Western New England Bancorp, Inc. quarterly report, Q3 FY2021

Western New England Bancorp, Inc. — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended September 30, 2021. The company is the holding company for Westfield Bank, a community bank serving western Massachusetts and northern Connecticut. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.

Financial performance and position

Metric	Q3 2021	Q3 2020	Nine months 2021	Nine months 2020
Net interest income	$18.8	$16.0	$54.6	$45.6
Non-interest income	$3.3	$2.2	$8.7	$6.8
Provision (credit) for loan losses	$(0.1)	$2.7	$(1.2)	$7.3
Net income	$6.0	$2.1	$17.5	$6.2
Diluted EPS	$0.27	$0.08	$0.74	$0.25
Net interest margin	3.18%	2.81%	3.16%	2.80%

Q3 return on average assets and return on average equity were 0.96% and 10.85%; nine-month figures were 0.95% and 10.45%, respectively. Efficiency ratios were 63.6% for Q3 and 64.7% for the nine-month period.
At September 30, total assets were $2.511 billion, deposits $2.225 billion, net loans $1.826 billion, and shareholders’ equity $218.3 million. Cash and cash equivalents were $148.5 million.
Nine-month cash flows: operating activities provided $18.5 million; investing activities used $84.9 million; financing activities provided $127.4 million. Cash and cash equivalents increased $61.1 million from year-end 2020.
Total borrowings were $23.5 million, including $3.8 million of FHLB debt and $19.6 million carrying value of subordinated notes. FHLB borrowing capacity was $479.2 million; unused correspondent-bank lines totaled $65.0 million.
Capital ratios remained above “well-capitalized” thresholds. At the Bank, Tier 1 leverage, common equity Tier 1, and total risk-based capital ratios were 8.9%, 12.5%, and 13.6%, respectively.

Changes versus comparable periods

Net income rose 187% year over year in Q3 and increased to $17.5 million from $6.2 million for the first nine months. Management attributed the improvement mainly to lower credit-loss provisions and higher net interest income.
Net interest income grew 17.4% in Q3 and 19.6% year to date, as lower deposit and borrowing costs more than offset lower interest and dividend income. Tax-equivalent net interest margin was 3.20% in Q3 and 3.18% year to date, versus 2.83% and 2.82% in 2020.
The loan-loss provision shifted to credits of $0.1 million in Q3 and $1.2 million year to date, compared with provisions of $2.7 million and $7.3 million in 2020. The allowance declined to $19.8 million from $21.2 million at year-end.
Total assets increased 6.1% from December 31, 2020. Deposits rose 9.2%, while total loans declined 4.2%, largely because PPP balances fell $108.4 million. Excluding PPP loans, loans increased 1.5%, with commercial real estate growth partly offset by declines in residential and commercial-and-industrial balances.
Nonperforming loans fell to $5.6 million, or 0.32% of loans excluding PPP, from $7.8 million, or 0.45%, at year-end. Allowance coverage of nonperforming loans increased to 352.2% from 269.8%.
Shareholders’ equity declined to $218.3 million from $226.6 million, reflecting $21.3 million of share repurchases, dividends, and higher accumulated other comprehensive loss, partly offset by earnings. Tangible book value per share rose 6.4% to $8.89.

Outlook, commentary, risks, and notable items

No formal earnings or financial guidance is provided. Management said it expected the majority of remaining PPP loans to be repaid through forgiveness by the end of 2021; PPP fee income was expected to continue benefiting earnings through year-end.
The company had $58.9 million of PPP loans outstanding at September 30, down from $167.3 million at year-end. Nine-month PPP origination-fee and interest income was $5.8 million; $1.6 million of processing fees remained deferred.
Eleven COVID-related modified loans totaling $42.8 million remained outstanding, equal to 2.4% of loans excluding PPP. Eight were hotel loans totaling $33.5 million; most remaining modified balances had resumed interest-only payments. Management cited continuing uncertainty around the pandemic and its effects on borrowers and the economy.
In April 2021, the company issued $20 million of 4.875% fixed-to-floating subordinated notes, maturing in 2031, intended to qualify as Tier 2 capital. The company also continued its repurchase plan: 2.566 million shares were repurchased year to date at an average $8.29 per share, with 869,397 shares remaining authorized at quarter-end.
The company sold $40.0 million of fixed-rate residential mortgages year to date, recognizing $1.1 million in gains, to diversify the loan mix and reduce interest-rate risk. It also reclassified $154.4 million of newly purchased mortgage-backed securities as held-to-maturity.
Unusual year-over-year comparisons include Q3 2020 securities-sale gains of $1.9 million and a $2.4 million loss on terminating an interest-rate swap. In 2021, the company recorded a $0.4 million loss related to a previously terminated hedge. It reported no outstanding cash-flow hedges at September 30.
Key risks include COVID-19 developments, economic and credit conditions, interest-rate changes that could pressure margins, competition, regulation, and uncertainty in real-estate and credit markets. The allowance for loan losses and deferred tax asset realizability depend on estimates; management cautions actual results may differ.
Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no material changes to risk factors since year-end. Pending ordinary-course legal matters were not expected to have a material adverse effect. The company had not quantified the impact of adopting the expected-credit-loss standard, which it anticipated would significantly change its allowance methodology.

Important facts for investors to verify

Whether deposit growth persists as stimulus and PPP-related balances normalize, and how deposit costs and mix affect net interest margin.
Whether commercial real estate concentrations and remaining COVID-related hotel and assisted-living modifications create future credit losses; monitor delinquencies, nonperforming loans, and allowance coverage.
How quickly PPP balances and deferred fees run off, and the resulting effect on reported net interest income and earnings.
The impact of mortgage sales and the larger securities portfolio, including interest-rate sensitivity and unrealized losses; available-for-sale securities had $4.1 million of gross unrealized losses at quarter-end.
Capital and tangible book value after continued repurchases, and the cost and capital treatment of the subordinated notes.
Management’s evolving estimates and implementation plans for the expected-credit-loss accounting standard.