Western New England Bancorp, Inc. Reports Results for Three and Nine Months Ended September 30, 2017 and Declares Quarterly Cash Dividend

WESTFIELD, Mass., Oct. 24, 2017 (GLOBE NEWSWIRE) -- Western New England Bancorp, Inc. (the "Company" or "WNEB") WNEB, the holding company for Westfield Bank (the "Bank"), today announced results of operations for the three and nine months ended September 30, 2017.   The third quarter financial results for 2017 reflect a full quarter of combined operations following the completion of the merger of Chicopee Bancorp, Inc. ("Chicopee") into WNEB on October 21, 2016.  The third quarter financial results for 2016 reflect the pre-merger operations of the Company, however does include nonrecurring merger-related charges. As a result, the Company's 2017 third quarter may not be comparable to financial results for the third quarter of 2016.

The Company also announced that the Board of Directors declared a quarterly cash dividend of $0.03 per share, payable on or about November 22, 2017 to shareholders of record on November 8, 2017. 

James C. Hagan, President and CEO stated, "October 21, 2017 marked the one year anniversary of the merger between the Company and Chicopee Bancorp. We would like to thank our Board of Directors and employees for their commitment and hard work over the last year. Our staff never lost sight that the execution of the merger was essential for our overall success. We would also like to thank our customers and shareholders for their support. Our focus will continue to be on leveraging the merger to make a meaningful impact in our market area, grow the balance sheet, and improve our financial performance. We are confident that we will continue to provide a strong and increasing value proposition to our shareholders, customers and community."

Financial Highlights⁽¹⁾:

• The Company recorded net income of $3.8 million, or $0.13 per diluted share for the three months ended September 30, 2017, compared to $628,000, or $0.04 per diluted share for the comparable 2016 period.  Adjusting for nonrecurring merger related expenses and tax benefits, core earnings for the three months ended September 30, 2017 totaled $3.8 million, or $0.13 per diluted share, compared to $1.4 million, or $0.09 per diluted share for the three months ended September 30, 2016. For the nine months ended September 30, 2017, net income was $12.7 million, or $0.42 per diluted share, compared to $3.0 million, or $0.17 per diluted share for the comparable 2016 period.  Core earnings totaled $11.3 million, or $0.38 per diluted share, compared to $4.7 million, or $0.27 per diluted share, for the nine months ended September 30, 2016.
  
  
• Return on average assets and return on average equity were 0.73% and 5.98%, respectively, for the three months ended September 30, 2017, as compared to 0.19% and 1.72%, respectively, for the three months ended September 30, 2016. On a core basis, return on average assets and return on average equity were 0.73% and 5.98%, respectively, for the three months ended September 30, 2017, as compared to 0.42% and 3.85%, respectively, for the three months ended September 30, 2016.

(1)    Please refer to the "Reconciliation of non-GAAP to GAAP Financial Measures" on page 14 for further details.

• Loan growth continued favorably with total loans increasing $52.3 million, or 3.3%, during the nine months ended September 30, 2017, net of an expected $7.5 million payoff related to a completed commercial real estate construction project during the first quarter of 2017. Specifically, commercial and industrial loans increased $22.1 million, or 9.9%, from December 31, 2016 to September 30, 2017.
  
  
• Deposits increased $19.9 million, or 1.3%, during the three months ended September 30, 2017 and decreased $2.9 million, or 0.2%, during the nine months ended September 30, 2017. These changes reflect both the cyclical nature of our commercial and municipal deposit balances, and our desire to reduce higher cost non-core deposits and focus on increasing lower cost, core deposit relationships.
  
  
• Tangible book value per share was $7.66 at September 30, 2017, an increase of $0.41 per share, or 5.7%, from $7.25 at December 31, 2016.

Net Income for the Three Months Ended September 30, 2017

The Company reported net income for the three months ended September 30, 2017 of $3.8 million, or $0.13 per diluted share, compared to $3.8 million, or $0.12 per diluted share, for the three months ended June 30, 2017. The results for the three months ended June 30, 2017 include $174,000 in tax benefits in connection with the exercise of stock options, which favorably impacted the income tax provision. Also included in the three months ended June 30, 2017 were $149,000 in after-tax merger related costs. Excluding these tax benefits and merger related costs, net income was $3.7 million, or $0.12 per diluted share, for the three months ended June 30, 2017, compared to $3.8 million, or $0.13 per diluted share, for the three months ended September 30, 2017.

Net Interest Income and Net Interest Margin

On a sequential quarter basis, net interest income increased $53,000, or 0.4%, to $14.8 million, for the three months ended September 30, 2017, from $14.7 million, for the three months ended June 30, 2017. The increase in net interest income was due to an increase of $189,000 or 1.0%, in interest and dividend income, partially offset by an increase in interest expense of $136,000, or 3.8%. The increase in interest expense was primarily due to an increase in interest expense on borrowings as well as the average cost of time deposits. The overall average cost of interest-bearing liabilities increased three basis points. For the three months ended September 30, 2017, average demand deposits of $300.8 million, an interest free source of funds, represented 20.0% of average total deposits, compared to $308.3 million, or 20.4% of average total deposits, at June 30, 2017. 

Net interest margin was 3.09% for the three months ended September 30, 2017, down from 3.11%, for the three months ended June 30, 2017 and up from 2.65% for the three months ended September 30, 2016. The amortization of purchase accounting adjustments related to the merger increased net interest income by $448,000 during the three months ended September 30, 2017. Excluding the purchase accounting adjustments, the net interest margin was 3.00% for the three months ended September 30, 2017.

Provision for Loan Losses

The provision for loan losses decreased $150,000, or 42.9%, to $200,000, for the three months ended September 30, 2017, compared to $350,000 for the three months ended June 30, 2017. The Company recorded net charge-offs of $99,000 for the three months ended September 30, 2017 as compared to $159,000 for the three months ended June 30, 2017.

Non-Interest Income

On a sequential quarter basis, non-interest income increased $337,000, or 16.2%, to $2.4 million, or 0.46% of average assets, for the three months ended September 30, 2017 from $2.1 million, or 0.40% of average assets, for the three month ended June 30, 2017. The increase was primarily due to an increase in service charges and fees of $165,000, or 10.7%, a $67,000 gain on the sale of other real estate owned ("OREO"), an increase in other income of $111,000, and an increase of $24,000, or 52.2%, in pre-tax realized gains on the sale of securities. These increases were partially offset by a decrease of $30,000, or 6.3%, in income from bank owned life insurance ("BOLI"). The third quarter is typically a high seasonal non-interest income point for the Company. The three months ended September 30, 2017 includes approximately $139,000 in seasonal fee income.

Non-Interest Expense

For the three months ended September 30, 2017, non-interest expense decreased $140,000, or 1.2%, to $11.2 million, or 2.14% of average assets, from $11.3 million, or 2.18% of average assets, for the three months ended June 30, 2017. The decrease in non-interest expense was primarily due to a decrease of $216,000 in merger related expenses, an $85,000, or 5.2%, decrease in other non-interest expense, a decrease in advertising expense of $57,000, or 14.8%, a decrease in professional fees of $39,000, or 5.7%, a decrease in occupancy expense of $26,000, or 2.8%, and a decrease in FDIC insurance expense of $23,000, or 12.4%. These decreases were partially offset by an increase in salaries and benefits of $251,000, or 4.0%, primarily due to higher incentive compensation accruals recorded during the quarter, an increase in furniture and equipment expense of $44,000, or 12.0%, and an increase in data processing expense of $11,000, or 1.6%.

The efficiency ratio, excluding merger expenses, was 65.4% for the three months ended September 30, 2017, compared to 66.1% for the three months ended June 30, 2017 and 76.6% for the three months ended September 30, 2016.

Income Tax Provision

The effective tax rate for the three months ended September 30, 2017 was 34.8%, compared to 27.4% for the three months ended June 30, 2017 and 40.2% for the three months ended September 30, 2016. As previously mentioned, the three months ended June 30, 2017 includes tax benefits of $174,000 in connection with stock option exercises which favorably impacted the income tax provision.

Net Income for the Nine Months Ended September 30, 2017

For the nine months ended September 30, 2017, the Company reported net income of $12.7 million, or $0.42 per diluted share, compared to $3.0 million, or $0.17 per diluted share, for the nine months ended September 30, 2016. The financial results for the nine months ended September 30, 2017 reflect three full quarters of combined operations following the completion of the merger and also includes $1.8 million in tax benefits recorded in connection with the reversal of a deferred tax valuation allowance and the exercises of stock options, favorably impacting the income tax provision for the nine months ended September 30, 2017. Also, included in the nine months ended September 30, 2017 was $444,000, net of tax, of merger related costs associated with the acquisition of Chicopee.  Included in the nine months ended September 30, 2016 was $1.8 million, net of tax, of merger related costs.  Excluding these tax benefits and merger expenses, net income was $11.3 million, or $0.38 per diluted share, for the nine months ended September 30, 2017, compared to $4.7 million, or $0.27 per diluted share, for the nine months ended September 30, 2016.

Return on average assets and return on average equity, excluding tax benefits and merger expenses, net of tax, were 0.73% and 6.09%, for the nine months ended September 30, 2017, respectively, compared to 0.47% and 4.47%, for the nine months ended September 30, 2016, respectively.

Net Interest Income and Net Interest Margin

Net interest income increased $19.5 million, or 79.2%, from $24.6 million for the nine months ended September 30, 2016 to $44.0 million for the nine months ended September 30, 2017. The increase in net interest income was primarily due to an increase in interest and dividend income of $22.3 million, or 68.7%, partially offset by an increase in interest expense of $2.8 million, or 35.9%, from the nine months ended September 30, 2016. The increase in interest income of $22.3 million was primarily due to a $714.1 million, or 81.6%, increase in average loans outstanding to $1.6 billion primarily due to the Chicopee acquisition. The increase in interest expense of $2.8 million was due to an increase in interest expense on deposits of $1.6 million, or 34.6%, due to the increase in average interest-bearing deposits of $441.1 million, or 57.7%, due to the Chicopee acquisition, partially offset by a 12 basis point decrease in the cost of interest-bearing deposits. The increase in interest expense on borrowings of $1.3 million, or 37.5%, during the three months ended September 30, 2017 was primarily due to a 25 basis point increase in the cost of borrowings due to the increase in the Federal Funds target rate.

The net interest margin increased 47 basis points from 2.62% for the nine months ended September 30, 2016 to 3.09% for the nine months ended September 30, 2017. During the nine months ended September 30, 2017, amortization of purchase accounting adjustments related to the Chicopee acquisition increased net interest income by $1.4 million. Excluding these items, net interest margin for the nine months ended September 30, 2017 was 2.99%. The average asset yield increased 37 basis points to 3.83% for the nine months ended September 30, 2017 from 3.46% for the nine months ended September 30, 2016. The average cost of funds decreased nine basis points to 0.95% for the nine months ended September 30, 2017 from 1.04%, for the nine months ended September 30, 2016, primarily due to purchase accounting adjustments on time deposits and borrowings as well as the continuation of low market interest rates which allowed the Company to renew or replace maturing time deposits at lower costs. The average cost of time deposits decreased 16 basis points to 1.09% for the nine months ended September 30, 2017 from 1.25% for the nine months ended September 30, 2016. The average cost of borrowings increased 25 basis points to 2.02% for the nine months ended September 30, 2017 from 1.77% for the nine months ended September 30, 2016. The increase in the cost of FHLB borrowings was primarily due to the increase in the Federal Funds target rate in December 2016, March 2017 and mid-September 2017.

The average balance sheet comparison for the nine months ended September 30, 2016 to September 30, 2017 largely reflects the merger with Chicopee. Average interest-earning assets increased $677.8 million, or 53.9%, to $1.9 billion for the nine months ended September 30, 2017 from $1.3 billion for the nine months ended September 30, 2016. The increase in average interest-earning assets was due to the increase in average loans of $714.1 million, or 81.6%, partially offset by the decrease of $29.8 million, or 8.9%, in average investments. The average balance of demand deposit accounts, an interest-free source of funds, increased $139.3 million, or 84.4%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016.

Provision for Loan Losses

The provision for loan losses increased $450,000, or 112.5%, from $400,000 for the nine months ended September 30, 2016 to $850,000 for the nine months ended September 30, 2017. The $450,000, or 112.5%, increase in the provision was primarily due to a $1.0 million recovery reported during the nine months ended September 30, 2016 on a previously charged-off commercial real estate loan. The Company recorded net charge-offs of $400,000 for the nine months ended September 30, 2017, as compared to net recoveries of $687,000 for the nine months ended September 30, 2016.

Non-Interest Income

For the nine months ended September 30, 2017, non-interest income of $6.5 million, or 0.42% of average assets, increased $2.9 million, or 80.8%, compared to $3.6 million, or 0.36% of average assets, for the nine months ended September 30, 2016. The increase of $2.9 million was primarily due to an increase in service charges and fees of $2.1 million, or 77.6%, an increase in income from BOLI of $236,000, or 20.8%, an increase in other income of $227,000 and a gain on the sale of OREO of $67,000. These increases were partially offset by a decrease in pre-tax realized gains on the sale of securities of $632,000, or 92.4%, and a $915,000 decrease in the loss on prepayment of borrowings reported during the nine months ended September 30, 2016. Excluding the net gain on sales of securities and the loss on prepayment of borrowings, non-interest income increased $2.6 million, or 68.4%. For the nine months ended September 30, 2017, wealth management fees of $404,000 earned by Westfield Financial Management Services, the Company's investment management subsidiary, were included in service charges and fee income. Total assets under management increased to $111.7 million at September 30, 2017, compared to $91.6 million at December 31, 2016 due to positive market movements and additions from new and existing clients.

Non-Interest Expense

For the nine months ended September 30, 2017, non-interest expense increased $10.1 million, or 43.5%, to $33.4 million, or 2.15% of average assets, compared to $23.3 million, or 2.33% of average assets, for the nine months ended September 30, 2016. Excluding merger-related expenses of $626,000 and $1.9 million during the nine months ended September 30, 2017 and September 30, 2016, respectively, non-interest expense was $32.8 million and $21.4 million, respectively. Non-interest expense excluding merger-related expenses is a non-GAAP financial measure.  Management believes total non-interest expense excluding merger-related expenses more accurately reflects the Company's results of operations in the overall evaluation of its performance. 

The increase in non-interest expense of $10.1 million, or 43.5%, was primarily due to the $7.3 million, or 61.9%, increase in salaries and benefits due to the addition of the Chicopee staff, increase in the incentive compensation plan as well as normal merit increases. Occupancy expense increased $1.1 million, or 64.4%, due to the acquisition of the Chicopee branches. Furniture and equipment expense increased $426,000, or 58.9%, and data processing expense increased $573,000, or 49.1%. Professional fees increased $202,000, or 11.8%, advertising expense increased $265,000, or 38.1%, and other non-interest expense increased $1.7 million, or 56.4%. These increases were partially offset by a decrease of $1.3 million, or 67.3%, in merger-related expenses, and a decrease of $128,000, or 21.5%, in FDIC insurance expense. The overall increase to non-interest expense reflects generally higher level of expenses associated with operating a larger financial institution, which includes additional employees, increased costs for data processing, occupancy, and professional services.

The merger provided the opportunity to achieve greater economies of scale as reflected in the improvement in the efficiency ratio, excluding merger-related expenses, to 65.0% for the nine months ended September 30, 2017 from 75.3% for the nine months ended September 30, 2016.  See page 14 for a reconciliation of this non-GAAP financial measure.

Income Tax Provision

The effective tax rate for the nine months ended September 30, 2017 and September 30, 2016, was 22.1% and 33.4%, respectively. The decrease in the effective tax rate was primarily due to $1.8 million in tax benefits recorded during the nine months ended September 30, 2017 as previously discussed.

Balance Sheet

At both September 30, 2017 and December 31, 2016, total assets were $2.1 billion, increasing slightly by $10.4 million, or 0.5%. During the same period, total loans increased $52.3 million, or 3.3%, partially offset by a decrease in cash and cash equivalents of $41.3 million, or 58.8%, and a $2.6 million, or 0.8%, decrease in investments.

Loans

Total loans increased $52.3 million, or 3.3%, due to an increase in one- to four-family real estate loans of $33.9 million, or 5.5%, to $648.1 million, an increase in commercial and industrial loans of $22.1 million, or 9.9%, to $244.4 million, partially offset by a decrease in commercial real estate loans of $3.9 million, or 0.5%, to $716.9 million. The decrease in the commercial real estate portfolio was largely related to the expected payoff of a $7.5 million completed commercial real estate construction project during first quarter 2017. In order to reduce interest rate risk, the Company currently services $67.8 million in residential loans sold to the secondary market. The servicing rights will continue to be retained on all loans sold.     

Credit Quality

Maintaining strong asset quality remains a core objective for management. Annualized net charge-offs to average loans was 0.03% for the nine months ended September 30, 2017, compared to net recoveries of 0.08% for the nine months ended September 30, 2016. Net charge-offs for the nine months ended September 30, 2017 totaled $400,000, as a result of $706,000 in charge-offs and $306,000 in recoveries, compared to net recoveries of $687,000 for the nine months ended September 30, 2016, as a result of recoveries of $1.0 million, partially offset by charge-offs of $347,000. During the nine months ended September 30, 2016, the Company received a partial recovery of $1.0 million related to a single commercial real estate loan previously charged-off in 2010.

At September 30, 2017, nonperforming loans decreased $892,000, or 6.3%, to $13.2 million, or 0.81% of total loans, compared to $14.1 million, or 0.90% of total loans, at December 31, 2016.  At September 30, 2017, nonperforming assets to total assets of 0.64% decreased from 0.69% at December 31, 2016. At September 30, 2017, nonperforming assets consisted of $13.2 million in nonperforming loans and $103,000 of OREO. The allowance for loan losses as a percentage of total loans was 0.65% at September 30, 2017, compared to 0.65% at June 30, 2017 and 0.64% at December 31, 2016. At September 30, 2017, the allowance for loan losses as a percentage of nonperforming loans was 79.9% compared to 71.6% at December 31, 2016. The allowance for loan losses as a percentage of total loans, excluding loans acquired from Chicopee, which were recorded at fair value with no related allowance for loan losses, was 1.02% at September 30, 2017 and 1.05% at December 31, 2016.

Deposits

At September 30, 2017, total deposits of $1.5 billion decreased $2.9 million, or 0.2%, from December 31, 2016. Core deposits, which the Company defines as all deposits except time deposits, increased $3.4 million, or 0.4%, from $945.1 million, or 62.3% of total deposits, at December 31, 2016, to $948.5 million, or 62.6% of total deposits, at September 30, 2017. Non-interest bearing deposits increased $4.9 million, or 1.6%, to $308.9 million, money market accounts increased $3.4 million, or 0.8%, to $412.7 million, and interest-bearing checking accounts increased $228,000, or 0.3%, to $82.6 million, while savings accounts decreased $5.2 million, or 3.5%, to $144.3 million. Time deposits decreased $6.3 million, or 1.1%, from $572.9 million at December 31, 2016 to $566.7 million at September 30, 2017. The decrease in time deposits is due to non-relationship customers and brokered deposits seeking higher yields. We are focused on allowing high cost non-relationship deposits to mature and be replaced with low cost relationship-based core deposits. Due to the seasonal activity in core deposits, specifically in commercial and municipal accounts, core deposits increased $16.4 million, or 1.8%, from $932.1 million at June 30, 2017 to $948.5 million at September 30, 2017. Time deposits increased $3.5 million, or 0.6%, from $563.2 million at June 30, 2017 to $566.7 million at September 30, 2017.

FHLB Advances and Repurchase Agreements

FHLB advances increased $503,000, or 0.2%, from $279.8 million at December 31, 2016 to $280.3 million at September 30, 2017 and customer repurchase agreements increased $1.1 million, or 6.3%, from $17.4 million at December 31, 2016 to $18.5 million at September 30, 2017.

Capital

At September 30, 2017, shareholders' equity was $252.6 million, or 12.1% of total assets, compared to $238.4 million, or 11.5% of total assets, at December 31, 2016. The increase in shareholders' equity during the nine months ended September 30, 2017, reflects net income of $12.7 million, the exercise of 921,849 stock options of $5.5 million and other comprehensive income of $3.2 million. These increases were offset by a decrease of $5.7 million for the repurchase of 574,309 shares of the Company's common stock at an average cost of $9.88 per share and the payment of regular dividends of $2.7 million during the nine months ended September 30, 2017. Total shares outstanding as of September 30, 2017 were 30,816,813. The Company's tangible book value per share increased by $0.41, or 5.7%, to $7.66 at September 30, 2017 from $7.25 at December 31, 2016. The Company's and Bank's regulatory capital ratios continued to exceed the levels required to be considered "well-capitalized" under federal banking regulations.

Share Repurchase

On January 31, 2017, the Board of Directors authorized a stock repurchase program under which the Company may purchase up to 3,047,000 shares, or 10% of its outstanding common stock.  As of September 30, 2017, there were 2,758,543 shares remaining under the plan.

About Western New England Bancorp, Inc.
Western New England Bancorp, Inc. is a Massachusetts-chartered stock holding company and the parent company of Westfield Bank, CSB Colts, Inc., Elm Street Securities Corporation, WFD Securities, Inc. and WB Real Estate Holdings, LLC.  Western New England Bancorp, Inc. and its subsidiaries are headquartered in Westfield, Massachusetts and operate 21 banking offices located in Agawam, Chicopee, East Longmeadow, Feeding Hills, Holyoke, Ludlow, South Hadley, Southwick, Springfield, Ware, West Springfield and Westfield, Massachusetts, and Granby and Enfield, Connecticut.  To learn more, visit our website at www.westfieldbank.com.

Forward-Looking Statements
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements contained in this press release, which speak only as of the date made. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors discussed under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016.  The Company and the Bank do not undertake and specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

The following tables set forth the information relating to our average balances and net interest income for the three months ended September 30, 2017, June 30, 2017, and September 30, 2016 and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated.

The following tables set forth the information relating to our average balances and net interest income for the nine months ended September 30, 2017 and 2016 and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated.

Reconciliation of Non-GAAP to GAAP Financial Measures

The Company believes that certain non-GAAP financial measures provide information to investors that is useful in understanding its financial condition.  Because not all companies use the same calculation, this presentation may not be comparable to other similarly titled measures calculated by other companies.  A reconciliation of these non-GAAP financial measures is provided below.

For further information contact:
James C. Hagan, President and CEO
Guida R. Sajdak, Executive Vice President and CFO
Meghan Hibner, Vice President and Investor Relations Officer
413-568-1911