Western New England Bancorp, Inc. annual report, FY2019

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Western New England Bancorp, Inc. (NASDAQ: WNEB) — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; filed March 11, 2020. The filing also reports fourth-quarter results. Amounts below are U.S. dollars.

Business context

WNEB is the holding company for Westfield Bank, a community-oriented bank serving western Massachusetts and northern Connecticut. At year-end, it operated 22 branches and reported $2.18 billion in assets, $1.76 billion in net loans, $1.68 billion in deposits, and $232.0 million in shareholders’ equity. Its stated strategy emphasizes commercial and residential lending, core deposits, customer relationships, technology investment, and selective expansion.

Financial results and condition

  • Full-year earnings: Net income was $13.35 million, down from $16.41 million in 2018; diluted EPS was $0.51 versus $0.57. The 2018 comparison included $1.1 million of favorable purchase-accounting adjustments and $715,000 of BOLI death-benefit income.
  • Fourth quarter: Net income was $3.44 million and diluted EPS was $0.13, compared with $3.84 million and $0.14 in fourth-quarter 2018. Net interest income was $14.92 million versus $14.82 million; provision for loan losses was $1.00 million versus $300,000.
  • Revenue and margins: Full-year interest and dividend income rose 4.0% to $82.1 million, but interest expense rose 27.2% to $24.1 million. Net interest income fell 3.4% to $58.0 million. Tax-equivalent net interest margin declined to 2.93% from 3.08%. Non-interest income increased 5.1% to $9.7 million; non-interest expense increased 3.4% to $47.8 million. The efficiency ratio worsened to 70.7% from 67.1%.
  • Cash flow: Operating cash flow was $15.4 million, down from $24.6 million. Investing activities used $48.1 million and financing activities provided $30.7 million. Cash and cash equivalents ended the year at $24.7 million.
  • Loans and credit quality: Gross loans grew 4.7% to $1.77 billion. Commercial real estate loans were $816.9 million, or 46.1% of loans. The allowance for loan losses rose to $14.1 million, or 0.79% of loans, from $12.1 million, or 0.71%. Non-performing loans declined to $9.9 million, or 0.56% of loans, from $13.5 million, or 0.79%; adversely classified loans increased to $57.3 million from $49.7 million.
  • Funding and liquidity: Deposits increased 5.1% to $1.68 billion; core deposits rose to 61.1% of deposits from 58.6%. Time deposits of $548.6 million were scheduled to mature within one year. FHLB borrowings were $240.5 million, down from $267.3 million; available FHLB borrowing capacity was $236.8 million. Unused correspondent-bank lines totaled $65 million.
  • Capital and shareholder returns: WNEB reported $232.0 million in GAAP equity and an 10.6% equity-to-assets ratio. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 13.22% and leverage ratio 9.88%. The company repurchased $19.2 million of shares and paid $5.3 million in dividends during 2019. Book value per share was $8.74.

Material changes versus 2018

  • Earnings fell as higher funding costs, increased credit-loss provision, and higher operating expenses more than offset loan growth and increased non-interest income.
  • Average cost of funds rose to 1.59% from 1.26%; average cost of time deposits rose to 2.12% from 1.55%. The company attributed margin pressure mainly to deposit repricing and higher interest expense.
  • Loan growth was led by commercial real estate, while deposits grew faster than loans. Investment securities declined to $227.7 million in available-for-sale securities from $253.7 million.
  • Shareholders’ equity declined from $237.0 million, primarily reflecting repurchases and dividends, partly offset by earnings and improved accumulated other comprehensive loss.
  • Asset quality was mixed: non-performing loans declined, while criticized/adversely classified balances and the allowance increased.

Outlook, risks, contingencies and unusual items

  • Management provided no numerical earnings or margin guidance. It planned three new locations in 2020; the Huntington branch opened February 25, 2020, while Bloomfield and West Hartford were anticipated to open during 2020.
  • Management said liquidity was adequate for expected funding needs and anticipated a significant portion of near-term maturing time deposits would remain. These are expectations, not guarantees.
  • Key risks include interest-rate and funding-cost sensitivity, commercial real estate and business-loan credit risk, local economic conditions, competition, regulation, cybersecurity and third-party dependence, and the transition away from LIBOR. The filing also identified potential COVID-19 disruption; it did not quantify any resulting financial impact.
  • Credit-loss provision increased to $2.7 million from $1.9 million, while net charge-offs were $626,000. Three loan relationships were designated troubled debt restructurings during 2019; related TDR charge-offs were $715,000.
  • The company reported no material pending litigation and no investment-security OTTI charges in 2019. Its allowance estimate remained subject to management judgment and economic conditions.
  • After year-end through March 11, 2020, WNEB repurchased 953,243 shares for $7.6 million at an average price of $8.01. The company also disclosed the expected adoption of the current expected credit loss standard in 2023 and said implementation work was ongoing.

Important facts for investors to verify

  • Whether deposit repricing and the rising cost of funds continue to pressure net interest margin and earnings.
  • Trends in criticized and adversely classified loans, TDRs, charge-offs, and the adequacy of the allowance, especially given commercial real estate exposure.
  • The amount and renewal outcomes of the $548.6 million in time deposits maturing within one year, and continued availability and cost of wholesale funding.
  • Capital and liquidity effects of ongoing repurchases, dividends, and planned branch expansion; confirm applicable regulatory limits on Bank dividends to the parent.
  • Subsequent-period results and disclosures on COVID-19, LIBOR transition, and implementation of expected-credit-loss accounting.