Western New England Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited consolidated results. The Massachusetts-based bank holding company operates Westfield Bank, with 22 offices in western Massachusetts and northern Connecticut. Its primary revenue sources are loan and investment interest income.
Financial performance and condition
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior balance-sheet date |
|---|---|---|
| Net income | $3.2 million; diluted EPS $0.12 | Q3 2018: $3.9 million; $0.14 |
| Net interest income | $14.5 million; net interest margin 2.88% | Q3 2018: $14.6 million; 2.94% |
| Provision for loan losses | $1.3 million | Q3 2018: $0.35 million |
| Non-interest income / expense | $2.6 million / $11.7 million | Q3 2018: $2.3 million / $11.6 million |
| Total assets | $2.17 billion | December 31, 2018: $2.12 billion |
| Loans, net / deposits | $1.74 billion / $1.67 billion | December 31, 2018: $1.68 billion / $1.60 billion |
| Cash and cash equivalents | $45.4 million | December 31, 2018: $26.8 million |
| Borrowings | $35.0 million short-term; $205.7 million long-term | December 31, 2018: $59.3 million; $208.0 million |
| Shareholders’ equity | $232.0 million, or 10.7% of assets | December 31, 2018: $237.0 million, or 11.2% |
Nine-month results and cash flow
- Net income was $9.9 million, or $0.38 per diluted share, versus $12.6 million, or $0.43, in the first nine months of 2018. Net interest income was $43.1 million versus $45.2 million; net interest margin was 2.90% versus 3.09%.
- Operating cash flow was $19.4 million; investing activities used $24.6 million and financing activities provided $23.8 million. Cash increased $18.6 million to $45.4 million.
- Net charge-offs were $0.46 million for the nine months. The allowance for loan losses was $13.3 million, or 0.76% of loans, versus $12.1 million, or 0.71%, at year-end 2018.
Material changes versus comparable periods
- Q3 net income declined about 17% year over year; nine-month net income declined about 21%. Higher interest expense, provision expense, and operating costs weighed on results.
- Deposit interest expense rose $1.4 million in Q3 and $4.6 million year to date, primarily reflecting higher time-deposit costs. The nine-month average cost of funds increased to 1.60% from 1.20%; the average cost of time deposits rose to 2.10% from 1.47%.
- Loans grew $54.7 million, or 3.2%, from year-end, led by $52.4 million of commercial real estate growth. Deposits rose $73.5 million, or 4.6%; core deposits increased $77.4 million. Management said deposit growth helped fund loans and reduce FHLB borrowings.
- Nonperforming loans fell to $11.1 million, or 0.63% of loans, from $13.5 million, or 0.79%, at year-end. However, substandard-rated loans increased to $60.9 million from $49.7 million.
- Shareholders’ equity declined despite year-to-date earnings, principally reflecting $19.1 million of share repurchases and $4.0 million of dividends, partly offset by improved accumulated other comprehensive loss.
Management commentary, outlook and risks
- Management’s stated strategy is to grow commercial lending and related deposits, expand residential lending and retail relationships, invest in technology and service, and pursue shareholder returns through dividends and repurchases. The filing provides no specific earnings or financial guidance.
- Q3 efficiency ratio was 68.9% versus 68.3%; the nine-month ratio increased to 71.6% from 66.6%. Q3 expense growth included higher salaries and data-processing costs; lower professional fees and FDIC assessments partly offset increases.
- Q3 non-interest income included a $49,000 securities gain and $45,000 unrealized equity-security gain. Year-to-date non-interest income included $110,000 of non-recurring interchange fees. The prior-year comparison included a $715,000 BOLI death benefit and a $48,000 gain on sale of other real estate.
- Q3 provision expense rose to $1.3 million from $0.35 million, reflecting portfolio changes and loan growth. Management cited a $470,000 quarter charge-off, primarily tied to an existing substandard commercial relationship. Year-to-date recoveries included $812,000 on a commercial real estate loan charged off in 2010.
- Two loan relationships totaling $2.4 million were modified as troubled debt restructurings during the nine months; one relationship was nonperforming at quarter-end. Management cautioned that future allowance adjustments may be needed if economic, real estate, or other conditions change.
- The Bank was classified as well-capitalized. At September 30, its total risk-based capital ratio was 13.29%, common equity Tier 1 ratio 12.50%, and Tier 1 leverage ratio 9.93%. Available FHLB borrowing capacity was approximately $232.7 million, in addition to unused correspondent-bank credit lines.
- The company said adoption of the expected-credit-loss standard is being implemented and is expected to significantly change its allowance methodology; the financial effect had not been quantified. Interest-rate changes, credit quality, competition, regulation, economic conditions, and technology are among the disclosed risks.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, no material change in risk factors or market-risk assessment, and no pending legal matter expected to have a material adverse effect.
Important facts for investors to verify
- Whether deposit pricing and time-deposit costs stabilize enough to limit further net interest margin compression.
- Commercial real estate concentration, the increase in substandard loans, and subsequent performance of the modified TDR relationships and other criticized credits.
- Drivers of the higher provision and charge-offs, and how the allowance develops relative to loan growth and credit trends.
- Capital and per-share effects of the repurchase program: the company repurchased 1.69 million shares under its 2019 plan through September 30 and had 1.13 million shares remaining authorized under that plan.
- Future implementation assumptions and quantified effects of the expected-credit-loss standard; the filing says the impact had not yet been quantified.