Western New England Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company operates Westfield Bank, with 21 offices in western Massachusetts and northern Connecticut. Comparisons with 2016 are materially affected by the October 2016 Chicopee Bancorp acquisition; Q3 2016 reflects pre-merger operations.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $14.8 million | $8.3 million | $44.0 million | $24.6 million |
| Non-interest income | $2.4 million | $1.3 million | $6.5 million | $3.6 million |
| Provision for loan losses | $0.2 million | $0.4 million | $0.9 million | $0.4 million |
| Non-interest expense | $11.2 million | $8.2 million | $33.4 million | $23.3 million |
| Net income | $3.8 million | $0.6 million | $12.7 million | $3.0 million |
| Diluted EPS | $0.13 | $0.04 | $0.42 | $0.17 |
| Tax-equivalent net interest margin | 3.09% | 2.65% | 3.09% | 2.62% |
Net interest margin included Chicopee purchase-accounting accretion of $448,000 in Q3 and $1.4 million year to date; excluding it, management reported margins of 3.00% and 2.99%, respectively. Efficiency ratio improved to 65.4% in Q3 and 65.0% year to date, from 76.6% and 75.3% in the comparable periods.
Financial position, cash flow and credit
- At September 30, assets were $2.09 billion, loans $1.61 billion, deposits $1.52 billion, and shareholders’ equity $252.6 million. Since December 31, 2016, loans increased $52.3 million (3.3%), while deposits decreased $2.9 million (0.2%).
- Cash and cash equivalents were $28.9 million, down $41.3 million from year-end. For the first nine months, operating cash flow was $13.6 million, investing cash flow was negative $51.4 million, and financing cash flow was negative $3.5 million.
- Total borrowings were $298.8 million: short-term borrowings of $192.5 million and long-term debt of $106.3 million. Management cited $132.0 million of additional FHLB borrowing capacity and available lines of credit of $54.0 million; it said liquidity was sufficient for current needs.
- The Bank was classified as well-capitalized. Its total risk-based capital ratio was 15.18%, Common Equity Tier 1 ratio 14.53%, and Tier 1 leverage ratio 11.53%.
- Nonperforming loans were $13.2 million, or 0.81% of loans, versus $14.1 million, or 0.90%, at year-end. The allowance was $10.5 million, or 0.65% of loans. Year-to-date net charge-offs were $400,000; the 2016 comparison included $1.0 million in recoveries on a previously charged-off commercial real estate loan.
Material changes, outlook and risks
- Results benefited from Chicopee’s larger loan and deposit base. Loan growth included residential real estate and commercial and industrial lending; commercial real estate loans declined modestly.
- Higher operating costs reflected acquired staff and branches, including increased salaries, occupancy and data-processing expenses. Merger-related expenses declined year over year.
- The nine-month effective tax rate was 22.1%, versus 33.4% in 2016. The 2017 period included $1.8 million in tax benefits related to reversal of a deferred-tax valuation allowance and stock-option exercises; adoption of share-based compensation guidance separately resulted in an $821,000 tax benefit.
- The company repurchased $5.7 million of stock and paid $2.7 million in dividends during the nine months. Q3 repurchases totaled 253,294 shares at an average $10.26 per share.
- No specific earnings or operating guidance was provided. Management’s stated strategy emphasizes commercial lending, relationship deposits, retail expansion and residential lending. Risks include interest-rate and margin changes, credit deterioration, competition, regulation, and realizing acquisition-related benefits. Management said unrealized securities losses reflected interest rates rather than credit deterioration and did not consider them other-than-temporary.
- Legal claims were described as arising in the ordinary course and not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts investors should verify
- How much of reported earnings and margin improvement is sustainable after Chicopee purchase-accounting accretion and tax benefits.
- Whether loan growth, credit quality and the allowance remain appropriate, particularly as net charge-offs rose from the 2016 recovery-driven comparison.
- Deposit mix and funding costs, including the replacement of higher-cost non-relationship and brokered time deposits with core deposits.
- Liquidity and interest-rate sensitivity given the fall in cash balances, borrowing levels, and outstanding commitments.
- Capital, share repurchases and dividend capacity, alongside acquisition integration costs and expected operating efficiencies.