Western New England Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Figures are unaudited; dollar amounts are in millions unless otherwise noted. The company is a community bank operating 22 offices in western Massachusetts and northern Connecticut, with lending focused on commercial and residential customers.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net income | $3.9 | $3.8 | $12.6 | $12.7 |
| Diluted earnings per share | $0.14 | $0.13 | $0.43 | $0.42 |
| Net interest income | $14.6 | $14.8 | $45.2 | $44.0 |
| Net interest margin | 2.94% | 3.04% | 3.09% | 3.04% |
| Provision for loan losses | $0.35 | $0.20 | $1.60 | $0.85 |
| Non-interest income | $2.30 | $2.41 | $7.00 | $6.50 |
| Non-interest expense | $11.57 | $11.16 | $34.54 | $33.42 |
- At September 30, total assets were $2.15 billion, up 3.2% from year-end 2017. Net loans were $1.68 billion, up 3.7%; deposits were $1.61 billion, up 6.8%.
- Cash and cash equivalents were $62.0 million, compared with $27.1 million at December 31, 2017. Nine-month operating cash flow was $20.4 million; investing activities used $42.9 million and financing activities provided $57.4 million.
- Short-term borrowings fell to $55.0 million from $144.7 million, while long-term debt rose to $224.3 million from $164.8 million. Total borrowings were $279.3 million, down from $309.4 million.
- Shareholders’ equity was $241.3 million, or 11.2% of assets, versus $247.3 million, or 11.9%, at year-end. The Bank remained classified as well-capitalized; its September 30 total risk-based capital ratio was 14.69% and Tier 1 leverage ratio was 10.99%.
- Nonperforming loans were $12.8 million, or 0.76% of loans, versus 0.78% at year-end; nonperforming assets were 0.59% of assets versus 0.62%. The allowance was $12.2 million, or 0.72% of loans, up from $10.8 million, or 0.66%.
Changes versus comparable periods
- Q3 net income increased 2.5%, but nine-month net income declined 0.8%. Q3 net interest income decreased 1.3%; nine-month net interest income increased 2.6%.
- In Q3, interest expense rose 34.4%, outpacing the 5.9% increase in interest income, and the reported net interest margin declined 10 basis points. Management attributed pressure principally to higher deposit and borrowing costs and lower purchase-accounting benefits.
- For the nine months, higher loan balances and yields supported net interest income, but interest expense rose 26.5%. The reported margin improved five basis points; excluding specified purchase-accounting adjustments and prepayment penalties, management reported adjusted margins of 3.02% versus 2.99%.
- Loan growth was led by commercial real estate. Deposit growth included a $76.2 million increase in time deposits; non-interest-bearing deposits increased $45.9 million. Core deposits rose in dollars but declined to 60.7% of total deposits from 63.0%.
- Shareholders’ equity declined amid $12.3 million in share repurchases, $3.5 million in dividends, and a $4.3 million increase in accumulated other comprehensive loss, partly offset by net income.
Outlook, commentary, risks, and unusual items
- No specific earnings, growth, or margin guidance is provided. Management describes a growth strategy emphasizing commercial lending, deposit relationships, retail banking, and residential lending. It says current liquidity is sufficient for operating needs.
- To manage rising funding costs, the company shifted part of its funding from short-term adjustable-rate borrowings to longer-term fixed-rate funding. Available additional FHLB borrowing capacity was $213.1 million; it also had $4.0 million and $50.0 million credit lines with ACBB and PNC, respectively.
- Q3 effective tax rate was 21.5%, versus 34.8%, reflecting the federal corporate tax-rate reduction. Nine-month non-interest income included $0.715 million of bank-owned life insurance death benefits. The company also recorded a $0.190 million nine-month unrealized loss on marketable equity securities after adopting ASU 2016-01.
- A previously charged-off 2010 loan generated a $0.3 million recovery, alongside $0.254 million of nine-month legal fees. The company intends to pursue further recovery from principals but cautions that significant additional recoveries are not assured.
- Available-for-sale securities had $13.2 million of gross unrealized losses at quarter-end; management attributed these to interest rates rather than credit quality and said it did not expect to be required to sell before recovery. Accumulated other comprehensive loss totaled $16.7 million.
- Key stated risks include interest-rate changes and margin compression, economic and credit deterioration, competition, regulation, deposit insurance costs, and execution of growth initiatives. The allowance for loan losses and deferred tax assets are identified as estimates subject to significant uncertainty. Management expects the forthcoming CECL standard to significantly change the allowance-calculation approach; effects were not quantified.
- The filing reports no material change in risk factors, no material off-balance-sheet arrangements, and no pending legal matter expected to have a material adverse effect. Regulatory capital requirements were exceeded, and disclosure controls were judged effective.
Important facts for investors to verify
- Whether deposit pricing and funding costs continue to rise faster than asset yields, and the resulting effect on net interest margin.
- Credit trends behind the higher provision and allowance, including past-due, nonaccrual, impaired, and criticized commercial loans.
- How much of reported non-interest income and earnings reflects the BOLI death benefit, securities valuation changes, and loan recovery, versus recurring operations.
- Liquidity and funding sensitivity, including the increased reliance on time deposits and the maturity, repricing, and collateral terms of FHLB borrowings.
- Capital and shareholder-return effects of ongoing repurchases, dividends, and unrealized securities losses.
- The eventual CECL adoption impact and any further recoveries or legal costs related to the charged-off loan.