Western New England Bancorp, Inc. — Q1 2018 Form 10-Q
Period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Unaudited consolidated results. Dollar amounts are in millions unless otherwise stated.
Business context
Western New England Bancorp is the holding company for Westfield Bank, which operates 21 offices in western Massachusetts and northern Connecticut. Its core business is lending to businesses and homeowners and investing in securities. Management’s stated strategy emphasizes commercial lending, deposit relationships, and growth in its retail and residential businesses.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Net interest and dividend income | $14.7 | $14.5 in Q1 2017, up 1.5% |
| Tax-equivalent net interest margin | 3.12% | 3.08% in Q1 2017 |
| Provision for loan losses | $0.5 | $0.3 in Q1 2017 |
| Non-interest income | $1.8 | $2.0 in Q1 2017 |
| Non-interest expense | $11.4 | $11.0 in Q1 2017 |
| Income before taxes | $4.6 | $5.3 in Q1 2017 |
| Income tax provision | $1.0; effective rate 22.9% | $0.1; effective rate 2.8% in Q1 2017 |
| Net income / diluted EPS | $3.5 / $0.12 | $5.1 / $0.17 in Q1 2017 |
| Total assets | $2,085.5 | $2,083.1 at December 31, 2017 |
| Net loans / total deposits | $1,635.6 / $1,553.7 | $1,619.9 / $1,506.1 at December 31, 2017 |
| Cash and cash equivalents | $29.4 | $27.1 at December 31, 2017 |
| Shareholders’ equity | $242.6; 11.6% of assets | $247.3; 11.9% at December 31, 2017 |
Net interest margin excluding purchase-accounting accretion was 3.07%, compared with 2.94% in Q1 2017. The efficiency ratio was 68.2%, versus 63.7%; excluding purchase-accounting adjustments, it was 69.2% versus 66.3%.
Operating cash flow was $8.9, investing cash flow was negative $6.8, and financing cash flow was positive $0.1. Cash and cash equivalents increased $2.3 during the quarter. The allowance for loan losses was $11.4, or 0.69% of total loans, compared with $10.8, or 0.66%, at year-end. Net recoveries were $0.04 in Q1 2018.
At March 31, 2018, short-term borrowings were $55.0 and long-term debt was $212.7. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 14.93%, Common Equity Tier 1 ratio 14.23%, and Tier 1 leverage ratio 11.27%. Management stated it believed liquidity was sufficient for current operating needs; additional FHLB borrowing capacity was $140.3, with $54.0 of available ACBB and PNC credit lines.
Material changes and notable items
- Net income fell 31% year over year. The prior-year quarter included $1.6 of tax benefits, including a nonrecurring reversal of a deferred-tax valuation allowance; the effective tax rate rose to 22.9% from 2.8%.
- Interest income increased, but funding costs also rose: average cost of interest-bearing liabilities increased to 1.07% from 0.91%. Deposit interest expense rose $0.35 and debt interest expense rose $0.21.
- Loan balances increased $16.3 from year-end, led by commercial real estate and residential lending. Deposits rose $47.6; core deposits increased $35.1. The company eliminated customer repurchase agreements, with balances moved into customers’ core deposit accounts, and used deposit growth to pay down FHLB borrowings.
- Non-interest income declined $0.25, reflecting a $0.20 loss on securities, $0.11 of marketable-equity fair-value losses, and lower other income, partly offset by higher service charges and a $0.05 gain on sale of other real estate owned. Non-interest expense increased; data-processing costs rose after merger-related credits expired. No merger-related expense was reported in Q1 2018, compared with $0.41 in Q1 2017.
- Other comprehensive loss was $2.8, largely reflecting a $3.6 after-tax loss on available-for-sale securities. Management attributed unrealized securities losses to interest-rate changes, not credit quality, and said it did not expect to be required to sell the securities before recovery.
- Adoption of ASU 2016-01 moved marketable-equity fair-value changes into net income; the quarter included $0.11 of such unrealized losses. Adoption also resulted in a $0.24 cumulative-effect adjustment between retained earnings and accumulated other comprehensive loss, with no effect on total equity.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management reiterated its growth strategy and noted that Q1 results are not necessarily indicative of full-year results. Principal risks identified include interest-rate changes affecting margins, credit deterioration from economic or regional conditions, competition, regulation, technology, and the ability to realize anticipated benefits from acquisitions.
Nonperforming loans were $12.1, or 0.73% of total loans, down from $12.8 at year-end; nonperforming assets were 0.58% of total assets. The allowance covered 94.0% of nonperforming loans. Management cautioned that future allowance adjustments may be needed if economic, real-estate, or other conditions differ from current assumptions. The expected-credit-loss standard (ASU 2016-13) was under evaluation; the company expected it to significantly change its allowance methodology but had not quantified the effect.
Outstanding credit commitments totaled $345.1, including available lines of credit, other loan commitments, and letters of credit; these are not estimates of future cash outflows because many expire unused. Operating lease obligations totaled $9.1. The company reported no material off-balance-sheet arrangements. Routine legal claims were not expected to have a material adverse effect, and no material risk-factor changes were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting identified.
Most important facts for investors to verify
- How much of the year-over-year earnings decline reflects the unusually low prior-year tax rate, and how earnings evolve under a more comparable tax rate.
- Whether deposit and borrowing costs continue to rise faster than asset yields, and the resulting effect on net interest margin and efficiency.
- Credit quality trends in commercial real estate and commercial and industrial portfolios, including nonperforming loans, criticized ratings, and allowance adequacy.
- The effect of interest rates on available-for-sale securities, accumulated other comprehensive loss, and the company’s ability to avoid selling securities at a loss.
- Funding and liquidity developments, including FHLB debt, deposit mix, unused commitments, and remaining share-repurchase authorization; 451,641 shares were repurchased in Q1 for approximately $4.8.