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145,012 | 30.44 | 153,861 | 32.03 | 116,514 | 27.74 | 100,237 | 25.69 | 100,019 | 26.06 | ||||||||||||||||||||||||||||||
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Consumer,
other
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3,307 | 0.69 | 4,248 | .88 | 5,479 | 1.30 | 5,841 | 1.49 | 7,372 | 1.92 | ||||||||||||||||||||||||||||||
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Total
other loans
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148,319 | 31.13 | 158,109 | 32.91 | 121,993 | 29.04 | 106,078 | 27.18 | 107,391 | 27.98 | ||||||||||||||||||||||||||||||
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Total
loans
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476,434 | 100.00 | % | 480,338 | 100.00 | % | 420,067 | 100.00 | % | 390,174 | 100.00 | % | 383,873 | 100.00 | % | |||||||||||||||||||||||||
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Unearned
premiums and net deferred loan fees and costs, net
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360 | 593 | 561 | 447 | 386 | |||||||||||||||||||||||||||||||||||
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Allowance
for net losses
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(7,645 | ) | (8,796 | ) | (5,726 | ) | (5,437 | ) | (5,422 | ) | ||||||||||||||||||||||||||||||
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Total
loans, net
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$ | 469,149 | $ | 472,135 | $ | 414,902 | $ | 385,184 | $ | 378,837 | ||||||||||||||||||||||||||||||
3
Loan Maturity and
Repricing.
The following table shows the repricing dates or contractual
maturity dates as of December 31, 2009. The table does not reflect prepayments
or scheduled principal amortization. Demand loans, loans having no stated
maturity, and overdrafts are shown as due in within one year.
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At December 31, 2009
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Residential
Real Estate
Loans
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Home
Equity
Loans
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Commercial
Real Estate
Loans
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Commercial
and
Industrial
Loans
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Consumer
Loans
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Total Loans
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(In
thousands)
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Amount
due:
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Within
one year
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$ | 16,027 | $ | 14,588 | $ | 36,935 | $ | 72,861 | $ | 825 | $ | 141,236 | ||||||||||||
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After
one year:
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One
to three years
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6,022 | 648 | 33,383 | 20,382 | 1,443 | 61,878 | ||||||||||||||||||
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Three
to five years
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1,098 | 1,391 | 118,627 | 44,372 | 803 | 166,291 | ||||||||||||||||||
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Five
to ten years
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5,700 | 7,300 | 32,224 | 7,397 | 36 | 52,657 | ||||||||||||||||||
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Ten
to twenty years
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18,250 | 10,828 | 5,367 | - | - | 34,445 | ||||||||||||||||||
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Over
twenty years
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17,202 | - | 2,525 | - | 200 | 19,927 | ||||||||||||||||||
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Total
due after one year
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48,272 | 20,167 | 192,126 | 72,151 | 2,482 | 335,198 | ||||||||||||||||||
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Total
amount due
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64,299 | 34,755 | 229,061 | 145,012 | 3,307 | 476,434 | ||||||||||||||||||
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Unearned
premiums and deferred loan fees and costs, net
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23 | 287 | (178 | ) | 225 | 3 | 360 | |||||||||||||||||
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Allowance
for loan losses
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(316 | ) | (171 | ) | (2,371 | ) | (4,748 | ) | (39 | ) | (7,645 | ) | ||||||||||||
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Loans,
net
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$ | 64,006 | $ | 34,871 | $ | 226,512 | $ | 140,489 | $ | 3,271 | $ | 469,149 | ||||||||||||
The
following table presents, as of December 31, 2009, the dollar amount of all
loans contractually due or scheduled to reprice after December 31, 2010, and
whether such loans have fixed interest rates or adjustable interest
rates.
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Due
After December 31, 2010
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Fixed
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Adjustable
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Total
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(In
thousands)
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Real
estate loans:
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Residential
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$ | 43,116 | $ | 5,156 | $ | 48,272 | ||||||
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Home
equity
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20,167 | - | 20,167 | |||||||||
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Commercial
real estate
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31,127 | 160,999 | 192,126 | |||||||||
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Total
real estate loans
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94,410 | 166,155 | 260,565 | |||||||||
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Other
loans:
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Commercial
and industrial
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47,145 | 25,006 | 72,151 | |||||||||
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Consumer
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2,482 | - | 2,482 | |||||||||
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Total
other loans
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49,627 | 25,006 | 74,633 | |||||||||
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Total
loans
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$ | 144,037 | $ | 191,161 | $ | 335,198 | ||||||
4
The
following table presents our loan originations, purchases, sales and principal
payments for the years indicated:
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For
the Years Ended December 31,
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2009
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2008
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2007
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(In
thousands)
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Loans:
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Balance
outstanding at beginning of year
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$ | 480,338 | $ | 420,067 | $ | 390,174 | ||||||
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Originations:
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Real
estate loans:
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Residential
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1,378 | 2,807 | 3,692 | |||||||||
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Home
equity
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16,601 | 12,120 | 17,158 | |||||||||
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Commercial
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39,805 | 40,367 | 44,811 | |||||||||
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Total
mortgage originations
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57,784 | 55,294 | 65,661 | |||||||||
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Commercial
and industrial loans
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47,492 | 84,300 | 59,812 | |||||||||
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Consumer
loans
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1,299 | 1,624 | 3,161 | |||||||||
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Total
originations
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106,575 | 141,218 | 128,634 | |||||||||
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Purchase
of one-to-four family mortgage loans
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16,381 | 1,648 | 1,759 | |||||||||
| 122,956 | 142,866 | 130,393 | ||||||||||
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Less:
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Principal
repayments, unadvanced funds and other, net
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121,809 | 82,212 | 100,389 | |||||||||
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Loan
charge-offs, net
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5,051 | 383 | 111 | |||||||||
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Total
deductions
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126,860 | 82,595 | 100,500 | |||||||||
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Ending
balance
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$ | 476,434 | $ | 480,338 | $ | 420,067 | ||||||
Commercial and
Industrial Loans.
We offer commercial and industrial loan
products and services which are designed to give business owners borrowing
opportunities for modernization, inventory, equipment, construction,
consolidation, real estate, working capital, vehicle purchases and the financing
of existing corporate debt. We offer business installment loans,
vehicle and equipment financing, lines of credit, and other commercial
loans. At December 31, 2009, our commercial and industrial loan
portfolio consisted of 878 loans, totaling $145.0 million or 30.4% of our total
loans. Since 2005, commercial and industrial loans have grown $45.0
million, or 45.0%, from $100.0 million at December 31, 2005 to $145.0 million at
December 31, 2009. Our commercial loan team includes nine commercial
loan officers, one business development manager, five credit analysts and two
portfolio managers. We may hire additional commercial loan officers
on an as needed basis.
As part
of our strategy of increasing our emphasis on commercial lending, we seek to
attract our business customers’ entire banking relationship. Most
commercial borrowers also maintain commercial deposits. We provide
complementary commercial products and services, a variety of commercial deposit
accounts, cash management services, internet banking, sweep accounts, a broad
ATM network and night deposit services. Westfield Bank offers a
remote deposit capture product whereby commercial customers can receive credit
for check deposits by electronically transmitting check images from their own
locations. Commercial loan officers are based in our main and branch
offices, and we view our potential branch expansion as a means of facilitating
these commercial relationships. We intend to continue to expand the
volume of our commercial business products and services within our current
underwriting standards.
5
Our
commercial and industrial loan portfolio does not have any significant loan
concentration by type of property or borrower. The largest concentration of
loans was for
manufacturing, which
comprises approximately 5.48% of the total loan portfolio as of December 31,
2009. At December 31, 2009, our largest commercial and industrial loan
relationship was $23.0 million to a private New England college. The loans to
this borrower have performed to contractual terms.
Commercial
and industrial loans generally have terms of seven years or less, however on an
occasional basis, may have terms of up to ten years. Among the $145.0 million we
have in our commercial and industrial loan portfolio as of December 31, 2009,
$85.1 million have adjustable interest rates and $59.9 million have fixed
interest rates. Whenever possible, we seek to originate adjustable rate
commercial and industrial loans. Borrower activity and market conditions
however, may influence whether we are able to originate adjustable rate loans
rather than fixed rate loans. We generally require the personal guarantee of the
business owner. Interest rates on commercial and industrial loans generally have
higher yields than residential or commercial real estate loans.
Commercial
and industrial loans are generally considered to involve a higher degree of risk
than residential or commercial real estate loans because the collateral may be
in the form of intangible assets and/or inventory subject to market
obsolescence. Please see
“Risk
Factors –
Our loan
portfolio includes loans with a higher risk of loss.”
Commercial and
industrial loans may also involve relatively large loan balances to single
borrowers or groups of related borrowers, with the repayment of such loans
typically dependent on the successful operation and income stream of the
borrower. These risks can be significantly affected by economic conditions. In
addition, business lending generally requires substantially greater oversight
efforts by our staff compared to residential or commercial real estate lending.
In order to mitigate this risk, we monitor our loan concentration and our loan
policies generally to limit the amount of loans to a single borrower or group of
borrowers. We also utilize the services of an outside consultant to conduct
credit quality reviews of the commercial and industrial loan
portfolio.
Commercial Real
Estate Loans.
We originate commercial real estate loans to finance the
purchase of real property, which generally consists of apartment buildings,
business properties, multi-family investment properties and construction loans
to developers of commercial and residential properties. In underwriting
commercial real estate loans, consideration is given to the property’s historic
cash flow, current and projected occupancy, location and physical condition. At
December 31, 2009, our commercial real estate loan portfolio consisted of 400
loans, totaling $229.1 million, or 48.1% of total loans. Since 2005, commercial
real estate loans have grown by $59.5 million, or 35.1%, from $169.6 million at
December 31, 2005 to $229.1 million at December 31, 2009.
The
majority of the commercial real estate portfolio consists of loans which are
collateralized by properties in the Pioneer Valley of Massachusetts and northern
Connecticut. Our commercial real estate loan portfolio is diverse, and does not
have any significant loan concentration by type of property or borrower. We
generally lend up to a loan-to-value ratio of 75% on commercial properties. We,
however, will lend up to a maximum of 85% loan-to-value ratio but will generally
require a minimum debt coverage ratio of 1.15. Our largest commercial real
estate loan relationship had an outstanding balance of $11.9 million at December
31, 2009, which is secured by one commercial investment property located in
Rhode Island. The loans of this borrower have performed to contractual
terms.
We also
offer construction loans to finance the construction of commercial properties
located in our primary market area. At December 31, 2009, we had $4.0 million in
commercial construction loans and commitments that are committed to refinance
into permanent mortgages at the end of the construction period and $4.0 million
in commercial construction loans and commitments that are not committed to
permanent financing at the end of the construction period.
Commercial
real estate lending involves additional risks compared with one-to-four family
residential lending. Payments on loans secured by commercial real estate
properties often depend on the successful management of the properties, on the
amount of rent from the properties, or on the level of expenses needed to
maintain the properties. Repayment of such loans may therefore be adversely
affected by conditions in the real estate market or the general economy. Also,
commercial real estate loans typically involve large loan balances to single
borrowers or groups of related borrowers. In order to mitigate this risk, we
monitor our loan concentration on a quarterly basis and our loan policies
generally limit the amount of loans to a single borrower or group of
borrowers.
6
Because
of increased risks associated with commercial real estate loans, our commercial
real estate loans generally have higher rates than residential real estate
loans. Please see
“Risk
Factors – Our loan portfolio
includes loans with a higher risk of loss.”
Commercial real estate loans
generally have adjustable rates with repricing dates of five years or less;
however, occasionally repricing dates may be as long as ten years. Whenever
possible, we seek to originate adjustable rate commercial real estate loans.
Borrower activity and market conditions, however, may influence whether we are
able to originate adjustable rate loans rather than fixed rate
loans.
Residential Real
Estate Loans and Originations.
We process substantially all of our
originations of residential real estate loans through a third party mortgage
company. Residential real estate borrowers submit applications to us, 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. We
retain no residual ownership interest in these loans. We receive a fee for each
of these loans originated by the third party mortgage company.
Even
though substantially all residential real estate loan originations are referred
to a third party mortgage company, we still hold residential real estate loans
in our loan portfolio. The loans consist primarily of loans originated by us
prior to the commencement of the third party residential mortgage referral
program, or are loans we purchased. We occasionally purchase adjustable rate
mortgages, which are serviced by the originating institutions, from other banks
located in Massachusetts. At December 31, 2009, loans on one-to-four family
residential properties, including home equity lines, accounted for $99.1
million, or 20.8%, of our total loan portfolio.
Our
residential adjustable rate mortgage loans generally are fully amortizing loans
with contractual maturities of up to 30 years, payments due monthly. Our
adjustable rate mortgage loans generally provide for specified minimum and
maximum interest rates, with a lifetime cap and floor, and a periodic adjustment
on the interest rate over the rate in effect on the date of origination. As a
consequence of using caps, the interest rates on these loans are not generally
as rate sensitive as our cost of funds. The adjustable rate mortgage loans that
we originate generally are not convertible into fixed rate loans.
Adjustable
rate mortgage loans generally pose different credit risks than fixed rate loans,
primarily because as interest rates rise, the borrower’s payments rise,
increasing the potential for default. To date, we have not experienced
difficulty with payments for these loans. At December 31, 2009, our residential
real estate and home equity loan portfolio included $35.5 million in adjustable
rate loans, or 7.4% of our total loan portfolio, and $63.6 million in fixed rate
loans, or 13.4% of our total loan portfolio.
Our home
equity loans totaled $34.8 million, or 7.3% of total loans at December 31, 2009.
Home equity loans include $20.3 million in fixed rate loans, or 4.3 % of total
loans, and $14.5 million in adjustable rate loans, or 3.0% of total loans. These
loans may be originated in amounts of the existing first mortgage, or up to 80%
of the value of the property securing the loan. The term to maturity on our home
equity and home improvement loans may be up to 15 years.
Consumer
Loans.
Consumer loans are generally originated at higher interest rates
than residential and commercial real estate loans, but they also generally tend
to have a higher credit risk than residential real estate loans because they are
usually unsecured or secured by rapidly depreciable assets. Management, however,
believes that offering consumer loan products helps to expand and create
stronger ties to our existing customer base by increasing the number of customer
relationships and providing cross-marketing opportunities.
We offer
a variety of consumer loans to retail customers in the communities we serve.
Examples of our consumer loans include automobile loans, secured passbook loans,
credit lines tied to deposit accounts to provide overdraft protection, and
unsecured personal loans. At December 31, 2009, the consumer loan portfolio
totaled $3.3 million or 0.7% of total loans. Our consumer lending will allow us
to diversify our loan portfolio while continuing to meet the needs of the
individuals and businesses that we serve.
Loans
collateralized by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than residential real estate loans. In such
cases, repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. Further,
collections on these loans are dependent on the borrower’s continuing financial
stability and, therefore, are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. There was no repossessed collateral
relating to consumer loans at December 31, 2009. Finally, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans if a
borrower defaults.
7
Loan Approval
Procedures and Authority.
Individuals authorized to make loans on our
behalf are designated by our Senior Lending Officer and approved by the Board of
Directors. Each loan officer has loan approval authority up to prescribed limits
that depend upon the officer’s level of experience.
Upon
receipt of a completed loan application from a prospective borrower, we order a
credit report and verify other information. If necessary, we obtain additional
financial or credit related information. We also require an appraisal for all
commercial real estate loans greater than $250,000, which is performed by
licensed or certified third party appraisal firms and reviewed by our lending
department.
Appraisals for home equity loans are
required for loans in excess of $100,000; otherwise, a designated employee
conducts an inspection of the property. We require title insurance on most
commercial real estate loans. We also require borrowers to obtain flood
insurance, if applicable, prior to closing, for all loans secured by real estate
within a designated flood zone.
Commercial and
Industrial Loans and Commercial Real Estate Loans
.
We lend up to a maximum
loan-to-value ratio of 85% on commercial properties and the majority of these
loans require a minimum debt coverage ratio of 1.15. Commercial real estate
lending involves additional risks compared with one-to-four-family residential
lending. Because payments on loans secured by commercial real estate properties
are often dependent on the successful operation or management of the properties,
and/or the collateral value of the commercial real estate securing the loan,
repayment of such loans may be subject, to a greater extent, to adverse
conditions in the real estate market or the economy. Also, commercial real
estate loans typically involve large loan balances to single borrowers or groups
or related borrowers. Our loan policies limit the amounts of loans to a single
borrower or group of borrowers to reduce this risk.
Our lending policies permit our
underwriting department to review and approve commercial and industrial loans
and commercial real estate loans up to $1 million. Any commercial and industrial
or commercial real estate loan application that exceeds $1 million or that would
result in the borrower’s total credit exposure with us to exceed $1 million, or
whose approval requires an exception to our standard loan approval procedures,
requires approval of the Executive Committee of the Board of Directors. An
example of an exception to our standard loan approval procedures would be if a
borrower was located outside our primary lending area. For loans requiring Board
approval, management is responsible for presenting to the Board information
about the creditworthiness of a borrower and the estimated value of the subject
equipment or property. Generally, these determinations are based on financial
statements, corporate and personal tax returns, as well as any other necessary
information, including real estate and or equipment appraisals.
Home Equity
Loans
.
We
originate and fund our home equity loans. These loans may be originated in
amounts of the existing first mortgage, or up to 80% of the value of the
property securing the loan. Our underwriting department may approve home equity
loans up to $200,000. Home equity loans in amounts greater than $200,000 and up
to $350,000 may be approved by certain officers who have been approved by the
Board of Directors. Home equity loans over $350,000, or whose approval requires
an exception to our standard loan approval procedures, are reviewed and approved
by the Executive Committee of the Board of Directors.
Asset Quality
One of
our key operating objectives has been and continues to be the achievement of a
high level of asset quality. We maintain a large proportion of loans secured by
residential and commercial properties, set sound credit standards for new loan
originations and follow careful loan administration procedures. We also utilize
the services of an outside consultant to conduct credit quality reviews of our
commercial and industrial and commercial real estate loan portfolio on at least
an annual basis.
8
Nonaccrual Loans
and Foreclosed Assets
.
Our policies require that
management continuously monitor the status of the loan portfolio and report to
the Board of Directors on a monthly basis. These reports include information on
nonaccrual loans and foreclosed real estate, as well as our actions and plans to
cure the nonaccrual status of the loans and to dispose of the foreclosed
property.
The
following table presents information regarding nonperforming mortgage, consumer
and other loans, and foreclosed real estate as of the dates indicated. All loans
where the interest payment is 90 days or more in arrears as of the closing date
of each month are placed on non-accrual status. At December 31, 2009, 2008, and
2007, we had $5.5 million, $8.8 million, and $1.2 million, respectively, of
nonaccrual loans. If all nonaccrual loans had been performing in accordance with
their terms, we would have earned additional interest income of $94,000
$200,000, and $65,000 for the years ended December 31, 2009, 2008, and 2007,
respectively.
|
At December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Nonaccrual
real estate loans:
|
||||||||||||||||||||
|
Residential
|
$ | 784 | $ | 905 | $ | 820 | $ | 803 | $ | 321 | ||||||||||
|
Home
equity
|
225 | 239 | 175 | 103 | 108 | |||||||||||||||
|
Commercial
real estate
|
782 | 1,460 | 177 | 69 | 1,285 | |||||||||||||||
|
Total
nonaccrual real estate loans
|
1,791 | 2,604 | 1,172 | 975 | 1,714 | |||||||||||||||
|
Other
loans:
|
||||||||||||||||||||
|
Commercial
and industrial
|
3,675 | 6,195 | 19 | 44 | 173 | |||||||||||||||
|
Consumer
|
4 | 6 | 11 | 9 | 32 | |||||||||||||||
|
Total
nonaccrual other loans
|
3,679 | 6,201 | 30 | 53 | 205 | |||||||||||||||
|
Total
nonperforming loans
|
5,470 | 8,805 | 1,202 | 1,028 | 1,919 | |||||||||||||||
|
Foreclosed
real estate, net
|
1,662 | - | - | - | - | |||||||||||||||
|
Total
nonperforming assets
|
$ | 7,132 | $ | 8,805 | $ | 1,202 | $ | 1,028 | $ | 1,919 | ||||||||||
|
Nonperforming
loans to total loans
|
1.15 | % | 1.83 | % | 0.29 | % | 0.26 | % | 0.50 | % | ||||||||||
|
Nonperforming
assets to total assets
|
0.60 | 0.79 | 0.12 | 0.10 | 0.24 | |||||||||||||||
9
Allowance for
Loan Losses
. The following table presents the activity in our allowance
for loan losses and other ratios at or for the dates indicated.
|
At or for Years Ended December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Balance
at beginning of year
|
$ | 8,796 | $ | 5,726 | $ | 5,437 | $ | 5,422 | $ | 5,277 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Residential
|
- | (131 | ) | - | - | - | ||||||||||||||
|
Commercial
real estate
|
(50 | ) | - | - | - | - | ||||||||||||||
|
Home
equity loans
|
(117 | ) | - | - | - | - | ||||||||||||||
|
Commercial
and industrial
|
(4,910 | ) | (284 | ) | (255 | ) | (505 | ) | (431 | ) | ||||||||||
|
Consumer
|
(22 | ) | (34 | ) | (62 | ) | (79 | ) | (181 | ) | ||||||||||
|
Total
charge-offs
|
(5,099 | ) | (449 | ) | (317 | ) | (584 | ) | (612 | ) | ||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Residential
|
- | - | - | 4 | - | |||||||||||||||
|
Commercial
real estate
|
- | - | - | - | 1 | |||||||||||||||
|
Home
equity loans
|
6 | 4 | 3 | 3 | 3 | |||||||||||||||
|
Commercial
and industrial
|
2 | 4 | 54 | 7 | 9 | |||||||||||||||
|
Consumer
|
40 | 58 | 149 | 195 | 279 | |||||||||||||||
|
Total
recoveries
|
48 | 66 | 206 | 209 | 292 | |||||||||||||||
|
Net
charge-offs
|
(5,051 | ) | (383 | ) | (111 | ) | (375 | ) | (320 | ) | ||||||||||
|
Provision
for loan losses
|
3,900 | 3,453 | 400 | 390 | 465 | |||||||||||||||
|
Balance
at end of year
|
$ | 7,645 | $ | 8,796 | $ | 5,726 | $ | 5,437 | $ | 5,422 | ||||||||||
|
Total
loans receivable (1)
|
$ | 476,434 | $ | 480,338 | $ | 420,067 | $ | 390,174 | $ | 383,873 | ||||||||||
|
Average
loans outstanding
|
$ | 476,214 | $ | 444,492 | $ | 398,281 | $ | 386,039 | $ | 383,436 | ||||||||||
|
Allowance
for loan losses as a
|
||||||||||||||||||||
|
percent
of total loans receivable
|
1.60 | % | 1.83 | % | 1.36 | % | 1.39 | % | 1.41 | % | ||||||||||
|
Net
loans charged-off as a percent
|
||||||||||||||||||||
|
of
average loans outstanding
|
1.06 | 0.09 | 0.03 | 0.10 | 0.08 | |||||||||||||||
(1) Does
not include unearned premiums, deferred costs and fees, or allowance for loan
losses.
We
maintain an allowance for loan losses to absorb losses inherent in the loan
portfolio based on ongoing quarterly assessments of the estimated losses. Our
methodology for assessing the appropriateness of the allowance consists of a
review of the components, which include a specific valuation allowance for
impaired loans and a general allowance for non-impaired loans. The specific
valuation allowance incorporates the results of measuring impairment for
specifically identified non-homogenous problem loans. The specific allowance
reduces the carrying amount of the impaired loans to their estimated fair value.
A loan is recognized as impaired when it is probable that principal and/or
interest are not collectible in accordance with the loan’s contractual terms.
The general allowance is calculated by applying loss factors to outstanding
loans by type, excluding loans for which a specific allowance has been
determined. As part of this analysis, each quarter we prepare an allowance for
loan losses worksheet which categorizes the loan portfolio by risk
characteristics such as loan type and loan grade. The general allowance is
inherently subjective as it requires material estimates that may be susceptible
to significant change. There are a number of factors that are considered when
evaluating the appropriate level of the allowance. These factors include current
economic and business conditions that affect our key lending areas, new loan
products, collateral values, loan volumes and concentrations, credit quality
trends such as nonperforming loans, delinquency and loan losses, and specific
industry concentrations within the portfolio segments that may impact the
collectability of the loan portfolio. For information on our methodology for
assessing the appropriateness of the allowance please see
“Footnote 1 – Summary of Significant
Accounting Policies, Allowance for Loan Losses.”
10
In
addition, management employs an independent third party to perform an annual
review of all of our commercial and industrial loans and owner occupied
commercial real estate loans with balances or commitments equal to or greater
than $750,000. The third party also reviews all commercial investment real
estate loans in excess of $750,000, as well as all adversely rated
loans.
Our
methodologies include several factors that are intended to reduce the difference
between estimated and actual losses. The loss factors that are used to establish
the allowance for pass graded loans are designated to be self-correcting by
taking into account changes in loan classification, loan concentrations and loan
volumes and by permitting adjustments based on management’s judgments of
qualitative factors as of the evaluation date. Similarly, by basing the pass
graded loan loss factors on loss experience over the prior three years, the
methodology is designed to take our recent loss experience into
account.
Our
allowance methodology has been applied on a consistent basis. Based on this
methodology, we believe that we have established and maintained the allowance
for loan losses at adequate levels. Future adjustments to the allowance for loan
losses, however, may be necessary if economic, real estate and other conditions
differ substantially from the current operating environment resulting in
estimated and actual losses differing substantially. Adjustments to the
allowance for loan losses are charged to income through the provision for loan
losses.
A summary
of the components of the allowance for loan losses is as follows:
|
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||||||||||||||||||||||
|
Specific
|
General
|
Total
|
Specific
|
General
|
Total
|
Specific
|
General
|
Total
|
||||||||||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||||||||||||
|
Real
estate mortgage:
|
||||||||||||||||||||||||||||||||||||
|
Residential
and
|
||||||||||||||||||||||||||||||||||||
|
home
equity
|
$ | - | $ | 487 | $ | 487 | $ | - | $ | 462 | $ | 462 | $ | - | $ | 456 | $ | 456 | ||||||||||||||||||
|
Commercial
|
- | 2,371 | 2,371 | - | 2,216 | 2,216 | - | 1,756 | 1,756 | |||||||||||||||||||||||||||
|
Commercial
and industrial
|
875 | 3,873 | 4,748 | 2,286 | 3,776 | 6,062 | - | 3,436 | 3,436 | |||||||||||||||||||||||||||
|
Consumer
|
- | 39 | 39 | - | 56 | 56 | - | 78 | 78 | |||||||||||||||||||||||||||
|
Total
|
$ | 875 | $ | 6,770 | $ | 7,645 | $ | 2,286 | $ | 6,510 | $ | 8,796 | $ | - | $ | 5,726 | $ | 5,726 | ||||||||||||||||||
|
December
31, 2006
|
December
31, 2005
|
|||||||||||||||||||||||
|
Specific
|
General
|
Total
|
Specific
|
General
|
Total
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Real
estate mortgage:
|
||||||||||||||||||||||||
|
Residential
and
|
||||||||||||||||||||||||
|
home
equity
|
$ | - | $ | 422 | $ | 422 | $ | - | $ | 355 | $ | 355 | ||||||||||||
|
Commercial
|
13 | 2,004 | 2,017 | 218 | 2,400 | 2,618 | ||||||||||||||||||
|
Commercial
and industrial
|
7 | 2,912 | 2,919 | 32 | 2,334 | 2,366 | ||||||||||||||||||
|
Consumer
|
- | 79 | 79 | - | 83 | 83 | ||||||||||||||||||
|
Total
|
$ | 20 | $ | 5,417 | 5,437 | $ | 250 | $ | 5,172 | $ | 5,422 | |||||||||||||
11
In
addition, the Office of Thrift Supervision (“OTS”), as an integral part of its
examination process, periodically reviews our loan and foreclosed real estate
portfolios and the related allowance for loan losses and valuation allowance for
foreclosed real estate. The OTS may require us to adjust the allowance for loan
losses or the valuation allowance for foreclosed real estate based on their
judgment of information available to them at the time of their examination,
thereby adversely affecting our results of operations.
For the
year ended December 31, 2009, we provided $3.9 million to the allowance for loan
losses based on our evaluation of the items discussed above. We believe that the
allowance for loan losses accurately reflects the level of risk in the current
loan portfolio as of December 31, 2009. At December 31, 2008, the allowance for
loan losses included a specific valuation allowance of $2.1 million related to a
manufacturing commercial loan relationship. This amount was charged off in
the first quarter of 2009 and contributed to the decrease in the allowance for
loan losses and the allowance for loan losses as a percent of total
loans.
12
Allocation of
Allowance for Loan Losses
. The following tables set forth the allowance
for loan losses allocated by loan category, the total loan balances by category,
and the percent of loans in each category to total loans.
|
At December 31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Loan Category
|
Amount of
Loan Loss
|
Loan
Balances by
Category
|
Percent of
Loans in
Each
Category to
Total Loans
|
Amount
of Loan
Loss
|
Loan
Balances
by
Category
|
Percent of
Loans in
Each
Category
to Total
Loans
|
Amount
of Loan
Loss
|
Loan
Balances
by
Category
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Real
estate mortgages:
|
||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 2,371 | $ | 229,061 | 48.08 | % | $ | 2,216 | $ | 223,857 | 46.61 | % | $ | 1,756 | $ | 189,964 | 45.22 | % | ||||||||||||||||||
|
Residential
and home equity
|
487 | 99,054 | 20.79 | 462 | 98,372 | 20.48 | 456 | 108,110 | 25.74 | |||||||||||||||||||||||||||
|
Commercial
loans
|
4,748 | 145,012 | 30.44 | 6,062 | 153,861 | 32.03 | 3,436 | 116,514 | 27.74 | |||||||||||||||||||||||||||
|
Consumer
loans
|
39 | 3,307 | 0.69 | 56 | 4,248 | 0.88 | 78 | 5,479 | 1.30 | |||||||||||||||||||||||||||
|
Total
allowance for loan losses
|
$ | 7,645 | $ | 476,434 | 100.00 | % | $ | 8,796 | $ | 480,338 | 100.00 | % | $ | 5,726 | $ | 420,067 | 100.00 | % | ||||||||||||||||||
|
At December 31,
|
||||||||||||||||||||||||
|
2006
|
2005
|
|||||||||||||||||||||||
|
Amount of
Loan Loss
|
Loan
Balances by
Category
|
Percent of
Loans in
Each
Category to
Total Loans
|
Amount
of Loan
Loss
|
Loan
Balances
by
Category
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Real
estate mortgages:
|
||||||||||||||||||||||||
|
Commercial
|
$ | 2,017 | $ | 174,556 | 44.74 | % | $ | 2,618 | $ | 169,564 | 44.17 | % | ||||||||||||
|
Residential
and home equity
|
422 | 109,540 | 28.08 | 355 | 106,918 | 27.85 | ||||||||||||||||||
|
Commercial
loans
|
2,919 | 100,237 | 25.69 | 2,366 | 100,019 | 26.06 | ||||||||||||||||||
|
Consumer
loans
|
79 | 5,841 | 1.49 | 83 | 7,372 | 1.92 | ||||||||||||||||||
|
Total
allowance for loan losses
|
$ | 5,437 | $ | 390,174 | 100.00 | % | $ | 5,422 | $ | 383,873 | 100.00 | % | ||||||||||||
13
Potential Problem
Loans.
We have a commercial line of credit of $1.1 million with a
borrower primarily engaged in the distribution of automotive parts and
accessories. This potential problem loan was not delinquent as of December 31,
2009, or as of March 9, 2010. During 2009, however, the borrower experienced a
decrease in revenue. We intend to restructure $470,892 of the debt to a real
estate holding company and an operating company affiliated with the borrower,
which has the ability to service the debt. After the restructure, the remaining
balance on the line of credit is estimated to be $666,766 and is collateralized
by inventory and accounts receivable.
Investment
Activities.
The Board of Directors
review and approve our investment policy on an annual basis. The Chief Executive
Officer and Chief Financial Officer, as authorized by the Board of Directors,
implement this policy based on the established guidelines within the written
policy.
Our
investment policy is designed primarily to manage the interest rate sensitivity
of our assets and liabilities, to generate a favorable return without incurring
undue interest rate and credit risk, to complement our lending activities and to
provide and maintain liquidity within the range established by policy. In
determining our investment strategies, we consider our interest rate
sensitivity, yield, credit risk factors, maturity and amortization schedules,
and other characteristics of the securities to be held.
Federally-chartered
savings banks have authority to invest in various types of assets, including
U.S. Treasury obligations, securities of various government-sponsored
enterprises, mortgage-backed securities, certain certificates of deposit of
insured financial institutions, repurchase agreements, overnight and short-term
loans to other banks and corporate debt instruments.
Securities
Portfolio.
We classify securities
as held to maturity or available for sale at the date of purchase. We do not
have any securities classified as trading. Held to maturity securities are
reported at cost, adjusted for amortization of premium and accretion of
discount. Available for sale securities are reported at fair value. At December
31, 2009, held to maturity securities totaled $295.0 million, or 48.0% of the
total securities portfolio, and available for sale securities totaled $319.1
million, or 52.0% of our total securities portfolio.
We invest
in Government-sponsored enterprise debt securities, the majority of which have
average lives of less than five years. We also invest in municipal bonds issued
by cities and towns in Massachusetts that are rated as investment grade by
Moody’s, Standard and Poor’s, or Fitch, the majority of which are also
independently insured. These securities generally have maturities between seven
and 20 years; however, many have earlier call dates. In addition, we have
investments in Federal Home Loan Bank stock and mutual funds that invest only in
securities allowed by the OTS.
Our
mortgage-backed securities, the majority of which are directly or indirectly
insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae, consist of both
fixed rate and adjustable rate securities primarily with average lives of less
than five years. At December 31, 2009, we owned $37.5 million in private-label
residential mortgage-backed securities.
14
The
following table sets forth the composition of our securities portfolio at the
dates indicated.
|
At
December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||||||||
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Debt
Securities:
|
||||||||||||||||||||||||
|
Government-sponsored
enterprises
|
$ | 45,884 | $ | 47,358 | $ | 60,924 | $ | 64,105 | $ | 101,906 | $ | 103,638 | ||||||||||||
|
Municipal
bonds
|
36,316 | 37,774 | 36,354 | 36,655 | 32,993 | 33,402 | ||||||||||||||||||
|
Total
securities
|
82,200 | 85,132 | 97,278 | 100,760 | 134,899 | 137,040 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||||||||||
|
Government
sponsored residential mortgage-backed
|
494,324 | 500,659 | 315,903 | 318,158 | 318,078 | 319,463 | ||||||||||||||||||
|
U.S.
Government guaranteed residential mortgage-backed
|
17,364 | 17,333 | 48,293 | 47,977 | 15,882 | 15,883 | ||||||||||||||||||
|
Private
label residential mortgage-backed
|
15,317 | 13,068 | 48,916 | 36,328 | 45,844 | 45,382 | ||||||||||||||||||
|
Total
mortgage-backed securities
|
527,005 | 531,060 | 413,112 | 402,463 | 379,804 | 380,728 | ||||||||||||||||||
|
Marketable
equity securities
|
||||||||||||||||||||||||
|
Mutual
funds
|
6,561 | 6,489 | 6,231 | 6,088 | 6,333 | 6,187 | ||||||||||||||||||
|
Common
and preferred stock
|
70 | 59 | 70 | 39 | 1,031 | 653 | ||||||||||||||||||
|
Total
marketable equity securities
|
6,631 | 6,548 | 6,301 | 6,127 | 7,364 | 6,840 | ||||||||||||||||||
|
Total
securities
|
$ | 615,836 | $ | 622,740 | $ | 516,691 | $ | 509,350 | $ | 522,067 | $ | 524,608 | ||||||||||||
15
Mortgage-Backed
Securities.
The following table sets forth the amortized cost and fair
value of our mortgage-backed securities, which are classified as available for
sale or held to maturity at the dates indicated
.
|
At
December 31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Amortized
Cost
|
Percent
of
Total
|
Fair
Value
|
Amortized
Cost
|
Percent
of
Total
|
Fair
Value
|
Amortized
Cost
|
Percent
of
Total
|
Fair
Value
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Available
for sale:
|
||||||||||||||||||||||||||||||||||||
|
Government
sponsored residential
|
$ | 289,840 | 55.00 | % | $ | 290,248 | $ | 161,926 | 39.20 | % | $ | 162,276 | $ | 160,473 | 42.25 | % | $ | 161,860 | ||||||||||||||||||
|
U.S.
Government guaranteed residential
|
1,030 | 0.19 | 1,047 | 40,401 | 9.78 | 40,424 | 5,674 | 1.49 | 5,687 | |||||||||||||||||||||||||||
|
Private
label residential
|
10,368 | 1.97 | 8,510 | 42,453 | 10.28 | 31,047 | 39,063 | 10.28 | 38,631 | |||||||||||||||||||||||||||
|
Total
available for sale
|
301,238 | 57.16 | 299,805 | 244,780 | 59.26 | 233,747 | 205,210 | 54.02 | 206,178 | |||||||||||||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||||||||||||||||||||||
|
Government
sponsored residential
|
204,484 | 38.80 | 210,411 | 153,977 | 37.27 | 155,882 | 157,605 | 41.50 | 157,603 | |||||||||||||||||||||||||||
|
U.S.
Government guaranteed residential
|
16,334 | 3.10 | 16,286 | 7,892 | 1.91 | 7,553 | 10,208 | 2.69 | 10,196 | |||||||||||||||||||||||||||
|
Private
label residential
|
4,949 | 0.94 | 4,558 | 6,463 | 1.56 | 5,281 | 6,781 | 1.79 | 6,751 | |||||||||||||||||||||||||||
|
Total
held to maturity
|
225,767 | 42.84 | 231,255 | 168,332 | 40.74 | 168,716 | 174,594 | 45.98 | 174,550 | |||||||||||||||||||||||||||
|
Total
mortgage-backed securities
|
$ | 527,005 | 100.00 | % | $ | 531,060 | $ | 413,112 | 100.00 | % | $ | 402,463 | $ | 379,804 | 100.00 | % | $ | 380,728 | ||||||||||||||||||
16
Securities
Portfolio Maturities
. The composition and maturities of the securities
portfolio (debt securities) and the mortgage-backed securities portfolio at
December 31, 2009 are summarized in the following table. Maturities are based on
the final contractual payment dates, and do not reflect the impact of
prepayments or redemptions that may occur.
|
One
Year or Less
|
More
than One Year
through
Five Years
|
More
than Five Years
through
Ten Years
|
More
than Ten Years
|
Total
Securities
|
||||||||||||||||||||||||||||||||||||||||
|
Amortized
Cost
|
Weighted
Average
Yield
|
Amortized
Cost
|
Weighted
Average
Yield
|
Amortized
Cost
|
Weighted
Average
Yield
|
Amortized
Cost
|
Weighted
Average
Yield
|
Amortized
Cost
|
Fair
Value
|
Weighted
Average
Yield
|
||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Government-sponsored
enterprises
|
$ | - | - | % | $ | - | - | % | $ | - | - | % | $ | 11,000 | 5.00 | % | $ | 11,000 | $ | 10,698 | 5.00 | % | ||||||||||||||||||||||
|
Municipal
bonds
|
- | - | - | - | 1,391 | 4.01 | 565 | 4.12 | 1,956 | 2,070 | 4.04 | |||||||||||||||||||||||||||||||||
|
Total
securities
|
- | - | - | - | 1,391 | 4.01 | 11,565 | 4.96 | 12,956 | 12,768 | 4.85 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||||||||||||||||||||||
|
available
for sale:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Government
sponsored residential mortgage-backed
|
- | - | 1,181 | 4.58 | 10,660 | 3.73 | 277,999 | 4.89 | 289,840 | 290,248 | 4.84 | |||||||||||||||||||||||||||||||||
|
U.S.
Government guaranteed residential mortgage-backed
|
- | - | - | - | - | - | 1,030 | 3.81 | 1,030 | 1,047 | 3.81 | |||||||||||||||||||||||||||||||||
|
Private
label residential mortgage-backed
|
- | - | - | - | - | - | 10,368 | 5.00 | 10,368 | 8,510 | 5.00 | |||||||||||||||||||||||||||||||||
|
Total
mortgage-backed securities
|
- | - | 1,181 | 4.58 | 10,660 | 3.73 | 289,397 | 4.89 | 301,238 | 299,805 | 4.84 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | - | - | $ | 1,181 | 4.58 | $ | 12,051 | 3.77 | $ | 300,962 | 4.89 | $ | 314,194 | $ | 312,573 | 4.84 | |||||||||||||||||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Government-sponsored
enterprises
|
$ | 5,044 | 0.86 | $ | 14,910 | 4.01 | $ | 14,930 | 5.13 | $ | - | - | $ | 34,884 | $ | 36,660 | 4.96 | |||||||||||||||||||||||||||
|
Municipal
bonds
|
1,190 | 3.48 | 6,748 | 3.57 | 15,448 | 4.06 | 10,974 | 4.38 | 34,360 | 35,704 | 3.64 | |||||||||||||||||||||||||||||||||
|
Total
investment securities
|
6,234 | 1.36 | 21,658 | 3.87 | 30,378 | 4.59 | 10,974 | 4.38 | 69,244 | 72,364 | 5.40 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||||||||||||||||||||||
|
held
to maturity:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Government
sponsored residential mortgage-backed
|
973 | (3.79 | ) | 4,851 | 3.74 | 17,367 | 4.95 | 181,293 | 5.04 | 204,484 | 210,411 | 4.96 | ||||||||||||||||||||||||||||||||
|
U.S.
Government guaranteed residential mortgage-backed
|
- | - | 132 | 4.89 | - | - | 16,202 | 3.63 | 16,334 | 16,286 | 3.64 | |||||||||||||||||||||||||||||||||
|
Private
label residential mortgage-backed
|
- | - | - | - | - | - | 4,949 | 5.40 | 4,949 | 4,558 | 5.40 | |||||||||||||||||||||||||||||||||
|
Total
mortgage-backed securities
|
973 | (3.79 | ) | 4,983 | 3.77 | 17,367 | 4.95 | 202,444 | 4.94 | 225,767 | 231,255 | 4.88 | ||||||||||||||||||||||||||||||||
|
Total
|
$ | 7,207 | 0.66 | % | $ | 26,641 | 3.85 | % | $ | 47,745 | 4.72 | % | $ | 213,418 | 4.91 | % | $ | 295,011 | $ | 303,619 | 4.68 | % | ||||||||||||||||||||||
17
Sources
of Funds
General.
Deposits, short-term borrowings, long-term debt, scheduled amortization and
prepayments of loan principal, maturities and calls of securities and funds
provided by operations are our primary sources of funds for use in lending,
investing and for other general purposes. See
“Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources.”
Deposits.
We offer a variety of deposit accounts having a range of interest rates and
terms. We currently offer regular savings deposits (consisting of passbook and
statement savings accounts), NOW accounts, noninterest-bearing demand accounts,
money market accounts and time deposits. We have expanded the types of deposit
products that we offer to include jumbo certificates of deposit, tiered money
market accounts and customer repurchase agreements to complement our increased
emphasis on attracting commercial banking relationships.
Deposit flows are influenced
significantly by general and local economic conditions, changes in prevailing
interest rates, pricing of deposits and competition. Our deposits are primarily
obtained from areas surrounding our offices. We rely primarily on paying
competitive rates, service and long-standing relationships with customers to
attract and retain these deposits. We do not use brokers to obtain
deposits.
When we determine our deposit rates, we
consider local competition, U.S. Treasury securities offerings and the rates
charged on other sources of funds. Core deposits (defined as regular accounts,
money market accounts, NOW accounts and demand accounts) represented 47.1% of
total deposits on December 31, 2009 and 44.3% on December 31, 2008. At December
31, 2009 and December 31, 2008, time deposits with remaining terms to maturity
of less than one year amounted to $242.3 million and $245.9 million,
respectively. See
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Net
Interest and Dividend Income”
for information relating to the
average balances and costs of our deposit accounts for the years ended December
31, 2009, 2008 and 2007.
Deposit
Distribution Weighted Average.
The following table sets forth the
distribution of our deposit accounts, by account type, at the dates
indicated
.
|
At
December 31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||||||||||||
|
Amount
|
Percent
|
Rates
|
Amount
|
Percent
|
Rates
|
Amount
|
Percent
|
Rates
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Demand
deposits
|
$ | 80,110 | 12.36 | % | - | % | $ | 50,860 | 8.65 | % | - | % | $ | 42,408 | 7.04 | % | - | % | ||||||||||||||||||
|
Now
accounts
|
70,462 | 10.87 | 1.42 | 83,788 | 14.25 | 1.17 | 85,316 | 14.15 | 1.62 | |||||||||||||||||||||||||||
|
Regular
accounts
|
104,650 | 16.15 | 0.88 | 68,085 | 11.58 | 1.05 | 47,072 | 7.81 | 1.24 | |||||||||||||||||||||||||||
|
Money
market accounts
|
50,120 | 7.74 | 0.74 | 57,655 | 9.80 | 0.94 | 74,601 | 12.38 | 1.24 | |||||||||||||||||||||||||||
|
Total
non-certificated accounts
|
305,342 | 47.12 | 0.75 | 260,388 | 44.28 | 0.86 | 249,397 | 41.38 | 1.16 | |||||||||||||||||||||||||||
|
Time
certificates of deposit:
|
||||||||||||||||||||||||||||||||||||
|
Due
within the year
|
242,318 | 37.40 | 2.41 | 245,939 | 41.83 | 3.30 | 266,234 | 44.18 | 4.49 | |||||||||||||||||||||||||||
|
Over
1 year through 3 years
|
85,867 | 13.25 | 2.65 | 78,627 | 13.37 | 3.82 | 79,806 | 13.24 | 4.26 | |||||||||||||||||||||||||||
|
Over
3 years
|
14,448 | 2.23 | 2.02 | 3,075 | 0.52 | 3.43 | 7,239 | 1.20 | 4.50 | |||||||||||||||||||||||||||
|
Total
certificated accounts
|
342,633 | 52.88 | 2.45 | 327,641 | 55.72 | 3.43 | 353,279 | 58.62 | 4.44 | |||||||||||||||||||||||||||
|
Total
|
$ | 647,975 | 100.00 | % | 1.65 | % | $ | 588,029 | 100.00 | % | 2.29 | % | $ | 602,676 | 100.00 | % | 3.08 | % | ||||||||||||||||||
18
Certificate of
Deposit Maturities.
At December 31, 2009,
we had $97.8 million in time certificates of deposit with balances of $100,000
and over maturing as follows:
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Maturity
Period
|
Amount
|
Rate
|
||||||
|
(In
thousands)
|
||||||||
|
3
months or less
|
$ | 11,017 | 2.78 | % | ||||
|
Over
3 months through 6 months.
|
24,855 | 2.41 | ||||||
|
Over
6 months through 12 months
|
29,684 | 2.34 | ||||||
|
Over
12 months
|
32,258 | 2.74 | ||||||
|
Total
|
$ | 97,814 | 2.54 | % | ||||
Certificate of
Deposit Balances by Rates.
The following table sets forth, by interest
rate ranges, information concerning our time certificates of deposit at the
dates indicated.
|
At
December 31, 2009
|
||||||||||||||||||||||||
|
Period
to Maturity
|
||||||||||||||||||||||||
|
Less
than
|
One
to Two
|
Two
to
|
More
than
|
Percent
|
||||||||||||||||||||
|
One
Year
|
Years
|
Three
Years
|
Three
Years
|
Total
|
of
Total
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
2.00%
and under
|
$ | 69,809 | $ | 21,104 | $ | 1,674 | $ | 7 | $ | 92,594 | 27.02 | % | ||||||||||||
|
2.01%
to 3.00%
|
126,808 | 25,257 | 9,497 | 13,772 | 175,334 | 51.17 | ||||||||||||||||||
|
3.01%
to 4.00%
|
26,455 | 18,920 | 2,080 | 49 | 47,504 | 13.87 | ||||||||||||||||||
|
4.01%
to 5.00%
|
16,829 | 7,015 | 320 | 456 | 24,620 | 7.19 | ||||||||||||||||||
|
5.01%
and over
|
2,417 | - | - | 164 | 2,581 | 0.75 | ||||||||||||||||||
|
Total
|
$ | 242,318 | $ | 72,296 | $ | 13,571 | $ | 14,448 | $ | 342,633 | 100.00 | % | ||||||||||||
Long-term
debt consists of FHLB advances, securities sold under repurchase agreements and
customer repurchase agreements with an original maturity of one year or more. At
December 31, 2009, we had $127.5 million in long-term debt with the FHLB, $81.3
million in securities sold under repurchase agreements with an approved
broker-dealer and $5.0 million in customer repurchase agreements. This compares
to $115.0 million in FHLB advances and $58.3 million in securities sold under
repurchase agreements with an approved broker-dealer at December 31, 2008. There
were no long-term customer repurchase agreements at December 31, 2008. At
December 31, 2009, securities sold under repurchase agreements of $81.3 million
were executed with a weighted average interest rate of 2.76% and final
maturities of $14.8 million in the year 2013, $28.0 million in the year 2014,
and $38.5 million in the year 2018. The securities sold under agreements to
repurchase are callable at the issuer’s option beginning in the years 2009 to
2012.
19
Personnel
As of
December 31, 2009, we had 145 full-time employees and 35 part-time employees.
The employees are not represented by a collective bargaining unit, and we
consider our relationship with our employees to be excellent.
REGULATION
General
.
As a federally-chartered savings bank, the Bank is subject to regulation,
examination, and supervision by the Office of Thrift Supervision (“OTS”) as its
chartering authority, and the Federal Deposit Insurance Corporation (“FDIC”) as
its deposit insurer. The Bank must file reports with the OTS and the FDIC
describing our activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. This
supervision and regulation is intended primarily for the protection of
depositors’ funds, federal deposit insurance funds and the banking system as a
whole, not shareholders.
As the
holding company of a savings bank, Westfield Financial is also regulated by the
OTS. As such, Westfield Financial is registered with and subject to OTS
examination and supervision, as well as certain OTS reporting requirements. In
addition, the OTS has enforcement authority over Westfield Financial and
Westfield Financial’s non-savings-association subsidiaries. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the financial safety, soundness or stability
of a subsidiary savings association. Unlike bank holding companies, federal
savings and loan holding companies are not subject to any regulatory capital
requirements or to supervision by the Federal Reserve Board. Westfield Financial
also is required to file reports with the OTS and the SEC, and otherwise comply
with the rules and regulations of the OTS and the SEC under federal securities
laws.
The
Office of Thrift Supervision and the FDIC have significant discretion in
connection with their supervisory and enforcement activities and examination
policies. Any change in such policies, whether by the OTS, the FDIC, the SEC or
the United States Congress, could have a material adverse impact on the Bank and
Westfield Financial’s operations and shareholders.
The
following discussion is intended to be a summary of the material statutes and
regulations applicable to federal savings banks and their holding companies, and
it does not purport to be a comprehensive description of all such statutes and
regulations.
Regulation
of Federal Savings Banks
Business
Activities
.
The
Bank derives its lending and investment powers from the Home Owners’ Loan Act,
as amended, and the regulations of the OTS thereunder. Those laws and
regulations limit the Bank’s authority to invest in certain types of assets and
to make certain types of loans. Permissible investments include, but are not
limited to, mortgage loans secured by residential and commercial real estate,
commercial and consumer loans, certain types of debt securities, and certain
other assets. The Bank may also establish service corporations that may engage
in activities not otherwise permissible for the Bank, including certain real
estate equity investments and securities and insurance brokerage.
Loans to One
Borrower
. Generally, a federal savings bank may not make a loan or extend
credit to a single borrower or related group of borrowers in excess of 15% of
unimpaired capital and surplus. An additional amount may be loaned, equal
to 10% of unimpaired capital and surplus, if the loan is secured by readily
marketable collateral, which generally does not include real estate. As of
December 31, 2009, we were in compliance with these limitations on loans to
one borrower.
Qualified Thrift
Lender Test
.
The
Bank must either qualify as a domestic building and loan association under the
Internal Revenue Code, or maintain an appropriate level of certain investments,
called “Qualified Thrift Investments” (“QTIs”), to remain a “Qualified Thrift
Lender” (“QTL”). QTIs must represent 65% or more of portfolio assets on a
monthly average basis during 9 out of every 12 months on a continuous basis.
Failure by the Bank to maintain its status as a QTL would result in the
following restrictions on operations: (i) we would not be able to engage in
any new activity or make any new investment, directly or indirectly, unless such
activity or investment was permissible for both national banks and thrift
institutions; (ii) the branching powers of the Bank would be restricted to
those of a national bank; and (iii) payment of dividends would be subject
to the rules regarding payment of dividends by a national bank. Additional
restrictions would apply three years after we ceased to be a QTL, including
requirements to dispose of certain assets not permissible for national banks and
to cease engaging in activities not permissible for national banks. A thrift
institution that fails to maintain its QTL status will be permitted to requalify
once, and if it fails the QTL test a second time, it will become immediately
subject to all restrictions described above as if all time periods prior to such
restrictions becoming effective had expired. At December 31, 2009,
our QTL ratio was 75.77%, which exceeded the requirement.
20
Capital
Requirements
.
The OTS
regulations require the Bank to meet the following minimum capital
standards:
|
|
(1)
|
a
tangible capital ratio requirement of 1.5% of total assets as adjusted
under OTS regulations;
|
|
|
(2)
|
a
leverage ratio of 3% of core capital to such adjusted total assets, if a
savings association has been assigned the highest composite rating of 1
under the Uniform Financial Institutions Rating System; otherwise, the
minimum leverage capital ratio for any other depository institution that
does not have a composite rating of 1 will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile
of the depository institution;
|
|
|
|
|
|
(3)
|
a Tier
1 risk-based capital ratio of
4.0%; and
|
|
|
(4)
|
a
risk-based capital ratio requirement of 8% of core and supplementary
capital to total risk-based assets, provided that the amount of
supplementary capital used to satisfy this requirement may not exceed the
amount of core capital.
|
In
determining the amount of risk-weighted assets for purposes of the risk-based
capital requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks found by the OTS to be
inherent in the type of asset.
Tangible
capital is defined, generally, as common stockholders’ equity (including
retained earnings); non-cumulative perpetual preferred stock and related
earnings; nonwithdrawable accounts and pledged deposits that would qualify as
core capital; and minority interests in equity accounts of fully consolidated
subsidiaries, less deductions such as certain intangible assets. Core
capital (or Tier 1 capital) is defined similarly to tangible capital, but core
capital also includes other elements such as certain qualifying supervisory
goodwill. Supplementary capital (or Tier 2 capital) includes elements
such as cumulative and other preferred stock; mandatory convertible debt
securities; subordinated debt; and the allowance for loan and lease losses
(“ALLL”). In addition, up to 45% of unrealized gains on
available-for-sale equity securities with a readily determinable fair value may
be included in Tier 2 capital. The ALLL includable in Tier 2 capital
is limited to a maximum of 1.25% of risk-weighted assets.
At
December 31, 2009, we exceeded each of the applicable regulatory capital
requirements.
Community
Reinvestment
.
Under the
Community Reinvestment Act (“CRA”), as implemented by the OTS regulations, the
Bank has a continuing and affirmative obligation, consistent with safe and sound
banking practices, to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions,
nor does it limit an institution’s discretion to develop the types of products
and services that it believes are best suited to its particular community, so
long as such practices are consistent with the CRA. The CRA requires
the OTS, in connection with its examination of a savings association, to assess
the Bank’s record of meeting the credit needs of its community and to take such
record into account in its evaluation of certain applications by the
Bank.
The CRA
regulations establish an assessment system that bases an association’s rating on
its actual performance in meeting community needs. In particular, the
assessment system focuses on three tests:
|
•
|
a
lending test, to evaluate the institution’s record of making loans in its
assessment areas;
|
21
|
|
•
|
an
investment test, to evaluate the institution’s record of investing in
community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses in its
assessment area or a broader area that includes its assessment area;
and
|
|
|
•
|
a
service test, to evaluate the institution’s delivery of services through
its retail banking channels and the extent and innovativeness of its
community development services.
|
The Bank
received a “Satisfactory” Community Reinvestment Act rating in its most recent
examination.
Transactions with
Affiliates
.
The Bank’s
authority to engage in transactions with its affiliates is limited by Sections
23A and 23B of the Federal Reserve Act and the Federal Reserve Board’s
Regulation W, as made applicable to federal savings associations by the Home
Owners’ Loan Act and the OTS regulations, which impose certain additional
restrictions on affiliate transactions. In general, these
transactions must be on terms that are at least as favorable to Westfield Bank
as comparable transactions with non-affiliates. In addition, certain
types of these transactions are restricted to an aggregate percentage of the
Bank’s capital. Collateral in specified amounts must usually be
provided by affiliates in order to receive loans from the Bank. In
addition, the OTS regulations prohibit a savings association from lending to any
of its affiliates that engage in activities not permissible for bank holding
companies and from purchasing the securities of any affiliate, other than a
subsidiary.
Loans to
Insiders
.
The Bank’s
authority to extend credit to its directors, executive officers and principal
shareholders, as well as to entities controlled by such persons, is currently
governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve
Act and Regulation O of the Federal Reserve Board, as made applicable to federal
savings associations by the Home Owners’ Loan Act and the OTS
regulations. Among other things, these provisions require that
extensions of credit to insiders: (i) be made on terms that are substantially
the same as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with unaffiliated
persons and that do not involve more than the normal risk of repayment or
present other unfavorable features; and (ii) not exceed certain limitations on
the amount of credit extended to such persons, individually and in the
aggregate, which limits are based, in part, on the amount of the Bank’s
capital. In addition, extensions for credit in excess of certain
limits must be approved by the Bank’s Board of Directors.
Enforcement
.
The OTS has
primary enforcement responsibility over savings associations, including the
Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist orders and to
remove directors and officers. In general, these enforcement actions
may be initiated in response to violations of laws and regulations as well as in
response to unsafe or unsound practices.
Standards for
Safety and Soundness
.
The Bank is
subject to certain standards designed to maintain the safety and soundness of
individual banks and the banking system. The OTS has prescribed safety and
soundness guidelines relating to (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate exposure; (v) asset growth,
concentration, and quality; (vi) earnings; and (vii) compensation and
benefit standards for officers, directors, employees and principal
stockholders. A savings institution not meeting one or more of the safety
and soundness guidelines may be required to file a compliance plan with the
OTS.
Prompt Corrective
Action
.
The federal
banking agencies have established by regulation, for each capital measure, the
levels at which an insured institution is “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized,” or
“critically undercapitalized.” The federal banking agencies are
required to take prompt corrective action with respect to insured institutions
that fall below the “adequately capitalized” level. Any insured depository
institution that falls below the “adequately capitalized” level must submit a
capital restoration plan, and, if its capital levels further decline or do not
increase, will face increased scrutiny and more stringent supervisory
action. As of December 31, 2009, the most recent notification from
the OTS categorized us as “well capitalized” under the prompt corrective action
framework.
Capital
Distributions
.
Thrift institutions are subject to limitations on their ability to make capital
distributions such as dividends, stock redemptions or repurchases, cash-out
mergers, and other transactions charged to the capital account of a thrift
institution. In general, an application to the OTS for prior approval to pay a
dividend is required when that dividend, combined with all distributions made
during the calendar year, would exceed a thrift institution’s net income
year-to-date plus retained net income for the proceeding two years, or that
would cause the thrift institution to be less than adequately capitalized.
We are currently in compliance with this requirement.
22
Liquidity
.
The Bank is
required to maintain a sufficient amount of liquid assets to ensure its safe and
sound operation.
Insurance of
Deposit Accounts
.
The deposits of
the Bank are insured up to the applicable limits established by law and are
subject to the deposit insurance premium assessments of the Deposit Insurance
Fund (“DIF”). The FDIC currently maintains a risk-based assessment
system under which assessment rates vary based on the level of risk posed by the
institution to the DIF. For institutions that have a long-term public debt
rating, the individual risk assessment is based on its supervisory ratings and
its debt rating. For institutions that do not have a long-term public debt
rating, the individual risk assessment is based on its supervisory ratings and
certain financial ratios and other measurements of its financial
condition. The assessment rate may, therefore, change after any of
these measurements change.
On
September 29, 2009, the FDIC increased annual assessment rates uniformly by 3
basis points beginning January 1, 2011. At least semi-annually
thereafter, the FDIC will update its loss and income projections for the DIF
and, if necessary to achieve the target reserve ratio, will change assessment
rates via a rulemaking that will include a public notice and comment
period.
Effective
November 17, 2009, the FDIC also amended its regulations to require all insured
institutions to prepay their risk-based deposit insurance assessments for the
fourth quarter of 2009 and all of 2010, 2011, and 2012. These
prepayments were collected on December 30, 2009, along with each institution’s
regular quarterly risk-based deposit insurance assessment for the third quarter
of 2009.
In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation (“FICO”), an agency of the Federal government established to
recapitalize the predecessor to the Savings Association Insurance Fund. These
assessments will continue until the FICO bonds mature in 2017. The
FDIC’s FICO assessment authority is separate from its authority to assess
risk-based premiums for deposit insurance. The FICO assessment rate
is adjusted quarterly to reflect changes in the assessment bases of the fund and
is not risk-based by institution. The FICO assessment rate for the
first quarter of 2010, due December 30, 2009, was 1.060% of insured
deposits.
Federal Home Loan
Bank System
. The Bank is a member of the Federal Home Loan
Bank of Boston (“FHLBB”), which is one of the regional Federal Home Loan Banks
comprising the Federal Home Loan Bank System. Each Federal Home Loan
Bank serves as a central credit facility primarily for its member
institutions. The Bank, as a member of the FHLBB, is required to
acquire and hold shares of capital stock in the FHLBB. While the
required percentages of stock ownership are subject to change by the FHLBB, the
Bank was in compliance with this requirement with an investment in FHLBB stock
at December 31, 2009 of $10.1
million. Any
advances from a Federal Home Loan Bank must be secured by specified types of
collateral, and all long-term advances may be obtained only for the purpose of
providing funds for residential housing finance. In the past, the
Bank has received dividends on its Federal Home Loan Bank stock. The
average dividend yield for fiscal 2008 was 3.4%. On January 28, 2009,
the FHLBB notified its members of its focus on preserving capital in response to
the ongoing market volatility. That letter outlined that actions
taken by the FHLBB included an excess stock repurchase moratorium, an increased
retained earnings target, and suspension of its quarterly dividend
payment. There can be no guarantee of future dividends. If
there are any further developments that cause the value of our stock
investment in the FHLBB to become impaired, we would be required to write
down the value of its investment, which in turn could affect our net income
and stockholders’ equity.
Federal Reserve
System
.
The Bank
is subject to provisions of the Federal Reserve Act and the Federal Reserve
Board’s regulations under which depository institutions may be required to
maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The Federal
Reserve Board’s regulations currently require reserves equal to 3% on
transaction account balances over $10.3 million and up to $44.4 million, plus
10% on the excess over $44.4 million. These requirements are subject to
adjustment annually by the Federal Reserve Board. Because required reserves must
be maintained in the form of vault cash or in a noninterest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution’s interest-earning assets. The Bank is in compliance
with the foregoing reserve requirements. On October 9, 2008, the Federal Reserve
Banks began paying interest on reserve balances. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements imposed by the Office of Thrift Supervision.
Federal Home Loan Bank System members are also authorized to borrow from the
Federal Reserve Board discount window, but Federal Reserve Board regulations
require such institutions to exhaust all Federal Home Loan Bank sources before
borrowing from the Federal Reserve Board.
23
Prohibitions
Against Tying Arrangements
.
Federal savings associations
are subject to prohibitions on certain tying arrangements. A savings association
is prohibited, subject to some exceptions, from extending credit or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain credit or services
from a competitor of the institution.
The Bank Secrecy
Act
.
We are
subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives
the federal government powers to address money laundering and terrorist threats
through enhanced domestic security measures, expanded surveillance powers, and
mandatory transaction reporting obligations. For example, the Bank Secrecy Act
imposes an affirmative obligation on the Bank to report currency transactions
that exceed certain thresholds and to report other transactions determined to be
suspicious. Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among financial institutions, bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act. Among other provisions,
the USA PATRIOT Act and the related regulations of the OTS and the United States
Department of Treasury require savings banks operating in the United States to
supplement and enhance the anti-money laundering compliance programs, due
diligence policies and controls required by the Bank Secrecy Act and Office of
Foreign Assets Control regulations to ensure the detection and reporting of
money laundering.
Holding
Company Regulation
Activities
Restrictions Applicable to Westfield Financial.
Under the
Gramm-Leach-Bliley Act, Westfield Financial is prohibited from engaging in or
acquiring an entity engaged in non-financial activities. In addition, we cannot
be acquired unless the acquirer is generally engaged solely in financial
activities.
Restrictions on
Acquisition of Control Applicable to Westfield Financial.
Under the
federal Change in Bank Control Act, a notice must be submitted to the OTS if any
person, or persons acting in concert, seeks to acquire control of WSB, as
“control” is defined in the OTS’s regulations. In reviewing a notice, the
OTS is required to take into consideration certain statutory factors, including
the financial and managerial resources of the acquirer, the competitive effects
of the proposed acquisition and any adverse effect on the DIF. If a
company, an individual who owns or controls more than 25% of the voting shares
of a savings and loan holding company or a director or officer of a savings and
loan holding company seeks to acquire control of us, an application for approval
must be submitted to the OTS instead of the notice described above. In
reviewing an application, the OTS is required to take into consideration certain
statutory factors in addition to those considered under the Change in Bank
Control Act, including the convenience and needs of the community to be
served.
AVAILABLE
INFORMATION
We maintain an Internet website at
www.westfieldbank.com
.
The website contains information about us and our operations. Through a link to
the Investor Relations section of our website, copies of each of our filings
with the SEC, on Form 10-K, Form 10-Q and Form 8-K and all amendments to those
reports, can be viewed and downloaded free of charge as soon as reasonably
practicable after the reports and amendments are electronically filed with or
furnished to the SEC.
In addition, copies of any document we
file with or furnish to the SEC may be obtained from the SEC at its public
reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain
information on the operation of the SEC's public reference room by calling the
SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the SEC at its principal office at 100 F
Street, N.E., Washington, D.C. 20549. The SEC maintains an Internet website at
www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file or furnish such information electronically with the
SEC. Our SEC filings are accessible through the Internet at that
website.
24
|
ITEM
1A.
|
RISK
FACTORS
|
Our loan
portfolio includes loans with a higher risk of loss.
We
originate commercial and industrial loans, commercial real estate loans,
consumer loans, and residential mortgage loans primarily within our market
area. In recent years, we have developed and implemented a lending
strategy that focuses less on residential real estate lending and more on
servicing commercial customers, including increased emphasis on commercial and
industrial lending and commercial deposit relationships. Commercial
and industrial loans, commercial real estate loans, and consumer loans may
expose a lender to greater credit risk than loans secured by residential real
estate because the collateral securing these loans may not be sold as easily as
residential real estate. In addition, commercial real estate and
commercial and industrial loans may also involve relatively large loan balances
to individual borrowers or groups of borrowers. These loans also have
greater credit risk than residential real estate for the following
reasons:
|
|
•
|
Commercial and Industrial
Loans.
Repayment is generally dependent upon the successful
operation of the borrower's
business.
|
|
|
•
|
Commercial Real Estate Loans.
Repayment is dependent on income
being
|
generated
in amounts sufficient to cover operating expenses and debt service.
|
|
•
|
Consumer Loans.
Consumer loans are collateralized, if at all, with assets that may
not provide an adequate source of payment of the loan due to depreciation,
damage or loss.
|
Due to
the ongoing economic recession, the real estate market and local economy are
continuing to deteriorate which has adversely affected the value of the
properties securing the loans or revenues from the borrower’s business, thereby
increasing the risk of non-performing loans. The decreases in real estate values
have adversely affected the value of property used as collateral for our
commercial real estate loans. The continued deterioration in the
economy may also have a negative effect on the ability of our commercial
borrowers to make timely repayments of their loans, which could have an adverse
impact on our earnings. In addition, if poor economic conditions continue to
result in decreased demand for loans, our profits may decrease because our
alternative investments may earn less income for us than loans.
If our allowance
for loan losses is not sufficient to cover actual loan losses, our earnings
could decrease.
Our loan customers may not repay their loans
according to their terms and the collateral securing the payment of these loans
may be insufficient to pay any remaining loan balance. We therefore
may experience significant loan losses, which could have a material adverse
effect on our operating results. Material additions to our allowance for loan
losses also would materially decrease our net income, and the charge-off of
loans may cause us to increase the allowance. We make various
assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate
and other assets serving as collateral for the repayment of many of our
loans. We rely on our loan quality reviews, our experience and our
evaluation of economic conditions, among other factors, in determining the
amount of the allowance for loan losses. If our assumptions prove to
be incorrect, our allowance for loan losses may not be sufficient to cover
losses inherent in our loan portfolio, resulting in additions to our
allowance.
If dividends paid
on our investment in the
F
HLBB
continue to be
suspended, or if our investment is classified as other-than-temporarily
impaired, our earnings and/or stockholders’ equity could decrease.
We own common stock of
the
FHLBB to qualify for membership in the Federal Home
Loan Bank System and to be eligible to borrow funds under the FHLBB’s advance
program. There is no market for our FHLBB common stock. The FHLBB previously
announced that the dividend paid on its common stock has been suspended
indefinitely. The continued suspension of the dividend will decrease our income.
There can be no assurance that such dividends will be reinstated in the future.
Further, there can be no assurance that the impact of recent or future
legislation on the Federal Home Loan Banks also will not cause a decrease in the
value of the FHLBB stock held by us.
25
It is possible that the capitalization
of a Federal Home Loan Bank, including the FHLBB, could be substantially
diminished or reduced to zero. Consequently, we believe that there is a risk
that our investment in FHLBB common stock could be deemed other-than-temporarily
impaired at some time in the future, and if this occurs, it would cause our
earnings and stockholders’ equity to decrease by the after-tax amount of the
impairment charge.
Changes in
interest rates could adversely affect our results of operations and financial
condition.
Our profitability, like that of most financial institutions,
depends substantially on our net interest income, which is the difference
between the interest income earned on our interest-earning assets and the
interest expense paid on our interest-bearing liabilities. Increases in interest
rates may decrease loan demand and make it more difficult for borrowers to repay
adjustable rate loans. In addition, as market interest rates rise, we will have
competitive pressures to increase the rates we pay on deposits, which will
result in a decrease of our net interest income.
We also
are subject to reinvestment risk associated with changes in interest rates.
Changes in interest rates may affect the average life of loans and
mortgage-related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage-related securities as borrowers refinance to
reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk to the extent that we are unable to reinvest the cash received
from such prepayments at rates that are comparable to the rates on existing
loans and securities.
Changes in the
national and local economy may affect our future growth possibilities.
Our current market area is principally located in Hampden County,
Massachusetts. Our future growth opportunities depend on the growth and
stability of our regional economy and our ability to expand our market area. The
continued downturn in our local economy may limit funds available for deposit
and may negatively affect our borrowers’ ability to repay their loans on a
timely basis, both of which could have an impact on our
profitability.
Dramatic
declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance
of mortgage loans and resulted in significant write-downs of assets by many
financial institutions. In addition, the values of real estate collateral
supporting many loans have declined and may continue to decline. The ongoing
economic recession, reduced availability of commercial credit and increasing
unemployment have negatively impacted the credit performance of commercial and
consumer credit, resulting in additional write-downs. Concerns over the
stability of the financial markets and the economy have resulted in decreased
lending by financial institutions to their customers and to each other. This
market turmoil and tightening of credit has led to increased commercial and
consumer delinquencies, lack of customer confidence, increased market volatility
and widespread reduction in general business activity. We do not believe these
difficult conditions are likely to improve in the near future. A worsening of
these conditions would likely exacerbate the adverse effects of these difficult
market and economic conditions on us, our customers and the other financial
institutions in our market. As a result, we may experience increases in
foreclosures, delinquencies and customer bankruptcies, as well as more
restricted access to funds and decrease in our stock price.
We depend on our
executive officers and key personnel to continue the implementation of our
long-term business strategy and could be harmed by the loss of their
services.
We believe that our continued growth and future success will
depend in large part upon the skills of our management team. The competition for
qualified personnel in the financial services industry is intense, and the loss
of our key personnel or an inability to continue to attract, retain and motivate
key personnel could adversely affect our business. We cannot assure you that we
will be able to retain our existing key personnel or attract additional
qualified personnel. We have employment agreements with our Chief Executive
Officer, Chief Financial Officer, and Executive Vice President and General
Counsel and change of control agreements with several other senior executive
officers, and the loss of the services of one or more of our executive officers
and key personnel could impair our ability to continue to develop our business
strategy.
We operate in a
highly regulated environment, and changes in laws and regulations to which we
are subject may adversely affect our results of operations.
The Bank is
subject to extensive regulation, supervision and examination by the OTS, as its
chartering authority, and by the FDIC as the insurer of its deposits up to
certain limits. In addition, the OTS regulates and oversees Westfield Financial.
We also belong to the Federal Home Loan Bank System and, as a member of such
system, we are subject to certain limited regulations promulgated by the Federal
Home Loan Bank of Boston. This regulation and supervision limits the activities
in which we may engage. The purpose of regulation and supervision is primarily
to protect our depositors and borrowers and, in the case of FDIC regulation, the
FDIC’s insurance fund. Regulatory authorities have extensive discretion in the
exercise of their supervisory and enforcement powers. They may, among other
things, impose restrictions on the operation of a banking institution, the
classification of assets by such institution and such institution’s allowance
for loan losses. Regulatory and law enforcement authorities also have wide
discretion and extensive enforcement powers under various consumer protection
and civil rights laws, including the Truth-in-Lending Act, the Equal Credit
Opportunity Act, the Fair Housing Act, and the Real Estate Settlement Procedures
Act.
26
As
discussed above under the caption “Regulation,” financial institutions have been
the subject of significant legislative and regulatory changes and will continue
to be the subject of further significant legislation or regulation in the
future, none of which is within our control. These changes as well as any future
change in the laws or regulations applicable to us, or in banking regulators’
supervisory policies or examination procedures, whether by the OTS, the FDIC,
other state or federal regulators, or the United States Congress could have a
material adverse effect on our business, financial condition, results of
operations and cash flows. In addition, the cost and burden of compliance, over
time, could significantly increase and adversely affect our ability to operate
profitably.
Competition in
our primary market area may reduce our ability to attract and retain deposits
and originate loans.
We operate in a competitive market for both
attracting deposits, which is our primary source of funds, and originating
loans. Historically, our most direct competition for deposits has come from
savings and commercial banks. Our competition for loans comes principally from
commercial banks, savings institutions, mortgage banking firms, credit unions,
finance companies, mutual funds, insurance companies and brokerage and
investment banking firms. We also face additional competition from
internet-based institutions, brokerage firms and insurance companies.
Competition for loan originations and deposits may limit our future growth and
earnings prospects.
Recent
legislative and regulatory initiatives to address these difficult market and
economic conditions may not stabilize the U.S. banking system.
The U.S.
Congress enacted the Emergency Economic Stabilization Act of 2008 (the “EESA”)
in response to the impact of the volatility and disruption in the capital and
credit markets on the financial sector. The U.S. Department of the Treasury (the
“Treasury”) and the federal banking regulators are implementing a number of
programs under this legislation that are intended to address these conditions
and the asset quality, capital and liquidity issues they have caused for certain
financial institutions and to improve the general availability of credit for
consumers and businesses. In addition, the U.S. Congress recently enacted the
American Recovery and Reinvestment Act (“ARRA”) in an effort to save and create
jobs, stimulate the U.S. economy and promote long-term growth and stability.
There can be no assurance that EESA, ARRA or the programs that are implemented
under them will achieve their intended purposes. The failure of EESA, ARRA or
the programs that are implemented under them to achieve their intended purposes
could result in a continuation or worsening of current economic and market
conditions, and this could adversely affect our financial condition, results of
operations, and/or the trading price of our common stock.
FDIC deposit
insurance premiums have increased and may increase further in the future.
Under the Federal Deposit Insurance Act, the FDIC, absent extraordinary
circumstances, must establish and implement a plan to restore the deposit
insurance reserve ratio to 1.15% of insured deposits, over a five-year period,
at any time that the reserve ratio falls below 1.15%. The FDIC’s reserve ratio
has continued to decline due to costs associated with bank failures and
FDIC-assisted transactions, and the reserve ratio is expected to continue to
decline due to future bank failures and FDIC-assisted transactions.
Pursuant
to the EESA, the maximum deposit insurance amount has been increased from
$100,000 to $250,000 until December 31, 2013 and certain types of deposit
accounts will have unlimited deposit insurance coverage through that date. On
October 13, 2008, the FDIC established a Temporary Liquidity Guarantee Program
under which the FDIC will fully guarantee all non-interest-bearing transaction
accounts through June 30, 2010, and all senior unsecured debt issued between
April 1, 2009 and October 31, 2009 of any insured depository institution or
their qualified holding companies that did not opt out of the program. Senior
unsecured debt includes federal funds purchased and certificates of deposit
outstanding to the credit of the bank with a maturity of 30 days or greater.
These increases have increased the aggregate amount of deposits that the FDIC
insures and thus have exposed the FDIC’s deposit insurance fund to potentially
greater losses. We will be subject to increased deposit premium expenses in 2009
and future years which may have an adverse impact on our results of
operations.
27
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
|
ITEM
2.
|
PROPERTIES
|
We
currently conduct our business through our eleven banking offices and eight
off-site ATMs. As of December 31, 2009, the properties and leasehold
improvements owned by us had an aggregate net book value of $12.2
million.
|
Location
|
Ownership
|
Year
Opened
|
Year of Lease or
License
Expiration
|
|||
|
Main
Office:
|
||||||
|
141
Elm St.
|
Owned
|
1964
|
N/A
|
|||
|
Westfield,
MA
|
||||||
|
Branch
Offices:
|
||||||
|
206
Park St.
West
Springfield, MA
|
Owned
|
1957
|
N/A
|
|||
|
655
Main St.
Agawam,
MA
|
Owned
|
1968
|
N/A
|
|||
|
26
Arnold St.
|
Owned
|
1976
|
N/A
|
|||
|
Westfield,
MA
|
||||||
|
|
||||||
|
300
Southampton Rd.
|
Owned
|
1987
|
N/A
|
|||
|
Westfield,
MA
|
||||||
|
|
||||||
|
462
College Highway
|
Owned
|
1990
|
N/A
|
|||
|
Southwick,
MA
|
||||||
|
|
||||||
|
382
North Main St.
|
Leased
|
1997
|
2012
|
|||
|
E.
Longmeadow, MA
|
||||||
|
1500
Main St.
|
Leased
|
2006
|
2016
|
|||
|
Springfield,
MA
|
||||||
|
1642
Northampton St.
|
Owned
|
2001
|
N/A
|
|||
|
Holyoke,
MA
|
||||||
|
560
East Main St.
|
Leased
|
2007
|
2046
|
|||
|
Westfield,
MA
|
||||||
|
241
South Westfield St.
|
Leased
|
2009
|
2038
|
|||
|
Feeding
Hill, MA
|
||||||
|
ATMs:
|
||||||
|
337
N. Westfield St.
Feeding
Hills, MA
|
Leased
|
1988
|
2013
|
|||
|
516
Carew St.
Springfield,
MA
|
Tenant
at will
|
2002
|
N/A
|
|||
|
1000
State St.
Springfield,
MA
|
Tenant
at will
|
2003
|
N/A
|
|||
|
788
Memorial Ave.
West
Springfield, MA
|
Leased
|
2006
|
2016
|
|||
|
2620
Westfield St.
West
Springfield, MA
|
Leased
|
2006
|
2020
|
|||
|
98
Southwick Rd.
Westfield,
MA
|
Leased
|
2006
|
2021
|
28
|
Location
|
Ownership
|
Year
Opened
|
Year of Lease or
License
Expiration
|
|||
|
115
West Silver St.
Westfield,
MA
|
Tenant
at will
|
2005
|
N/A
|
|||
|
1342
Liberty St.
Springfield,
MA
|
|
Owned
|
|
2001
|
|
N/A
|
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
We are
not involved in any pending legal proceeding other than routine legal
proceedings occurring in the ordinary course of business. In the opinion of
management, no legal proceedings will have a material effect on our consolidated
financial position or results of operations.
|
ITEM
4.
|
RESERVED
|
29
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Effective
on August 21, 2007, we switched the listing of our common stock from the
American Stock Exchange to the NASDAQ Stock Market and retained the symbol
“WFD”. At December 31, 2009, there were 29,818,526 shares of common stock issued
and outstanding, and there were approximately 5,049 shareholders of
record.
The table
below shows the high and low sales price during the periods indicated as well as
dividends declared per share. The information set forth in the table below was
provided by the American Stock Exchange and NASDAQ.
|
Price Per Share
|
Cash
Dividends
Declared
|
|||||||||||
|
For
the Year Ended December 31, 2009
|
High
|
Low
|
||||||||||
|
Fourth
Quarter ended December 31, 2009
|
$ | 8.50 | $ | 7.85 | $ | 0.20 | ||||||
|
Third
Quarter ended September 30, 2009
|
9.82 | 8.43 | 0.05 | |||||||||
|
Second
Quarter ended June 30, 2009
|
9.86 | 8.62 | 0.20 | |||||||||
|
First
Quarter ended March 31, 2009
|
10.34 | 8.27 | 0.05 | |||||||||
|
Price Per Share
|
Cash
Dividends
Declared
|
|||||||||||
|
For
the Year Ended December 31, 2008
|
High
|
Low
|
||||||||||
|
Fourth
Quarter ended December 31, 2008
|
$ | 10.36 | $ | 8.89 | $ | 0.30 | ||||||
|
Third
Quarter ended September 30, 2008
|
11.30 | 8.76 | 0.05 | |||||||||
|
Second
Quarter ended June 30, 2008
|
9.86 | 9.05 | 0.20 | |||||||||
|
First
Quarter ended March 31, 2008
|
10.53 | 8.95 | 0.05 | |||||||||
A
quarterly cash dividend of $0.05 per share was declared on January 27, April 28,
July 21, and October 27, 2009 by the Board of Directors. In addition, the Board
of Directors declared special cash dividends of $0.15 per share on April 28 and
October 27, 2009. The continued payment of dividends depends upon our debt and
equity structure, earnings, financial condition, need for capital in connection
with possible future acquisitions and other factors, including economic
conditions, regulatory restrictions and tax considerations. We cannot guarantee
the payment of dividends or that, if paid, that dividends will not be reduced or
eliminated in the future.
The only
funds available for the payment of dividends on our capital stock will be cash
and cash equivalents held by us, dividends paid by to us by the Bank, and
borrowings. The Bank will be prohibited from paying cash dividends to us to the
extent that any such payment would reduce the Bank’s capital below required
capital levels or would impair the liquidation account to be established for the
benefit of the Bank’s eligible account holders and supplemental eligible account
holders at the time of the reorganization and stock offering.
There
were no sales by us of unregistered securities during the year ended December
31, 2009.
30
The
following table sets forth information with respect to purchases made by us of
our common stock during the three months ended December 31, 2009.
|
Period
|
Total
Number of
Shares
Purchased
|
Average Price
Paid per Share
($)
|
Total Number
of Shares
Purchased as
Publicly
Announced
Programs
|
Maximum
Number of
Shares that May
Yet Be
Purchased
Under the
Program (1)
|
||||||||||||
|
October
1 - 31, 2009
|
97,977 | (2) | 8.32 | 72,375 | 1,323,715 | |||||||||||
|
November
1 - 30, 2009
|
601,576 | 8.13 | 601,576 | 722,139 | ||||||||||||
|
December
1 - 31, 2009
|
133,291 | 8.10 | 133,291 | 588,848 | ||||||||||||
|
Total
|
832,844 | 8.15 | 807,242 | 588,848 | ||||||||||||
|
(1)
|
In
January 2008, the Board of Directors approved a repurchase program
(“Repurchase Program”) authorizing us to repurchase up to 3,194,000
shares, or ten percent of its outstanding shares of common stock. The
Repurchase Program will continue until it is completed. The repurchases
may be made from time to time at the discretion of
management.
|
|
(2)
|
In
October 2009, we repurchased 25,602 shares from certain executives as
repayment of their tax obligations for shares of restricted stock that
vested on October 20, 2009 under Westfield Financial’s 2002 and 2007
Recognition and Retention Plans. These repurchases were reported by each
reporting person on October 20,
2009.
|
31
Performance
Graph
The
following graph compares our total cumulative shareholder return by an investor
who invested $100.00 on December 31, 2004 to December 31, 2009, to the total
return by an investor who invested $100.00 in each of the Russell 2000 Index and
the Nasdaq Bank Index for the same period.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
Among
Westfield Financial, Inc., The Russell 2000 Index and the
NASDAQ
Bank Index
|
Period
Ending
|
||||||||||||||||||||||||
|
Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||||||||
|
Westfield
Financial, Inc.
|
100.00 | 96.49 | 144.18 | 138.08 | 155.97 | 131.94 | ||||||||||||||||||
|
Russell
2000
|
100.00 | 104.55 | 123.76 | 121.82 | 80.66 | 102.58 | ||||||||||||||||||
|
NASDAQ
Bank
|
100.00 | 95.67 | 106.20 | 82.76 | 62.96 | 51.31 | ||||||||||||||||||
32
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The
summary information presented below at or for each of the years presented is
derived in part from our consolidated financial statements. The
following information is only a summary, and you should read it in conjunction
with our consolidated financial statements and notes beginning on page
F-1.
|
At December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Selected
Financial Condition Data:
|
||||||||||||||||||||
|
Total
assets
|
$ | 1,191,410 | $ | 1,109,056 | $ | 1,039,784 | $ | 996,829 | $ | 805,095 | ||||||||||
|
Loans,
net (1)
|
469,149 | 472,135 | 414,902 | 385,184 | 378,837 | |||||||||||||||
|
Securities
available for sale
|
19,316 | 24,396 | 38,051 | 41,687 | 28,321 | |||||||||||||||
|
Securities
held to maturity
|
69,244 | 79,303 | 104,025 | 77,299 | 73,323 | |||||||||||||||
|
Mortgage-backed
securities available for sale
|
299,805 | 233,747 | 206,178 | 126,942 | 101,138 | |||||||||||||||
|
Mortgage-backed
securities held to maturity
|
225,767 | 168,332 | 174,594 | 163,093 | 152,127 | |||||||||||||||
|
Deposits
|
647,975 | 588,029 | 602,676 | 627,466 | 623,045 | |||||||||||||||
|
Short-term
borrowings
|
74,499 | 49,824 | 32,268 | 17,919 | 14,441 | |||||||||||||||
|
Long-term
debt
|
213,845 | 173,300 | 105,000 | 55,000 | 45,000 | |||||||||||||||
|
Total
stockholders’ equity (2)
|
247,299 | 259,919 | 286,532 | 289,408 | 115,842 | |||||||||||||||
|
Allowance
for loan losses
|
7,645 | 8,796 | 5,726 | 5,437 | 5,422 | |||||||||||||||
|
Nonperforming
loans
|
5,470 | 8,805 | 1,202 | 1,028 | 1,919 | |||||||||||||||
|
For
the
Years
Ended
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(In thousands, except per share data)
|
||||||||||||||||||||
|
Selected
Operating Data:
|
||||||||||||||||||||
|
Interest
and dividend income
|
$ | 52,530 | $ | 54,056 | $ | 53,584 | $ | 42,435 | $ | 37,306 | ||||||||||
|
Interest
expense
|
20,022 | 22,304 | 23,408 | 19,551 | 13,597 | |||||||||||||||
|
Net
interest and dividend income
|
32,508 | 31,752 | 30,176 | 22,884 | 23,709 | |||||||||||||||
|
Provision
for loan losses
|
3,900 | 3,453 | 400 | 390 | 465 | |||||||||||||||
|
Net
interest and dividend income after provision for loan
losses
|
28,608 | 28,299 | 29,776 | 22,494 | 23,244 | |||||||||||||||
|
Total
noninterest income
|
3,155 | 3,520 | 4,561 | 3,073 | 3,372 | |||||||||||||||
|
Total
noninterest expense
|
25,037 | 23,333 | 21,825 | 19,390 | 18,464 | |||||||||||||||
|
Income
before income taxes
|
6,726 | 8,486 | 12,512 | 6,177 | 8,152 | |||||||||||||||
|
Income
taxes
|
1,267 | 1,795 | 3,812 | 1,523 | 1,933 | |||||||||||||||
|
Net
income
|
$ | 5,459 | $ | 6,691 | $ | 8,700 | $ | 4,654 | $ | 6,219 | ||||||||||
|
Basic
earnings per share (3)
|
$ | 0.19 | $ | 0.22 | $ | 0.29 | $ | 0.15 | $ | 0.20 | ||||||||||
|
Diluted
earnings per share (3)
|
$ | 0.18 | $ | 0.22 | $ | 0.28 | $ | 0.15 | $ | 0.20 | ||||||||||
|
Dividends
per share paid (3)
|
$ | 0.50 | $ | 0.60 | $ | 0.40 | $ | 0.32 | $ | 0.27 | ||||||||||
|
(1)
|
Loans
are shown net of deferred loan costs, allowance for loan losses and
unadvanced loan funds.
|
|
(2)
|
Stockholders’
equity includes $171.7 million in capital from the net proceeds raised in
the stock offering. Westfield Financial completed its second
step stock offering on January 3, 2007. Consequently, the
proceeds were recognized by Westfield Financial and reported in its
balance sheet as of December 31, 2006. Proceeds, net of stock
issuance costs, received directly by Westfield Financial or held by the
underwriter for the convenience of Westfield Financial were recorded by
increasing cash, the capital stock, and the paid-in capital
accounts.
|
|
(3)
|
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.
|
33
|
At or for the Years Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Selected
Financial Ratios and
Other
Data
(1)
|
||||||||||||||||||||
|
Performance
Ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
0.47 | % | 0.63 | % | 0.86 | % | 0.56 | % | 0.77 | % | ||||||||||
|
Return
on average equity (2)
|
2.12 | 2.43 | 3.00 | 3.99 | 5.27 | |||||||||||||||
|
Average
equity to average assets (2)
|
22.16 | 25.75 | 28.74 | 14.08 | 14.66 | |||||||||||||||
|
Equity
to total assets at end of year (2)
|
20.76 | 23.44 | 27.56 | 29.03 | 14.39 | |||||||||||||||
|
Average
interest rate spread
|
2.41 | 2.44 | 2.23 | 2.61 | 2.89 | |||||||||||||||
|
Net
interest margin (3)
|
3.04 | 3.23 | 3.25 | 3.05 | 3.24 | |||||||||||||||
|
Average
interest-earning assets to average interest-earning
liabilities
|
134.62 | 135.36 | 141.05 | 117.37 | 119.22 | |||||||||||||||
|
Total
noninterest expense to average assets
|
2.16 | 2.18 | 2.16 | 2.34 | 2.29 | |||||||||||||||
|
Efficiency
ratio (4)
|
68.44 | 65.77 | 63.91 | 73.63 | 68.23 | |||||||||||||||
|
Dividend
payout ratio
|
2.63 | 2.73 | 1.38 | 2.13 | 1.35 | |||||||||||||||
|
Regulatory
Capital Ratios:
|
||||||||||||||||||||
|
Total
risk-based capital
|
38.07 | 42.56 | 50.29 | 29.07 | 14.48 | |||||||||||||||
|
Tier
1 risk-based capital
|
36.94 | 41.31 | 49.30 | 54.38 | 24.54 | |||||||||||||||
|
Tier
1 leverage capital
|
20.92 | 23.97 | 27.48 | 55.39 | 25.68 | |||||||||||||||
|
Asset
Quality Ratios:
|
||||||||||||||||||||
|
Nonperforming
loans to total loans
|
1.15 | 1.83 | 0.29 | 0.26 | 0.50 | |||||||||||||||
|
Nonperforming
assets to total assets
|
0.60 | 0.79 | 0.12 | 0.10 | 0.24 | |||||||||||||||
|
Allowance
for loan losses to total loans
|
1.60 | 1.83 | 1.36 | 1.39 | 1.41 | |||||||||||||||
|
Allowance
for loan losses to nonperforming assets
|
107 | 100 | 476 | 529 | 283 | |||||||||||||||
|
Number
of:
|
||||||||||||||||||||
|
Banking
offices
|
11 | 11 | 11 | 10 | 10 | |||||||||||||||
|
Full-time
equivalent employees
|
168 | 180 | 177 | 155 | 142 | |||||||||||||||
|
(1)
|
Asset
Quality Ratios and Regulatory Capital Ratios are end of period
ratios.
|
|
(2)
|
Average
equity and stockholders’ equity includes $171.7 million in capital from
the net proceeds raised in the stock offering. We completed our
second step stock offering on January 3, 2007. Consequently,
the proceeds were recognized by us and reported in our balance sheet as of
December 31, 2006 and therefore affected the balance of stockholders’
equity for one calendar day. Proceeds, net of stock issuance
costs, received directly by us or held by the underwriter for our
convenience were recorded by increasing cash, the capital stock, and the
paid-in capital accounts.
|
|
(3)
|
Net
interest margin represents tax-equivalent net interest and dividend income
as a percentage of average interest earning
assets.
|
|
(4)
|
The
efficiency ratio represents the ratio of operating expenses divided by the
sum of net interest and dividend income and noninterest income less gain
on sale and losses on other than temporary impairment of securities and
sale of premises and
equipment.
|
34
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview.
We strive 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 we have served since 1853. Historically, we have 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. We meet the needs of our local community through a
community-based and service-oriented approach to banking.
We have
adopted a growth-oriented strategy that has focused on increasing commercial
lending. Our strategy also calls for increasing deposit relationships
and broadening our product lines and services. We believe that this
business strategy is best for our long term success and viability, and
complements our existing commitment to high quality customer
service. In connection with our overall growth strategy, we seek
to:
|
|
•
|
continue
to grow our commercial and industrial and commercial real estate loan
portfolio by targeting businesses in our primary market area and in
northern Connecticut as a means to increase the yield on and diversify our
loan portfolio and build transactional deposit account
relationships;
|
|
|
•
|
focus
on expanding our retail banking franchise and increase the number of
households served within our market area;
and
|
|
|
•
|
depending
on market conditions, refer substantially all of the fixed-rate
residential real estate loans to a third party mortgage company which
underwrites, originates and services these loans in order to diversify our
loan portfolio, increase fee income and reduce interest rate
risk.
|
You
should read the following financial results for the year ended December 31, 2009
in the context of this strategy.
|
|
•
|
Net
income was $5.5 million, or $0.18 per diluted share, for the year ended
December 31, 2009 compared to $6.7 million, or $0.22 per diluted share for
the same period in 2008. The results for the year ended
December 31, 2009 showed an increase in net interest income; however this
was offset by an increase in noninterest expenses and the provision for
loan losses and a decrease in noninterest
income.
|
|
|
•
|
We
provided $3.9 million for loan losses for the year ended December 31,
2009, compared to $3.5 million for the same period in 2008.
This was the result of an increase in net loan charge-offs and the further
weakening of the local and national economy. The allowance was $7.6
million, or 1.60% of total loans at December 31, 2009 and $8.8 million, or
1.83% of total loans at December 31,
2008.
|
|
|
•
|
Net
interest and dividend income increased $756,000 to $32.5 million for the
year ended December 31, 2009, compared to $31.8 million for the same
period in 2008. The net interest margin, on a tax-equivalent
basis, was 3.04% for the year ended December 31, 2009, compared to 3.23%
for the same period in 2008. The increase in net interest
income was primarily due to an increase in average interest-earning assets
of $89.1 million for the year ended December 31, 2009. Also
contributing to the increase in net interest income was a decrease in the
cost of interest-bearing liabilities. The cost of
interest-bearing liabilities decreased 55 basis points to 2.47% for the
year ended December 31, 2009, compared to the same period in
2008.
|
|
|
•
|
The
year ended December 31, 2009 also included net impairment losses of
$278,000 on two collateralized mortgage obligations whose impairment was
determined to be other than temporary. This compares to net
impairment losses of $1.3 million for the same period in
2008. The 2008 impairment losses were primarily due to
write-downs of $961,000 on preferred stock issued by Freddie Mac, which
was placed into conservatorship by the United States Treasury in September
2008.
|
35
|
|
•
|
Nonperforming
loans decreased $3.3 million to $5.5 million at December 31, 2009,
compared to $8.8 million at December 31, 2008. This represented
1.15% of total loans at December 31, 2009 and 1.83% of total loans at
December 31, 2008. The decrease was related to a single
commercial manufacturing relationship of $5.5 million. The
underlying business was sold in 2009 and resulted in a charge-off of $3.1
million.
|
General
.
Our consolidated
results of operations are comprised of earnings on investments and loans and the
net income recorded by the Bank. Our consolidated results of
operations depend primarily on net interest and dividend income. Net
interest and dividend income is the difference between the interest income
earned on interest-earning assets and the interest paid on interest-bearing
liabilities. Interest-earning assets consist primarily of commercial
real estate loans, commercial and industrial loans, residential real estate
loans, consumer loans, and securities. Interest-bearing liabilities
consist primarily of certificates of deposit and money market account, NOW
account and savings account deposits, borrowings from the Federal Home Loan Bank
of Boston and securities sold under repurchase agreements. The
consolidated results of operations also depend on provision for loan losses,
noninterest income, and noninterest expense. Noninterest expense
includes salaries and employee benefits, occupancy expenses and other general
and administrative expenses. Noninterest income includes service fees
and charges, income on bank-owned life insurance, and gains (losses) on
securities.
Critical
Accounting Policies.
Our accounting policies
are disclosed in Note 1 to the Consolidated Financial
Statements. Given our current business strategy and asset/liability
structure, the more critical policies are accounting for nonperforming loans,
the allowance for loan losses and provision for loan losses, the classification
of securities as either held to maturity or available for sale, other than
temporary impairment of securities, and the valuation of deferred
taxes. In addition to the informational disclosure in the Notes to
the Consolidated Financial Statements, our policy on each of these accounting
policies is described in detail in the applicable sections of
“Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.”
Senior management has discussed the development
and selection of these accounting policies and the related disclosures with the
Audit Committee of our Board of Directors.
Our
general policy regarding recognition of interest on loans 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 collectability 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.
The
process of evaluating the loan portfolio, classifying loans and determining the
allowance and provision is described in detail in Part I under
“Business – Lending Activities -
Allowance for Loan Losses.”
Our methodology for assessing the
allocation of the allowance consists of two key components, which are a specific
allowance for impaired loans and a formula allowance for the remainder of the
portfolio. Measurement of impairment can be based on 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
allocation of the allowance is also reviewed by management based upon our
evaluation of then-existing economic and business conditions affecting our key
lending areas 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
collectability of the loan portfolio. Although management believes it
has established and maintained the allowance for loan losses at adequate levels,
if management’s assumptions and judgments prove to be incorrect due to continued
deterioration in economic, real estate and other conditions, and the allowance
for loan losses is not adequate to absorb inherent losses, our earnings and
capital could be significantly and adversely affected.
36
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,
that 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, excluded from
earnings and 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. We have never sold held to maturity securities
or reclassified such securities to available for sale other than in specifically
permitted circumstances. We do not acquire securities or mortgage-backed
securities for purposes of engaging in trading activities.
On a
quarterly basis, we review securities with a decline in fair value below the
amortized cost of the investment to determine whether the decline in fair value
is temporary or other than temporary. Declines in the fair value of
marketable equity securities below their cost that are deemed to be other than
temporary based on the severity and duration of the impairment are reflected in
earnings as realized losses. In estimating other than temporary
impairment losses for held to maturity and available for sale debt securities,
impairment is required to be recognized (1) if we intend to sell the security;
(2) if it is “more likely than not” that we will be required to sell the
security before recovery of its amortized cost basis; or (3) the present value
of expected cash flows is not sufficient to recover the entire amortized cost
basis. For all impaired held to maturity and available for sale
securities that we intend to sell, or more likely than not will be required to
sell, the full amount of the other than temporary impairment is recognized
through earnings. For all other impaired held to maturity or
available for sale securities, credit-related other than temporary impairment is
recognized through earnings, while non-credit related other than temporary
impairment is recognized in other comprehensive income, net of applicable
taxes.
We must
make certain estimates in determining income tax expense for financial statement
purposes. These estimates occur in the calculation of the deferred
tax assets and liabilities, which arise from the temporary differences between
the tax basis and financial statement basis of our assets and
liabilities. The carrying value of our net deferred tax asset is
based on our historic taxable income for the two prior years as well as our
belief that it is more likely than not that we will generate sufficient future
taxable income to realize these deferred tax assets. Judgments
regarding future taxable income may change due to changes in market conditions,
changes in tax laws or other factors which could result in a change in the
assessment of the realization of the net deferred tax asset.
Average
Balance Sheet and Analysis of Net Interest and Dividend Income
The
following table sets forth information relating to our condition and net
interest and dividend income for the years ended December 31, 2009, 2008 and
2007 and reflect the average yield on assets and average cost of liabilities for
the years indicated. The yields and costs were derived by dividing
income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years
shown. Average balances were derived from actual daily balances over
the years indicated. Interest income includes fees earned from making
changes in loan rates or terms, and fees earned when commercial real estate
loans were prepaid or refinanced.
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.
37
|
For the Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||||||||||||||
|
ASSETS:
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Short-term
investments(1)
|
$ | 15,051 | $ | 11 | 0.07 | % | $ | 33,674 | $ | 594 | 1.76 | % | $ | 53,624 | $ | 2,800 | 5.22 | % | ||||||||||||||||||
|
Securities(5)
|
597,811 | 27,286 | 4.56 | 521,767 | 26,752 | 5.13 | 491,968 | 24,332 | 4.95 | |||||||||||||||||||||||||||
|
Loans(2)(5)
|
476,214 | 25,834 | 5.42 | 444,492 | 27,280 | 6.14 | 398,281 | 26,993 | 6.78 | |||||||||||||||||||||||||||
|
Total
interest-earning assets
|
1,089,076 | 53,131 | 4.88 | 999,933 | 54,626 | 5.46 | 943,873 | 54,125 | 5.73 | |||||||||||||||||||||||||||
|
Total
noninterest-earning assets
|
72,267 | 68,831 | 65,194 | |||||||||||||||||||||||||||||||||
|
Total
assets.
|
$ | 1,161,343 | $ | 1,068,764 | $ | 1,009,067 | ||||||||||||||||||||||||||||||
|
LIABILITIES
AND EQUITY:
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
NOW
accounts
|
$ | 68,967 | 1,238 | 1.80 | $ | 85,558 | 1,205 | 1.41 | $ | 80,613 | 1,340 | 1.66 | ||||||||||||||||||||||||
|
Savings
accounts
|
89,185 | 955 | 1.07 | 60,515 | 748 | 1.24 | 41,266 | 329 | 0.08 | |||||||||||||||||||||||||||
|
Money
market deposit accounts
|
53,100 | 467 | 0.88 | 67,017 | 763 | 1.14 | 85,045 | 1,301 | 1.53 | |||||||||||||||||||||||||||
|
Time
certificates of deposit
|
337,692 | 10,034 | 2.97 | 330,892 | 12,417 | 3.75 | 369,516 | 16,574 | 4.49 | |||||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
548,944 | 12,694 | 543,982 | 15,133 | 576,440 | 19,544 | ||||||||||||||||||||||||||||||
|
Short-term
borrowings and long-term debt
|
260,083 | 7,328 | 2.82 | 194,750 | 7,171 | 3.68 | 92,750 | 3,864 | 4.17 | |||||||||||||||||||||||||||
|
Interest-bearing
liabilities
|
809,027 | 20,022 | 2.47 | 738,732 | 22,304 | 3.02 | 669,190 | 23,408 | 3.50 | |||||||||||||||||||||||||||
|
Non-interest-bearing
deposits
|
80,186 | 45,009 | 39,387 | |||||||||||||||||||||||||||||||||
|
Other
noninterest-bearing liabilities
|
14,789 | 9,828 | 10,495 | |||||||||||||||||||||||||||||||||
|
Total
noninterest-bearing liabilities
|
94,975 | 54,837 | 49,882 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
904,002 | 793,569 | 719,072 | |||||||||||||||||||||||||||||||||
|
Total
equity
|
257,341 | 275,195 | 289,995 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and equity
|
$ | 1,161,343 | $ | 1,068,764 | $ | 1,009,067 | ||||||||||||||||||||||||||||||
|
Less:
Tax-equivalent adjustment(5)
|
(601 | ) | (570 | ) | (541 | ) | ||||||||||||||||||||||||||||||
|
Net
interest and dividend income
|
$ | 32,508 | $ | 31,752 | $ | 30,176 | ||||||||||||||||||||||||||||||
|
Net
interest rate spread(3)
|
2.41 | 2.44 | 2.23 | |||||||||||||||||||||||||||||||||
|
Net
interest margin(4)
|
3.04 | % | 3.23 | % | 3.25 | % | ||||||||||||||||||||||||||||||
|
Ratio
of average interest-earning assets to average interest-bearing
liabilities
|
134.6 | X | 135.4 | X | 141.0 | X | ||||||||||||||||||||||||||||||
|
(1)
|
Short-term
investments include federal funds
sold.
|
|
(2)
|
Loans,
including non-accrual loans, are net of deferred loan origination costs,
and unadvanced funds.
|
|
(3)
|
Net
interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
|
|
(4)
|
Net
interest margin represents tax-equivalent net interest and dividend income
as a percentage of average
interest-earning-assets.
|
|
(5)
|
Securities
income, loan income and net interest income are presented on a
tax-equivalent basis using a tax rate of 34%. The
tax-equivalent adjustment is deducted from tax-
equivalent
net interest and dividend income to agree to the amount reported in the
statements of income.
|
38
Rate/Volume
Analysis
.
The following
table shows how changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities have affected our
interest and dividend income and interest expense during the periods
indicated. Information is provided in each category with respect
to: (1) interest income changes attributable to changes in volume
(changes in volume multiplied by prior rate); (2) interest income changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (3) 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.
|
Year Ended December 31, 2009 Compared to
Year Ended December 31, 2008
|
Year Ended December 31, 2008 Compared to
Year Ended December 31, 2007
|
|||||||||||||||||||||||
|
Increase/(Decrease) Due to
|
Increase/(Decrease) Due to
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||
|
Interest-earning
Assets
|
||||||||||||||||||||||||
|
Short-term
investments
|
$ | (329 | ) | $ | (254 | ) | $ | (583 | ) | $ | (1,042 | ) | $ | (1,164 | ) | $ | (2,206 | ) | ||||||
|
Securities
(1)
|
3,899 | (3,365 | ) | 534 | 1,474 | 946 | 2,420 | |||||||||||||||||
|
Loans
(1)
|
1,947 | (3,393 | ) | (1,446 | ) | 3,132 | (2,845 | ) | 287 | |||||||||||||||
|
Total
interest-earning assets
|
5,517 | (7,012 | ) | (1,495 | ) | 3,564 | (3,063 | ) | 501 | |||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
|
NOW
accounts
|
(234 | ) | 267 | 33 | 82 | (217 | ) | (135 | ) | |||||||||||||||
|
Savings
accounts
|
354 | (147 | ) | 207 | 153 | 266 | 419 | |||||||||||||||||
|
Money
market deposit accounts
|
(158 | ) | (138 | ) | (296 | ) | (276 | ) | (262 | ) | (538 | ) | ||||||||||||
|
Time
certificates of deposit
|
255 | (2,638 | ) | (2,383 | ) | (1,732 | ) | (2,425 | ) | (4,157 | ) | |||||||||||||
|
Short-term
borrowings and long-term debt
|
2,406 | (2,249 | ) | 157 | 4,249 | (942 | ) | 3,307 | ||||||||||||||||
|
Total
interest-bearing liabilities
|
2,623 | (4,905 | ) | (2,282 | ) | 2,476 | (3,580 | ) | (1,104 | ) | ||||||||||||||
|
Change
in net interest and dividend income
|
$ | 2,894 | $ | (2,107 | ) | $ | 787 | $ | 1,088 | $ | 517 | $ | 1,605 | |||||||||||
|
(1)
|
Securities
and loan income and net interest income are presented on a tax-equivalent
basis using a tax rate of 34%. The tax-equivalent adjustment is deducted
from tax-equivalent net interest income to agree to the amount reported in
the statements of income.
|
39
Comparison
of Financial Condition at December 31, 2009 and December 31, 2008
Total
assets increased $82.4 million to $1.2 billion at December 31, 2009 from $1.1
billion at December 31, 2008. Cash and cash equivalents decreased
$27.8 million to $28.7 million at December 31, 2009 from $56.5 million at
December 31, 2008, as funds were used to purchase
securities. Securities increased $110.3 million to $624.5 million at
December 31, 2009 from $514.2 million at December 31,
2008. Securities increased as funds from deposits, short-term
borrowings and long-term debt were reinvested in securities. The
securities portfolio is primarily comprised of mortgage-backed securities, which
totaled $525.6 million at December 31, 2009, the majority of which were issued
by government-sponsored enterprises such as the Federal National Mortgage
Association. Privately issued mortgage-backed securities comprised
$13.5 million, or 2.6%, of the mortgage-backed securities portfolio at December
31, 2009.
Debt
securities issued by government-sponsored enterprises decreased $15.6 million to
$45.6 million at December 31, 2009 from $61.2 million at December 31,
2008. Securities issued by government-sponsored enterprises consist
entirely of bonds issued by the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, the Federal Home Loan Bank and the
Federal Farm Credit Banks. We also invest in municipal bonds issued
by cities and towns in Massachusetts that are rated as investment grade by
Moody’s, Standard & Poor’s or Fitch, and the majority of which are also
independently insured. Municipal bonds were $36.4 million at December
31, 2009 and 2008, respectively. In addition, we have investments in
Federal Home Loan Bank stock and mutual funds that invest only in securities
allowed by the Office of Thrift Supervision.
Net loans
decreased by $3.0 million to $469.1 million at December 31, 2009 from $472.1
million at December 31, 2008. The decrease in net loans was primarily
the result of a decrease in commercial and industrial loans and consumer loans,
partially offset by an increase in commercial real estate loans and residential
loans. Commercial and industrial loans decreased $8.9
million to $145.0 million at December 31, 2009 from $153.9 million at December
31, 2008. The decrease in commercial and industrial loans was
primarily the result of customers decreasing their balances on lines of credit,
charge-offs on commercial and industrial loans of $4.9 million, the majority of
which was recorded in the first half of 2009, and normal loan payments and
payoffs. Consumer loans decreased $942,000 to $3.3 million due to low
loan demand.
Commercial
real estate loans increased $5.2 million to $229.1 million at December 31, 2009
from $223.9 million at December 31, 2008. The increase in commercial real estate
loans was due to new loan originations in our market area. Residential real
estate loans increased $683,000 to $99.1 million at December 31, 2009 from $98.4
million at December 31, 2008. Since September 2001, we have referred
substantially all of the originations of our residential real estate loans to a
third party mortgage company. Residential real estate borrowers submit
applications to us, 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. We retain no residual ownership interest in these
loans.
Other
real estate owned totaled $1.7 million at December 31, 2009, compared to none at
December 31, 2008, with $635,000 in foreclosure and $1.0 million in which the
deed was acquired in lieu of foreclosure. The balance of other real
estate owned consists of four properties representing two commercial and
industrial loan relationships. Both commercial and industrial loan
relationships were taken into other real estate owned in the fourth quarter of
2009.
Asset
growth was funded primarily through a $60.0 million increase in deposits, which
totaled $648.0 million at December 31, 2009, compared to $588.0 million at
December 31, 2008. The increase in deposits was due to increases in regular
savings accounts, checking accounts and time deposits, partially offset by a
decrease in money market accounts. Regular savings accounts increased $36.6
million to $104.7 million at December 31, 2009. NOW and checking accounts
increased $15.9 million to $150.5 million at December 31, 2009. In addition,
time deposits increased $15.0 million to $342.6 million, while money market
accounts decreased $7.5 million to $50.1 million at December 31, 2009. The
increases in savings accounts, checking accounts and time deposits were
concentrated in accounts that pay a higher interest rate than comparable
products. Management placed less emphasis on growing money market accounts in
favor of growing core deposits and locking in some low cost term funding through
time deposits.
40
Long-term
debt consists of FHLB advances, securities sold under repurchase agreements and
customer repurchase agreements with an original maturity of one year or more. At
December 31, 2009, we had $127.5 million in long-term debt with the FHLB, $81.3
million in securities sold under repurchase agreements and $5.0 million in
customer repurchase agreements. This compares to $115.0 million in FHLB advances
and $58.3 million in securities sold under repurchase agreements at December 31,
2008. There were no long-term customer repurchase agreements at December 31,
2008. Securities sold under repurchase agreements were executed with a weighted
average interest rate of 2.76% and final maturities of $14.8 million in the year
2013, $28.0 million in the year 2014 and $38.5 million in the year 2018. The
securities sold under repurchase agreements are callable at the issuer’s option
beginning in the years 2009 to 2012. Current interest rates permit us to earn a
more advantageous spread by borrowing funds and reinvesting in loans and
securities.
Short-term
borrowings increased $24.7 million to $74.5 million at December 31, 2009 from
$49.8 million at December 31, 2008. Short-term borrowings are made up of FHLB
advances with an original maturity of less than one year as well as customer
repurchase agreements, which have an original maturity of one day. Short-term
borrowings issued by the FHLB were $58.0 million and $28.5 million at December
31, 2009 and 2008, respectively. Customer repurchase agreements decreased $4.8
million to $16.5 million at December 31, 2009 from $21.3 million at December 31,
2008. A customer repurchase agreement is an agreement by us to sell to and
repurchase from the customer an interest in specific securities issued by or
guaranteed by the United States government or government-sponsored enterprises.
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. At December 31, 2009, all of our customer repurchase
agreements were held by commercial customers.
Stockholders’
equity decreased $12.6 million to $247.3 million at December 31, 2009 from
$259.9 million at December 31, 2008. This represented 20.8% of total
assets as of December 31, 2009 and 23.4% of total assets as of December 31,
2008. The decrease in stockholders’ equity is the result of the
repurchase of 1.6 million shares of our common stock at a cost of $13.7 million,
pursuant to our current stock repurchases plan, and the payment of regular and
special dividends amounting to $14.6 million, or $0.50 per
share. This was partially offset by an increase in other
comprehensive income of $6.6 million, net income of $5.5 million for the year
ended December 31, 2009 and $3.0 million related to the accrual of share-based
compensation.
Comparison
of Operating Results for Years Ended December 31, 2009 and 2008
General
.
Net income for
the year ended December 31, 2009 was $5.5 million, or $0.18 per diluted share,
compared to $6.7 million, or $0.22 per diluted share for the same period in
2008.
Interest and
Dividend Income
.
Total interest and dividend income decreased $1.6 million to $52.5
million for the year ended December 31, 2009, compared to $54.1 million for the
same period in 2008.
The decrease in interest income was
primarily the result of a decrease in the average yield on interest-earnings
assets for the year ended December 31, 2009, which was partially offset by an
increase in the average balance of interest-earnings assets for the same
period. The average yield on interest-earnings assets, on a
tax-equivalent basis, decreased 58 basis points to 4.88% for the twelve months
ended December 31, 2009 from 5.46% for the same period in 2008. While
the decrease in the average yield on the balance of interest-earning assets, on
a tax-equivalent basis, decreased interest income by $7.0 million, the average
balance of interest-earnings assets increased $89.1 million, resulting in a
partial offset of $5.5 million to the decrease in interest income for the year
ended December 31, 2009.
Interest
income on loans decreased $1.4 million to $25.7 million for the year ended
December 31, 2009 from $27.1 million for the year ended December 31,
2008. The tax-equivalent yield on loans decreased 72 basis points
from 6.14% for the year 2008 to 5.42% for the same period in 2009 due to the
falling interest rate environment. The decrease in interest income
resulting from the decrease in the average yield on loans was partially offset
by a $31.7 million increase in the average balance of loans from $444.5 million
for the year ended December 31, 2008 to $476.2 million for the year ended
December 31, 2009.
41
The
tax-equivalent yield on and average balance of short-term investments decreased
for the year ended December 31, 2009. The tax-equivalent yield on
short-term investments decreased 169 basis points to 0.07% for the year ended
December 31, 2009 from 1.76% for the same period in 2008 due to the enduring low
interest rate environment. In addition, the average balance of
short-term investments decreased $18.6 million from $33.7 million for the year
ended December 31, 2008 to $15.1 million for the year ended December 31,
2009. Management actively reinvested available funds during the year
into securities and loans in order to earn a more favorable yield on our
interest-earnings assets.
These
decreases were partially offset by an increase in interest and dividends on
securities of $500,000 to $26.8 million for the year ended December 31, 2009
compared to $26.3 million for the same period in 2008. The increase
in interest and dividend income on securities was due to an increase in the
average balance on securities, which increased $76.0 million to $597.8 million
at December 31, 2009 from $521.8 million at December 31, 2008. The
increase was partially offset by a decrease in the tax-equivalent yield on
securities, which decreased 57 basis points to 4.56% for the year ended December
31, 2009 from 5.13% for the same period in 2008 due to the enduring low interest
rate environment.
Interest
Expense.
Interest expense for the year ended December 31, 2009
decreased $2.3 million to $20.0 million from the comparable 2008
period. This was attributable to a decrease in the average cost of
interest-bearing liabilities of 55 basis points to 2.47% for the year ended
December 31, 2009 from 3.02% for the same period in 2008. The
decrease in the average cost of interest-bearing liabilities was primarily due
to the enduring low interest rate environment. Additionally,
management utilized sources of lower-cost funding, such as long-term debt and
short-term borrowings, to control overall funding costs.
Net Interest and
Dividend Income.
Net interest and dividend income increased
$756,000 to $32.5 million for the year ended December 31, 2009 as compared to
$31.8 million for same period in 2008. The net interest margin, on a
tax-equivalent basis, was 3.04% and 3.23% for the years ended December 31, 2009
and 2008, respectively. The change in net interest and dividend
income for the year ended December 31, 2009 was primarily the result of a
decrease in interest expense of $2.3 million from the comparable 2008 period
resulting from a 55 basis point decrease in the average cost of interest-bearing
liabilities, partially offset by an decrease in interest and dividend income of
$1.6 million resulting from a 58 basis point decrease in the average yield of
interest-earning assets. The enduring low rate environment was the
cause for the basis point decrease in both the average cost of interest-bearing
liabilities and the average yield on interest-earning assets.
Provision for
Loan Losses.
The provision for loan losses is reviewed by
management based upon our evaluation of then-existing economic and business
conditions affecting our key lending areas 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 collectability of the loan portfolio.
The amount that we provided for the
provision for loan losses during the year ended December 31, 2009 was based upon
the changes that occurred in the loan portfolio during that same period as well
as the continued weakening of the local and national economy. The changes in the
loan portfolio, described in detail below, include an increase in net loan
charge-offs, partially offset by a decrease in commercial and industrial loans
and an increase in commercial real estate loans. After evaluating
these factors, we provided $3.9 million for loan losses for the year ended
December 31, 2009, compared to $3.5 million for the same period in
2008. The allowance was $7.6 million at December 31, 2009 and $8.8
million at December 31, 2008. The allowance for loan losses was 1.60%
of total loans at December 31, 2009 and 1.83% at December 31,
2008. At December 31, 2008, the allowance for loan losses included a
specific valuation allowance of $2.1 million related to a manufacturing
commercial loan relationship. This amount was charged off in the
first quarter of 2009 and contributed to the decrease in the allowance for loan
losses and the allowance for loan losses as a percent of total
loans.
For the
year ended December 31, 2009, Westfield Bank recorded net charge-offs of $5.1
million compared to net charge-offs of $383,000 for the year ended December 31,
2008. The 2009 period was comprised of charge-offs of $5.1 million
for the year ended December 31, 2009, partially offset by recoveries of $48,000
for the same period. The increase in charge offs for the year 2009
was primarily due to three unrelated commercial loan relationships which
resulted in charge offs totaling $4.7 million, the majority of which occurred in
the first half of 2009. The 2008 period was comprised of charge-offs
of $449,000 for the year ended December 31, 2008, partially offset by recoveries
of $66,000 for the same period.
42
At December 31, 2009, commercial and
industrial loans decreased $8.8 million to $145.0 million compared to December
31, 2008. 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 $5.2 million to $229.1 million at December 31,
2008.
Nonperforming
loans decreased $3.3 million to $5.5 million at December 31, 2009 from $8.8
million at December 31, 2008. This represented 1.15 % of total loans
at December 31, 2009 and 1.83% of total loans at December 31,
2008. The decrease in nonperforming loans was related to the
previously mentioned single commercial manufacturing relationship of $5.5
million. The underlying business was sold in 2009 and resulted in a
charge-off of $3.1 million.
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 decreased $365,000 to $3.2 million
for the year ended December 31, 2009 compared to $3.5 million for the same
period in 2008.
The years ended December 31, 2009 and
2008 included net impairment losses of $278,000 and $1.3 million, respectively,
on securities that were determined to be other-than-temporarily
impaired. The 2009 impairment losses were on two private-label
residential mortgage-backed securities. The fair value of these
securities was $4.5 million at December 31, 2009. The 2008 impairment
loss was primarily due to write-downs of $961,000 on preferred stock issued by
Freddie Mac, which was placed into conservatorship by the United States Treasury
in September 2008. Our book value remaining on preferred stock issued
by Freddie Mac was $39,000 at December 31, 2009. In addition, we
recorded net losses on the sales of securities of $383,000 for the year ended
December 31, 2009. For the year ended December 31, 2008, net gains on
sales of securities were $1.1 million.
For the year ended December 31, 2009,
income from service charges and fees increased $248,000 to $2.6 million,
compared to $2.4 million for the comparable 2008 period. This
increase was due to income from the third party mortgage program and bank-owned
life insurance. Income from the third party mortgage program
increased $473,000 to $572,000 for the year ended December 31, 2009, compared to
$99,000 in the comparable 2008 period. During the year, we
experienced an increase in mortgage referrals due to a decrease in interest
rates. In addition, income from bank-owned life insurance increased
$103,000 to $1.5 million for the year ended December 31, 2009 compared to the
same period in 2008. This was primarily the result of a $2.6 million
increase in the average balance of bank-owned life insurance in 2009 compared to
2008.
Noninterest
Expense.
Noninterest expense for the year ended December 31,
2009 was $25.0 million compared to $23.3 million for the same period in
2008. This increase was primarily due to an increase of $1.0 million
in FDIC insurance expense to $1.1 million for the year ended December 31, 2009,
compared to $89,000 during the same period in 2008. The increase was
due to higher FDIC insurance assessments nationwide and a special assessment of
$453,000 at June 30, 2009. Salaries and benefits increased $295,000
to $15.0 million for the year ended December 31, 2009, primarily the result of a
$526,000 increase in costs related to the defined benefit pension
plan. This was partially offset by a $207,000 decrease in salary
expenses associated with employee bonuses.
Income
Taxes.
The provision for income taxes decreased $500,000 to $1.3 million
for the year ended December 31, 2009, compared to $1.8 million for the
comparable 2008 period. The effective tax rate was 18.8% for the year
ended December 31, 2009 and 21.2% for the same period in 2008. The
decrease in the tax provision and effective tax rate in the 2009 period is due
primarily to lower pre-tax income while maintaining the same level of
tax-advantaged income such as BOLI and tax-exempt municipal
obligations. The 2008 period also includes the utilization of prior
years’ loss carry forwards against gains on the sales of
securities.
43
Comparison
of Operating Results for Years Ended December 31, 2008 and 2007
General
.
Net income for
the year ended December 31, 2008 was $6.7 million, or $0.22 per diluted share,
compared to $8.7 million, or $0.29 per diluted share for the same period in
2007.
Interest and
Dividend Income
.
Total interest and dividend income increased $473,000 to $54.1 million
for the year ended December 31, 2008, compared to $53.6 million for the same
period in 2007.
The increase in interest income was
primarily the result of a $56.1 million increase in average interest-earnings
assets for the year ended December 31, 2008. Average interest-earning
assets were $1.0 billion for the year ended December 31, 2008 compared to $943.9
million for the same period in 2007. The average yield on
interest-earning assets, on a tax-equivalent basis, decreased 27 basis points to
5.46% for the year ended December 31, 2008 from 5.73% for the same period in
2007.
Interest
and dividends on securities increased $2.4 million to $26.3 million for the year
ended December 31, 2008 compared to $23.9 million for the same period in
2007. The average balance on securities increased $29.8 million to
$521.8 million at December 31, 2008 from $492.0 million at December 31,
2007. In addition, the tax-equivalent yield on securities increased
from 4.95% for the year 2007 to 5.13% for the same period in
2008. The increase in interest and dividend income on securities was
partially offset by a decrease in the tax-equivalent yield on and average
balance of short-term investments. The tax-equivalent yield on
short-term investments decreased 346 basis points to 1.76% for the year ended
December 31, 2008 from 5.22% for the same period in 2007 due to the falling
interest rate environment. In addition, the average balance of
short-term investments decreased $20.0 million from $53.6 million for the year
ended December 31, 2007 to $33.6 million for the year ended December 31,
2008.
Interest
income from loans increased $287,000 to $27.3 million for the year ended
December 31, 2008 from $27.0 million for the year ended December 31,
2007. The average balance of loans increased $46.2 million to $444.5
million for the year ended December 31, 2008 from $398.3 million for the year
ended December 31, 2007
The
increase in interest income resulting from the volume of average loan balances
of $3.1 million was offset by a decrease in the yield on loans of $2.8 million
for the year ended December 31, 2008. The falling interest rate
environment in 2008 caused a decrease in the average yield on loans of 64 basis
points to 6.14% for the year ended December 31, 2008 from 6.78% for the
comparable 2007 period.
Interest
Expense.
Interest expense for the year ended December 31, 2008
decreased $1.1 million to $22.3 million from the comparable 2007
period. This was attributable to a decrease in the average cost of
interest-bearing liabilities of 48 basis points to 3.02% for the year ended
December 31, 2008 from 3.50% for the same period in 2007. In
addition, the average balance of total interest-bearing liabilities increased
$69.5 million to $738.7 million for the year ended December 31, 2008 from $669.2
million for the same period in 2007. The decrease in the average cost
of interest-bearing liabilities was primarily due to the falling interest rate
environment. Additionally, management placed less emphasis on
gathering time deposits in order to take advantage of other sources of
lower-cost funding, such as long-term debt and short-term borrowings, to control
funding costs.
Net Interest and
Dividend Income.
Net interest and dividend income increased
$1.6 million to $31.8 million for the year ended December 31, 2008 as compared
to $30.2 million for same period in 2007. The net interest margin, on
a tax-equivalent basis, was 3.23% and 3.25% for the years ended December 31,
2008 and 2007, respectively. The change in net interest and dividend
income for the year ended December 31, 2008 was primarily the result of a
decrease in interest expense of $1.1 million from the comparable 2007 period
resulting from a decrease in the average cost of interest-bearing liabilities,
partially offset by an increase in interest and dividend income of $473,000
resulting from an increase in the average balance of interest-earning assets of
$56.1 million for the year ending December 31, 2008.
44
Provision for
Loan Losses.
The provision for loan losses is reviewed by
management based upon our evaluation of then-existing economic and business
conditions affecting our key lending areas 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 collectability of the loan portfolio.
The amount that the Bank provided for
the provision for loan losses during the year ended December 31, 2008 was based
upon the changes that occurred in the loan portfolio during that same period as
well as the weakening of the national economy. The changes in the loan
portfolio, described in detail below, include an increase in commercial and
industrial loans and commercial real estate loans, an increase in impaired loans
and nonperforming loans, and an increase in net charged-off
loans. After evaluating these factors, the Bank provided $3.5 million
for loan losses for the year ended December 31, 2008, compared to $400,000 for
the same period in 2007. The allowance was $8.8 million at December
31, 2008 and $5.7 million at December 31, 2007. The allowance for
loan losses was 1.83% of total loans at December 31, 2008 and 1.36% at December
31, 2007.
At December 31, 2008, commercial and
industrial loans increased $37.4 million to $153.9 million compared to December
31, 2007. The 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 $33.9 million to $223.9 million at December 31,
2008.
For the
year ended December 31, 2008, the Bank recorded net charge-offs of $383,000
compared to net charge-offs of $111,000 for the year ended December 31, 2007.
The 2008 period was comprised of charge-offs of $449,000 for the year ended
December 31, 2008, partially offset by recoveries of $66,000 for the same
period. The 2007 period was comprised of charge-offs of $317,000 for
the year ended December 31, 2007, partially offset by recoveries of $206,000 for
the same period.
Nonperforming
loans increased $7.6 million to $8.8 million at December 31, 2008 from $1.2
million at December 31, 2007. This represented 1.83% of total loans
at December 31, 2008 and 0.29% of total loans at December 31,
2007. The increase was primarily the result of a manufacturing
commercial loan relationship of $5.5 million and an agricultural commercial loan
relationship of $1.7 million.
The
manufacturing commercial loan relationship is secured by real estate and other
business assets. Additionally, all debt is cross-collateralized,
defaulted, and guaranteed with the exception of the SBA guaranteed
notes. During the year ended December 31, 2008, a valuation allowance
of $2.1 million was allocated on the relationship of $5.5 million based on the
estimated fair value of the underlying collateral.
The
agricultural commercial loan relationship is primarily secured by real
estate. Management does not anticipate incurring significant losses
on this relationship. During the year ended December 31, 2008, a
valuation allowance of $138,000 was allocated on the loan relationship of $1.7
million based on the estimated fair value of the underlying
collateral.
Nonperforming
residential real estate loans increased $149,000 to $1.1 million at December 31,
2008 from $995,000 at December 31, 2007. The majority of nonperforming
residential real estate loans are collateralized by first liens.
Impaired
loans increased $7.7 million to $7.8 million at December 31, 2008 primarily as a
result of the two commercial loan relationships consisting of an agricultural
commercial loan relationship of $1.7 million and a manufacturing commercial loan
relationship of $5.5 million, as discussed above. During the year
ended December 31, 2008, a valuation allowance of $138,000 was allocated on the
loan relationship of $1.7 million and a valuation allowance of $2.1 million was
allocated on the loan relationship of $5.5 million based on the estimated fair
value of the underlying collateral.
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.
45
Noninterest
Income.
Noninterest income decreased $1.1 million to $3.5
million for the year ended December 31, 2008 compared to $4.6 million for the
same period in 2007. The 2007 results include a pre-tax gain of
$546,000 on the sale of a piece of vacant land in Feeding Hills,
Massachusetts. The results for the 2007 year also include a pre-tax
gain of $315,000 resulting from the curtailment of a defined benefit plan,
specifically pertaining to providing a life insurance benefit to employees who
retire from the Bank.
The year ended December 31, 2008
included a net loss of $205,000 on the sale and write-down of
securities. The Bank recorded write-downs of $1.3 million on
securities deemed to be other-than-temporarily impaired. This was
primarily due to write-downs on preferred stock issued by Freddie Mac of
$961,000. Freddie Mac was placed into conservatorship by the United
States Treasury in September 2008. The book value remaining on
preferred stock issued by Freddie Mac was $39,000 at December 31,
2008. The write-downs were partially offset by net gains of $1.1
million for the year ended December 31, 2008 on the sale of other investment
securities. For the year ended December 31, 2007, we reported net
gains of $41,000 on sales of securities.
Income from bank-owned life insurance
increased $98,000 to $1.4 million for the year ended December 31, 2008 compared
to the same period in 2007. This was primarily the result of a $2.8
million increase in the average balance of bank-owned life insurance in 2008
compared to 2007.
Noninterest
Expense.
Noninterest expense for the year ended December 31,
2008 was $23.3 million compared to $21.8 million for the same period in
2007. This increase was primarily due to an increase of $921,000 in
salaries and benefits to $14.7 million for the year ended December 31,
2008. Expenses related to share-based compensation increased $702,000
for the year ended December 31, 2008 as a result of new grants of restricted
stock and stock options awarded in the third quarter of 2007. In
addition, expenses related to employee health insurance increased $150,000 due
to normal increases in this area.
Data processing expense increased
$270,000 to $1.7 million for the year ended December 31, 2008 compared to $1.4
million for the same period in 2007. This was the result of new
software licensing agreements and new technology related to branch deposit
imaging.
Professional
services expense increased $225,000 to $1.6 million for the year ended December
31, 2008 compared to $1.4 million for the same period in 2007. This
was primarily the result of expenses related to fees paid to consultants for
work performed reviewing internal Bank procedures in order to improve
efficiencies.
Income
Taxes.
The provision for income taxes decreased $2.0 million to $1.8
million for the year ended December 31, 2008. The decrease in the
provision for income tax was primarily due to lower income before
taxes. The effective tax rate was 21.2% for the year ended December
31, 2008 and 30.5% for the same period in 2007.
Liquidity
and Capital Resources
The term
“liquidity” refers to our ability to generate adequate amounts of cash to fund
loan originations, loan purchases, deposit withdrawals and operating
expenses. Our 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 our
operations. We also can borrow funds from the FHLB based on eligible
collateral of loans and securities. Outstanding borrowings from the
FHLB were $185.5 million at December 31, 2009 and $143.5 million at December 31,
2008. At December 31, 2009, we had $83.9 million in available
borrowing capacity with the FHLB. We have the ability to increase our
borrowing capacity with the FHLB by pledging investment securities or
loans. In addition, we may enter into reverse repurchase agreements
with approved broker-dealers. Reverse repurchase agreements are
agreements that allow us to borrow money using our securities as
collateral.
The Bank
also has outstanding at any time, a significant number of commitments to extend
credit and provide financial guarantees to third parties. These
arrangements are subject to strict credit control
assessments. Guarantees specify limits to our
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. We are also obligated under
agreements with the FHLB to repay borrowed funds and is obligated under leases
for certain of our branches and equipment. A summary of lease
obligations, borrowings, and credit commitments at December 31, 2009
follows:
46
|
After 1 Year
|
After 3 Years
|
|||||||||||||||||||
|
Within
|
but Within
|
but Within
|
After
|
|||||||||||||||||
|
1 Year
|
3 Years
|
5 Years
|
5 Years
|
Total
|
||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||
|
Lease
Obligations
|
||||||||||||||||||||
|
Operating
lease obligations
|
$ | 539 | $ | 975 | $ | 860 | $ | 10,296 | $ | 12,670 | ||||||||||
|
Borrowings
and Debt
|
||||||||||||||||||||
|
Federal
Home Loan Bank
|
83,000 | 60,800 | 31,650 | 10,000 | 185,450 | |||||||||||||||
|
Securities
sold under agreements to repurchase
|
21,594 | - | 42,800 | 38,500 | 102,894 | |||||||||||||||
|
Total
borrowings and debt
|
104,594 | 60,800 | 74,450 | 48,500 | 288,344 | |||||||||||||||
|
Credit
Commitments
|
||||||||||||||||||||
|
Available
lines of credit
|
60,295 | - | - | 17,878 | 78,173 | |||||||||||||||
|
Other
loan commitments
|
14,364 | - | - | - | 14,364 | |||||||||||||||
|
Letters
of credit
|
3,239 | - | - | 506 | 3,745 | |||||||||||||||
|
Total
credit commitments
|
77,898 | - | - | 18,384 | 96,282 | |||||||||||||||
|
Total
|
$ | 183,031 | $ | 61,775 | $ | 75,310 | $ | 77,180 | $ | 397,296 | ||||||||||
Maturing
investment securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments 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.
Our
primary investing activities are the origination of commercial real estate,
commercial and industrial and consumer loans, and the purchase of
mortgage-backed and other investment securities. During the year
ended December 31, 2009, we originated loans of $106.6 million, and during the
comparable period of 2008, the Bank originated loans of $141.2
million. Under our residential real estate loan program, we refer our
residential real estate borrowers to a third party mortgage company and
substantially all of our residential real estate loans are underwritten,
originated and serviced by a third party mortgage company. Purchases
of securities totaled $398.6 million for the year ended December 31, 2009 and
$223.0 million for the year ended December 31, 2008. At December 31,
2009, the Bank had loan commitments to borrowers of approximately $18.1 million,
and available home equity and unadvanced lines of credit of approximately $78.2
million.
Deposit
flows are affected by the level of interest rates, by the interest rates and
products offered by competitors and by other factors. Total deposits
increased $60.0 million during the year ended December 31, 2009 and decreased
$14.7 million during the year ended December 31, 2008. Time deposit
accounts scheduled to mature within one year were $242.3 million at December 31,
2009. Based on the Bank’s deposit retention experience and current
pricing strategy, the Bank anticipates that a significant portion of these
certificates of deposit will remain on deposit. The Bank monitors its
liquidity position frequently and anticipates that it will have sufficient funds
to meet our current funding commitments.
At
December 31, 2009, the Bank exceeded each of the applicable regulatory capital
requirements. The Bank’s tier 1 leverage capital was $230.1 million,
or 19.56 % to adjusted total assets. Our tier 1 capital to risk weighted assets
was $230.1 million or 34.28%. The Bank had total capital to risk
weighted assets of $236.9 million or 35.29%.
47
We do not
anticipate any material capital expenditures during calendar year 2010, nor do
we have any balloon or other payments due on any long-term obligations or any
off-balance sheet items other than the commitments and unused lines of credit
noted above.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements, other than noted above, that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
Management
of Market Risk
As a
financial institution, our primary market risk is interest rate risk since
substantially all transactions are denominated in U.S. dollars with no direct
foreign exchange or changes in commodity price exposure. Fluctuations
in interest rates will affect both our level of income and expense on a large
portion of our assets and liabilities. Fluctuations in interest rates
will also affect the market value of all interest-earning assets.
The
primary goal of our interest rate management strategy is to limit fluctuations
in net interest income as interest rates vary up or down and control variations
in the market value of assets, liabilities and net worth as interest rates vary.
We seek to coordinate asset and liability decisions so that, under changing
interest rate scenarios, net interest income will remain within an acceptable
range.
To
achieve the objectives of managing interest rate risk, the Bank’s Asset and
Liability Management Committee meets monthly to discuss and monitor the market
interest rate environment relative to interest rates that are offered on our
products. The Asset and Liability Management Committee presents
periodic reports to the Boards of Directors of the Bank and Westfield Financial
at their regular meetings.
The
Bank’s primary source of funds has been deposits, consisting primarily of time
deposits, money market accounts, savings accounts, demand accounts and NOW
accounts, which have shorter terms to maturity than the loan
portfolio. Several strategies have been employed to manage the
interest rate risk inherent in the asset/liability mix, including but not
limited to:
|
|
•
|
maintaining
the diversity of the Bank’s existing loan portfolio through the
origination of commercial loans and commercial real estate loans which
typically have variable rates and shorter terms than residential
mortgages; and
|
|
|
•
|
emphasizing
investments with an expected average duration of five years or
less.
|
In
addition, emphasis on commercial loans has reduced the average maturity of the
Bank’s loan portfolio. Moreover, the actual amount of time before
loans are repaid can be significantly affected by changes in market interest
rates. Prepayment rates will also vary due to a number of other
factors, including the regional economy in the area where the loans were
originated, seasonal factors, demographic variables and the assumability of the
loans. However, the major factors affecting prepayment rates are
prevailing interest rates, related financing opportunities and
competition. We monitor interest rate sensitivity so that we can
adjust our asset and liability mix in a timely manner and minimize the negative
effects of changing rates.
Each of
the Bank’s sources of liquidity is vulnerable to various uncertainties beyond
the control of Westfield Bank. Scheduled loan and security payments
are a relatively stable source of funds, while loan and security prepayments and
calls, and deposit flows vary widely in reaction to market conditions, primarily
prevailing interest rates. Asset sales are influenced by pledging activities,
general market interest rates and unforeseen market conditions. Our financial
condition is affected by our ability to borrow at attractive rates, retain
deposits at market rates and other market conditions. Management considers the
Bank’s sources of liquidity to be adequate to meet expected funding needs and
also to be responsive to changing interest rate markets
48
Net Interest and
Dividend Income Simulation.
We use a simulation model to
monitor interest rate risk. This model reports the net interest
income at risk primarily under seven different interest rate
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, 300 and 400 and decrease 100 and 200 basis
points, respectively, from current rates over the one year time period following
the current consolidated financial statements.
The
changes in interest income and interest expense due to changes in interest rates
reflect the rate 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 is likely to increase depending on
its repricing characteristics while the interest income from a fixed rate loan
would not increase until the funds were repaid and loaned out at a higher
interest rate.
The
tables below set forth as of December 31, 2009 the estimated changes in net
interest and dividend income that would result from incremental changes in
interest rates over the applicable twelve-month period.
|
For the Year Ending December 31, 2009
|
||||||||
|
Changes in
Interest Rates
(Basis Points)
|
Net Interest and
Dividend
Income
|
% Change
|
||||||
|
(Dollars in thousands)
|
||||||||
|
400
|
36,030 | 9.5 | % | |||||
|
300
|
35,506 | 7.9 | % | |||||
|
200
|
34,677 | 5.3 | % | |||||
|
100
|
34,254 | 4.1 | % | |||||
|
0
|
32,919 | 0.0 | % | |||||
|
-100
|
30,845 | -6.3 | % | |||||
|
-200
|
27,327 | -17.0 | % | |||||
Market
rates were assumed to increase 100, 200, 300 and 400 basis points and decrease
100 and 200 basis points, in even increments over the twelve month
period. The repricing and/or new rates of assets and liabilities
moved in tandem with market rates. However, in certain deposit
products, the use of data from a historical analysis indicated that the rates on
these products would move only a fraction of the rate change
amount.
We have
developed consolidated balance sheet growth projections for the twelve month
period. The same product mix and growth strategy was used for all
rate change simulations, except for the shift into term deposits in certain
scenarios as described in the previous paragraph. Income from
tax-exempt assets is calculated on a fully taxable equivalent
basis.
Pertinent
data from each loan account, deposit account and investment security was used to
calculate future cash flows. The data included such items as maturity
date, payment amount, next repricing date, repricing frequency, repricing index
and spread. Prepayment speed assumptions were based upon the
difference between the account rate and the current market rate.
The
income simulation analysis was based upon a variety of
assumptions. These assumptions include but are not limited to 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.
Recent
Accounting Pronouncements
Refer to
Note 1 of the Notes to Consolidated Financial Statements for a summary of the
recent accounting pronouncements.
49
Impact
of Inflation and Changing Prices
Our
Consolidated Financial Statements and accompanying Notes have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”). GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike industrial companies, our
assets and liabilities are primarily monetary in nature. As a result,
changes in market interest rates have a greater impact on performance than do
the effects of inflation.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
See Item
7,
“Management’s Discussion
and Analysis of Financial Condition and Results of Operations-Management of
Market Risk,”
for a discussion of quantitative and qualitative
disclosures about market risk.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our
Consolidated Financial Statements may be found on pages F-1 through F-45 of this
report.
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Management,
including our President and Chief Executive Officer and Chief Financial Officer
and Treasurer, has evaluated the effectiveness of our 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 that evaluation,
our Chief Executive Officer and Chief Financial Officer and Treasurer concluded
that the disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports we file and submit under the
Exchange Act (i) is recorded, processed, summarized and reported as and when
required and (ii) accumulated and communicated to our management including the
Chief Executive Officer and Chief Financial Officer and Treasurer, as
appropriate to allow timely discussion regarding required
disclosure.
There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation that occurred during our last fiscal quarter
that has materially affected, or that is reasonably likely to materially affect,
our internal control over financial reporting.
Management
Report on Internal Control Over Financial Reporting
|
|
•
|
Our
management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our
internal control system is a process designed to provide reasonable
assurance to our management and board of directors regarding the
preparation and fair presentation of published financial
statements.
|
|
|
•
|
Our
internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America,
and that receipts and expenditures are being made only in accordance with
authorizations of management and the directors; and provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material
effect on our financial
statements.
|
50
|
|
•
|
Because
of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
|
|
|
•
|
Our
management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2009. In making this
assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in
Internal Control-Integrated
Framework
. Based on our assessment we believe that, as
of December 31, 2009, our internal control over financial reporting is
effective based on those criteria.
|
|
|
•
|
Our
Independent Registered Public Accounting Firm has issued an audit report
on the effective operation of our internal control over financial
reporting as of December 31, 2009. This report appears on page
F-45.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
51
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
following information included in the Proxy Statement is incorporated herein by
reference: “Information About Our Board of Directors,” “Information About Our
Executive Officers,” “Corporate Governance,” and “Section 16(a) Beneficial
Ownership Reporting Compliance.”
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The
following information included in the Proxy Statement is incorporated herein by
reference: “Corporate Governance – Compensation Committee Interlocks,”
“Compensation Discussion and Analysis,” “Compensation Committee Report,” and
“Compensation of Directors and Executive Officers.”
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following information included in the Proxy Statement is incorporated herein by
reference: “Security Ownership of Certain Beneficial Owners and Management” and
“Securities Authorized For Issuance Under Equity Compensation
Plans.”
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
following information included in the Proxy Statement is incorporated herein by
reference: “Transactions with Certain Related Persons” and “Board of Directors
Independence.”
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The
following information included in the Proxy Statement is incorporated herein by
reference: “Principal Accounting Fees and Services.”
52
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
(a)(1)
|
Financial
Statements
|
Reference
is made to the Consolidated Financial Statements included in Item 8 of Part II
hereof.
|
(a)(2)
|
Financial
Statement Schedules
|
Consolidated
financial statement schedules have been omitted because the required information
is not present, or not present in amounts sufficient to require submission of
the schedules, or because the required information is provided in the
consolidated financial statements or notes thereto.
|
(a)(3)
|
Exhibits
|
The
exhibits required to be filed as part of this Annual Report on Form 10-K are
listed in the Exhibit Index attached hereto and are incorporated herein by
reference.
53
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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, on March 12, 2010.
|
Westfield
Financial, Inc.
|
||
|
By:
|
/s/
James C. Hagan
|
|
|
James
C. Hagan
|
||
|
Chief
Executive Officer and
President
|
||
Pursuant
to the requirements of the Securities Act of 1933, as amended, and any rules and
regulations promulgated thereunder, this Annual Report on Form 10-K, has been
signed by the following persons in the capacities and on the dates
indicated.
|
Name
|
Title
|
Date
|
||
|
/s/ James C. Hagan
|
Chief
Executive Officer and President
|
March
12, 2010
|
||
|
James
C. Hagan
|
(Principal
Executive Officer)
|
|||
|
/s/ Leo R. Sagan, Jr.
|
Chief
Financial Officer and Treasurer
|
March
12, 2010
|
||
|
Leo
R. Sagan, Jr.
|
(Principal
Accounting Officer)
|
|||
|
/s/ Donald A. Williams
|
Chairman
of the Board
|
March
12, 2010
|
||
|
Donald
A. Williams
|
||||
|
/s/ Victor J. Carra
|
Director
|
March
12, 2010
|
||
|
Victor
J. Carra
|
||||
|
/s/ David C. Colton, Jr.
|
Director
|
March
12, 2010
|
||
|
David
C. Colton, Jr.
|
||||
|
/s/ Robert T. Crowley, Jr.
|
Director
|
March
12, 2010
|
||
|
Robert
T. Crowley, Jr.
|
||||
|
/s/ Harry C. Lane
|
Director
|
March
12, 2010
|
||
|
Harry
C. Lane
|
||||
|
/s/ Richard C. Placek
|
Director
|
March
12, 2010
|
||
|
Richard
C. Placek
|
||||
|
/s/ Paul R. Pohl
|
Director
|
March
12, 2010
|
||
|
Paul
R. Pohl
|
||||
|
/s/ Philip R. Smith
|
Director
|
March
12, 2010
|
||
|
Philip
R. Smith
|
||||
|
/s/ Charles E. Sullivan
|
Director
|
March
12, 2010
|
||
|
Charles
E. Sullivan
|
|
|
EXHIBIT
INDEX
|
2.1
|
Amended
and Restated Plan of Conversion and Stock Issuance of Westfield Mutual
Holding Company, Westfield Financial, Inc. and Westfield Bank
(incorporated by reference to Exhibit 2.1 of the Registration Statement
No. 333-137024 on Form S-1 filed with the Securities and Exchange
Commission on August 31, 2006).
|
|
|
3.1
|
Articles
of Organization of Westfield Financial, Inc. (incorporated by reference to
Exhibit 3.3 of the Form 8-K filed with the Securities and Exchange
Commission on January 5, 2007).
|
|
|
3.2
|
Bylaws
of Westfield Financial, Inc. (Incorporated by reference to Exhibit 3.2 of
the Form 8-K filed with the Securities and Exchange Commission on January
5, 2007).
|
|
|
4.1
|
Form
of Stock Certificate of Westfield Financial, Inc. (incorporated by
reference to Exhibit 4.1 of the Registration Statement No. 333-137024 on
Form S-1 filed with the Securities and Exchange Commission on August 31,
2006).
|
|
|
10.1*
|
Form
of Employee Stock Ownership Plan of Westfield Financial, Inc.
(incorporated by reference to Exhibit 10.1 of the Registration Statement
No. 333-68550 on Form S-1 filed with the Securities and Exchange
Commission on August 28, 2001).
|
|
|
10.2*
|
Amendment
to the Employee Stock Ownership Plan of Westfield Financial, Inc.
(incorporated by reference to Exhibit 10.9 of 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).
|
|
|
10.3*
|
Amendment
No. 1 to the Employee Stock Ownership Plan of Westfield Financial, Inc.
(incorporated by reference to Exhibit 10.9 of the Annual Report on Form
10-K for the year ended December 31, 2003 filed with the Securities
and Exchange Commission on March 15, 2004).
|
|
|
10.4*
|
Amendment
No. 3 (incorporating Amendment Nos. 1 and 2) to the Employee Stock
Ownership Plan of Westfield Financial, Inc. (incorporated by
reference to Exhibit 10.10 of the Form 8-K filed with the Securities and
Exchange Commission on August 25, 2005).
|
|
|
10.5†
|
Amendment
No. 4 to the Employee Stock Ownership Plan of Westfield Financial,
Inc.
|
|
|
10.6*
|
Form
of Director’s Deferred Compensation Plan (incorporated by reference to
Exhibit 10.7 of the Form 8-K filed with the Securities and Exchange
Commission on December 22, 2005).
|
|
|
10.7*
|
The
401(k) Plan adopted by Westfield Bank (incorporated herein by reference to
Exhibit 4.1 of 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).
|
|
|
10.8*
|
Amendment
to the 401(k) Plan adopted by Westfield Bank (incorporated by reference to
Exhibit 10.11 of the Form 8-K filed with the Securities and Exchange
Commission on July 13, 2006).
|
|
|
10.9*
|
Amended
and Restated Benefit Restoration Plan of Westfield Financial, Inc.
(incorporated by reference to Exhibit 10.2 of the Form 8-K filed with the
Securities and Exchange Commission on October 25,
2007).
|
|
|
10.10*
|
Form
of Amended and Restated Deferred Compensation Agreement with Donald A.
Williams (incorporated by reference to Exhibit 10.10 of the Form 8-K filed
with the Securities and Exchange Commission on December 22,
2005).
|
|
|
10.11*
|
Amended
and Restated Employment Agreement between James C. Hagan and Westfield
Bank (incorporated by reference to Exhibit 10.9 of the Form 8-K filed with
the Securities and Exchange Commission on January 5,
2009).
|
|
|
10.12*
|
Amended
and Restated Employment Agreement between James C. Hagan and Westfield
Financial, Inc. (incorporated by reference to Exhibit 10.12 of the Form
8-K filed with the Securities and Exchange Commission on January 5,
2009).
|
|
10.13
|
Agreement
between Westfield Bank and Village Mortgage Company (incorporated by
reference to Exhibit 10.17 of Amendment No. 1 of the Registration
Statement No. 333-137024 on Form S-1 filed with the Securities and
Exchange Commission on August 31, 2006).
|
|
|
10.14*
|
Employment
Agreement between Leo R. Sagan, Jr. and Westfield Bank (incorporated by
reference to Exhibit 10.15 of the Form 8-K filed with the Securities and
Exchange Commission on January 5, 2009).
|
|
|
10.15*
|
Employment
Agreement between Leo R. Sagan, Jr. and Westfield Financial, Inc
(incorporated by reference to Exhibit 10.16 of the Form 8-K filed with the
Securities and Exchange Commission on January 5, 2009).
|
|
|
10.16*
|
Employment
Agreement between Gerald P. Ciejka and Westfield
Bank (incorporated by reference to Exhibit 10.17 of the Form
8-K filed with the Securities and Exchange Commission on January 5,
2009).
|
|
|
10.17*
|
Employment
Agreement between Gerald P. Ciejka and Westfield Financial, Inc.
(incorporated by reference to Exhibit 10.18 of the Form 8-K filed with the
Securities and Exchange Commission on January 5, 2009).
|
|
|
10.18*
|
Employment
Agreement between Allen J. Miles, III and Westfield Bank (incorporated by
reference to Exhibit 10.19 of the Form 8-K filed with the Securities and
Exchange Commission on January 5, 2009).
|
|
|
10.19*
|
Employment
Agreement between Allen J. Miles, III and Westfield Financial, Inc.
(incorporated by reference to Exhibit 10.20 of the Form 8-K filed with the
Securities and Exchange Commission on January 5,
2009).
|
|
10.20*
|
2002
Stock Option Plan (incorporated by reference to Appendix B of the Schedule
14A filed with the Securities and Exchange Commission on May 24,
2002).
|
|
|
10.21*
|
Amendment
to the 2002 Stock Option Plan (incorporated by reference to Appendix A of
the Schedule 14A filed with the Securities and Exchange Commission on
April 25, 2003).
|
|
|
10.22*
|
2002
Recognition and Retention Plan (incorporated by reference to Appendix C of
the Schedule 14A filed with the Securities and Exchange Commission on May
24, 2002).
|
|
|
10.23*
|
Amendment
to the 2002 Recognition and Retention Plan (incorporated by reference to
Appendix B of the Schedule 14A filed with the Securities and Exchange
Commission on April 25, 2003).
|
|
|
10.24*
|
2007
Stock Option Plan (incorporated by reference to Appendix A of the Schedule
14A filed with the Securities and Exchange Commission on June 18,
2007).
|
|
|
10.25*
|
Amendment
to the 2007 Stock Option Plan (incorporated by reference to Appendix B of
the Schedule 14A filed with the Securities and Exchange Commission on
April 14, 2008).
|
|
|
10.26*
|
2007
Recognition and Retention Plan (incorporated by reference to Appendix B of
the Schedule 14A filed with the Securities and Exchange Commission on June
18, 2007).
|
|
|
10.27*
|
Amendment
to the 2007 Recognition and Retention Plan (incorporated by reference to
Appendix C of the Schedule 14A filed with the Securities and Exchange
Commission on April 14, 2008).
|
|
21.1†
|
Subsidiaries
of Westfield Financial
|
|
|
23.1†
|
Consent
of Wolf & Company, P.C.
|
|
|
31.1†
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2†
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.1†
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.2†
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
†
|
Filed
herewith.
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
Westfield
Financial, Inc.
We have
audited the accompanying consolidated balance sheets of Westfield Financial,
Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and
the related consolidated statements of income, changes in stockholders’ equity
and cash flows for each of the years in the three-year period ended December 31,
2009. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Westfield Financial, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
We have
also audited, in accordance with the standards of the Public Accounting
Oversight Board (United States), Westfield Financial, Inc.’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 12, 2010 expressed an
unqualified opinion on the effectiveness of Westfield Financial, Inc.’s internal
control over financial reporting.
|
/s/
WOLF & COMPANY, P.C.
|
|
Boston,
Massachusetts
|
|
March
12, 2010
|
F-1
WESTFIELD
FINANCIAL INC., AND SUBSIDIARIES
(Dollars
in thousands, except share data)
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks
|
$ | 12,204 | $ | 11,525 | ||||
|
Federal
funds sold
|
2 | 42,338 | ||||||
|
Interest-bearing
deposits
|
16,513 | 2,670 | ||||||
|
Cash
and cash equivalents
|
28,719 | 56,533 | ||||||
|
SECURITIES
:
|
||||||||
|
Available
for sale - at fair value
|
19,316 | 24,396 | ||||||
|
Held
to maturity - at amortized cost (fair value of $72,364 at December 31,
2009, and $82,491 at December 31, 2008)
|
69,244 | 79,303 | ||||||
|
MORTGAGE-BACKED
SECURITIES:
|
||||||||
|
Available
for sale - at fair value
|
299,805 | 233,747 | ||||||
|
Held
to maturity - at amortized cost (fair value of $231,255 at December 31,
2009, and $168,716 at December 31, 2008)
|
225,767 | 168,332 | ||||||
|
FEDERAL
HOME LOAN BANK OF BOSTON AND OTHER RESTRICTED STOCK - AT
COST
|
10,339 | 8,456 | ||||||
|
LOANS
- Net of allowance for loan losses of $7,645 at December 31, 2009, and
$8,796 at December 31, 2008
|
469,149 | 472,135 | ||||||
|
PREMISES
AND EQUIPMENT, Net
|
12,202 | 12,066 | ||||||
|
ACCRUED
INTEREST RECEIVABLE
|
5,198 | 5,261 | ||||||
|
BANK-OWNED
LIFE INSURANCE
|
37,880 | 36,100 | ||||||
|
DEFERRED
TAX ASSET, Net
|
6,995 | 10,521 | ||||||
|
OTHER
REAL ESTATE OWNED
|
1,662 | - | ||||||
|
OTHER
ASSETS
|
5,134 | 2,206 | ||||||
|
TOTAL
ASSETS
|
$ | 1,191,410 | $ | 1,109,056 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
DEPOSITS
:
|
||||||||
|
Noninterest-bearing
|
$ | 80,110 | $ | 50,860 | ||||
|
Interest-bearing
|
567,865 | 537,169 | ||||||
|
Total
deposits
|
647,975 | 588,029 | ||||||
|
SHORT-TERM
BORROWINGS
|
74,499 | 49,824 | ||||||
|
LONG-TERM
DEBT
|
213,845 | 173,300 | ||||||
|
DUE
TO BROKER FOR SECURITIES PURCHASED
|
- | 27,603 | ||||||
|
OTHER
LIABILITIES
|
7,792 | 10,381 | ||||||
|
TOTAL
LIABILITIES
|
944,111 | 849,137 | ||||||
|
COMMITMENTS
AND CONTINGENCIES (NOTE 14)
|
||||||||
|
STOCKHOLDERS'
EQUITY:
|
||||||||
|
Preferred
stock - $.01 par value, 5,000,000 shares authorized, none outstanding at
December 31, 2009 and 2008
|
- | - | ||||||
|
Common
stock - $.01 par value, 75,000,000 shares authorized, 29,818,526 shares
issued and outstanding at December 31, 2009; 31,307,881 shares issued and
outstanding at December 31, 2008
|
298 | 313 | ||||||
|
Additional
paid-in capital
|
193,609 | 204,866 | ||||||
|
Unearned
compensation – ESOP
|
(10,299 | ) | (10,913 | ) | ||||
|
Unearned
compensation - Equity Incentive Plan
|
(3,248 | ) | (4,337 | ) | ||||
|
Retained
earnings
|
69,253 | 78,898 | ||||||
|
Accumulated
other comprehensive loss
|
(2,314 | ) | (8,908 | ) | ||||
|
Total
stockholders' equity
|
247,299 | 259,919 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 1,191,410 | $ | 1,109,056 | ||||
See
accompanying notes to consolidated financial statements.
F-2
WESTFIELD
FINANCIAL, INC. AND SUBSIDIARIES
(Dollars
in thousands, except share data)
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
INTEREST
AND DIVIDEND INCOME:
|
||||||||||||
|
Debt
securities, taxable
|
$ | 25,090 | $ | 24,362 | $ | 21,983 | ||||||
|
Residential
and commercial real estate loans
|
18,312 | 18,783 | 18,193 | |||||||||
|
Commercial
and industrial loans
|
7,150 | 8,032 | 8,301 | |||||||||
|
Debt
securities, tax-exempt
|
1,470 | 1,389 | 1,303 | |||||||||
|
Equity
securities
|
234 | 574 | 643 | |||||||||
|
Consumer
loans
|
263 | 322 | 361 | |||||||||
|
Federal
funds sold
|
10 | 591 | 2,700 | |||||||||
|
Interest-bearing
deposits
|
1 | 3 | 100 | |||||||||
|
Total
interest and dividend income
|
52,530 | 54,056 | 53,584 | |||||||||
|
INTEREST
EXPENSE:
|
||||||||||||
|
Deposits
|
12,694 | 15,133 | 19,544 | |||||||||
|
Long-term
debt
|
6,984 | 6,291 | 3,136 | |||||||||
|
Short-term
borrowings
|
344 | 880 | 728 | |||||||||
|
Total
interest expense
|
20,022 | 22,304 | 23,408 | |||||||||
|
Net
interest and dividend income
|
32,508 | 31,752 | 30,176 | |||||||||
|
PROVISION
FOR LOAN LOSSES
|
3,900 | 3,453 | 400 | |||||||||
|
Net
interest and dividend income after provision for loan
losses
|
28,608 | 28,299 | 29,776 | |||||||||
|
NONINTEREST
INCOME (LOSS):
|
||||||||||||
|
Total
other-than-temporary impairment losses on equity
securities
|
- | (1,283 | ) | - | ||||||||
|
Total
other-than temporary impairment losses on debt securities
|
(1,754 | ) | - | - | ||||||||
|
Portion
of other-than-temporary impairment losses recognized in accumulated other
comprehensive loss on debt securities
|
1,476 | - | - | |||||||||
|
Net
other-than-temporary impairment losses recognized in
income
|
(278 | ) | (1,283 | ) | - | |||||||
|
Service
charges and fees
|
2,616 | 2,368 | 2,400 | |||||||||
|
Income
from bank-owned life insurance
|
1,460 | 1,357 | 1,259 | |||||||||
|
Gain
(loss) on sales of securities, net
|
(383 | ) | 1,078 | 41 | ||||||||
|
(Loss)
gain on sales of premises and equipment, net
|
(8 | ) | - | 546 | ||||||||
|
Curtailment
of defined benefit life insurance plan
|
- | - | 315 | |||||||||
|
Loss
on prepayment of borrowings
|
(142 | ) | - | - | ||||||||
|
Loss
on disposal of other real estate owned
|
(110 | ) | - | - | ||||||||
|
Total
noninterest income
|
3,155 | 3,520 | 4,561 | |||||||||
|
NONINTEREST
EXPENSE:
|
||||||||||||
|
Salaries
and employees benefits
|
14,955 | 14,660 | 13,739 | |||||||||
|
Occupancy
|
2,583 | 2,448 | 2,368 | |||||||||
|
Professional
fees
|
1,705 | 1,625 | 1,400 | |||||||||
|
Data
processing
|
1,760 | 1,717 | 1,447 | |||||||||
|
FDIC
insurance assessment
|
1,134 | 89 | 74 | |||||||||
|
Stationery,
supplies and postage
|
419 | 484 | 498 | |||||||||
|
Other
|
2,481 | 2,310 | 2,299 | |||||||||
|
Total
noninterest expense
|
25,037 | 23,333 | 21,825 | |||||||||
|
INCOME
BEFORE INCOME TAXES
|
6,726 | 8,486 | 12,512 | |||||||||
|
INCOME
TAXES
|
1,267 | 1,795 | 3,812 | |||||||||
|
NET
INCOME
|
$ | 5,459 | $ | 6,691 | $ | 8,700 | ||||||
|
EARNINGS
PER COMMON SHARE:
|
||||||||||||
|
Basic
earnings per share
|
$ | 0.19 | $ | 0.22 | $ | 0.29 | ||||||
|
Weighted
average shares outstanding
|
29,308,996 | 29,838,347 | 30,187,495 | |||||||||
|
Diluted
earnings per share
|
$ | 0.18 | $ | 0.22 | $ | 0.28 | ||||||
|
Weighted
average diluted shares outstanding
|
29,577,622 | 30,190,532 | 30,637,454 | |||||||||
See
accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars
in thousands, except share data)
|
Common Stock
|
Unearned
|
Accumulated
|
||||||||||||||||||||||||||||||
|
Shares
|
Par
Value
|
Additional
Paid-in
Capital
|
Unearned
Compensation-
ESOP
|
Compensation-
Equity Incentive
Plan
|
Retained
Earnings
|
Other
Comprehensive
Income (Loss)
|
Total
|
|||||||||||||||||||||||||
|
BALANCE
AT DECEMBER 31, 2006
|
9,728,912 | $ | 274 | $ | 201,736 | $ | (4,835 | ) | $ | (405 | ) | $ | 93,364 | $ | (726 | ) | $ | 289,408 | ||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 8,700 | - | 8,700 | ||||||||||||||||||||||||
|
Net
unrealized losses on securities available for sale arising during the
period, net reclassification adjustment and tax effects
|
- | - | - | - | - | - | 1,298 | 1,298 | ||||||||||||||||||||||||
|
Change
in pension gains or losses and transition assets, net of
tax
|
- | - | - | - | - | - | 477 | 477 | ||||||||||||||||||||||||
|
Total
comprehensive income:
|
10,475 | |||||||||||||||||||||||||||||||
|
Exchange
of common stock pursuant to reorganization (9,728,912) shares exchanged at
a 3.28138 ratio for 31,923,903 shares)
|
21,458,993 | 38 | (358 | ) | - | - | - | - | (320 | ) | ||||||||||||||||||||||
|
Capital
contribution pursuant to dissolution of Mutual Holding
Company
|
- | - | - | - | - | 2,713 | - | 2,713 | ||||||||||||||||||||||||
|
Common
stock held by ESOP committed to be released (96,182
shares)
|
- | - | 320 | 653 | - | - | - | 973 | ||||||||||||||||||||||||
|
Share-based
compensation – stock options
|
- | - | 418 | - | - | - | - | 418 | ||||||||||||||||||||||||
|
Share-based
compensation – equity incentive plan
|
- | - | - | - | 751 | - | - | 751 | ||||||||||||||||||||||||
|
Establishment
of equity incentive plan – restricted stock
|
- | - | 5,839 | - | (5,839 | ) | - | - | - | |||||||||||||||||||||||
|
Excess
tax benefits in connection with equity incentive plan
|
- | - | 222 | - | - | - | - | 222 | ||||||||||||||||||||||||
|
Purchase
of ESOP shares
|
736,000 | 7 | 7,353 | (7,360 | ) | - | - | - | - | |||||||||||||||||||||||
|
Purchase
of common stock in connection with equity incentive plan
|
- | - | (6,075 | ) | - | - | - | - | (6,075 | ) | ||||||||||||||||||||||
|
Issuance
of common stock in connection with stock option exercises
|
9,644 | - | 42 | - | - | - | - | 42 | ||||||||||||||||||||||||
|
Cash
dividends declared (0.$40 per share)
|
- | - | - | - | - | (12,075 | ) | - | (12,075 | ) | ||||||||||||||||||||||
|
BALANCE
AT DECEMBER 31, 2007
|
31,933,549 | 319 | 209,497 | (11,542 | ) | (5,493 | ) | 92,702 | 1,049 | 286,532 | ||||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 6,691 | - | 6,691 | ||||||||||||||||||||||||
|
Net
unrealized losses on securities available for sale arising during the
period, net reclassification adjustment and tax effects
|
- | - | - | - | - | - | (7,376 | ) | (7,376 | ) | ||||||||||||||||||||||
|
Change
in pension gains or losses and transition assets, net of
tax
|
- | - | - | - | - | - | (2,581 | ) | (2,581 | ) | ||||||||||||||||||||||
|
Total
comprehensive loss
|
(3,266 | ) | ||||||||||||||||||||||||||||||
|
Common
stock held by ESOP committed to be released (93,947
shares)
|
- | - | 291 | 629 | - | - | - | 920 | ||||||||||||||||||||||||
|
Share-based
compensation - stock options
|
- | - | 770 | - | - | - | - | 770 | ||||||||||||||||||||||||
|
Share-based
compensation - equity incentive plan
|
- | - | - | - | 1,156 | - | - | 1,156 | ||||||||||||||||||||||||
|
Excess
tax shortfalls from equity incentive plan
|
- | - | (11 | ) | - | - | - | - | (11 | ) | ||||||||||||||||||||||
|
Common
stock repurchased
|
(1,058,778 | ) | (10 | ) | (10,473 | ) | - | - | - | - | (10,483 | ) | ||||||||||||||||||||
|
Issuance
of common stock in connection with stock option exercises
|
433,110 | 4 | 4,447 | - | - | (2,550 | ) | - | 1,901 | |||||||||||||||||||||||
|
Excess
tax benefits in connection with stock option exercises
|
- | - | 345 | - | - | - | - | 345 | ||||||||||||||||||||||||
|
Cash
dividends declared ($0.60 per share)
|
- | - | - | - | - | (17,945 | ) | - | (17,945 | ) | ||||||||||||||||||||||
|
BALANCE
AT DECEMBER 31, 2008
|
31,307,881 | 313 | 204,866 | (10,913 | ) | (4,337 | ) | 78,898 | (8,908 | ) | 259,919 | |||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 5,459 | - | 5,459 | ||||||||||||||||||||||||
|
Noncredit
portion of other-than-temporary impairment losses on available for sale
securities net of reclassification and tax effects
|
- | - | - | - | - | - | (872 | ) | (872 | ) | ||||||||||||||||||||||
|
Net
unrealized gains on securities available for sale arising during the
period, net of reclassification adjustment and tax effects
|
- | - | - | - | - | - | 6,791 | 6,791 | ||||||||||||||||||||||||
|
Change
in pension gains or losses and transition assets, net of
tax
|
- | - | - | - | - | - | 675 | 675 | ||||||||||||||||||||||||
|
Total
comprehensive income:
|
12,053 | |||||||||||||||||||||||||||||||
|
Common
stock held by ESOP committed to be released (91,493
shares)
|
- | - | 210 | 614 | - | - | - | 824 | ||||||||||||||||||||||||
|
Share-based
compensation - stock options
|
- | - | 899 | - | - | - | - | 899 | ||||||||||||||||||||||||
|
Share-based
compensation - equity incentive plan
|
- | - | - | - | 1,285 | - | - | 1,285 | ||||||||||||||||||||||||
|
Excess
tax benefits from equity incentive plan
|
- | - | 5 | - | - | - | - | 5 | ||||||||||||||||||||||||
|
Common
stock repurchased
|
(1,591,733 | ) | (16 | ) | (13,674 | ) | - | - | - | - | (13,690 | ) | ||||||||||||||||||||
|
Issuance
of common stock in connection with stock option exercises
|
102,378 | 1 | 957 | - | - | (509 | ) | - | 449 | |||||||||||||||||||||||
|
Issuance
of common stock in connection with equity incentive plan
|
- | - | 205 | - | (205 | ) | - | - | - | |||||||||||||||||||||||
|
Forfeiture
of common stock in connection with equity incentive plan
|
- | - | (9 | ) | - | 9 | - | - | - | |||||||||||||||||||||||
|
Excess
tax benefits in connection with stock option exercises
|
- | - | 150 | - | - | - | - | 150 | ||||||||||||||||||||||||
|
Cash
dividends declared ($0.50 per share)
|
- | - | - | - | - | (14,595 | ) | - | (14,595 | ) | ||||||||||||||||||||||
|
BALANCE
AT DECEMBER 31, 2009
|
29,818,526 | $ | 298 | $ | 193,609 | $ | (10,299 | ) | $ | (3,248 | ) | $ | 69,253 | $ | (2,314 | ) | $ | 247,299 | ||||||||||||||
See the
accompanying notes to unaudited consolidated financial
statements.
F-4
WESTFIELD
FINANCIAL, INC. AND SUBSIDIARIES
(Dollars
in thousands)
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
Income
|
$ | 5,459 | $ | 6,691 | $ | 8,700 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Provision
for loan losses
|
3,900 | 3,453 | 400 | |||||||||
|
Depreciation
and amortization of premises and equipment
|
1,252 | 1,182 | 1,096 | |||||||||
|
Net
amortization of premiums and discounts on securities, mortgage-backed
securities and mortgage loans
|
1,909 | 178 | 321 | |||||||||
|
Share-based
compensation expense
|
2,184 | 1,926 | 1,169 | |||||||||
|
Amortization
of ESOP expense
|
824 | 920 | 973 | |||||||||
|
Excess
tax (benefits) shortfalls from equity incentive plan
|
(5 | ) | 11 | (222 | ) | |||||||
|
Excess
tax benefits in connection with stock option exercises
|
(150 | ) | (345 | ) | - | |||||||
|
Net
losses (gains) on sales of securities
|
383 | (1,078 | ) | (41 | ) | |||||||
|
Other
than temporary impairment of securities
|
278 | 1,283 | - | |||||||||
|
Write-downs
and loss on sale of other real estate owned
|
127 | - | - | |||||||||
|
Loss
(gain) on disposition of premises and equipment ,net
|
8 | - | (546 | ) | ||||||||
|
Loss
on prepayment of borrowings
|
142 | - | - | |||||||||
|
Deferred
income tax benefit
|
(112 | ) | (1,098 | ) | (184 | ) | ||||||
|
Income
from bank-owned life insurance
|
(1,460 | ) | (1,357 | ) | (1,259 | ) | ||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accrued
interest receivable
|
37 | 526 | (1,259 | ) | ||||||||
|
Other
assets
|
(2,926 | ) | 48 | 376 | ||||||||
|
Other
liabilities
|
(1,411 | ) | (1,245 | ) | 1,236 | |||||||
|
Net
cash provided by operating activities
|
10,439 | 11,095 | 10,760 | |||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Securities
held to maturity:
|
||||||||||||
|
Purchases
|
(10,111 | ) | (2,290 | ) | (41,738 | ) | ||||||
|
Proceeds
from calls, maturities, and principal collections
|
20,090 | 27,010 | 15,000 | |||||||||
|
Securities
available for sale:
|
||||||||||||
|
Purchases
|
(485 | ) | (22,346 | ) | (26,281 | ) | ||||||
|
Proceeds
from sales
|
5,105 | 20,304 | 15,147 | |||||||||
|
Proceeds
from calls, maturities, and principal collections
|
154 | 14,992 | 15,023 | |||||||||
|
Mortgage-backed
securities held to maturity:
|
||||||||||||
|
Purchases
|
(118,378 | ) | (31,089 | ) | (49,078 | ) | ||||||
|
Principal
collections
|
60,125 | 34,917 | 39,560 | |||||||||
|
Mortgage-backed
securities available for sale:
|
||||||||||||
|
Purchases
|
(297,198 | ) | (141,929 | ) | (111,304 | ) | ||||||
|
Proceeds
from sales
|
144,704 | 88,891 | 272 | |||||||||
|
Principal
collections
|
66,757 | 41,888 | 33,634 | |||||||||
|
Purchase
of residential mortgages
|
(16,381 | ) | (1,648 | ) | (1,759 | ) | ||||||
|
Net
other decrease (increase) in loans
|
13,473 | (59,074 | ) | (28,388 | ) | |||||||
|
Purchase
of Federal Home Loan Bank of Boston stock
|
(1,883 | ) | (946 | ) | (3,481 | ) | ||||||
|
Proceeds
from redemption of Federal Home Loan Bank of Boston stock
|
- | - | 217 | |||||||||
|
Proceeds
from sale of other real estate owned
|
148 | - | - | |||||||||
|
Purchases
of premises and equipment
|
(1,396 | ) | (536 | ) | (1,935 | ) | ||||||
|
Proceeds
from sale of premises and equipment
|
- | - | 920 | |||||||||
|
Purchase
of bank-owned life insurance
|
(320 | ) | (2,345 | ) | (10,520 | ) | ||||||
|
Net
cash used in investing activities
|
(135,596 | ) | (34,201 | ) | (154,711 | ) | ||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Net
increase (decrease) in deposits
|
59,946 | (14,647 | ) | (24,790 | ) | |||||||
|
Net
change in short-term borrowings
|
24,675 | 14,556 | 7,349 | |||||||||
|
Repayment
of long-term debt
|
(80,142 | ) | (20,000 | ) | (20,000 | ) | ||||||
|
Proceeds
from long-term debt
|
120,545 | 88,300 | 80,000 | |||||||||
|
Cash
dividends paid
|
(14,595 | ) | (17,945 | ) | (12,075 | ) | ||||||
|
Exchange
of common stock pursuant to the dissolution of MHC
|
- | - | (320 | ) | ||||||||
|
Capital
contribution pursuant to dissolution of MHC
|
- | - | 2,713 | |||||||||
|
Common
stock repurchased
|
(13,690 | ) | (10,483 | ) | - | |||||||
|
Issuance
of common stock in connection with stock option exercises
|
449 | 1,901 | 42 | |||||||||
|
Excess
tax benefits (shortfalls) in connection with equity incentive
plan
|
5 | (11 | ) | 222 | ||||||||
|
Excess
tax benefits in connection with stock option exercises
|
150 | 345 | - | |||||||||
|
Purchase
of common stock in connection with equity incentive plan
|
- | - | (6,075 | ) | ||||||||
|
Net
cash provided by financing activities
|
97,343 | 42,016 | 27,066 | |||||||||
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS:
|
(27,814 | ) | 18,910 | (116,885 | ) | |||||||
|
Beginning
of period
|
56,533 | 37,623 | 154,508 | |||||||||
|
End
of period
|
$ | 28,719 | $ | 56,533 | $ | 37,623 | ||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Transfer
of loans to other real estate owned
|
$ | 1,937 | $ | - | $ | - | ||||||
|
Increase
(decrease) from broker
|
(27,603 | ) | 27,603 | - | ||||||||
See
the accompanying notes to consolidated financial statements
F-5
WESTFIELD
FINANCIAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Operations and Basis of Presentation
- Westfield Financial, Inc. (the
“Company” or “Westfield Financial”) 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.
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.
Westfield
Bank is a federally-chartered stock savings bank subsidiary of Westfield
Financial. 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.
In
October 2009, WB Real Estate Holdings, LLC, a Massachusetts-chartered limited
liability company was formed for the primary purpose of holding real property
acquired as security for debts previously contracted by Westfield
Bank.
Principles of
Consolidation
- The consolidated financial statements include the
accounts of Westfield Financial, Westfield Bank, Elm Street Securities
Corporation, WB Real Estate Holdings and WFD 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 allowance for loan losses and other than temporary impairment of
investment securities, and the valuation of deferred tax assets.
Reclassifications
–
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
F-6
Cash and Cash
Equivalents
- Westfield Financial defines cash on hand, cash due from
banks, federal funds sold and interest-bearing deposits having an original
maturity of 90 days or less as cash and cash equivalents. Cash
and cash equivalents at December 31, 2009 and 2008 includes partially
restricted cash of $2,460,000, and $2,386,000 respectively, for Federal Reserve
Bank of Boston cash reserve requirements.
Securities and
Mortgage-Backed Securities
- Debt 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 comprehensive income/loss. Westfield Financial does not
acquire securities and mortgage-backed securities for purposes of engaging in
trading activities.
Realized
gains and losses on sales of securities and mortgage-backed securities are
computed using the specific identification method and are included in
noninterest income. The amortization of premiums and accretion of
discounts is determined by using the level yield method to the maturity
date.
Other than
Temporary Impairment of Securities
- On a quarterly basis, Westfield
Financial reviews securities with a decline in fair value below the amortized
cost of the investment to determine whether the decline in fair value is
temporary or other than temporary. Declines in the fair value of
marketable equity securities below their cost that are deemed to be other than
temporary based on the severity and duration of the impairment are reflected in
earnings as realized losses. In estimating other than temporary
impairment losses for held to maturity and available for sale debt securities,
impairment is required to be recognized (1) if we intend to sell the security;
(2) if it is “more likely than not” that we will be required to sell the
security before recovery of its amortized cost basis; or (3) the present value
of expected cash flows is not sufficient to recover the entire amortized cost
basis. For all impaired held to maturity and available for sale debt
securities that we intend to sell, or more likely than not will be required to
sell, the full amount of the other than temporary impairment is recognized
through earnings. For all other impaired held to maturity or
available for sale debt securities, credit-related other than temporary
impairment is recognized through earnings, while non-credit related other than
temporary impairment is recognized in other comprehensive income/loss, net of
applicable taxes.
Fair Value
Hierarchy
- Westfield Financial groups its assets and liabilities
generally measured at fair value in three levels, based on the markets in which
the assets and liabilities are traded and the reliability of the assumptions
used to determine fair value.
Level 1 –
Valuation is based on quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities generally include debt and equity
securities that are traded in an active exchange market. Valuations are obtained
from readily available pricing sources for market transactions involving
identical assets or liabilities.
Level 2 –
Valuation is based on observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
Level 3 –
Valuation is based on unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments whose
value is determined using pricing models, discounted cash flow methodologies, or
similar techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation.
Federal Home Loan
Bank Stock
- Westfield Bank, as a member of the Federal Home Loan Bank
(“FHLB”) system, is required to maintain an investment in capital stock of the
FHLB. Based on the redemption provisions of the FHLB, the stock has
no quoted market value and is carried at cost. At its discretion, the
FHLB may declare dividends on the stock, however, as of January 28, 2009, the
FHLB suspended all payments of dividends indefinitely. Westfield Bank
reviews for impairment based on the ultimate recoverability of the cost basis in
the FHLB stock. As of December 31, 2009, no impairment has been
recognized. The recorded investment in FHLB stock is $10.1 million
and $8.2 million at December 31, 2009 and 2008, respectively.
F-7
Loans
-
Loans are recorded at the principal amount outstanding, adjusted for
charge-offs, unearned premiums and deferred loan fees and
costs. Interest on loans is calculated using the effective yield
method on daily balances of the principal amount outstanding and is credited to
income on the accrual basis to the extent it is deemed
collectible. Westfield Financial’s general policy is to discontinue
the accrual of interest when principal or interest payments are delinquent 90
days or more based on the contractual terms of the loan, 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 the 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 collectability 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.
Allowance for
Loan Losses
- The allowance for loan losses is established through
provisions for loan losses charged to expense. Loans are charged-off
against the allowance when management believes that the collectability of the
principal is unlikely. Subsequent recoveries, if any, are credited to
the allowance.
Westfield
Bank maintains an allowance for loan losses to absorb losses inherent in the
loan portfolio based on ongoing quarterly assessments of the estimated losses.
Westfield Bank’s methodology for assessing the appropriateness of the allowance
consists of two key components, which are a specific allowance for impaired
loans and a formula allowance for the remainder of the portfolio. The
appropriateness of the formula allowance is 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 collectability 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.
The
specific allowance incorporates the results of measuring impaired
loans. A loan is recognized as impaired when it is probable that
principal and/or interest are not collectible in accordance with the loan’s
contractual terms. A loan is not deemed to be impaired if there is a
short delay in receipt of payment or if, during a longer period of delay,
Westfield Financial expects to collect all amounts due including interest
accrued at the contractual rate during the period of
delay. Measurement of impairment can be based on present value of
expected future cash flows discounted at the loan’s effective interest rate or
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. If the fair value of the impaired loan is less
than the related recorded amount, a specific valuation allowance is established
within the allowance for loan losses or a writedown is charged against the
allowance for loan losses if the impairment is considered to be
permanent.
Westfield
Financial may periodically agree to modify the contractual terms of
loans. When a loan is modified and a concession is made to a borrower
experiencing financial difficulty, the modification is considered a troubled
debt restructuring (“TDR”). All TDRs are initially classified as
impaired.
Measurement
of impairment does not apply to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment such as Westfield
Financial’s portfolios of consumer and residential real estate loans, unless
such loans are subject to a troubled debt restructuring agreement.
Management
believes that the allowance for loan losses accurately reflects estimated credit
losses for specifically identified loans, as well as probable credit losses
inherent in the remainder of the portfolio as of the end of the years
presented.
F-8
Bank-Owned Life
Insurance –
Bank-owned life insurance policies are reflected on the
consolidated balance sheets at cash surrender value. Changes in the net cash
surrender value of the policies, as well as insurance proceeds received, are
reflected in non-interest income on the consolidated statements of income and
are not subject to income taxes.
Transfers and
Servicing of Financial Assets
– Transfers of financial assets are
accounted for as sales, when control over the assets has been
surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from Westfield Financial, (2)
the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets,
and (3) Westfield Financial does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
Premises and
Equipment
– Land is carried at cost. Buildings and equipment
are stated at cost, less accumulated depreciation and amortization, computed on
the straight-line method over the estimated useful lives of the assets, or the
expected lease term, if shorter. Expected terms include lease option
periods to the extent that the exercise of such options is reasonably
assured. The estimated useful lives of the assets are as
follows:
|
Years
|
||||
|
Buildings
|
39
|
|||
|
Leasehold
Improvements
|
5-20
|
|||
|
Furniture
and Equipment
|
3-7
|
|||
The cost
of maintenance and repairs is charged to expense when incurred. Major
expenditures for betterments are capitalized and depreciated.
Other Real Estate
Owned
- Other real estate owned represents property acquired through
foreclosure or deeded to Westfield Financial in lieu of
foreclosure. Other real estate owned is initially recorded at the
estimated fair value of the real estate acquired, net of estimated selling
costs, establishing a new cost basis. Initial write-downs are charged
to the allowance for loan losses at the time the loan is transferred to other
real estate owned. Subsequent valuations are periodically performed
by management and the carrying value is adjusted by a charge to expense to
reflect any subsequent declines in the estimated fair
value. Operating costs associated with other real estate owned are
expensed as incurred.
Retirement Plans
and Employee Benefits
-
Westfield
Financial provides a defined benefit pension plan for eligible employees through
membership in the Savings Banks Employees Retirement Association
(“SBERA”). Westfield Financial’s policy is to fund pension costs as
accrued. Employees are also eligible to participate in a 401(k) plan
through the Principal Financial Group. Westfield Financial makes
matching contributions to this plan at 50% of up to 6% of the employees’
eligible compensation.
Westfield
Financial currently offers postretirement life insurance benefits to retired
employees. Such postretirement benefits represent a form of deferred
compensation which requires that the cost and obligations of such benefits are
recognized in the period in which services are rendered.
Share-Based
Compensation Plans
– Westfield Financial measures and recognizes
compensation cost relating to share-based payment transactions based on the
grant-date fair value of the equity instruments issued. Share-based
compensation is recognized over the period the employee is required to provide
services for the award. Reductions in compensation expense associated
with forfeited options are estimated at the date of grant, and this estimated
forfeiture rate is adjusted based on actual forfeiture
experience. Westfield Financial uses a binomial option-pricing model
to determine the fair value of the stock options granted.
F-9
Employee Stock
Ownership Plan
– Compensation expense for the Employee Stock Ownership
Plan (“ESOP”) is recorded at an amount equal to the shares allocated by the ESOP
multiplied by the average fair market value of the shares during the
period. Westfield Financial recognizes compensation expense ratably
over the year based upon its estimate of the number of shares expected to be
allocated by the ESOP. Unearned compensation applicable to the ESOP
is reflected as a reduction of stockholders’ equity in the consolidated balance
sheets. The difference between the average fair market value and the
cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in capital.
Income
Taxes
- Westfield Financial uses the asset and liability method for
income tax accounting, whereby, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates applied to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance related to deferred tax assets
is established when, in the judgment of management, it is more likely than not
that all or a portion of such deferred tax assets will not be realized based on
the available evidence including historical and projected taxable
income. Westfield Financial does not have any uncertain tax positions
at December 31, 2009 which require accrual or disclosure.
Earnings per
Share
– Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. If rights to dividends or unvested awards are
non-forfeitable, these unvested awards are considered outstanding in the
computation of basic earnings per share. Diluted earnings per share
reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income
that would result from the assumed issuance. Potential common shares
that may be issued by Westfield Financial relate solely to stock options and are
determined using the treasury stock method. Unallocated ESOP shares
are not deemed outstanding for earnings per share calculations.
Earnings
per common share have been computed based on the following:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In thousands, except per share data)
|
||||||||||||
|
Net
income applicable to common stock
|
$ | 5,459 | $ | 6,691 | $ | 8,700 | ||||||
|
Average
number of common shares issued
|
30,873 | 31,509 | 31,927 | |||||||||
|
Less:
Average unallocated ESOP Shares
|
(1,513 | ) | (1,606 | ) | (1,701 | ) | ||||||
|
Less:
Average ungranted equity incentive plan shares
|
(51 | ) | (65 | ) | (39 | ) | ||||||
|
Average
number of common shares outstanding used to calculate basic earnings per
common share(1)
|
29,309 | 29,838 | 30,187 | |||||||||
|
Effect
of dilutive stock options
|
269 | 352 | 450 | |||||||||
|
Average
number of common shares outstanding used to calculate diluted earnings per
common share
|
29,578 | 30,190 | 30,637 | |||||||||
|
Basic
earnings per share
|
$ | 0.19 | $ | 0.22 | $ | 0.29 | ||||||
|
Diluted
earnings per share
|
$ | 0.18 | $ | 0.22 | $ | 0.28 | ||||||
|
(1)
|
Weighted-average
shares outstanding for 2008 and 2007 have been adjusted retrospectively
for
restricted
shares that were determined to be “participating” in accordance with an
amendment to Financial Accounting Standards Board ASC 260, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating
Securities.”
|
F-10
Stock
options that would have an anti-dilutive effect on diluted earnings per share
are excluded from the calculation. For the year ended December 31,
2009, 1,543,100 shares were anti-dilutive and for the years ended December 31,
2008 and 2007, 1,501,857 shares were anti-dilutive.
Comprehensive
Income/Loss
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and
liabilities are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income/loss.
The
components of other comprehensive income (loss) and related tax effects are as
follows:
|
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Unrealized
holding gains (losses) on available for sale securities
|
$ | 8,548 | $ | (11,899 | ) | $ | 2,096 | |||||
|
Other-than-temporary
impairment losses on available-for-sale securities
|
1,754 | 1,283 | - | |||||||||
|
Noncredit
portion of other-than-temporary impairment losses on available for sale
securities
|
(1,476 | ) | - | - | ||||||||
|
Reclassification
adjustment for losses (gains) realized in income
|
383 | (1,078 | ) | (41 | ) | |||||||
|
Net
unrealized (losses) gains on available for sale securities
|
9,209 | (11,694 | ) | 2,055 | ||||||||
|
Tax
effect
|
(3,290 | ) | 4,318 | (757 | ) | |||||||
|
Net-of-tax
amount
|
5,919 | (7,376 | ) | 1,298 | ||||||||
|
Gains
and losses arising during the period pertaining to defined benefit
plans
|
898 | (3,852 | ) | 736 | ||||||||
|
Reclassification
adjustments for items reflected in earnings:
|
||||||||||||
|
Actuarial
loss (gain)
|
137 | (45 | ) | (1 | ) | |||||||
|
Transition
asset
|
(12 | ) | (13 | ) | (12 | ) | ||||||
|
Net
adjustments pertaining to defined benefit plans
|
1,023 | (3,910 | ) | 723 | ||||||||
|
Tax
effect
|
(348 | ) | 1,329 | (246 | ) | |||||||
|
Net-of-tax
amount
|
675 | (2,581 | ) | 477 | ||||||||
|
Net
other comprehensive income (loss)
|
$ | 6,594 | $ | (9,957 | ) | $ | 1,775 | |||||
F-11
The
components of accumulated other comprehensive loss, included in stockholders’
equity are as follows:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Net
unrealized loss on securities available for sale
|
$ | (228 | ) | $ | (10,913 | ) | ||
|
Tax
effect
|
138 | 4,032 | ||||||
|
Net-of-tax
amount
|
(90 | ) | (6,881 | ) | ||||
|
Noncredit
portion of other-than-temporary impairment losses on available for sale
securities
|
(1,476 | ) | - | |||||
|
Tax
effect
|
604 | - | ||||||
|
Net-of-tax
amount
|
(872 | ) | - | |||||
|
Unrecognized
transition assets pertaining to defined benefit plans
|
56 | 68 | ||||||
|
Unrecognized
deferred loss pertaining to defined benefit plan
|
(2,103 | ) | (3,138 | ) | ||||
|
Net
accumulated other comprehensive loss pertaining to defined benefit
plans
|
(2,047 | ) | (3,070 | ) | ||||
|
Tax
effect
|
695 | 1,043 | ||||||
|
Net-of-tax
amount
|
(1,352 | ) | (2,027 | ) | ||||
|
Net
accumulated other comprehensive loss
|
$ | (2,314 | ) | $ | (8,908 | ) | ||
An
actuarial loss of $91,000 is included in accumulated other comprehensive loss at
December 31, 2009, and is expected to be recognized as a component of net
periodic pension cost for the year ending December 31, 2010. A
transition asset of $12,000 is included in accumulated other comprehensive loss
at December 31, 2009, and is expected to be recognized as a component of net
periodic pension cost for the year ending December 31, 2010.
Recent Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board (the “FASB”) approved the
FASB Accounting Standards
Codification
(
Codification
) as the single
source of authoritative nongovernmental U.S. Generally Accepted Accounting
Principles (
U.S.
GAAP
). The Codification does not change current U.S. GAAP but
is intended to simplify user access to all authoritative U.S. GAAP by providing
all the authoritative literature related to a particular topic in one
place. All existing accounting standard documents will be superseded
and all other accounting literature not included in the Codification will be
considered nonauthoritative. The Codification is effective for
interim and annual periods ending after September 15, 2009. The
Codification was effective for Westfield Financial during its interim period
ending September 30, 2009 and it did not have an impact on its financial
condition or results of operations.
In June
2008, the FASB issued guidance that clarifies that share-based payment awards
that entitle their holders to receive non-forfeitable dividends or dividend
equivalents before vesting should be considered participation
securities. As a result, Westfield Financial’s unvested restricted
shares are deemed participating securities and included in basic earnings per
share. The adoption of this guidance on January 1, 2009 did not have a
significant impact on Westfield Financial’s earnings per share
amounts.
In
December 2008, the FASB issued guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement
plan. This guidance requires disclosure of information about how
investment allocation decisions are made, the fair value of each major category
of plan assets and the inputs and valuation techniques used to develop fair
value measurements. Also, an employer shall provide users of
financial statements with an understanding of significant concentrations of risk
in plan assets. In addition, it requires a nonpublic entity that
sponsors one or more defined benefit pension or postretirement plans to disclose
the net periodic benefit cost recognized for each annual period for which an
annual statement of income is presented. The disclosures about plan
assets are required for fiscal years ending after December 15,
2009. Upon initial adoption, disclosures are not required for earlier
periods that are presented for comparative purposes. The requirement
to disclose the net periodic benefit cost was effective as of December 31,
2008. Westfield Financial has provided these disclosures in the
consolidated financial statements.
F-12
In April
2009, the FASB issued guidance on how to determine the fair value of assets and
liabilities in an environment where the volume and level of activity for the
asset or liability have significantly decreased and re-emphasizes that the
objective of a fair value measurement remains an exit price. This
guidance is effective for periods ending after June 15, 2009, with earlier
adoption permitted. The adoption of this guidance on April 1, 2009
did not have any impact on Westfield Financial’s consolidated financial
statements.
In April
2009, the FASB issued guidance that modifies the requirements for recognizing
other-than-temporary-impairment on debt securities and significantly changes the
impairment model for such securities. Under this guidance, a security
is considered to be other-than-temporarily impaired if the present value of cash
flows expected to be collected are less than the security’s amortized cost basis
(the difference being defined as the credit loss) or if the fair value of the
security is less than the security’s amortized cost basis and the investor
intends, or more-likely-than-not will be required, to sell the security before
recovery of the security’s amortized cost basis. If
other-than-temporary impairment exists, the charge to earnings is limited to the
amount of credit loss if the investor does not intend to sell the security, and
it is more-likely-than-not that it will not be required to sell the security,
before recovery of the security’s amortized cost basis. Any remaining
difference between fair value and amortized cost is recognized in other
comprehensive income, net of applicable taxes. Otherwise, the entire
difference between fair value and amortized cost is charged to
earnings. Upon adoption of this guidance, an entity reclassifies from
retained earnings to other comprehensive income the non-credit portion of an
other-than-temporary impairment loss previously recognized on a security it
holds if the entity does not intend to sell the security, and it is
more-likely-than-not that it will not be required to sell the security, before
recovery of the security’s amortized cost basis. This guidance also
modifies the presentation of other-than-temporary impairment losses and
increases related disclosure requirements. This guidance is effective
for periods ending after June 15, 2009, with earlier adoption
permitted.
F-13
2. SECURITIES
Securities
are summarized as follows:
|
December 31, 2009
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||
|
Government-sponsored
enterprises
|
$ | 34,884 | $ | 1,776 | $ | - | $ | 36,660 | ||||||||
|
Municipal
bonds
|
34,360 | 1,353 | (9 | ) | 35,704 | |||||||||||
|
Total
held to maturity
|
69,244 | 3,129 | (9 | ) | 72,364 | |||||||||||
|
Available
for sale:
|
||||||||||||||||
|
Government-sponsored
enterprises
|
11,000 | - | (302 | ) | 10,698 | |||||||||||
|
Municipal
bonds
|
1,956 | 114 | - | 2,070 | ||||||||||||
|
Mutual
funds
|
6,561 | 1 | (73 | ) | 6,489 | |||||||||||
|
Common
and preferred stock
|
70 | - | (11 | ) | 59 | |||||||||||
|
Total
available for sale
|
19,587 | 115 | (386 | ) | 19,316 | |||||||||||
|
Total
securities
|
$ | 88,831 | $ | 3,244 | $ | (395 | ) | $ | 91,680 | |||||||
|
December
31, 2008
|
||||||||||||||||
|
Amortized Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||
|
Government-sponsored
enterprises
|
$ | 44,906 | $ | 2,900 | $ | - | $ | 47,806 | ||||||||
|
Municipal
bonds
|
34,397 | 467 | (179 | ) | 34,685 | |||||||||||
|
Total
held to maturity
|
79,303 | 3,367 | (179 | ) | 82,491 | |||||||||||
|
Available
for sale:
|
||||||||||||||||
|
Government-sponsored
enterprises
|
16,018 | 281 | - | 16,299 | ||||||||||||
|
Municipal
bonds
|
1,957 | 27 | (14 | ) | 1,970 | |||||||||||
|
Mutual
funds
|
6,231 | - | (143 | ) | 6,088 | |||||||||||
|
Common
and preferred stock
|
70 | - | (31 | ) | 39 | |||||||||||
|
Total
available for sale
|
24,276 | 308 | (188 | ) | 24,396 | |||||||||||
|
Total
securities
|
$ | 103,579 | $ | 3,675 | $ | (367 | ) | $ | 106,887 | |||||||
F-14
Information
pertaining to securities with gross unrealized losses at December 31, 2009 and
2008, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:
|
December 31, 2009
|
||||||||||||||||
|
Less Than Twelve Months
|
Over Twelve Months
|
|||||||||||||||
|
Gross
Unrealized
Losses
|
Fair Value
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||
|
Municipal
bonds
|
$ | (9 | ) | $ | 356 | $ | - | $ | - | |||||||
|
Total
held to maturity
|
(9 | ) | 356 | - | - | |||||||||||
|
Available
for sale:
|
||||||||||||||||
|
Government-sponsored
enterprises
|
(302 | ) | 10,698 | - | - | |||||||||||
|
Mutual
funds
|
(19 | ) | 2,597 | (54 | ) | 1,479 | ||||||||||
|
Common
and preferred stock
|
(11 | ) | 28 | - | - | |||||||||||
|
Total
available for sale
|
(332 | ) | 13,323 | (54 | ) | 1,479 | ||||||||||
|
Total
|
$ | (341 | ) | $ | 13,679 | $ | (54 | ) | $ | 1,479 | ||||||
|
December 31, 2008
|
||||||||||||||||
|
Less Than Twelve Months
|
Over Twelve Months
|
|||||||||||||||
|
Gross
Unrealized
Losses
|
Fair Value
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||
|
Municipal
bonds
|
$ | (155 | ) | $ | 6,677 | $ | (24 | ) | $ | 1,585 | ||||||
|
Total
held to maturity
|
(155 | ) | 6,677 | (24 | ) | 1,585 | ||||||||||
|
Available
for sale:
|
||||||||||||||||
|
Municipal
bonds
|
(14 | ) | 1,093 | - | - | |||||||||||
|
Mutual
funds
|
- | - | (143 | ) | 3,834 | |||||||||||
|
Common
and preferred stock
|
- | - | (31 | ) | 8 | |||||||||||
|
Total
available for sale
|
(14 | ) | 1,093 | (174 | ) | 3,842 | ||||||||||
|
Total
|
$ | (169 | ) | $ | 7,770 | $ | (198 | ) | $ | 5,427 | ||||||
At
December 31, 2009, two debt securities have gross unrealized losses with
aggregate depreciation of 2.7% from Westfield Financial’s amortized cost basis
which have existed for less than twelve months. Because these losses
relate to a highly rated municipal obligation and a security guaranteed by a
government-sponsored enterprise, the declines are the result of fluctuations in
interest rates and not credit quality, and it is more likely than not that
therefore Westfield Financial will not be required to sell the investments
before recovery of their amortized cost bases, no declines are deemed to be
other-than-temporary.
F-15
At
December 31, 2009, two marketable equity securities have gross unrealized losses
with aggregate depreciation of 1.1% from Westfield Financial’s amortized cost
basis which have existed for less than twelve months. These losses
relate to one mutual fund which invests primarily in government related
securities and preferred stock issued by Freddie Mac. Because these
losses are the result of fluctuations in interest rates, and management has the
intent and ability to hold these securities for the foreseeable future, no
declines are deemed to be other than temporary at December 31,
2009. Westfield Financial recorded write-downs of $322,000 related to
mutual funds and $961,000 related to Freddie Mac preferred stock during the year
ended December 31, 2008. Freddie Mac was placed into conservatorship
by the United States Treasury in September 2008. Westfield
Financial’s book value remaining on preferred stock issued by Freddie Mac was $
39,000 at December 31, 2009.
At
December 31, 2009, one marketable equity security has gross unrealized losses
with aggregate depreciation of 3.5% from Westfield Financial’s cost basis which
has existed for greater than twelve months and is principally related to
fluctuations in interest rates. This loss relates to one mutual fund
which invests primarily in government sponsored mortgage-backed
securities. Because this loss is the result of fluctuations in
interest rates, and management has the intent and ability to hold these
securities for the foreseeable future, no declines are deemed to be other than
temporary at December 31, 2009.
The
amortized cost and fair value of debt securities at December 31, 2009, by
maturity, are shown below. Actual maturities may differ from
contractual maturities because certain issues have the right to call or repay
obligations.
|
December 31, 2009
|
||||||||
|
Amortized
Cost
|
Fair Value
|
|||||||
|
(In
thousands)
|
||||||||
|
Held
to maturity:
|
||||||||
|
Due
in one year or less
|
$ | 6,234 | $ | 6,270 | ||||
|
Due
after one year through five years
|
21,658 | 23,024 | ||||||
|
Due
after five years through ten years
|
30,378 | 31,832 | ||||||
|
Due
after ten years
|
10,974 | 11,238 | ||||||
|
Total
held to maturity
|
$ | 69,244 | $ | 72,364 | ||||
|
Available
for sale:
|
||||||||
|
Due
in one year or less
|
$ | - | $ | - | ||||
|
Due
after one year through five years
|
- | - | ||||||
|
Due
after five years through ten years
|
1,391 | 1,479 | ||||||
|
Due
after ten years
|
11,565 | 11,289 | ||||||
|
Total
available for sale
|
$ | 12,956 | $ | 12,768 | ||||
Proceeds
from the sale of securities available for sale amounted to $5.1 million, $20.3
million and $15.1 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Gross
realized gains of $89,000, $293,000 and $51,000, and gross realized losses of
$2,000, $11,000, and $13,000 were recorded on securities during the years ended
December 31, 2009, 2008, and 2007, respectively. Westfield Financial
recorded gross losses of $278,000 and $1.3 million due to other than temporary
impairment in value of securities during the years ended December 31, 2009 and
2008, respectively. No impairment losses were recognized during the
year ended December 31, 2007. The tax provision applicable to these
net realized gains and losses amounted to $35,000, $111,000 and, $14,000 for the
years ended December 31, 2009, 2008 and 2007, respectively.
At
December 31, 2009 and 2008, one security with a carrying value of $5.0 million
was pledged as collateral to the Federal Reserve Bank of Boston to secure public
deposits.
F-16
|
3.
|
MORTGAGE-BACKED
SECURITIES
|
Mortgage-backed
securities are summarized as follows:
|
December 31, 2009
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||
|
Government-sponsored
residential
|
$ | 204,484 | $ | 6,111 | $ | (184 | ) | $ | 210,411 | |||||||
|
U.S.
Government guaranteed residential
|
16,334 | 95 | (143 | ) | 16,286 | |||||||||||
|
Private-label
residential
|
4,949 | 44 | (435 | ) | 4,558 | |||||||||||
|
Total
held to maturity
|
225,767 | 6,250 | (762 | ) | 231,255 | |||||||||||
|
Available
for sale:
|
||||||||||||||||
|
Government-sponsored
residential
|
289,840 | 2,696 | (2,288 | ) | 290,248 | |||||||||||
|
U.S.
Government guaranteed residential
|
1,030 | 17 | - | 1,047 | ||||||||||||
|
Private-label
residential
|
10,368 | - | (1,858 | ) | 8,510 | |||||||||||
|
Total
available for sale
|
301,238 | 2,713 | (4,146 | ) | 299,805 | |||||||||||
|
Total
mortgage-backed securities
|
$ | 527,005 | $ | 8,963 | $ | (4,908 | ) | $ | 531,060 | |||||||
|
December 31, 2008
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||
|
Government-sponsored
residential
|
$ | 153,977 | $ | 2,471 | $ | (566 | ) | $ | 155,882 | |||||||
|
U.S.
Government guaranteed residential
|
7,892 | 1 | (340 | ) | 7,553 | |||||||||||
|
Private-label
residential
|
6,463 | - | (1,182 | ) | 5,281 | |||||||||||
|
Total
held to maturity
|
168,332 | 2,472 | (2,088 | ) | 168,716 | |||||||||||
|
Available
for sale:
|
||||||||||||||||
|
Government-sponsored
residential
|
161,926 | 1,118 | (768 | ) | 162,276 | |||||||||||
|
U.S.
Government guaranteed residential
|
40,401 | 181 | (158 | ) | 40,424 | |||||||||||
|
Private-label
residential
|
42,453 | - | (11,406 | ) | 31,047 | |||||||||||
|
Total
available for sale
|
244,780 | 1,299 | (12,332 | ) | 233,747 | |||||||||||
|
Total
mortgage-backed securities
|
$ | 413,112 | $ | 3,771 | $ | (14,420 | ) | $ | 402,463 | |||||||
The private-label
residential mortgage-backed securities included above are structured
collateralized mortgage obligations.
F-17
Proceeds
from the sale of mortgage-backed securities available for sale amounted to
$144.7 million, $88.9 million and $272,000 at December 31, 2009, 2008 and 2007,
respectively.
Gross
realized gains of $1.9 million, $953,000 and $3,000 and gross realized losses of
$2.4 million, $157,000, and $0 were recorded on sales of mortgage-backed
securities during the years ended December 31, 2009, 2008, and 2007,
respectively. The tax (benefit) provision applicable to these net realized gains
and losses amounted to $(232,000), $296,000 and $1,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Information
pertaining to securities with gross unrealized losses at December 31, 2009 and
2008 aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:
|
December 31, 2009
|
||||||||||||||||
|
Less Than Twelve Months
|
Over Twelve Months
|
|||||||||||||||
|
Gross
Unrealized
Losses
|
Fair Value
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||
|
Government-sponsored
residential
|
$ | (159 | ) | $ | 21,227 | $ | (25 | ) | $ | 1,677 | ||||||
|
U.S.
Government guaranteed residential
|
(143 | ) | 9,760 | - | - | |||||||||||
|
Private-label
residential
|
- | - | (435 | ) | 3,123 | |||||||||||
|
Total
held to maturity
|
(302 | ) | 30,987 | (460 | ) | 4,800 | ||||||||||
|
Available
for sale:
|
||||||||||||||||
|
Government-sponsored
residential
|
(2,287 | ) | 170,741 | (1 | ) | 128 | ||||||||||
|
Private-label
residential
|
- | - | (1,858 | ) | 8,510 | |||||||||||
|
Total
available for sale
|
(2,287 | ) | 170,741 | (1,859 | ) | 8,638 | ||||||||||
|
Total
|
$ | (2,589 | ) | $ | 201,728 | $ | (2,319 | ) | $ | 13,438 | ||||||
F-18
|
December 31, 2008
|
||||||||||||||||
|
Less Than Twelve Months
|
Over Twelve Months
|
|||||||||||||||
|
Gross
Unrealized
Losses
|
Fair Value
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Held
to maturity:
|
||||||||||||||||
|
Government-sponsored
residential
|
$ | (357 | ) | $ | 28,144 | $ | (209 | ) | $ | 11,329 | ||||||
|
U.S.
Government guaranteed residential
|
(266 | ) | 5,482 | (74 | ) | 1,867 | ||||||||||
|
Private-label
residential
|
(1,182 | ) | 5,282 | - | - | |||||||||||
|
Total
held to maturity
|
(1,805 | ) | 38,908 | (283 | ) | 13,196 | ||||||||||
|
Available
for sale:
|
||||||||||||||||
|
Government-sponsored
residential
|
(626 | ) | 52,548 | (142 | ) | 22,210 | ||||||||||
|
U.S.
Government guaranteed
|
(147 | ) | 3,842 | (11 | ) | 251 | ||||||||||
|
Private-label
residential
|
(6,953 | ) | 28,423 | (4,453 | ) | 2,624 | ||||||||||
|
Total
available for sale
|
(7,726 | ) | 84,813 | (4,606 | ) | 25,085 | ||||||||||
|
Total
|
$ | (9,531 | ) | $ | 123,721 | $ | (4,889 | ) | $ | 38,281 | ||||||
At
December 31, 2009, forty government-sponsored and U.S. government guaranteed
mortgage-backed securities have gross unrealized losses with aggregate
depreciation of 1.3% from Westfield Financial’s amortized cost basis which have
existed for less than twelve months. At December 31, 2009, eleven
government-sponsored and U.S. government guaranteed mortgage-backed securities
have gross unrealized losses of 1.4% from Westfield Financial’s amortized cost
basis which existed for greater than twelve months. Because these
losses relate to securities guaranteed by the U.S. government or an agency
thereof, the declines are the result of fluctuations in interest rates and not
credit quality, and it is more likely than not that the Westfield Financial will
not be required to sell the investments before recovery of their amortized cost
bases, no declines are deemed to be other than temporary.
At
December 31, 2009, five private label mortgage-backed securities have gross
unrealized losses of 16.5% from Westfield Financial’s amortized cost basis which
existed for greater than twelve months. Management used a third party
experienced in analyzing private-label mortgage-backed securities to determine
if credit losses existed for these securities. The third party
incorporated a number of factors to estimate the performance and possible credit
loss of the underlying assets. These factors include but are not
limited to: loans in various stages of delinquency i.e. 30, 60, 90 days
delinquent, loans in foreclosure, projected prepayment rates (10-12 constant
prepayment rate), projected default rates (weighted average of 0.60% - 26.8%),
severity of loss on defaulted loans (50% - 55%), current levels of
subordination, current credit enhancement (5.19% - 9.14%), vintage (2006), and
geographic location. As a result of this analysis, two private label
mortgage-backed securities were deemed to have other than temporary impairment
loss. Westfield Financial recorded a write-down of $1.8 million due
to other-than-temporary impairment on mortgage-backed securities during the year
ended December 31, 2009 related to private label mortgage-backed securities.
Other-than-temporary impairment loss recognized in accumulated other
comprehensive loss was $1.5 million, and a net impairment loss of $278,000 due
to credit losses was recognized in income for the year ended December 31,
2009. No other-than-temporary impairment losses were recorded on
mortgage-backed securities during the year ended December 31, 2008 or
2007.
F-19
The
following table presents a roll-forward of the amount of credit losses on
mortgage-backed securities for which a portion of other-than-temporary
impairment was recognized in other comprehensive income:
|
Year Ended
|
||||
|
December 31, 2009
|
||||
|
(In
thousands)
|
||||
|
Balance
as of December 31, 2008
|
$ | - | ||
|
Credit
losses for which other-than-temporary impairment was not previously
recorded
|
278 | |||
|
Balance
as of December 31, 2009
|
$ | 278 | ||
4.
LOANS
Loans
consisted of the following amounts:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Commercial
real estate
|
$ | 229,061 | $ | 223,857 | ||||
|
Residential
real estate:
|
||||||||
|
Owner-occupied
one-to-four family loans
|
58,252 | 54,875 | ||||||
|
Other
residential real estate loans
|
40,802 | 43,497 | ||||||
|
Commercial
and industrial
|
145,012 | 153,861 | ||||||
|
Consumer
|
3,307 | 4,248 | ||||||
|
Total
loans
|
476,434 | 480,338 | ||||||
|
Unearned
premiums and deferred loan fees and costs, net
|
360 | 593 | ||||||
|
Allowance
for loan losses
|
(7,645 | ) | (8,796 | ) | ||||
| $ | 469,149 | $ | 472,135 | |||||
F-20
The
following tables summarize information regarding impaired loans:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Impaired
loans without a valuation allowance
|
$ | 192 | $ | 753 | ||||
|
Impaired
loans with a valuation allowance
|
4,450 | 7,095 | ||||||
|
Total
impaired loans
|
$ | 4,642 | $ | 7,848 | ||||
|
Valuation
allowance related to impaired loans
|
$ | 875 | $ | 2,286 | ||||
|
Impaired
loans in nonaccrual status
|
$ | 4,642 | $ | 7,848 | ||||
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Average
recorded investment in impaired loans
|
$ | 4,875 | $ | 2,134 | $ | 119 | ||||||
|
Income
recorded on cash basis during the period for impaired
loans
|
- | - | 28 | |||||||||
No
additional funds are committed to be advanced in connection with impaired
loans.
Nonaccrual
loans at December 31, 2009, 2008, and 2007 and related interest income are
summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Nonaccrual
loans at year end
|
$ | 5,470 | $ | 8,805 | $ | 1,202 | ||||||
|
Interest
income that would have been recorded under the original contract
terms
|
94 | 200 | 65 | |||||||||
At
December 31, 2009, 2008 and 2007, no loans were delinquent for ninety days or
more and still accruing.
Mortgage
loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid balances of these loans totaled $5.7
million and $8.4 million at December 31, 2009 and 2008,
respectively. Net service fee income of $15,000, $15,000, and $17,000
was recorded for the years ended December 31, 2009, 2008, and 2007,
respectively, and is included in service charges and fees on the consolidated
statements of income.
F-21
An
analysis of changes in the allowance for loan losses is as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance,
beginning of year
|
$ | 8,796 | $ | 5,726 | $ | 5,437 | ||||||
|
Provision
|
3,900 | 3,453 | 400 | |||||||||
|
Charge-offs
|
(5,099 | ) | (449 | ) | (317 | ) | ||||||
|
Recoveries
|
48 | 66 | 206 | |||||||||
|
Balance,
end of year
|
$ | 7,645 | $ | 8,796 | $ | 5,726 | ||||||
|
5.
|
PREMISES
AND EQUIPMENT
|
Premises
and equipment are summarized as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Land
|
$ | 1,826 | $ | 1,826 | ||||
|
Buildings
|
12,393 | 11,769 | ||||||
|
Leasehold
improvements
|
1,435 | 1,435 | ||||||
|
Furniture
and equipment
|
8,462 | 7,629 | ||||||
|
Construction
in process
|
2 | 90 | ||||||
|
Total
|
24,118 | 22,749 | ||||||
|
Accumulated
depreciation and amortization
|
(11,916 | ) | (10,683 | ) | ||||
|
Premises
and equipment, net
|
$ | 12,202 | $ | 12,066 | ||||
Depreciation
and amortization expense for the years ended December 31, 2009, 2008, and 2007
amounted to $1.3 million, $1.2 million, and $1.1 million,
respectively.
F-22
|
6.
|
DEPOSITS
|
Deposit
accounts by type and weighted average rates are summarized as
follows:
|
At December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Demand
and NOW:
|
||||||||||||||||
|
NOW
accounts
|
$ | 70,462 | 1.42 | % | $ | 83,788 | 1.17 | % | ||||||||
|
Demand
deposits
|
80,110 | - | 50,860 | - | ||||||||||||
|
Savings:
|
||||||||||||||||
|
Regular
accounts
|
104,650 | 0.88 | 68,085 | 1.05 | ||||||||||||
|
Money
market accounts
|
50,120 | 0.74 | 57,655 | 0.94 | ||||||||||||
|
Time
certificates of deposit
|
342,633 | 2.49 | 327,641 | 3.43 | ||||||||||||
|
Total
deposits
|
$ | 647,975 | 1.65 | % | $ | 588,029 | 2.29 | % | ||||||||
Time
deposits of $100,000 or more totaled $97.8 million and $86.7 million at December
31, 2009 and 2008, respectively. Interest expense on such deposits
totaled $2.8 million, $3.3 million and $4.4 million for the years ended December
31, 2009, 2008, and 2007 respectively.
Cash paid
for interest on deposits and borrowings was:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Deposits
|
$ | 12,725 | $ | 15,141 | $ | 19,429 | ||||||
|
Short-term
borrowings
|
341 | 928 | 720 | |||||||||
|
Long-term
debt
|
6,989 | 6,075 | 2,892 | |||||||||
| $ | 20,055 | $ | 22,144 | $ | 23,041 | |||||||
At
December 31, 2009, the scheduled maturities of time certificates of deposit are
as follows:
|
Year
Ending
|
||||
|
December 31,
|
Amount
|
|||
|
(In
thousands)
|
||||
|
2010
|
$ | 242,318 | ||
|
2011
|
72,296 | |||
|
2012
|
13,571 | |||
|
2013
|
14,221 | |||
|
2014
|
227 | |||
| $ | 342,633 | |||
F-23
Interest
expense on deposits for the years ended December 31, 2009, 2008, and 2007 is
summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Savings
|
$ | 955 | $ | 748 | $ | 329 | ||||||
|
Money
market
|
467 | 763 | 1,301 | |||||||||
|
Time
|
10,034 | 12,417 | 16,574 | |||||||||
|
Other
interest-bearing
|
1,238 | 1,205 | 1,340 | |||||||||
| $ | 12,694 | $ | 15,133 | $ | 19,544 | |||||||
7. SHORT-TERM
BORROWINGS
Federal Home Loan
Bank Advances
–
Federal
Home Loan Bank advances with an original maturity of less than one year,
amounted to $58.0 million and $25.0 million at December 31, 2009 and 2008,
respectively, at a weighted average rate of 0.23% and 0.53%,
respectively.
Westfield
Financial has an “Ideal Way” line of credit with the Federal Home Loan Bank of
Boston for $9,541,000 for the years ended December 31, 2009 and
2008. Interest on this line of credit is payable at a rate determined
and reset by the Federal Home Loan Bank on a daily basis. The
outstanding principal shall be due daily but the portion not repaid will be
automatically renewed. At December 31, 2008, there was $3.5 million
outstanding under this line and there were no advances as of December 31,
2009. The weighted average interest rate on the outstanding principal
balance was 4.20% at December 31, 2008.
Federal
Home Loan Bank advances are collateralized by a blanket lien on Westfield
Financial’s residential real estate loans and certain mortgage-back
securities.
Customer
Repurchase Agreements
– The following table summarizes information
regarding repurchase agreements:
|
Years
Ended
|
||||||||
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
Balance
outstanding, end of year
|
$ | 16,499 | $ | 21,274 | ||||
|
Maximum
amount outstanding at any month end during year
|
25,834 | 21,693 | ||||||
|
Average
amount outstanding during year
|
22,835 | 18,079 | ||||||
|
Weighted
average interest rate, end of year
|
1.29 | % | 1.40 | % | ||||
|
Amortized
cost of collateral pledged, end of year (1)
|
37,640 | 35,317 | ||||||
|
Fair
value of collateral pledged, end of year (1)
|
39,376 | 37,338 | ||||||
(1)Includes collateral pledged toward $5.0 million in long-term customer repurchase agreements.
Westfield
Financial’s repurchase agreements are collateralized by government-sponsored
enterprises and certain mortgage-backed securities. The weighted
average interest rate on the pledged collateral was 4.92% and 4.97% at December
31, 2009 and 2008, respectively.
F-24
8. LONG-TERM
DEBT
Federal Home Loan
Bank Advances
– The following fixed rate advances are collateralized by a
blanket lien on Westfield Financial’s residential real estate loans and certain
mortgage-backed securities.
|
Weighted Average
|
||||||||||||||||
|
Amount
|
Rate
|
|||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Year of Maturity
|
(In
thousands)
|
|||||||||||||||
|
2009
|
$ | - | $ | 45,000 | - | % | 4.2 | % | ||||||||
|
2010
|
25,000 | 40,000 | 2.6 | 4.3 | ||||||||||||
|
2011
|
21,650 | 5,000 | 2.1 | 3.5 | ||||||||||||
|
2012
|
39,150 | 20,000 | 3.6 | 4.6 | ||||||||||||
|
2013
|
16,650 | - | 3.1 | - | ||||||||||||
|
2014
|
15,000 | 5,000 | 3.8 | 5.0 | ||||||||||||
|
2015
|
10,000 | - | 3.8 | - | ||||||||||||
|
Total
advances
|
$ | 127,450 | $ | 115,000 | 3.1 | % | 4.3 | % | ||||||||
At
December 31, 2009, Westfield Financial had $20.0 million in Federal Home Loan
Bank of Boston advances callable in March 2010 with a weighted average rate of
3.89%.
Customer
Repurchase Agreements-
At December 31, 2009 Westfield Financial had one
long-term customer repurchase agreement for $5.0 million with a rate of 2.50%
and a final maturity in 2009 . There were no long-term customer
repurchase agreements in 2008.
Securities Sold
Under Agreements to Repurchase
– The following securities sold under
agreements to repurchase mature on a daily basis and are secured by government
sponsored enterprise securities with a carrying value of $90.7
million.
|
Weighted Average
|
||||||||||||||||
|
Amount
|
Rate
|
|||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Year of Maturity
|
(In thousands)
|
|||||||||||||||
|
2013
|
$ | 14,800 | $ | 9,800 | 2.5 | % | 2.4 | % | ||||||||
|
2014
|
28,000 | - | 3.1 | - | ||||||||||||
|
2018
|
38,500 | 48,500 | 2.7 | 2.7 | ||||||||||||
|
Total
advances
|
$ | 81,300 | $ | 58,300 | 2.8 | % | 2.6 | % | ||||||||
F-25
At
December 31, 2009, Westfield Financial had $48.3 million in callable securities
sold under agreements to repurchase. At December 31, 2009, the years
in which securities sold under agreements to repurchase are callable are as
follows:
|
Weighted Average
|
||||||||
|
Amount
|
Rate
|
|||||||
|
(In thousands)
|
||||||||
|
2010
|
$ | 28,800 | 2.3 | % | ||||
|
2011
|
9,500 | 2.9 | ||||||
|
2012
|
10,000 | 3.1 | ||||||
| $ | 48,300 | 2.6 | % | |||||
|
9.
|
STOCK
PLANS AND EMPLOYEE STOCK OWNERSHIP
PLAN
|
Stock Options -
Under Westfield Financial’s 2002 Stock Option Plan and 2007 Stock Option
Plan, Westfield Financial may grant options to its directors, officers, and
employees of up to 1,631,682 shares and 1,560,101 shares, respectively, of
common stock, of which 1,631,682 and 1,400,869, respectively, are currently
issued and outstanding. 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 on the date of grant with a maximum term of ten years. All
options currently outstanding vest at 20% per year.
The fair
value of each option grant is estimated on the date of grant using the binomial
option pricing model with the following weighted average
assumptions:
|
Options
granted in 2009:
|
||||
|
Expected
dividend yield
|
6.35 | % | ||
|
Expected
volatility
|
36.09 | % | ||
|
Risk-free
interest rate
|
2.78 | % | ||
|
Expected
life
|
10 years
|
|||
|
Granted Under
|
Granted Under
|
|||||||
|
2002 Stock
Option Plan
|
2007 Stock
Option Plan
|
|||||||
|
Options
granted in 2007:
|
||||||||
|
Expected
dividend yield low
|
1.98 | % | 1.99 | % | ||||
|
Expected
dividend yield high
|
3.00 | % | 3.00 | % | ||||
|
Expected
volatility
|
16.39 | % | 20.39 | % | ||||
|
Risk-free
interest rate
|
4.83 | % | 4.53 | % | ||||
|
Expected
life
|
10 years
|
10 years
|
||||||
No stock
options were granted in 2008.
The
expected volatility is based on historical volatility. The risk-free
rates for period consistent with the expected term of the awards are based on
the U.S. Treasury yield curve in effect at the time of grant. The
expected term is based on historical exercise. The dividend yield
assumption is based on Westfield Financial’s history and expectation of dividend
payouts.
F-26
A summary
of the status of Westfield Financial’s stock options at December 31, 2009 is
presented below:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
(In
years)
|
(In thousands)
|
|||||||||||||||
|
Outstanding
at December 31, 2008
|
2,276,223 | $ | 8.15 | |||||||||||||
|
Granted
|
52,500 | 9.93 | ||||||||||||||
|
Exercised
|
(102,378 | ) | 4.39 | |||||||||||||
|
Forfeited
|
(3,333 | ) | 10.04 | |||||||||||||
|
Outstanding
at December 31, 2009
|
2,223,012 | 8.36 | 6.2 | $ | 2,542 | |||||||||||
|
Exercisable
at December 31, 2009
|
1,302,094 | 7.17 | 5.1 | $ | 2,542 | |||||||||||
The
weighted average fair value of the options granted in 2009 and 2007 was $2.36
and $2.67 per option, respectively. The total intrinsic value of
options exercised during the years ended December 31, 2009, 2008, and 2007 was
$502,000, $2.4 million and $57,000, respectively. Cash received for
options exercised during the years ended December 31, 2009, 2008, and 2007 was
$449,000, $1.9 million, and $42,000, respectively.
For the
years ended December 31, 2009, 2008, and 2007, share-based compensation expense
applicable to stock options was $899,000, $770,000, and $418,000, respectively,
and a related tax benefit of $242,000, $185,000, and $101,000,
respectively.
At
December 31, 2009, total unrecognized share-based compensation cost related to
unvested stock options was $2.2 million. This amount is expected to
be recognized over a weighted average period of 2.8 years.
Restricted Stock
Awards
– During 2002 and 2007, Westfield Financial adopted equity
incentive plans under which 652,664 and 624,041 shares, respectively, were
reserved for issuance as restricted stock awards to directors and
employees. Of these totals, 652,664 and 580,100, respectively, are
currently issued and outstanding. Shares issued upon vesting may be either
authorized but unissued shares or reacquired shares held by Westfield
Financial. Any shares not issued because vesting requirements are not
met will again be available for issuance under the plans. Shares
awarded vest ratably over five years. The fair market value of shares
awarded, based on the market price at the date of grant, is recorded as unearned
compensation and amortized over the applicable vesting period.
A summary
of the status of unvested restricted stock awards at December 31, 2009 is
presented below:
|
Shares
|
Weighted
Average Grant
Date Fair Value
|
|||||||
|
Balance
at December 31, 2008
|
465,192 | $ | 10.04 | |||||
|
Shares
granted
|
22,000 | 9.34 | ||||||
|
Shares
vested
|
(127,719 | ) | 10.02 | |||||
|
Shares
forfeited
|
(900 | ) | 10.04 | |||||
|
Balance
at December 31, 2009
|
358,573 | 10.00 | ||||||
F-27
Westfield
Financial recorded total expense for restricted stock awards of $1.3 million,
$1.2 million, and $751,000 for the years ended December 31, 2009, 2008, and
2007, respectively. Tax benefits related to equity incentive plan expense were
$5,000 and $42,000 for the years ended December 31, 2009 and 2007, respectively.
A tax shortfall of $11,000 related to this expense was recognized for the year
ended December 31, 2008. Unrecognized compensation cost for stock awards was
$3.2 million at December 31, 2009, with a remaining life of 2.9
years.
In 2007,
559,000 restricted stock awards were granted, having a fair value of $10.04 per
share. No restricted stock awards were grated in 2008. Total fair value of the
stock awards vested was $1.3 million, $1.2 million and $477,000 for the years
ended December 31, 2009, 2008 and 2007.
Employee Stock
Ownership Plan -
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. In January 2002, as part of the initial stock 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 the
common stock sold in the initial public offering.
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.
At
December 31, 2009 the remaining principal balance is payable as
follows:
|
Year
Ending
|
||||
|
December
31,
|
Amount
|
|||
|
2010
|
$ | 446,782 | ||
|
2011
|
446,782 | |||
|
2012
|
446,782 | |||
|
2013
|
446,782 | |||
|
2014
|
446,782 | |||
|
Thereafter
|
8,821,957 | |||
| $ | 11,055,867 | |||
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 $824,000, $920,000, and $973,000 for the years ended December 31,
2009, 2008, and 2007, respectively.
Shares
held by the ESOP include the following at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Allocated
|
437,626 | 361,644 | ||||||
|
Committed
to be allocated
|
91,493 | 93,947 | ||||||
|
Unallocated
|
1,459,973 | 1,551,466 | ||||||
| 1,989,092 | 2,007,057 | |||||||
F-28
Cash
dividends declared and received on allocated shares are allocated to
participants and charged to retained earnings. Cash dividends declared and
received on unallocated shares are held in suspense and are applied to repay the
outstanding debt of the ESOP. The fair value of unallocated shares was
$12.0 million and $16.0 million at December 31, 2009 and 2008,
respectively. ESOP shares are considered outstanding for earnings per
share calculations as they are committed to be allocated. Unallocated ESOP
shares are excluded from earnings per share calculations. The value of
unearned shares to be allocated to ESOP participants for future services not yet
performed is reflected as a reduction of stockholders’ equity.
|
10.
|
RETIREMENT
PLANS AND EMPLOYEE BENEFITS
|
Pension
Plan
- Westfield Financial provides basic and supplemental pension
benefits for eligible employees through the SBERA Pension Plan (the
“Plan”). Employees must work a minimum of 1,000 hours per year to be
eligible for the Plan. Eligible employees become vested in the Plan after
five years of service.
The
following table provides information for the Plan at or for the years ended
December 31:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In thousands)
|
||||||||||||
|
Change
in benefit obligation:
|
||||||||||||
|
Benefit
obligation, beginning of year
|
$ | 12,698 | $ | 10,804 | $ | 10,103 | ||||||
|
Service
cost
|
862 | 817 | 701 | |||||||||
|
Interest
|
730 | 756 | 581 | |||||||||
|
Actuarial
loss (gain)
|
26 | 628 | (419 | ) | ||||||||
|
Benefits
paid
|
(259 | ) | (307 | ) | (162 | ) | ||||||
|
Benefit
obligation, end of year
|
14,057 | 12,698 | 10,804 | |||||||||
|
Change
in plan assets:
|
||||||||||||
|
Fair
value of plan assets, beginning of year
|
8,445 | 9,504 | 8,081 | |||||||||
|
Actual
return (loss) on plan assets
|
1,607 | (2,423 | ) | 1,049 | ||||||||
|
Employer
contribution
|
- | 1,671 | 536 | |||||||||
|
Benefits
paid
|
(259 | ) | (307 | ) | (162 | ) | ||||||
|
Fair
value of plan assets, end of year
|
9,793 | 8,445 | 9,504 | |||||||||
|
Funded
status and accrued benefit, end of year
|
$ | 4,264 | $ | 4,253 | $ | 1,300 | ||||||
|
Accumulated
benefit obligation, end of year
|
$ | 7,579 | $ | 6,824 | $ | 5,941 | ||||||
The
following actuarial assumptions were used in determining the pension benefit
obligation for the years ended December 31:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Discount
rate
|
5.50 | % | 5.75 | % | ||||
|
Rate
of compensation increase
|
5.00 | 5.00 | ||||||
F-29
Net
pension cost includes the following components for the years ended December
31:
|
2009
|
2008
|
2007
|
||||||||||
|
(In thousands)
|
||||||||||||
|
Service
cost
|
$ | 862 | $ | 817 | $ | 701 | ||||||
|
Interest
cost
|
730 | 756 | 581 | |||||||||
|
Expected
return on assets
|
(676 | ) | (887 | ) | (646 | ) | ||||||
|
Actuarial
loss (gain)
|
137 | (45 | ) | (1 | ) | |||||||
|
Transition
asset
|
(12 | ) | (13 | ) | (12 | ) | ||||||
|
Net
periodic pension cost
|
$ | 1,041 | $ | 628 | $ | 623 | ||||||
The
following actuarial assumptions were used in determining the service costs for
the years ended December 31:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Discount
rate
|
5.75 | % | 6.00 | % | 5.75 | % | ||||||
|
Expected
return on plan assets
|
8.00 | 8.00 | 8.00 | |||||||||
|
Rate
of compensation increase
|
5.00 | 5.00 | 5.00 | |||||||||
The
expected long term rate of return on plan assets is based on prevailing yields
of high quality fixed income investments increased by a premium of 3% to 5% for
equity investments. Westfield Financial expects to contribute up to
$600,000 to its pension plan in 2010.
The fair
value of major categories of Westfield Financial’s pension plan assets are
summarized below:
|
December 31, 2009
|
||||||||||||||||
|
Plan Assets
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 362 | $ | - | $ | - | $ | 362 | ||||||||
|
Collective
funds
|
613 | 3,880 | - | 4,493 | ||||||||||||
|
Equity
securities
|
2,714 | - | - | 2,714 | ||||||||||||
|
Mutual
funds
|
744 | 58 | - | 802 | ||||||||||||
|
Hedge
funds
|
- | - | 374 | 374 | ||||||||||||
|
Short-term
investments
|
- | 1,048 | - | 1,048 | ||||||||||||
| $ | 4,433 | $ | 4,986 | $ | 374 | $ | 9,793 | |||||||||
The plan
assets measured at fair value in Level 1 are based on quoted market prices in an
active exchange market. Plan assets measured at fair value in Level 2 are based
on pricing models that consider standard input factors such as observable market
data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit
spreads and new issue data. Plan assets measured at fair value in Level 3
are based on unobservable inputs, which include assumptions and the best
information under the circumstance.
The asset
of liability’s fair value measurement level within fair value hierarchy is based
on the lowest level of any input that is significant to the fair value
measurement. Valuation techniques used need to maximize the use of
observable inputs and minimize the use of unobservable inputs. The Plan
reports bonds and other obligations, short-term investments and equity
securities at fair value based on published quotations. Collective funds
and hedgefunds (Funds) are valued in accordance with valuations provided by such
Funds, which generally value marketable equity securities at the last reported
sales price on the valuation date and other investments at fair value, as
determined by each Fund’s manager.
F-30
The
preceding methods described may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future values.
Furthermore, although the Plan believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies to determine the fair value of certain financial instruments could
result in a different fair value measurement at the reporting date.
The
following is a reconciliation of Level 3 investments for which significant
unobservable inputs were used to determine fair value:
|
(In thousands)
|
||||
|
Balance
at December 31, 2008
|
$ | 337 | ||
|
Unrealized
appreciation
|
37 | |||
|
Balance
at December 31, 2009
|
$ | 374 | ||
The
defined benefit plan offers a common and collective trust as the underlying
investment structure for its retirement structure for the pension plan.
The target allocation mix for the pension plan for 2008 was an equity-based
investment deployment range from 40% to 64% of total portfolio assets. The
remainder of the portfolio is allocated to fixed income from 15% to 25% and
other investments including global asset allocation and hedge funds from 20% to
36%. The investment objective is to diversify investments across a
spectrum of investment types to limit risks from large market
swings.
Trustees
of SBERA select investment managers for the portfolio and a special investment
advisory firm is retained to provide allocation analysis. The overall
investment objective is to diversify equity investments across a spectrum of
types, small cap, large cap and international, along with investment styles such
as growth and value.
Westfield
Financial estimates that the benefits to be paid from the pension plan for years
ended December 31 are as follows:
|
Year
|
Benefit Payments to Participants
|
|||
|
(In thousands)
|
||||
|
2010
|
$ | 1,432 | ||
|
2011
|
697 | |||
|
2012
|
755 | |||
|
2013
|
218 | |||
|
2014
|
891 | |||
|
In
Aggregate for 2015 – 2019
|
3,039 | |||
| $ | 7,032 | |||
Postretirement
Benefits
- Westfield Financial provided postretirement life insurance
benefits to employees based on the employee’s salary at time of
retirement. As of December 31, 2009 and 2008, the accrued liability
recorded in other liabilities on the consolidated balance sheets amounted to
$407,000 and $399,000, respectively. Total expense associated with this
plan amounted to $26,000, $25,000 and $19,000 for the years ended December 31,
2009, 2008, and 2007, respectively.
In 2007,
Westfield Financial curtailed its postretirement life insurance benefits for
active employee to offset rising compensation costs. The curtailment
resulted in a pre-tax gain of $315,000.
F-31
Supplemental
Retirement Benefits
- Westfield Financial provides supplemental
retirement benefits to certain key officers. At December 31, 2009 and
2008, Westfield Financial had accrued $183,000 and $2.6 million, respectively,
relating to these benefits. Amounts charged to expense were $127,000,
$347,000, and $350,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
401(k)
-
Employees are eligible to participate in a 401(k) plan. Westfield
Financial makes a matching contribution of 50% with respect to the first 6% of
each participant’s annual earnings contributed to the plan. Westfield
Financial’s contributions to the plan were $171,000, $169,000 and $161,000, for
the years ended December 31, 2009, 2008 and 2007, respectively.
|
11.
|
REGULATORY
CAPITAL
|
Westfield
Bank is subject to various regulatory capital requirements administered by the
Office of Thrift Supervision. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on
Westfield Bank’s consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Westfield
Bank must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions
are not applicable to savings and loan holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require Westfield
Financial and Westfield Bank to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), Tier 1 capital (as defined)
to average assets (as defined) and of tangible capital (as defined) to tangible
assets (as defined). Management believes, as of December 31, 2009 and
2008, that Westfield Financial and Westfield Bank met all capital adequacy
requirements to which they are subject.
As of
December 31, 2009, the most recent notification from the Office of Thrift
Supervision categorized Westfield Bank as “well capitalized” under the
regulatory framework for prompt corrective action. To be categorized as
“well capitalized” Westfield Bank must maintain minimum total risk-based, Tier 1
risk based and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed Westfield Bank’s category. Westfield Financial’s and
Westfield Bank’s actual capital ratios as of December 31, 2009 and 2008 are also
presented in the table.
|
Actual
|
Minimum for Capital
Adequacy Purposes
|
Minimum To Be Well
Capitalized Under Prompt
Corrective Action
Provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||
|
Total
Capital
(to Risk
Weighted Assets
):
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 257,209 | 38.07 | % | $ | 54,052 | 8.00 | % | N/A | |||||||||||||||
|
Bank
|
236,940 | 35.29 | 53,706 | 8.00 | $ | 67,132 | 10.00 | % | ||||||||||||||||
|
Tier
1 Capital (
to Risk
Weighted Assets
):
|
||||||||||||||||||||||||
|
Consolidated
|
249,564 | 36.94 | 27,026 | 4.00 | N/A | - | ||||||||||||||||||
|
Bank
|
230,109 | 34.28 | 26,853 | 4.00 | 40,279 | 6.00 | ||||||||||||||||||
|
Tier
1 Capital (
to Adjusted
Total Assets
):
|
||||||||||||||||||||||||
|
Consolidated
|
249,564 | 20.92 | 47,713 | 4.00 | N/A | - | ||||||||||||||||||
|
Bank
|
230,109 | 19.56 | 47,059 | 4.00 | 58,824 | 5.00 | ||||||||||||||||||
|
Tangible
Equity (
to Tangible
Assets
):
|
||||||||||||||||||||||||
|
Consolidated
|
N/A | - | N/A | - | N/A | - | ||||||||||||||||||
|
Bank
|
230,109 | 19.56 | 17,647 | 1.50 | N/A | - | ||||||||||||||||||
|
December 31, 2008
|
||||||||||||||||||||||||
|
Total
Capital
(to Risk
Weighted Assets
):
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 276,857 | 42.56 | % | $ | 52,042 | 8.00 | % | N/A | |||||||||||||||
|
Bank
|
226,314 | 35.55 | 50,930 | 8.00 | $ | 63,662 | 10.00 | % | ||||||||||||||||
|
Tier
1 Capital (
to Risk
Weighted Assets
):
|
||||||||||||||||||||||||
|
Consolidated
|
268,725 | 41.31 | 26,021 | 4.00 | N/A | - | ||||||||||||||||||
|
Bank
|
219,744 | 34.52 | 25,465 | 4.00 | 38,197 | 6.00 | ||||||||||||||||||
|
Tier
1 Capital (
to Adjusted
Total Assets
):
|
||||||||||||||||||||||||
|
Consolidated
|
268,725 | 23.97 | 44,836 | 4.00 | N/A | - | ||||||||||||||||||
|
Bank
|
219,744 | 20.51 | 42,854 | 4.00 | 53,567 | 5.00 | ||||||||||||||||||
|
Tangible
Equity (
to Tangible
Assets
):
|
||||||||||||||||||||||||
|
Consolidated
|
N/A | N/A | - | N/A | - | |||||||||||||||||||
|
Bank
|
219,744 | 20.51 | 16,070 | 1.50 | N/A | - | ||||||||||||||||||
F-32
In
January 2008, Westfield Financial announced that the Board of Directors had
approved a share repurchase program (the “Repurchase Program”) which authorized
the repurchase of up to 3,194,000 shares or ten percent of its outstanding
shares of common stock, continuing until its completion. At December 31,
2009, Westfield Financial had 588,848 shares remaining to be purchased under
this program.
Westfield
Financial and Westfield Bank are subject to dividend restrictions imposed by
various regulators, including a limitation on the total of all dividends that
Westfield Bank may pay to Westfield Financial in any calendar year, to an amount
that shall not exceed Westfield Bank’s net income for the current year, plus
Westfield Bank’s net income retained for the two previous years, without
regulatory approval. In addition, Westfield Bank may not declare or pay
dividends on, and Westfield Financial may not repurchase, any of its shares of
common stock if the effect thereof would cause stockholders’ equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration, payment or repurchase would otherwise violate regulatory
requirements. At December 31, 2009 and 2008, Westfield Bank’s retained
earnings available for payment of dividends was $12.3 million and $20.4 million,
respectively. Accordingly, $54.1 million and $52.0 million of Westfield
Financial’s equity in net assets of Westfield Bank were restricted at December
31, 2009 and 2008, respectively.
The only
funds available for the payment of dividends on the capital stock of Westfield
Financial will be cash and cash equivalents held by Westfield Financial,
dividends paid from Westfield Bank to Westfield Financial, and borrowings.
Westfield Bank will be prohibited from paying cash dividends to Westfield
Financial to the extent that any such payment would reduce Westfield Bank’s
capital below required capital levels.
The
following is a reconciliation of Westfield Financial’s GAAP capital to
regulatory Tier 1 and total capital:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Consolidated
GAAP capital
|
$ | 247,299 | $ | 259,919 | ||||
|
Unrealized
losses on certain available for sale securities, net of
tax
|
913 | 6,779 | ||||||
|
Unrealized
losses on defined benefit pension plan
|
1,352 | 2,027 | ||||||
|
Tier
1 Capital
|
249,564 | 268,725 | ||||||
|
Plus:
Allowance for loan losses
|
7,645 | 8,132 | ||||||
|
Total
Regulatory Capital
|
$ | 257,209 | $ | 276,857 | ||||
F-33
|
12.
|
INCOME
TAXES
|
Income
taxes consist of the following:
|
Years
Ended
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In thousands)
|
||||||||||||
|
Current
tax provision:
|
||||||||||||
|
Federal
|
$ | 1,213 | $ | 2,774 | $ | 3,612 | ||||||
|
State
|
166 | 119 | 384 | |||||||||
|
Total
|
1,379 | 2,893 | 3,996 | |||||||||
|
Deferred
tax (benefit) provision:
|
||||||||||||
|
Federal
|
(108 | ) | (1,153 | ) | (136 | ) | ||||||
|
State
|
(4 | ) | 55 | (48 | ) | |||||||
|
Total
|
(112 | ) | (1,098 | ) | (184 | ) | ||||||
|
Total
|
$ | 1,267 | $ | 1,795 | $ | 3,812 | ||||||
The
reasons for the differences between the statutory federal income tax rate and
the effective rates are summarized below:
|
Years
Ended
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Statutory
federal income tax rate
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
|
Increase
(decrease) resulting from:
|
||||||||||||
|
State
taxes, net of federal tax benefit
|
1.6 | 1.3 | 1.8 | |||||||||
|
Tax
exempt income
|
(7.1 | ) | (5.8 | ) | (4.0 | ) | ||||||
|
Bank-owned
life insurance
|
(7.7 | ) | (5.7 | ) | (3.6 | ) | ||||||
|
Dividends
received deduction
|
- | (0.1 | ) | (0.1 | ) | |||||||
|
Other,
net
|
(2.0 | ) | (2.5 | ) | 2.4 | |||||||
|
Effective
tax rate
|
18.8 | % | 21.2 | % | 30.5 | % | ||||||
Cash paid
for income taxes for the years ended December 31, 2009, 2008, and 2007 was $1.8
million, $3.4 million, and $3.8 million, respectively.
The tax
effects of each item that gives rise to deferred taxes are as
follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Net
unrealized loss on securities available for sale
|
$ | 742 | $ | 4 ,032 | ||||
|
Defined
benefit plan
|
695 | 1,043 | ||||||
|
Allowance
for loan losses
|
2,599 | 2,991 | ||||||
|
Employee
benefit and share-based compensation plans
|
2,094 | 2,060 | ||||||
|
Other-than-temporary
impairment write-down
|
531 | 436 | ||||||
|
Other
|
334 | (41 | ) | |||||
|
Net
deferred tax asset
|
$ | 6,995 | $ | 10,521 | ||||
F-34
The
federal income tax reserve for loan losses at the Bank’s base year is $5.8
million. If any portion of the reserve is used for purposes other than to
absorb loan losses, approximately 150% of the amount actually used, limited to
the amount of the reserve, would be subject to taxation in the fiscal year in
which used. As the Bank intends to use the reserve solely to absorb loan
losses, a deferred tax liability of $2.4 million has not been
provided.
|
13.
|
TRANSACTIONS
WITH DIRECTORS AND EXECUTIVE
OFFICERS
|
Westfield
Financial has had, and expects to have in the future, loans with its directors
and executive officers. Such loans, in the opinion of management do not
include more than the normal risk of collectability or other unfavorable
features. Following is a summary of activity for such
loans:
|
Years
Ended
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Balance,
beginning of year
|
$ | 15,539 | $ | 12,893 | ||||
|
Principal
distributions
|
4,061 | 7,457 | ||||||
|
Repayments
of principal
|
(1,974 | ) | ( 4,811 | ) | ||||
|
Balance,
end of year
|
$ | 17,626 | $ | 15,539 | ||||
|
14.
|
COMMITMENTS
AND CONTINGENCIES
|
In the
normal course of business, various commitments and contingent liabilities are
outstanding, such as standby letters of credit and commitments to extend credit
with off-balance-sheet risk that are not reflected in the consolidated financial
statements. Financial instruments with off-balance-sheet risk involve
elements of credit, interest rate, liquidity and market risk.
Management
does not anticipate any significant losses as a result of these
transactions. The following summarizes these financial instruments and
other commitments and contingent liabilities at their contract
amounts:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Commitments
to extend credit:
|
||||||||
|
Unused
lines of credit
|
$ | 78,173 | $ | 69,222 | ||||
|
Loan
commitments
|
13,482 | 16,826 | ||||||
|
Existing
construction loan agreements
|
882 | 1,079 | ||||||
|
Standby
letters of credit
|
3,745 | 5,946 | ||||||
Westfield
Financial uses the same credit policies in making commitments and conditional
obligations as it does for on balance sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some commitments expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Westfield Financial evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by Westfield Financial upon extension of credit,
is based on management’s credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
F-35
Standby
letters of credit are written conditional commitments issued by Westfield
Financial that guarantees the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
At
December 31, 2009, outstanding commitments to extend credit totaled $96.3
million, with $9.6 million in fixed rate commitments with interest rates ranging
from 4.25% to 12.00% and $86.7 million in variable rate commitments. At
December 31, 2008, outstanding commitments to extend credit totaled $93.1
million, with $9.2 million in fixed rate commitments with interest rates ranging
from 6.00% to 12.00% and $83.9 million in variable rate
commitments.
In the
ordinary course of business, Westfield Financial is party to various legal
proceedings, none of which, in the opinion of management, will have a material
effect on Westfield Financial’s consolidated financial position or results of
operations.
Westfield
Financial leases facilities and certain equipment under cancelable and
noncancelable leases expiring in various years through the year 2046.
Certain of the leases provide for renewal periods for up to forty years at the
discretion of Westfield Financial. Rent expense under operating leases was
$481,000, $401,000, and $363,000 for the years ended December 31, 2009, 2008,
and 2007, respectively.
Aggregate
future minimum rental payments under the terms of non-cancelable operating
leases at December 31, 2009, are as follows:
|
Year Ending
|
||||
|
December 31,
|
Amount
|
|||
|
(In thousands)
|
||||
|
2010
|
$ | 538 | ||
|
2011
|
536 | |||
|
2012
|
440 | |||
|
2013
|
431 | |||
|
2014
|
429 | |||
|
Thereafter
|
10,296 | |||
| $ | 12,670 | |||
|
15.
|
CONCENTRATIONS
OF CREDIT RISK
|
Most of
Westfield Financial’s loans consist of residential and commercial real estate
loans located in Western Massachusetts. As of December 31, 2009 and 2008,
Westfield Financial’s residential and commercial related real estate loans
represented 68.9% and 67.1% of total loans, respectively. Westfield
Financial’s policy for collateral requires that the amount of the loan may not
exceed 100% and 85% of the appraised value of the property for residential and
commercial real estate, respectively, at the date the loan is granted. For
residential loans, in cases where the loan exceeds 80%, private mortgage
insurance is typically obtained for that portion of the loan in excess of 80% of
the appraised value of the property.
F-36
|
16.
|
FAIR
VALUE OF ASSETS AND LIABLITIES
|
Determination
of Fair Value
Westfield
Financial uses fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures. The fair
value of a financial instrument is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market
prices for Westfield Financial’s various financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.
Methods
and assumptions for valuing Westfield Financial’s financial instruments are set
forth below. Estimated fair values are calculated based on the value
without regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications or estimated
transaction cost.
Cash and cash
equivalents -
T
he
carrying amounts of cash and short-term instruments approximate fair values
based on the short-term nature of the assets.
Interest-bearing
deposits in banks
- The carrying amounts of interest-bearing deposits
maturing within ninety days approximate their fair values. Fair values of other
interest-bearing deposits are estimated using discounted cash flow analyses
based on current market rates for similar types of deposits.
Securities and
mortgage-backed securities
- The securities measured at fair value in
Level 1 are based on quoted market prices in an active exchange market. These
securities include marketable equity securities. All other securities are
measured at fair value in Level 2 and are based on pricing models that consider
standard input factors such as observable market data, benchmark yields,
interest rate volatilities, broker/dealer quotes, credit spreads and new issue
data. These securities include government sponsored enterprise obligations,
state and municipal obligations, residential mortgage-backed securities
guaranteed and sponsored by the U.S. government or an agency thereof, and
private label residential mortgage-backed securities.
Federal Home Loan
Bank and other stock
- These investments are carried at cost which is
their estimated redemption value.
Loans receivable
-
For
adjustable rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values. Fair values for
other loans (e.g., commercial real estate and investment property mortgage
loans, commercial and industrial loans) are estimated using discounted cash flow
analyses, using market interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
non-performing loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Accrued
interest -
The carrying
amounts of accrued interest approximate fair value.
Deposit
liabilities -
The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts of
fixed-term money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
market interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
F-37
Short-term
borrowings -
For short-term borrowings
maturing within ninety days, carrying values approximate fair
values.
Long-term debt
-
The fair
values of Westfield Financial’s long-term debt are estimated using discounted
cash flow analyses based on the current incremental borrowing rates in the
market for similar types of borrowing arrangements.
Commitments to
extend credit
- The stated value of commitments to extend credit
approximates fair value as the current interest rates for similar commitments do
not differ significantly. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. Such differences are not considered
significant.
Assets
Measured at Fair Value on a Recurring Basis
Assets
measured at fair value on a recurring basis are summarized below:
|
December
31,
2009
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||
|
Mutual
funds
|
$ | 5,037 | $ | 1,452 | $ | - | $ | 6,489 | ||||||||
|
Common
and preferred stock
|
59 | - | - | 59 | ||||||||||||
|
Government-sponsored
agency debt
|
- | 10,698 | - | 10,698 | ||||||||||||
|
State
and municipal
|
- | 2,070 | - | 2,070 | ||||||||||||
|
Government-sponsored
residential mortgage-backed
|
- | 290,248 | - | 290,248 | ||||||||||||
|
U.S.
Government guaranteed residential mortgage-backed
|
- | 1,047 | - | 1,047 | ||||||||||||
|
Private-label
residential mortgage-backed
|
- | 8,510 | - | 8,510 | ||||||||||||
|
Total
assets
|
$ | 5,096 | $ | 314,025 | $ | - | $ | 319,121 | ||||||||
|
December
31,
2008
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Securities
available for sale
|
$ | 6,127 | $ | 18,269 | $ | - | $ | 24,396 | ||||||||
|
Mortgage-backed
securities available for sale
|
- | 233,747 | - | 233,747 | ||||||||||||
|
Total
assets
|
$ | 6,127 | $ | 252,016 | $ | - | $ | 258,143 | ||||||||
F-38
Assets
Measured at Fair Value on a Non-recurring Basis
Westfield
Financial may also be required, from time to time, to measure certain other
financial assets on a nonrecurring basis in accordance with generally accepted
accounting principles. These adjustments to fair value usually result from
application of lower-of-cost-or-market accounting or write-downs of individual
assets. The following table summarizes the fair value hierarchy used to
determine each adjustment and the carrying value of the related individual
assets as of December 31, 2009 and 2008.
|
At
December
31,
2009
|
Year
Ended
December
31,
2009
|
|||||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Total
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Gains
(Losses)
|
|||||||||||||
|
Impaired
loans
|
$ | - | $ | - | $ | 3,575 | $ | (875 | ) | |||||||
|
Total
assets
|
$ | - | $ | - | $ | 3,575 | $ | (875 | ) | |||||||
|
At
December
31,
2008
|
Year
Ended
December
31,
2008
|
|||||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Total
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Gains
(Losses)
|
|||||||||||||
|
Impaired
loans
|
$ | - | $ | - | $ | 4,809 | $ | (2,286 | ) | |||||||
|
Total
assets
|
$ | - | $ | - | $ | 4,809 | $ | (2,286 | ) | |||||||
Losses
applicable to write-downs of impaired loans are based on the appraised value of
the underlying collateral discounted as necessary, as foreclosure of these loans
is imminent.
Westfield
Financial does not measure any liabilities at fair value on a recurring or
non-recurring basis on the consolidated balance sheets.
F-39
Summary
of Fair Values of Financial Instruments
The
estimated fair values of the Westfield Financial’s financial instruments at
December 31 are as follows:
|
2009
|
2008
|
|||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
Value
|
Fair
Value
|
Value
|
Fair
Value
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 28,719 | $ | 28,719 | $ | 56,533 | $ | 56,333 | ||||||||
|
Securities:
|
||||||||||||||||
|
Available
for sale
|
19,316 | 19,316 | 24,396 | 24,396 | ||||||||||||
|
Held
to maturity
|
69,244 | 72,364 | 79,303 | 82,491 | ||||||||||||
|
Mortgage
backed securities:
|
||||||||||||||||
|
Available
for sale
|
299,805 | 299,805 | 233,747 | 233,747 | ||||||||||||
|
Held
to maturity
|
225,767 | 231,255 | 168,332 | 168,716 | ||||||||||||
|
Federal
Home Loan Bank of Boston
|
||||||||||||||||
|
and
other restricted stock
|
10,339 | 10,339 | 8,456 | 8,456 | ||||||||||||
|
Loans
- net
|
469,149 | 474,554 | 472,135 | 492,121 | ||||||||||||
|
Accrued
interest receivable
|
5,198 | 5,198 | 5,261 | 5,261 | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Deposits
|
647,975 | 649,473 | 588,029 | 591,244 | ||||||||||||
|
Short-term
borrowings
|
74,499 | 74,499 | 49,824 | 49,824 | ||||||||||||
|
Long-term
debt
|
213,845 | 214,669 | 173,300 | 177,567 | ||||||||||||
|
Accrued
interest payable
|
730 | 730 | 762 | 762 | ||||||||||||
Limitations
- Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time Westfield Financial’s entire holdings of a particular
financial instrument. Where quoted market prices are not available, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment.
Changes in assumptions could significantly affect the
estimates.
F-40
|
17.
|
SEGMENT
INFORMATION
|
Westfield
Financial has one reportable segment, “Community Banking.” All of
Westfield Financial’s activities are interrelated, and each activity is
dependent and assessed based on how each of the activities of Westfield
Financial supports the others. For example, commercial lending is
dependent upon the ability of Westfield Bank to fund itself with retail deposits
and other borrowings and to manage interest rate and credit risk. This
situation is also similar for consumer and residential mortgage lending.
Accordingly, all significant operating decisions are based upon analysis of
Westfield Financial as one operating segment or unit.
Westfield
Financial operates only in the U.S. domestic market, primarily in Western
Massachusetts. For the years ended December 31, 2009, 2008 and 2007, there
is no customer that accounted for more than 10% of Westfield Financial’s
revenue.
|
18.
|
CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
|
The
condensed balance sheets of the Westfield Financial parent company are as
follows:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In thousands)
|
||||||||
|
ASSETS:
|
||||||||
|
Due
from banks
|
$ | 5,237 | $ | 2,700 | ||||
|
Federal
funds sold
|
- | 10,518 | ||||||
|
Securities
held to maturity
|
1,882 | 6,885 | ||||||
|
Mortgage-backed
securities held to maturity
|
35 | 9,937 | ||||||
|
Mortgage-backed
securities available for sale
|
8,130 | 13,503 | ||||||
|
Investment
in subsidiaries
|
227,680 | 212,277 | ||||||
|
Other
assets
|
4,371 | 4,227 | ||||||
|
TOTAL
ASSETS
|
247,335 | 260,047 | ||||||
|
LIABILITIES
AND EQUITY:
|
||||||||
|
Liabilities
|
36 | 128 | ||||||
|
Equity
|
247,299 | 259,919 | ||||||
|
TOTAL
LIABILITIES AND EQUITY
|
$ | 247,335 | $ | 260,047 | ||||
F-41
The
condensed statements of income for the Westfield Financial parent company are as
follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In thousands)
|
||||||||||||
|
INCOME
(LOSS):
|
||||||||||||
|
Interest
income from securities
|
$ | 1,499 | $ | 2,231 | $ | 2,605 | ||||||
|
Interest
income from federal funds sold
|
4 | 290 | 1,559 | |||||||||
|
(Loss)
gain on sale of securities, net
|
(2,079 | ) | 303 | - | ||||||||
|
Other
income
|
6 | 9 | 9 | |||||||||
|
Total
(loss) income
|
(570 | ) | 2,833 | 4,173 | ||||||||
|
OPERATING
EXPENSE:
|
||||||||||||
|
Salaries
and employee benefits
|
3,100 | 2,857 | 2,200 | |||||||||
|
Other
|
470 | 491 | 493 | |||||||||
|
Total
operating expense
|
3,570 | 3,348 | 2,693 | |||||||||
|
(LOSS)
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES AND INCOME
TAXES
|
(4,140 | ) | (515 | ) | 1,480 | |||||||
|
EQUITY
IN UNDISTRIBUTED INCOME OF
|
||||||||||||
|
SUBSIDIARIES
|
8,311 | 7,144 | 7,882 | |||||||||
|
NET
INCOME BEFORE TAXES
|
4,171 | 6,629 | 9,362 | |||||||||
|
INCOME
TAX BENEFIT
|
(1,288 | ) | (62 | ) | 662 | |||||||
|
NET
INCOME
|
$ | 5,459 | $ | 6,691 | $ | 8,700 | ||||||
F-42
The
condensed statements of cash flows of the Westfield Financial parent company are
as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In thousands)
|
||||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
Income
|
$ | 5,459 | $ | 6,691 | $ | 8,700 | ||||||
|
Equity
in undistributed earnings of subsidiaries
|
(8,311 | ) | (7,144 | ) | (7,882 | ) | ||||||
|
Net
amortization of premiums and discounts on securities
|
39 | 10 | 21 | |||||||||
|
Net
realized securities losses (gains)
|
2,079 | (303 | ) | - | ||||||||
|
Change
in other liabilities
|
(92 | ) | 1 | 55 | ||||||||
|
Change
in other assets
|
(789 | ) | 414 | (1,565 | ) | |||||||
|
Other,
net
|
2,610 | 2,327 | 2,780 | |||||||||
|
Net
cash provided by operating activities
|
995 | 1,996 | 2,109 | |||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Purchase
of securities
|
(5,276 | ) | - | (58,179 | ) | |||||||
|
Proceeds
from principal collections
|
10,509 | 5,331 | 4,395 | |||||||||
|
Sale
of securities
|
4,394 | 18,414 | - | |||||||||
|
Transfer
of stock offering proceeds to subsidiaries
|
- | - | (90,797 | ) | ||||||||
|
Net
cash provided (used) by investing activities
|
9,627 | 23,745 | (144,581 | ) | ||||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Cash
dividends paid
|
(14,595 | ) | (17,945 | ) | (12,075 | ) | ||||||
|
Purchase
of common stock for equity incentive plan
|
- | - | (6,075 | ) | ||||||||
|
Capital
contribution pursuant to dissolution of MHC
|
- | - | 2,713 | |||||||||
|
Common
stock repurchased
|
(13,690 | ) | (10,483 | ) | - | |||||||
|
Net
capital distribution from subsidiaries
|
9,078 | - | - | |||||||||
|
Exchange
of common stock pursuant to reorganization
|
- | - | (320 | ) | ||||||||
|
Excess
tax benefit from share-based compensation
|
155 | 334 | 222 | |||||||||
|
Issuance
of common stock in connection with stock option exercises
|
449 | 1,901 | 42 | |||||||||
|
Other,
net
|
- | - | (738 | ) | ||||||||
|
Net
cash used by financing activities
|
(18,603 | ) | (26,193 | ) | (16,231 | ) | ||||||
|
DECREASE
IN CASH AND CASH EQUIVALENTS
|
(7,981 | ) | (452 | ) | (158,703 | ) | ||||||
|
CASH
AND CASH EQUIVALENTS:
|
||||||||||||
|
Beginning
of year
|
13,218 | 13,670 | 172,373 | |||||||||
|
End
of year
|
$ | 5,237 | $ | 13,218 | $ | 13,670 | ||||||
|
19.
|
OTHER
NONINTEREST EXPENSE
|
There is
no item that as a component of other noninterest expense exceeded 1% of the
aggregate of total interest income and noninterest income for the years ended
December 31, 2009, 2008 and 2007, respectively.
F-43
|
20.
|
SUMMARY
OF QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
|
|
2009
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
(Dollars in thousands, except per share amounts)
|
||||||||||||||||
|
Interest
and dividend income
|
$ | 13,102 | $ | 12,975 | $ | 13,298 | $ | 13,155 | ||||||||
|
Interest
expense
|
5,084 | 5,169 | 5,056 | 4,713 | ||||||||||||
|
Net
interest and dividend income
|
8,018 | 7,806 | 8,242 | 8,442 | ||||||||||||
|
Provision
for loan losses
|
1,150 | 590 | 620 | 1,540 | ||||||||||||
|
Noninterest
income
|
1,060 | 1,098 | 951 | 967 | ||||||||||||
|
Total
other-than-temporary impairment losses in securities
|
- | - | (1,343 | ) | (411 | ) | ||||||||||
|
Portion
of impairment losses recognized in accumulated other comprehensive
loss
|
- | - | 1,157 | 319 | ||||||||||||
|
Net
impairment losses recognized in income
|
- | - | (186 | ) | (92 | ) | ||||||||||
|
Loss
on sales of premises and equipment, net
|
(8 | ) | - | - | - | |||||||||||
|
Loss
on prepayment of borrowings
|
- | (142 | ) | - | - | |||||||||||
|
Loss
on disposal of OREO
|
- | - | (110 | ) | - | |||||||||||
|
Gain
(loss) on sales of securities, net
|
87 | 122 | (774 | ) | 182 | |||||||||||
|
Noninterest
expense
|
6,408 | 7,007 | 6,064 | 5,558 | ||||||||||||
|
Income
before income taxes
|
1,599 | 1,287 | 1,439 | 2,401 | ||||||||||||
|
Income
taxes
|
394 | 214 | 197 | 462 | ||||||||||||
|
Net
income
|
1,205 | 1,073 | 1,242 | 1,939 | ||||||||||||
|
Basic
earnings per share
|
$ | 0.04 | $ | 0.04 | $ | 0.04 | $ | 0.07 | ||||||||
|
Diluted
earnings per share
|
$ | 0.04 | $ | 0.04 | $ | 0.04 | $ | 0.06 | ||||||||
|
2008
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
(Dollars in thousands, except per share amounts)
|
||||||||||||||||
|
Interest
and dividend income
|
$ | 13,769 | $ | 13,547 | $ | 13,504 | $ | 13,236 | ||||||||
|
Interest
expense
|
6,061 | 5,594 | 5,405 | 5,244 | ||||||||||||
|
Net
interest and dividend income
|
7,708 | 7,953 | 8,099 | 7,992 | ||||||||||||
|
Provision
for loan losses (1)
|
175 | 240 | 275 | 2,763 | ||||||||||||
|
Noninterest
income
|
875 | 932 | 964 | 954 | ||||||||||||
|
Total
other-than-temporary impairment losses in securities
|
(310 | ) | - | (651 | ) | (322 | ) | |||||||||
|
Portion
of impairment losses recognized in accumulated other comprehensive
loss
|
- | - | - | - | ||||||||||||
|
Net
impairment losses recognized in income
|
(310 | ) | - | (651 | ) | (322 | ) | |||||||||
|
Gain
on sales of securities, net
|
300 | 19 | 486 | 273 | ||||||||||||
|
Noninterest
expense
|
5,784 | 5,733 | 5,783 | 6,033 | ||||||||||||
|
Income
before income taxes
|
2,614 | 2,931 | 2,840 | 101 | ||||||||||||
|
Income
taxes
|
753 | 811 | 793 | (562 | ) | |||||||||||
|
Net
income
|
$ | 1,861 | $ | 2,120 | $ | 2,047 | $ | 663 | ||||||||
|
Basic
earnings per share
|
$ | 0.06 | $ | 0.07 | $ | 0.07 | $ | 0.02 | ||||||||
|
Diluted
earnings per share
|
$ | 0.06 | $ | 0.07 | $ | 0.07 | $ | 0.02 | ||||||||
F-44
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Westfield
Financial, Inc.
We have
audited Westfield Financial, Inc.’s internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Westfield Financial Inc.’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America. Also, because management’s assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA), our audit of Westfield
Financial, Inc.’s internal control over financial reporting included controls
over the preparation of financial statements in accordance with the instructions
to the Consolidated Financial Statements for Bank Holding Companies (Form FR
Y-9C) and the Office of Thrift Supervision Instructions for Thrift Financial
Reports. A company's internal control over financial reporting includes those
policies and procedures that (a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (c) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Westfield Financial, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the December 31, 2009 consolidated financial
statements of Westfield Financial, Inc. and our report dated March 12, 2010
expressed an unqualified opinion.
|
/s/
Wolf & Company, P.C.
|
|
Boston,
Massachusetts
|
|
March
12, 2010
|
F-45
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesPart OfItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules