Western New England Bancorp, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2016. Western New England Bancorp is a community bank serving western Massachusetts and parts of Connecticut, with lending focused on commercial and residential real estate and business customers. The financial statements do not include Chicopee Bancorp, which was acquired on October 21, 2016, after quarter-end.
Financial results and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest and dividend income | $8.33 million | $8.16 million | $24.57 million | $23.53 million |
| Net interest margin, tax-equivalent | 2.65% | 2.53% | 2.62% | 2.52% |
| Provision for loan losses | $375,000 | $150,000 | $400,000 | $800,000 |
| Noninterest income | $1.32 million | $1.15 million | $3.60 million | $3.62 million |
| Noninterest expense | $8.23 million | $6.87 million | $23.30 million | $20.44 million |
| Net income | $628,000 | $1.61 million | $2.98 million | $4.31 million |
| Diluted earnings per share | $0.04 | $0.09 | $0.17 | $0.25 |
- Balance sheet at September 30: assets were $1.378 billion, up from $1.340 billion at December 31, 2015; deposits were $962.6 million, up from $900.4 million; and shareholders’ equity was $145.2 million, or 10.5% of assets.
- Lending and credit: loans before the allowance were $942.6 million, versus $814.4 million at year-end. The allowance was $9.9 million, 1.05% of loans. Nonperforming loans were $7.3 million (0.77% of loans), down from $8.1 million (0.99%) at year-end.
- Funding and liquidity: short-term borrowings were $180.3 million and long-term debt $71.2 million, for total borrowings of $251.4 million. Cash and cash equivalents were $50.8 million, versus $13.7 million at year-end. Management said liquidity was sufficient for current needs; additional stated borrowing capacity included $99.8 million from the FHLBB and $54.0 million from BBN and PNC combined.
- Cash flows, nine months: operating activities provided $3.5 million, investing activities provided $4.2 million, and financing activities provided $29.3 million. Cash and cash equivalents increased $37.1 million.
- Capital: the Bank was categorized as well-capitalized. Its September 30 ratios included total risk-based capital of 15.20%, Tier 1 risk-based capital of 14.22%, Common Equity Tier 1 of 14.22%, and Tier 1 leverage of 10.81%.
Material changes versus comparable periods
- Net income fell 61% in Q3 and 31% for the nine-month period. Merger-related expenses of $830,000 in Q3 and $1.9 million year to date were a major factor; management also cited their effect on the effective tax rate.
- Net interest income and margin improved, reflecting a shift in earning assets from securities to loans and lower average borrowings. For the nine months, average loan balances increased while average securities balances declined.
- Year-to-date provision expense declined, primarily because of $1.0 million in recoveries on one previously charged-off commercial real estate loan. Net recoveries were $687,000.
- Loans grew, including $107.6 million of purchased residential loans. Deposits increased, while management said it continued to reduce reliance on brokered and listing-service deposits.
- Borrowings declined overall from year-end, though short-term borrowings increased as long-term debt was repaid. A $42.5 million FHLBB prepayment generated a $915,000 expense in Q1.
- In Q1, the company transferred $232.8 million of held-to-maturity securities to available-for-sale and subsequently sold $136.8 million of available-for-sale securities during the nine-month period.
Outlook, commentary, risks and unusual items
- The company reported no earnings guidance. Management described a growth strategy centered on commercial lending, expanding deposit relationships and the retail franchise, and using residential lending to diversify the portfolio.
- Chicopee Bancorp’s acquisition closed October 21, 2016. At September 30, Chicopee had approximately $724.5 million of assets, $610.8 million of net loans, and $632.6 million of deposits and borrowings. Shareholders of Chicopee received 2.425 WNEB shares per share; purchase accounting fair values were still being determined. The acquisition’s financial effects are not in this quarter’s statements.
- Interest-rate changes, competition, economic conditions and credit quality are among the disclosed risks. The allowance for loan losses and securities/deferred-tax valuations rely on estimates that may change. The company also disclosed cash-flow swaps with a $5.2 million estimated liability and potential collateral or settlement obligations under specified default or regulatory events.
- A $4.6 million commercial real estate relationship was designated a troubled debt restructuring during the first nine months; the loans were nonaccrual but current under a forbearance arrangement. The filing reported no TDR defaults within 12 months of restructuring in the periods presented.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, no material change in risk factors, and no material off-balance-sheet arrangements. It said pending ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How Chicopee’s acquired assets, liabilities, integration costs, and post-merger earnings compare with the estimates and expectations used in evaluating the transaction.
- Whether merger and debt-prepayment costs remain elevated, and how they affect reported earnings and the effective tax rate.
- Whether loan growth is sustained by performing loans and how commercial real estate concentrations, nonaccrual loans, the TDR, and recoveries affect credit costs.
- Whether deposit growth is durable, including the disclosed $11.5 million of temporary checking-account deposits, and how the funding mix affects borrowing costs and liquidity.
- How net interest margin responds to interest-rate changes, and whether securities valuation changes or derivative collateral requirements create material impacts.