Western New England Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company is the holding company for Westfield Bank, operating in western Massachusetts and northern Connecticut. Chicopee Bancorp was acquired in October 2016, so year-over-year comparisons include the effects of the acquisition and larger operating scale.
Financial performance and position
Amounts are in millions except per-share data and ratios. The filing does not present a conventional revenue line; net interest income plus noninterest income is shown as a revenue proxy.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $14.7 | $8.0 | $29.2 | $16.2 |
| Noninterest income | $2.1 | $1.3 | $4.1 | $2.3 |
| Net interest income plus noninterest income | $16.8 | $9.3 | $33.3 | $18.5 |
| Provision for loan losses | $0.35 | $0.63 | $0.65 | $0.03 |
| Noninterest expense | $11.3 | $8.0 | $22.3 | $15.1 |
| Net income | $3.8 | $0.4 | $8.9 | $2.4 |
| Diluted earnings per share | $0.12 | $0.02 | $0.30 | $0.14 |
| Tax-equivalent net interest margin | 3.11% | 2.62% | 3.09% | 2.61% |
- Balance sheet at June 30: Assets were $2.07 billion, broadly unchanged from year-end 2016. Net loans were $1.60 billion, up $41.8 million from year-end; total loans before allowance rose 2.7%. Available-for-sale securities were $303.4 million.
- Funding and debt: Deposits totaled $1.50 billion, down $22.7 million from December 31, 2016. Borrowings totaled $308.7 million, including $191.0 million short-term and $117.7 million long-term debt; total borrowings increased $11.5 million.
- Liquidity and cash flow: Cash and cash equivalents were $19.4 million, versus $70.2 million at year-end. For the first six months, operating cash flow was $6.3 million, investing cash outflow $46.7 million and financing cash outflow $10.4 million, resulting in a $50.8 million decrease in cash. Management cited $131.1 million of additional FHLB borrowing capacity and available $54.0 million bank credit lines, and said liquidity was sufficient for current needs.
- Credit and capital: Nonperforming loans were $14.0 million, or 0.87% of loans, versus $14.1 million and 0.90% at year-end. The allowance for loan losses was $10.4 million, or 0.65% of loans. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 15.16% and Tier 1 leverage ratio was 11.44%.
- Equity and distributions: Shareholders’ equity was $251.2 million, 12.1% of assets. The company paid $1.8 million in dividends and repurchased $3.1 million of shares during the six months; 921,849 shares were issued upon option exercises.
Material changes versus comparable periods
- Q2 net income rose to $3.8 million from $0.4 million; first-half net income increased to $8.9 million from $2.4 million. Growth reflects the Chicopee acquisition as well as loan growth and improved net interest margin, and is not solely organic.
- Average interest-earning assets grew substantially year over year, largely following the acquisition. Net interest margin improved, but Chicopee purchase-accounting accretion contributed $341,000 to Q2 net interest income and about $1.0 million for the first half. Excluding that accretion, reported margins would have been 3.04% for both periods.
- Noninterest expense increased with the acquired staff and branches, including higher salaries, occupancy and data-processing costs. The efficiency ratio improved to 66.1% for Q2 from 76.3%, and to 64.9% for the first half from 74.6%.
- First-half provision expense increased from $25,000 to $650,000. The 2016 comparison benefited from an $852,000 partial recovery on a previously charged-off commercial real estate loan.
- First-half noninterest income in 2016 included a $915,000 loss on prepayment of borrowings and $683,000 net securities gains; 2017 had no borrowing-prepayment loss and an $18,000 net securities loss.
Outlook, risks and unusual items
- The filing provides no formal earnings or margin guidance. Management describes a growth strategy focused on commercial lending, expanding retail relationships and growing residential lending.
- Risks identified include interest-rate changes affecting margins, competition, regional economic and credit conditions, regulatory changes, deposit-insurance costs, technology and execution of acquisition benefits. Management cautions that interim results are not necessarily indicative of full-year results.
- The six-month effective tax rate was 15.0%, including approximately $1.8 million of tax benefits from reversal of a deferred-tax valuation allowance and stock-option exercises. Q2 included $174,000 of tax benefits related to option exercises and share-based compensation.
- Goodwill was reduced by $1.26 million in first-quarter purchase-accounting adjustments, including a $2.4 million adjustment to acquired premises fair value; no goodwill impairment was recorded.
- Cash-flow hedges had a $2.9 million net liability fair value. The company estimated $1.9 million would be reclassified as an increase in interest expense over the next 12 months; certain contractual events could require collateralization or settlement.
- The company said pending ordinary-course legal claims were insured or not expected to have a material adverse effect. It reported no material changes in risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Investor verification priorities
- Separate Chicopee-related growth and purchase-accounting accretion from organic loan growth, core earnings and sustainable margin performance.
- Assess the quality and persistence of the unusually low first-half tax rate, including the valuation-allowance reversal and stock-option benefits.
- Review deposit trends, particularly declines in core and time deposits, and the increased use of short-term FHLB funding as cash balances fell.
- Monitor credit quality, allowance adequacy and the acquired Chicopee loan portfolio; compare nonperforming loans and risk-rating changes over subsequent quarters.
- Check the effect of acquisition-related operating costs, planned cost savings, and continuing share issuance or repurchases on per-share results and capital.