Western New England Bancorp, Inc. — Q1 2022 Form 10-Q
Business context and period: The company is the holding company for Westfield Bank, a community bank operating in western Massachusetts and northern Connecticut. Its primary revenues come from loans and investment securities. This unaudited report covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Amounts below are in millions unless otherwise stated.
Financial results and position
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Net income; diluted EPS | $5.3; $0.24 | Q1 2021: $5.8; $0.24 |
| Net interest income | $18.7 | Q1 2021: $18.0, up 3.7% |
| Net interest margin | 3.18% (3.20% tax-equivalent) | Q1 2021: 3.24% (3.26% tax-equivalent) |
| Adjusted net interest margin, excluding specified PPP, purchase-accounting and prepayment items | 3.10% | Q1 2021: 3.04% |
| Non-interest income; non-interest expense | $2.3; $14.5 | Q1 2021: $3.0; $13.3 |
| Efficiency ratio; adjusted efficiency ratio | 68.7%; 67.8% | Q1 2021: 63.4%; 64.6% |
| Total assets; net loans | $2,555.4; $1,907.0 | December 31, 2021: $2,538.4; $1,844.9 |
| Deposits; total borrowings | $2,278.2; $21.3 | December 31, 2021: $2,256.9; $22.3 |
| Cash and cash equivalents | $62.9 | December 31, 2021: $103.5 |
| Shareholders’ equity; book value per share | $219.1; $9.63 | December 31, 2021: $223.7; $9.87 |
- Interest expense fell $0.8 million, chiefly from lower deposit costs, supporting higher net interest income. Interest and dividend income was $19.9 million versus $20.0 million a year earlier.
- The loan-loss provision was a $0.4 million credit, versus $0.1 million of provision in Q1 2021. Net charge-offs were $54,000 versus $5,000.
- Operating cash flow was $7.1 million, compared with $11.0 million in Q1 2021. Investing activities used $66.1 million and financing activities provided $18.5 million; cash declined $40.6 million during the quarter.
- At March 31, nonperforming loans were $4.0 million, or 0.21% of loans, versus $5.0 million, or 0.27%, at year-end. Allowance coverage was 1.00% of loans and 484.2% of nonperforming loans. There were no loans 90 or more days past due and still accruing.
- Regulatory capital remained above well-capitalized thresholds. Company ratios were 8.9% Tier 1 leverage, 11.9% common equity Tier 1 and 14.0% total risk-based capital; Bank ratios were 9.1%, 12.1% and 13.1%, respectively.
Material changes and management commentary
- Total loans increased $61.6 million during the quarter; excluding PPP loans, they rose $80.8 million, or 4.4%. Commercial real estate loans grew $59.5 million. PPP balances fell $19.3 million to $6.1 million as forgiveness and runoff continued.
- Core deposits increased $44.2 million, while total deposits rose $21.3 million. Core deposits were 83.4% of deposits; the company reported no brokered deposits.
- Cash and cash equivalents fell as the company shifted liquidity into held-to-maturity securities and funded loan growth. Total investment securities were $423.1 million. The fair value of held-to-maturity securities was $220.3 million against $237.6 million carrying value.
- Accumulated other comprehensive loss widened by $8.4 million in the quarter, primarily reflecting unrealized losses on available-for-sale securities as market yields rose. Management attributed securities losses to interest-rate changes, not credit quality, and reported no other-than-temporary impairment charges. Equity and tangible book value per share declined; management said AOCI reduced tangible book value per share by $0.37.
- Non-interest income declined 21.8%, in part because Q1 2021 included a $0.5 million gain on non-marketable equity investments and higher mortgage-sale gains. Non-interest expense rose 8.5%, primarily reflecting salaries and employee benefits, which management attributed mainly to merit increases and benefit costs.
- Management reported that COVID-19 had not materially affected delinquencies, nonperforming assets or credit losses as of March 31, while continuing to monitor potential effects. Two commercial real estate loans totaling $12.1 million remained under COVID-related principal deferral; borrowers continued paying interest and property taxes.
Outlook, risks and contingencies
- The filing provides no specific earnings or margin guidance. Management describes a growth strategy centered on commercial and residential lending, core deposits, technology and service investment, dividends, share repurchases and possible acquisitions. It anticipates sufficient liquidity for funding commitments over the next 12 months and beyond.
- Key risks cited include changing interest rates and margin pressure, inflation and economic conditions, credit deterioration, competition, regulation, technology, COVID-19 developments and other factors. Management cautions that Q1 results are not necessarily indicative of full-year results.
- The allowance for loan losses depends on estimates that could change with economic, real estate and borrower conditions. The company was preparing to adopt CECL, effective for it in fiscal years beginning after December 15, 2022; management expected a significant change in the allowance-calculation approach but had not quantified the impact.
- Available liquidity included $464.1 million of additional FHLB borrowing capacity and unused correspondent-bank lines of $15.0 million and $50.0 million. Contractual and contingent funding needs included $206.8 million of loan commitments and letters of credit, plus $320.8 million of available home-equity and other unadvanced credit lines; these amounts are not estimates of expected draws.
- Remaining core-provider contractual obligations were estimated at $13.1 million; lease liabilities totaled $10.1 million. The $20 million subordinated notes carry a 4.875% fixed rate until May 2026, then a floating rate based on the 90-day average SOFR plus 412 basis points, and mature in 2031.
- The company reported ordinary-course legal claims, which it believed were insured or would not have a material adverse effect. It reported no material changes in risk factors, no material changes in market-risk assessment, effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate, remains sustainable and whether credit quality and allowance coverage hold as economic conditions change.
- How rising rates affect net interest margin, deposit pricing, securities valuations, AOCI and tangible book value; also verify the carrying-versus-fair-value gap in held-to-maturity securities.
- The pace and remaining contribution of PPP fee income, and the effect of its continued runoff on reported loan yields and earnings comparisons.
- Whether higher operating expenses and the weaker efficiency ratio persist, and how recurring earnings compare after adjusting for unusual or nonrecurring items.
- Liquidity under potential deposit outflows and draws on commitments, including the maturity profile of time deposits and access to contingent borrowing sources.
- The eventual CECL adoption impact, future pension funding requirements, and the subordinated notes’ transition to floating-rate interest in 2026.