Business context and reporting period
Western New England Bancorp, Inc. (WNEB) is the parent of Westfield Bank, a community bank serving western Massachusetts and northern Connecticut. This Form 10-K covers the fiscal year ended December 31, 2017. The 2016 comparison is affected by the October 2016 acquisition of Chicopee Bancorp; 2017 includes a full year of combined operations, while 2016 includes Chicopee only from the acquisition date.
Key financial results and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets at year-end | $2.083 billion | $2.076 billion |
| Net interest and dividend income | $59.4 million | $37.3 million |
| Non-interest income | $8.5 million | $6.0 million |
| Net income | $12.3 million | $4.8 million |
| Diluted earnings per share | $0.41 | $0.24 |
| Net interest margin, tax-equivalent | 3.12% | 2.70% |
- Interest and dividend income was $74.0 million, up 52.3%; interest expense was $14.6 million, up 30.1%. The increase in net interest income primarily reflected higher average loan balances following the Chicopee acquisition and organic growth.
- Non-interest expense rose 26.9% to $44.8 million, chiefly from higher salaries and benefits and other costs of operating the larger combined bank. The efficiency ratio improved to 65.25% from 67.40%.
- Return on average assets was 0.59% and return on average equity was 4.94%. These profitability measures include the material tax charge described below.
- Year-end loans, net, were $1.620 billion, up 4.1%; total deposits were $1.506 billion, down 0.8%. Commercial real estate loans were $732.6 million, commercial and industrial loans $238.5 million, and residential real estate and home equity loans $650.4 million.
- Cash and cash equivalents fell to $27.1 million from $70.2 million. Net cash provided by operating activities was $18.9 million; investing activities used $56.0 million and financing activities used $6.0 million.
- Year-end shareholders’ equity was $247.3 million, or 11.87% of assets. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 14.94% and Tier 1 leverage ratio was 11.36%.
- Borrowings were $309.4 million in total: $144.7 million short-term and $164.8 million long-term. The company reported $109.4 million of available FHLBB borrowing capacity. Core deposits were 63.1% of deposits.
- Nonperforming loans decreased to $12.8 million from $14.1 million, or 0.78% of loans versus 0.90%. The allowance for loan losses was $10.8 million, 0.66% of loans; provision expense was $1.36 million, compared with $0.58 million.
Material changes versus the prior comparable period
- Annual net income increased to $12.3 million from $4.8 million, reflecting higher net interest income and fees as well as a full year of Chicopee operations. The comparison is not fully like-for-like because of the acquisition timing.
- Loan growth was funded in part by using cash and securities cash flows: securities declined to $288.4 million from $300.1 million at fair value, while cash and cash equivalents fell by $43.1 million.
- Deposits declined modestly, with core deposits increasing $4.4 million and time deposits decreasing $16.4 million. Management said it was allowing higher-cost deposits to mature and seeking lower-cost core funding.
- The allowance increased to $10.8 million from $10.1 million, while net charge-offs were $597,000; 2016 had net recoveries of $653,000.
Outlook, commentary, risks and unusual items
- Management’s strategy emphasizes commercial lending and related business deposits, expanding the retail franchise, supplementing growth with residential lending, and pursuing selective acquisitions. It stated that liquidity was adequate for expected funding needs and anticipated no material capital expenditures in 2018. No specific earnings or revenue guidance was provided.
- The Tax Cuts and Jobs Act resulted in a one-time, non-cash $4.0 million deferred tax asset write-down. The reported 2017 effective tax rate was approximately 43.4%; management said it would have been 25.0% excluding that charge. Fourth-quarter net loss was $353,000, with a $5.8 million tax provision. The company also early-adopted guidance to reclassify $2.1 million of stranded tax effects from accumulated other comprehensive loss to retained earnings.
- Interest-rate simulation estimated that net interest income for the following 12 months would decline 4.93% under a 200-basis-point rate increase and 2.50% under a 100-basis-point decrease, versus unchanged rates. The filing cautions that this model is assumption-dependent, not a forecast.
- Key risks include credit quality and collateral values, particularly in commercial real estate and commercial lending; 85.1% of loans were real-estate-related. The business is geographically concentrated in its regional markets and is exposed to competition, funding costs, interest-rate movements, regulation, cybersecurity and technology risks.
- At year-end, classified loans totaled $63.6 million, including $43.7 million not considered impaired. Management reported no material legal proceedings and no goodwill impairment. The independent auditor gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
- Commitments to extend credit, unused lines and letters of credit totaled approximately $322.0 million. Management did not anticipate significant losses from these commitments. Dividends from the Bank to the parent are subject to regulatory limits; the company paid $0.12 per share in 2017 and repurchased approximately $9.3 million of stock.
Important facts for investors to verify
- Separate the effects of the Chicopee acquisition from organic growth when assessing 2017 earnings, loan growth, expenses and deposit trends.
- Review the $4.0 million tax-related deferred tax asset write-down and its effect on reported fourth-quarter and full-year earnings.
- Assess credit quality beyond headline nonperforming loans, including classified loans, acquired credit-impaired loans, commercial real estate concentrations and allowance coverage.
- Check liquidity and funding sensitivity, including declining cash balances, deposit mix and maturities, borrowing capacity, and the modeled impact of interest-rate changes.
- Confirm regulatory capital and dividend capacity, including restrictions on Bank distributions to the parent and the scale of planned share repurchases.