Western New England Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless noted. Unaudited consolidated results. The company is a Massachusetts bank holding company operating Westfield Bank, with 22 offices in western Massachusetts and northern Connecticut; revenue is primarily generated from loans and investment securities.
Financial results and key metrics
- Earnings: Net income was $3.43 million, down 2.5% from $3.52 million in Q1 2018. Diluted EPS increased to $0.13 from $0.12, as weighted-average diluted shares fell to 27.15 million from 29.62 million, reflecting substantial share repurchases.
- Interest income and margin: Interest and dividend income rose 7.1% to $20.06 million, but interest expense increased 43.0% to $5.73 million. Net interest income declined 2.7% to $14.33 million. Net interest margin was 2.94%, down from 3.09% (2.97% versus 3.12% on a tax-equivalent basis). Average cost of interest-bearing liabilities rose to 1.54% from 1.09%; management identified deposit-cost increases, especially time deposits, as a key pressure.
- Other income and expenses: Non-interest income rose 22.9% to $2.17 million, including a $35,000 securities gain and $70,000 unrealized gain on marketable equity securities. Non-interest expense increased 5.2% to $12.02 million, with higher salaries, occupancy and other operating costs. The efficiency ratio worsened to 73.4% from 68.2%. Income before taxes was $4.42 million versus $4.56 million; the effective tax rate was 22.5% versus 22.9%.
- Credit: The loan-loss provision was $50,000 versus $500,000 in Q1 2018. Net charge-offs were $224,000, compared with net recoveries of $39,000 a year earlier. The allowance was $11.88 million, or 0.71% of loans, unchanged as a percentage of loans from year-end. Nonperforming loans rose to $15.31 million, or 0.91% of loans, from $13.48 million, or 0.79%; allowance coverage of nonperforming loans declined to 77.6% from 89.4%. No loans 90 or more days past due were still accruing interest.
- Balance sheet and funding: Total assets were $2.12 billion, down 0.2%; gross loans were $1.68 billion, down 1.0%, while deposits increased 2.1% to $1.63 billion. Cash and cash equivalents rose to $44.48 million from $26.79 million. Core deposits increased $11.0 million, but their share of deposits edged down to 58.1% from 58.6%; time deposits rose $23.0 million, and brokered deposits increased to $28.1 million from $23.8 million.
- Debt and liquidity: FHLB advances declined to $231.0 million from $267.3 million, as deposit growth helped fund repayments. The company reported $229.5 million of additional FHLB borrowing capacity, plus unused correspondent-bank credit lines of $15 million and $50 million. The filing reports $35.0 million of short-term borrowings and $196.0 million of long-term debt at quarter-end.
- Capital and shareholder returns: Shareholders’ equity was $227.3 million, or 10.8% of assets, versus $237.0 million, or 11.2%, at year-end. Book value per share rose to $8.43 and tangible book value per share to $7.84. The Bank remained well-capitalized; its total risk-based capital ratio was 13.56%, Common Equity Tier 1 was 12.83%, and Tier 1 leverage was 9.99%. The company repurchased 1.56 million shares for approximately $15.4 million and paid $1.4 million in dividends; the quarterly dividend was $0.05 per share.
- Cash flow: Operating activities provided $6.50 million, versus $8.93 million in Q1 2018. Investing activities provided $30.50 million, compared with $6.76 million used, including net loan repayments and securities proceeds. Financing activities used $19.31 million, principally for debt repayments and share buybacks. Cash and cash equivalents increased $17.69 million during the quarter.
Material changes and notable items
- Loan originations totaled $57.9 million, but payoffs and seasonal factors contributed to a $16.2 million net decline in loans, particularly in commercial and industrial lending.
- Nonperforming loans and nonperforming assets increased from year-end, while loan-loss coverage of nonperforming loans fell. Management attributed the lower quarterly provision primarily to the decrease in loan balances.
- Q1 2018 included a $201,000 securities loss related to previously unamortized bond premiums and a $106,000 unrealized loss on equity securities; these prior-period items contributed to the year-over-year increase in Q1 2019 non-interest income.
- Accumulated other comprehensive loss improved to $10.20 million from $13.42 million, largely reflecting higher available-for-sale securities values. Management said unrealized securities losses reflected market yields rather than credit deterioration and reported no other-than-temporary impairment.
- Adoption of the new lease standard on January 1, 2019 added approximately $7.2 million to both assets and liabilities. The company also adopted callable-debt premium amortization guidance, with a $7,000 cumulative-effect adjustment.
- The company completed its prior repurchase plan and began a new authorization for up to 2,814,200 shares. By March 31, it had repurchased 1,295,647 shares under the new plan.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue, margin or loan-growth guidance. Management’s stated strategy emphasizes commercial and residential lending, core-deposit growth, technology and service investment, shareholder returns, and potential acquisitions. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Management said implementation of the expected-credit-loss standard (CECL) was underway and expected to significantly change the allowance-calculation approach; the financial impact had not been quantified.
- Key disclosed risks include interest-rate changes and margin pressure, economic and credit deterioration, competition, regulatory and accounting changes, deposit-insurance costs, technology and operational risks, and execution of acquisition or cost-saving plans.
- Credit commitments totaled $391.1 million, including available lines, other loan commitments and letters of credit; many may expire unfunded. The company stated it had no material off-balance-sheet arrangements.
- Interest-rate swap agreements had a $1.52 million net liability. Certain default, capital-status or regulatory-action provisions could trigger termination, collateralization or settlement obligations.
- The company reported ordinary-course legal claims that it believed were insured or not expected to have a material adverse effect. It reported no material changes to its risk factors, no material changes to internal controls, and effective disclosure controls.
Important facts for investors to verify
- Whether higher deposit and borrowing costs continue to outpace asset-yield gains and further pressure net interest margin.
- Trends in nonperforming loans, charge-offs, criticized or substandard credits, and allowance coverage, especially given the decline in coverage of nonperforming loans.
- Whether deposit growth remains sufficient to support lending and reduce FHLB advances, and how the mix and cost of deposits evolve.
- The pace and price of share repurchases, their effect on per-share earnings and capital, and the remaining authorization under the new program.
- The eventual CECL adoption impact, and any material developments in liquidity, derivative collateral requirements, or credit commitments.