Western New England Bancorp - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

For the quarterly period ended September 30, 2010

OR

 

For the transition period from _____ to _____.

Commission file number 001-16767

 

This Quarterly Report on Form 10-Q contains “forward-looking statements.”  These forward-looking statements are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  These forward-looking statements may be subject to significant known and unknown risks, uncertainties and other factors, including, but not limited to, changes in the real estate market or local economy, changes in interest rates, changes in laws and regulati ons to which we are subject, and competition in our primary market area.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Westfield Financial undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED

(Dollars in thousands, except per share data)

 

See accompanying notes to unaudited consolidated financial statements.

 

See the accompanying notes to unaudited consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Nature of Operations – Westfield Financial, Inc. (“Westfield Financial,” “we” or “us”) is the bank holding company for Westfield Bank, a federally-chartered stock savings bank (the “Bank”).

Westfield Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”).  Westfield Bank operates eleven branches in Western Massachusetts and its primary sources of revenue are income from securities and 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 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 the 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, the disclosure of contingent assets and liabilities and the reported amounts of income and expenses for both at the date of the consolidated financial statements.  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, other-than-temporary impairment of securities, and the valuation of deferred tax assets.

Basis of Presentation – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of September 30, 2010, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented.  The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results of operations for the year ending December 31, 2010.  Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2009, included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Annual Report”).

Reclassifications - Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.

Basic earnings per share represent income available to shareholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by us relate solely to outstanding stock options and are determined using the treasury stock method.

Earnings per common share for the three and nine months ended September 30, 2010 and 2009 have been computed based on the following:

 

Stock options that would have an antidilutive effect on diluted earnings per share are excluded from the calculation.  At September 30, 2010 and 2009, 1,576,024 and 1,538,357 shares were antidilutive, respectively.

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.

The components of other comprehensive income and related tax effects are as follows:

The components of accumulated other comprehensive income included in shareholders’ equity are as follows:

 

Securities are summarized as follows:

 

 

 

 

In August 2010, Westfield Financial transferred all of its held-to-maturity investments to the available-for-sale category.  Management determined that it no longer had the positive intent to hold its securities classified as held-to-maturity for an indefinite period of time because of management’s desire to have more flexibility in managing the investment portfolio.  The securities transferred had a total amortized cost of $287.1 million, fair value of $299.7 million and the net unrealized gain of $12.6 million was recorded as other comprehensive income at the time of transfer.

The amortized cost and fair value of debt securities, excluding mortgage-backed securities, at September 30, 2010, by maturity, are shown below.  Actual maturities may differ from contractual maturities because certain issuers have the right to call or repay obligations.

 

Gross realized gains and losses on sales of securities for the three and nine months ended September 30, 2010 and 2009 are as follows:

 

Proceeds from the sale of securities available for sale amounted $309.2 million and $44.3 million for the nine months ended September 30, 2010 and 2009, respectively.

The tax provision applicable to net realized gains and losses were $887,000 and $1.3 million for the three and nine months ended September 30, 2010, respectively.  The tax benefit applicable to net realized gains and losses were $258,000 and $186,000 for the three and nine months ended September 30, 2009, respectively.

One security with a carrying value of $4.2 and $5.0 million at September 30, 2010 and December 31, 2009, respectively, was pledged as collateral to the Federal Reserve Bank of Boston to secure public deposits.

 

 

 

 

 

At September 30, 2010, forty government-sponsored and U.S. government guaranteed mortgage-backed securities had gross unrealized losses with aggregate depreciation of 1.3% from our amortized cost basis existing for less than twelve months.  At September 30, 2010, four government-sponsored securities had gross unrealized losses with aggregate depreciation of 1.8% from our amortized cost basis existing for more 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 interest rates and not credit quality.  Because we do not intend to sell the securities and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost basis, no declines are deemed to be other- than-temporary.

At September 30, 2010, one mutual fund had a gross unrealized loss with aggregate depreciation of 2.8% from our cost basis existing for greater than twelve months and was principally related to fluctuations in interest rates.  This loss relates to a mutual fund which invests primarily in short-term debt instruments and adjustable rate mortgage-backed securities.  Because we do not intend to sell the security and it is more likely than not that we will not be required to sell it prior to the recovery of its amortized cost basis, the loss is deemed temporary.

At September 30, 2010, four private label mortgage-backed securities have gross unrealized losses of 8.5% from our amortized cost basis which existed for greater than twelve months.  Management uses a third party on a quarterly basis that is 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 voluntary prepayment rate), severity of loss on defaulted loans (50% - 60%), current levels of subordination, current credit enhancement (4.21% - 8.01% ), vintage (2006), geographic location and projected default rates.  As a result of this analysis, two private label mortgage-backed securities were deemed to have other-than- temporary impairment losses as of September 30, 2010.  We had no writedowns due to other-than-temporary impairment on mortgage-backed securities during the three months ended September 30, 2010.  During the nine months ended September 30, 2010, we had writedowns of $1.1 million due to other-than-temporary impairment on mortgage-backed securities, of which $971,000 was recognized in accumulated other comprehensive loss and $100,000 was recognized as a credit loss and charged to income.  During the nine months ended September 30, 2009, we had writedowns of $1.3 million due to other-than-temporary impairment on mortgage-backed securities, of which $1.2 million was recognized in accumulated other comprehensive loss and $186,000 was recognized as a credit loss and charged to income.

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:

Under our 2007 Recognition and Retention Plan and 2007 Stock Option Plan, we may grant up to 624,041 stock awards and 1,631,682 stock options to our directors, officers, and employees, respectively.

Stock award allocations are recorded as unearned compensation based on the market price at the date of grant.  Unearned compensation is amortized over the vesting period.

We may grant both incentive and non-statutory stock options.  The exercise price of each option equals the market price of our stock on the date of grant with a maximum term of ten years.

The fair value of each option grant is estimated on the grant date using the binomial option pricing model with the following weighted average assumptions:

 

The weighted average fair value of the options granted during the three and nine months ended 2010 was $1.27 per option.  The weighted average fair value of the options granted during the nine months ended 2009 was $2.63 per option.  No stock options were granted in the three months ended September 30, 2009.

All stock awards and stock options currently vest at 20% per year.  At September 30, 2010, 34,941 stock awards and 134,232 stock options were available for future grants.

Our stock award and stock option plans activity for the nine months ended September 30, 2010 and 2009 is summarized below:

 

We recorded compensation cost related to the stock awards of $289,000 and $868,000 for the three and nine months ended September 30, 2010, respectively, and $288,000 and $1.0 million for the three and nine months ended September 30, 2009, respectively.

 

We utilize short-term borrowings and long-term debt as an additional source of funds to finance our lending and investing activities and to provide liquidity for daily operations.  Short-term borrowings are made up of Federal Home Loan Bank (“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 $53.0 million and $58.0 million at September 30, 2010 and December 31, 2009, respectively.  Customer repurchase agreements were $12.4 million at September 30, 2010, and $16.5 million at December 31, 2009.  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 guara nteed by the United States government.  This transaction settles immediately on a same day basis in immediately available funds.  Interest paid is commensurate with other products of equal interest and credit risk.  All of our customer repurchase agreements at September 30, 2010 and December 31, 2009 were held by commercial customers.

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 September 30, 2010, we had $152.3 million in long-term debt with the FHLB and $81.3 million in securities sold under repurchase agreements with an approved broker-dealer.  This compares to $127.5 million in long-term debt with FHLB advances and $81.3 million in securities sold under repurchase agreements with an approved broker-dealer at December 31, 2009.  Customer repurchase agreements were $5.2 million at September 30, 2010 and $5.0 million at December 31, 2009.  The securities sold under agreements to repurchase are callable at the issuer’s option beginning in the year 2011.

The following table provides information regarding net pension benefit costs for the periods shown:

 

We maintain a pension plan for our eligible employees.  We plan to contribute to the pension plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue Code.  Additional contributions will be made as deemed appropriate by management in conjunction with the pension plan’s actuaries.  We expect to contribute up to $600,000 to our pension plan in 2010.  No contributions have been made to the plan for the three and nine months ended September 30, 2010.

Determination of Fair Value

We use 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 our 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.

 

Fair Value Hierarchy

We group our 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.

Methods and assumptions for valuing our 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 - The 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 – Fair value of securities are primarily measured using unadjusted information from an independent pricing service. 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.

Federal Home Loan Bank and other stock - These investments are carried at cost which is their estimated redemption value.

Loans receivable - For variable-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 variable-rate, 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.

Short-term borrowings - For short-term borrowings maturing within ninety days, carrying values approximate fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Long-term debt - The fair values of our 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 - Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the term and credit risk.  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 are summarized below: