Western New England Bancorp, Inc. — Q1 2021 Form 10-Q
Business context and period. Unaudited consolidated results for the three months ended March 31, 2021, compared with Q1 2020; balance-sheet comparisons are with December 31, 2020. The company is the holding company for Westfield Bank, a community bank operating 25 offices in western Massachusetts and northern Connecticut.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Interest and dividend income | $20.0 million | $20.4 million in Q1 2020 |
| Net interest income | $18.0 million | $14.6 million in Q1 2020 |
| Net interest margin | 3.24% (3.26% tax-equivalent) | 2.87% (2.89% tax-equivalent) in Q1 2020 |
| Non-interest income | $3.0 million | $2.5 million in Q1 2020 |
| Non-interest expense | $13.3 million | $12.3 million in Q1 2020 |
| Net income / diluted EPS | $5.8 million / $0.24 | $2.1 million / $0.08 in Q1 2020 |
| Operating cash flow | $11.0 million | $12.1 million in Q1 2020 |
| Total assets | $2.46 billion | $2.37 billion at December 31, 2020 |
| Deposits | $2.15 billion | $2.04 billion at December 31, 2020 |
| Net loans / allowance for loan losses | $1.90 billion / $21.2 million | $1.91 billion / $21.2 million at December 31, 2020 |
| Long-term debt | $42.7 million | $57.9 million at December 31, 2020 |
| Cash and cash equivalents | $132.1 million | $87.4 million at December 31, 2020 |
The efficiency ratio improved to 65.3% from 72.6% in Q1 2020. The effective tax rate was 24.1%, versus 21.9%. Shareholders’ equity was $222.9 million, or 9.1% of assets; book value per share was $9.07 and tangible book value per share was $8.44. The Bank remained “well-capitalized”; its total risk-based capital ratio was 13.85% and Tier 1 leverage ratio was 8.81%.
Q1 cash flows included $60.3 million used in investing activities, principally reflecting $64.0 million of held-to-maturity securities purchases, and $93.9 million provided by financing activities, including $116.0 million of net deposit growth and $15.2 million of long-term debt repayment. Cash increased $44.7 million during the quarter. The Bank reported $453.3 million of additional FHLB borrowing capacity, as well as unused correspondent-bank and Federal Reserve credit lines.
Material changes versus comparable periods
- Net income rose 178% year over year, while net interest income increased 23.9%. Lower funding costs were the main driver: interest expense fell $3.8 million, more than offsetting a $357,000 decline in interest and dividend income.
- Q1 2021 net interest income included $2.4 million of PPP interest income and origination fees. Management reported that, excluding PPP and specified purchase-accounting and prepayment items, net interest income increased 8.0% year over year. Higher average cash balances and lower asset yields partly constrained margin.
- Provision for loan losses declined to $75,000 from $2.1 million in Q1 2020, when the provision reflected heightened pandemic uncertainty. Net charge-offs were $5,000, compared with $365,000 in Q1 2020.
- Non-interest income included a $546,000 gain on non-marketable equity investments and $227,000 of mortgage-sale gains. Non-interest expense increased 8.2%, notably due to staffing, branch expansion, and FDIC assessment costs.
- Compared with December 2020, deposits rose 5.7%, led by core deposits; time deposits fell 11.4%. Net loans were nearly flat, with commercial real estate growth offset by declines in residential and commercial and industrial lending. Shareholders’ equity declined $3.8 million, including the effects of share repurchases, dividends, and higher accumulated other comprehensive loss.
Outlook, commentary, risks and unusual items
- Outlook: No specific earnings or financial guidance was provided. Management’s stated strategy emphasizes commercial and residential lending, core deposit growth, investment in technology and service, shareholder returns, and potential acquisitions.
- COVID-19 and credit: Management said delinquencies and nonperforming assets had not been materially affected by the pandemic as of March 31, 2021, but noted the ultimate effects remain uncertain. CARES Act loan modifications had declined to $66.9 million across 29 loans, or 3.8% of loans excluding PPP. Hotel exposures were particularly represented among remaining commercial real estate modifications. The allowance was 1.21% of loans excluding PPP and 313.0% of nonperforming loans.
- Credit quality: Nonperforming loans were $6.8 million, or 0.39% of loans excluding PPP, versus $7.8 million and 0.45% at year-end. The filing describes hospitality, transportation, retail, and restaurant/food-service borrowers as potentially more exposed to pandemic-related disruption. Allowance estimates depend on economic, collateral, and borrower conditions and may require revision.
- Market and funding risks: Management identifies interest-rate changes, competition, regional economic weakness, regulation, and pandemic developments as risks. Available-for-sale securities had $4.3 million of gross unrealized losses at quarter-end; management attributed losses to market yields rather than credit deterioration and recorded no other-than-temporary impairment. Accumulated other comprehensive loss increased $3.1 million during the quarter, mainly reflecting securities valuation changes.
- Subsequent events: On April 20, 2021, the company issued $20 million of 4.875% fixed-to-floating subordinated notes due 2031, intended to qualify as Tier 2 capital; proceeds were designated for general corporate purposes, including organic growth and share repurchases. On April 27, the board authorized a new plan to repurchase up to 2.4 million shares after completion of the 2020 plan. These events occurred after quarter-end.
- Other: The company reported no material change in risk factors, no material off-balance-sheet arrangements, and no material change in market-risk assessment. Management concluded disclosure controls were effective; pending ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of the improvement in earnings and margin is sustainable as PPP fees run off and funding costs or market rates change.
- The quality and performance of remaining pandemic-modified loans, especially hotel and other exposed commercial borrowers, and the adequacy of the allowance.
- The recurring nature of non-interest income, including the $546,000 investment gain and $227,000 mortgage-sale gain, alongside rising operating costs.
- The effect of securities valuation changes on accumulated other comprehensive loss, equity, and reported book value.
- Use and cost of the new subordinated notes, and the timing and size of share repurchases under the new authorization.
- The filing’s stated interest-rate and economic risks, and the potential effect of future expected-credit-loss accounting; management said implementation was underway and expected to change its allowance approach significantly.