Business context and reporting period
This is Westfield Financial, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015, filed November 6, 2015. The filing describes a Massachusetts bank holding company operating Westfield Bank, with 13 banking offices in western Massachusetts and Connecticut. The filing names Westfield Financial, Inc., not Western New England Bancorp, Inc.; verify the entity and filing match before relying on this summary.
The company’s strategy emphasized commercial lending, deposit growth and expansion of its retail franchise, supplemented by residential loan purchases. Financial amounts below are in U.S. dollars; balance-sheet and income-statement figures are generally converted from thousands to millions.
Financial results and condition
- Quarterly earnings: Net income was $1.61 million, or $0.09 per diluted share, versus $1.51 million, or $0.08, in Q3 2014. Net interest and dividend income was $8.16 million, compared with $7.83 million.
- Nine-month earnings: Net income was $4.31 million, or $0.25 per diluted share, versus $4.50 million, or $0.25, in the first nine months of 2014. Net interest and dividend income was $23.53 million, versus $23.19 million.
- Revenue and margin: Total interest and dividend income was $10.97 million in Q3 and $31.66 million for nine months. Tax-equivalent net interest margin was 2.53% for Q3 (2.58% in 2014) and 2.52% for nine months (2.61% in 2014). The filing does not present a single conventional total-revenue figure.
- Credit costs and expenses: Loan-loss provision was $0.15 million for Q3 and $0.80 million for nine months, down from $0.75 million and $1.30 million, respectively. Noninterest expense rose to $6.87 million for Q3 and $20.44 million for nine months. The nine-month tax provision was $1.60 million, with a 27.0% effective rate, versus $1.36 million and 23.2% in 2014.
- Assets, loans and deposits: Total assets were $1.36 billion at September 30, up from $1.32 billion at year-end 2014. Reported loans, net of the allowance, were $798.5 million; gross loans in the financial-statement note were $803.2 million. Deposits were $909.0 million, up from $834.2 million. The MD&A separately reports total loans of $806.9 million; the filing text does not clearly reconcile this amount with the note’s gross-loan figure.
- Funding, debt and equity: Short-term borrowings were $121.2 million and long-term debt $166.4 million, totaling $287.6 million, versus $326.5 million at year-end 2014. Shareholders’ equity was $139.6 million, or 10.3% of assets, versus $142.5 million, or 10.8%. Cash and cash equivalents were $22.0 million.
- Cash flow: For nine months, operating activities provided $9.4 million, investing activities used $36.1 million and financing activities provided $29.9 million. Cash and cash equivalents increased $3.2 million to $22.0 million.
- Capital and liquidity: The bank was classified as well-capitalized. At September 30, its total risk-based capital ratio was 16.51%, Tier 1 risk-based ratio 15.59%, Common Equity Tier 1 ratio 15.59%, and Tier 1 leverage ratio 10.40%. Management said liquidity was sufficient; stated additional borrowing capacity was $99.8 million at the FHLBB and $54.0 million through BBN and PNC lines.
Material changes versus comparable periods
- Q3 net income increased year over year, while nine-month net income declined. In both comparisons, net interest income rose modestly, but the margin narrowed.
- Loan growth was significant: the balance-sheet loan amount, net of allowance, rose from $716.7 million at year-end 2014 to $798.5 million. Residential loans grew in part through $77.1 million of purchases during the first nine months; securities declined primarily as sales helped fund loan growth.
- Deposits increased $74.8 million from year-end, including growth in time deposits and money-market accounts. Borrowings declined overall as long-term debt fell, while short-term borrowings increased.
- Nonperforming loans were $7.3 million, or 0.91% of loans, versus $8.8 million, or 1.22%, at year-end 2014. Nonperforming assets were 0.54% of assets, compared with 0.67%.
- Accumulated other comprehensive loss widened by $3.3 million during the nine months, primarily reflecting changes in interest-rate swap values. Equity was also reduced by $2.9 million of share repurchases and $1.6 million of dividends, partly offset by net income.
Outlook, risks and unusual items
- No quantified earnings guidance is provided. Management said 2015 interim results are not necessarily indicative of full-year results.
- The company prepaid $39.0 million of borrowings during the first nine months and recorded $1.3 million of related prepayment expense: $0.593 million in Q1, $0.278 million in Q2 and $0.429 million in Q3. Management expected the prepayments to reduce future funding costs and improve net interest margin.
- Noninterest income included $1.51 million in net securities-sale gains for the nine-month period, up from $0.28 million in 2014. Management attributed the increase to sales of lower-yielding securities. Q3 professional fees included one-time third-party management consulting costs.
- Interest-rate exposure remains important: the company reported $120 million notional of cash-flow hedges and $8.1 million of derivative liabilities. It disclosed collateral and termination provisions tied to default, capital status and certain regulatory actions.
- Management identified risks including changing interest rates and margins, credit quality and local economic conditions, competition, regulation, deposit-insurance costs, technology, key-personnel changes, and severe external events. It said there were no material changes to previously disclosed risk factors or market-risk assessments.
- The company reported no material off-balance-sheet arrangements, no material pending legal matter identified in the filing, and effective disclosure controls at period-end.
Most important facts for investors to verify
- Confirm that this Westfield Financial, Inc. filing is the intended filing for Western New England Bancorp, Inc.
- Reconcile the MD&A’s $806.9 million loan figure with the note’s $803.2 million gross loans and the balance sheet’s $798.5 million net loans.
- Assess whether loan growth, including purchased residential mortgages, can sustain earnings without further pressure on net interest margin or credit quality.
- Review the recurring impact of the $1.3 million borrowing-prepayment expense, securities-sale gains, and consulting costs on reported earnings.
- Monitor deposit composition and costs, borrowing levels, derivative collateral requirements, and the continuing effect of rate changes on margins and accumulated other comprehensive loss.