Western New England Bancorp - 10-Q quarterly report FY2011 Q2

Washington, D. C. 20549

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For the quarterly period ended June 30, 2011

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 regulations 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.

 

 

 

 

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”).

The Bank’s deposits are insured to the limits specified by the Federal Deposit Insurance Corporation (“FDIC”).  The 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.  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, the Bank, Elm Street Securities Corporation, WB Real Estate Holdings, LLC 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 June 30, 2011, 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 six months ended June 30, 2011 are not necessarily indicative of the results of operations for the year ending December 31, 2011.  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, 2010, included in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 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 six months ended June 30, 2011 and 2010 have been computed based on the following:

 

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Stock options that would have an antidilutive effect on diluted earnings per share are excluded from the calculation.  There were 1,654,024 and 1,615,024 shares that were antidilutive for the three and six months ended June 30, 2011, respectively, and 2,209,012 and 1,880,018 shares that were antidilutive for the three and six months ended June 30, 2010, 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 loss included in shareholders’ equity are as follows:

 

Securities are summarized as follows:

The amortized cost and fair value of debt securities, excluding mortgage-backed securities, at June 30, 2011, 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 six months ended June 30, 2011 and 2010 are as follows:

 

Proceeds from the sale of securities available for sale amounted to $90.2 and $247.5million for the six months ended June 30, 2011 and 2010, respectively.

The tax provision applicable to net realized gains and losses was $16,000 and $28,000 for the three and six months ended June 30, 2011, respectively.  The tax provision applicable to net realized gains and losses was $389,000 and $452,000 for the three and six months ended June 30, 2010.

One security with a carrying value of $2.2 million at December 31, 2010, was pledged as collateral to the Federal Reserve Bank of Boston to secure public deposits.  No securities were pledged to secure public deposits at June 30, 2011.

 

Information pertaining to securities with gross unrealized losses at June 30, 2011and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

At June 30, 2011, one mutual fund had a gross unrealized loss with aggregate depreciation of 3.6% 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 June 30, 2011, one private label mortgage-backed securities had a gross unrealized loss of 18.6% 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%), current levels of subordination, current credit enhancement (1.66%), vintage (2006), geographic location and projected default rates.  As a result of this analysis, one private label mortgage-backed securities was deemed to have other-than- temporary impairment losses as of June 30, 2011.  During the three months ended June 30, 2011, we had writedowns of $433,000 due to other-than-temporary impairment on mortgage-backed securities, of which $425,000 was recognized in accumulated other comprehensive loss and $8,000 was recognized as a credit loss and charged to income.  We had no writedowns due to other-than-temporary impairment on mortgage backed securities during the three months ended June 30, 2010. During the six months ended June 30, 2011, we had writedowns of $465,000 due to other-than-temporary impairment on mortgage-backed securities, of which $425,000 was recognized in accumulated other comprehensive loss and $40,000 was recognized as a credit loss and charged to income. During the six months ended June 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.  

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:

 

 

 

During the six months ended June 30, 2011 and 2010, we purchased residential real estate loans aggregating $38.6 million and $16.3 million, respectively.

We have transferred a portion of our originated commercial real estate loans to participating lenders.  The amounts transferred have been accounted for as sales and are therefore not included in our accompanying consolidated balance sheets.  We share ratably with our participating lenders in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan.  We continue to service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties.  At June 30, 2011 and December 31, 2010, we serviced loans for participants aggregating $4.7 million and $5.2 million, respectively.

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.  The unpaid balances of these loans totaled $3.3 million and $3.9 million at June 30, 2011 and December 31, 2010, respectively.  Net service fee income of $2,000, and $3,000 was recorded for three months ended June 30, 2011 and 2010. Net service fee income of $4,000, and $6,000 was recorded for six months ended June 30, 2011 and 2010. Net Service fee income is included in service charges and fees on the consolidated statements of income.

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.  Our 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.

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.

The allowance for loan losses is evaluated on a regular basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general and allocated components, as further described below.

 

 

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, commercial and industrial, and consumer.  Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment.  This historical loss factor is adjusted for the following qualitative factors: trends in delinquencies and nonperforming loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; and national and local economic trends and industry conditions.  There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the periods presented for disclosure.

The qualitative factors are determined based on the various risk characteristics of each loan segment.  Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate – We require private mortgage insurance for all loans originated with a loan-to-value ratio greater than 80 percent and do not grant subprime loans.  All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate – Loans in this segment are primarily income-producing investment properties throughout New England.  The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.  Management obtains rent rolls and tax returns annually and continually monitors the cash flows of these loans.

Commercial and industrial loans – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

The allocated component relates to loans that are classified as impaired. Impaired loans are identified by analysis of loan performance, internal credit ratings and watch list loans that management believes are subject to a higher risk of loss.  Impairment is measured on a loan by loan basis for commercial real estate and commercial and industrial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, we do not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

 

 

We 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.

An analysis of changes in the allowance for loan losses by segment for the periods ended June 30, 2011 and 2010 is as follows:

 

Further information pertaining to the allowance for loan losses by segment at June 30, 2011 and December 31, 2010 follows:

 

 

The following is a summary of past due and non-accrual loans by class at June 30, 2011 and December 31, 2010:

 

 

 

The following is a summary of impaired loans by class: