Business context and reporting period
This is Westfield Financial, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016—not a filing under the requested name, Western New England Bancorp, Inc. The company operated Westfield Bank, a community bank with 13 offices in western Massachusetts and Connecticut, focused on commercial, residential and consumer banking.
Financial performance and position
Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in thousands.
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior date |
|---|---|---|
| Net income; diluted EPS | $389,000; $0.02 | Q2 2015: $1.364 million; $0.08 |
| Six-month net income; diluted EPS | $2.353 million; $0.14 | Six months 2015: $2.702 million; $0.15 |
| Net interest income | Q2: $8.002 million; six months: $16.245 million | Q2 2015: $7.779 million; six months 2015: $15.370 million |
| Tax-equivalent net interest margin | Q2: 2.62%; six months: 2.61% | Q2 2015: 2.50%; six months 2015: 2.51% |
| Provision for loan losses | Q2: $625,000; six months: $25,000 | Q2 2015: $350,000; six months 2015: $650,000 |
| Total assets; shareholders’ equity | $1.306 billion; $144.6 million | December 31, 2015: $1.340 billion; $139.5 million |
| Loans, net of allowance | $896.6 million | December 31, 2015: $809.4 million |
| Deposits | $920.9 million | December 31, 2015: $900.4 million |
| Short-term borrowings; long-term debt | $144.7 million; $78.0 million | December 31, 2015: $128.4 million; $153.4 million |
| Cash and cash equivalents | $21.3 million | December 31, 2015: $13.7 million |
For the first six months, operating cash flow was $1.052 million, versus $5.175 million in 2015. Investing activities provided $46.990 million, while financing activities used $40.478 million. The allowance for loan losses was $9.570 million, or 1.06% of total loans, at quarter-end. The bank reported regulatory capital ratios above applicable well-capitalized thresholds; its Tier 1 leverage ratio was 11.00%.
Material changes versus comparable periods
- Q2 net income fell by about 71% year over year. Net interest income improved, but noninterest expense rose $1.133 million, principally reflecting $929,000 of Chicopee merger costs; the loan-loss provision also increased. The quarter’s effective tax rate rose to 39.1% from 24.6%, partly reflecting nondeductible merger costs and lower expected tax-advantaged income.
- Six-month net income declined about 13%, despite higher net interest income. Merger-related costs totaled $1.083 million in the first half. The six-month provision was low largely because of an $852,000 recovery on a previously charged-off commercial real estate loan; net recoveries were $705,000.
- Loans increased, led by residential real estate and commercial real estate growth. The company purchased $70.4 million of residential loans during the first half. Securities declined $128.1 million as the company sold securities to support loan growth and reduce borrowings.
- In Q1, the company transferred $232.8 million of held-to-maturity securities to available-for-sale and sold $136.8 million of available-for-sale securities during the first half. Total borrowings fell $59.1 million from year-end, including prepayment of $42.5 million of FHLB advances, which generated a $915,000 expense; short-term borrowings nevertheless increased.
- Deposits rose $20.5 million, with growth in money market and checking balances partly offset by lower time deposits. Management said it was seeking to reduce reliance on brokered and listing-service deposits.
Outlook, risks, contingencies and unusual items
The company agreed to acquire Chicopee Bancorp in an all-stock transaction, with each Chicopee share converting into 2.425 Westfield Financial shares. Closing was expected in Q4 2016, subject to regulatory and shareholder approvals and customary conditions. The filing gives no earnings or financial-performance guidance.
Management cited interest-rate and margin changes, competition, economic and credit conditions, regulation, deposit-insurance costs, technology, and operational and other external events as risks. It said available liquidity was sufficient for current needs and reported additional FHLB borrowing capacity of $99.8 million, plus $54.0 million of available BBN and PNC lines.
Nonperforming loans were $8.0 million, or 0.89% of loans, versus $8.1 million and 0.99% at year-end; nonperforming assets were 0.62% of assets. A $5.1 million loan relationship was classified as a troubled debt restructuring during Q2, was on nonaccrual but current under a forbearance arrangement, and was being evaluated for impairment quarterly. Management warned that allowance estimates may need adjustment if economic or real-estate conditions change.
Cash-flow hedge derivatives had a $5.740 million fair-value liability at June 30. Derivative agreements included default and capital-related termination or collateral provisions; the company had posted a mortgage-backed security valued at $4.7 million and $1.6 million of cash as collateral. Contractual credit commitments totaled $203.3 million; management said many commitments may expire unfunded. The company reported no material off-balance-sheet arrangements, no material changes to its previously disclosed risk factors or market-risk assessment, and no pending legal matters expected to have a material adverse effect.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for Westfield Financial, Inc., not Western New England Bancorp, Inc.
- Track Chicopee merger approvals, closing timing, share issuance and integration costs; the stated Q4 2016 close was conditional.
- Assess recurring earnings apart from merger costs, securities gains or losses, debt-prepayment expense, and the unusually large loan recovery.
- Monitor loan growth, credit ratings, nonperforming assets, the $5.1 million TDR, and the allowance for loan losses.
- Review funding mix, short-term borrowing levels, deposit pricing, liquidity capacity and interest-rate hedge collateral or termination exposure.