Western New England Bancorp, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted. The Massachusetts-based bank holding company operates Westfield Bank, with 22 offices in western Massachusetts and northern Connecticut. Its community-banking strategy emphasizes commercial lending, deposits, residential lending and shareholder returns.
Key financial metrics
Amounts are in millions except per-share data and ratios.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest and dividend income | $14.2 | $15.9 | $28.5 | $30.6 |
| Net interest margin | 2.89% | 3.24% | 2.92% | 3.17% |
| Provision for loan losses | $0.35 | $0.75 | $0.40 | $1.25 |
| Non-interest income | $2.5 | $2.9 | $4.7 | $4.7 |
| Non-interest expense | $12.1 | $11.5 | $24.2 | $23.0 |
| Net income | $3.3 | $5.1 | $6.7 | $8.7 |
| Diluted earnings per share | $0.12 | $0.18 | $0.25 | $0.29 |
- At June 30, total assets were $2.127 billion, net loans $1.710 billion, deposits $1.645 billion, cash and cash equivalents $25.7 million, and shareholders’ equity $229.7 million, or 10.8% of assets.
- Allowance for loan losses was $12.4 million, 0.72% of total loans. Nonperforming loans were $14.9 million, or 0.87% of loans; nonperforming assets were 0.70% of assets.
- Six-month operating cash flow was $10.4 million, investing cash flow was $2.1 million, and financing cash flow was negative $13.6 million. Cash and cash equivalents declined $1.1 million from year-end to $25.7 million.
- FHLB borrowings totaled $225.7 million, down from $267.3 million at December 31, 2018. The Bank reported $231.6 million of additional FHLB borrowing capacity and unused correspondent-bank lines of $15 million and $50 million.
- The Bank exceeded regulatory capital requirements and was categorized as well-capitalized. Its total risk-based, Tier 1 risk-based, Common Equity Tier 1 and Tier 1 leverage ratios were 13.33%, 12.58%, 12.58% and 10.03%, respectively.
Material changes versus comparable periods
- Q2 net income fell about 37%, and six-month net income fell about 23%. Net interest income declined 10.5% in Q2 and 6.7% for the first half.
- Margin compression reflected higher deposit funding costs: the six-month average cost of funds rose to 1.58% from 1.15%, while time-deposit cost rose to 2.06% from 1.39%. The company also had lower purchase-accounting benefits and prepayment penalties than in 2018.
- Q2 non-interest expense increased 5.1%; the efficiency ratio rose to 72.5% from 63.5%. For the first half, the efficiency ratio was 72.9% versus 65.8%.
- Compared with December 31, 2018, total loans grew 1.5%, led by commercial real estate loans, which rose $33.9 million. Deposits grew 3.0%; FHLB borrowings declined as deposit growth funded repayments.
- Shareholders’ equity declined from $237.0 million to $229.7 million, reflecting share repurchases and dividends, partly offset by net income and improved accumulated other comprehensive loss. The company repurchased 1.546 million shares under its 2019 program through June 30.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or margin guidance. Management describes a growth strategy focused on commercial and residential lending, deposit relationships, technology investment, dividends, share repurchases and potential acquisitions.
- Q2 non-interest income included $110,000 of non-recurring interchange fee income. Q2 2018 included a $715,000 BOLI death benefit, weighing on the year-over-year comparison. Q2 2019 included a $79,000 unrealized gain on marketable equity securities, versus a $41,000 loss a year earlier.
- Six-month net charge-offs were $30,000, after $923,000 of charge-offs and $893,000 of recoveries. The charge-offs included a $440,000 partial charge-off on a commercial and industrial relationship; recoveries included $812,000 on a commercial real estate loan previously charged off in 2010.
- Two loan relationships totaling $2.415 million were modified as troubled debt restructurings during the first half. One relationship totaling $166,000 remained nonperforming at June 30; the other was current. Management said both were adequately secured by real estate.
- Management identifies interest-rate changes, competition, economic and credit conditions, regulation, technology, and execution of acquisition benefits among forward-looking risks. It cautions that allowance estimates are subjective and future adjustments may be needed if conditions change.
- The company adopted lease accounting in 2019, recording $6.744 million of operating lease right-of-use assets and $6.778 million of lease liabilities at June 30. It is implementing the expected-credit-loss standard, effective for it in 2020, and expects a significant change in its allowance methodology; the impact has not been quantified.
- Pending ordinary-course legal matters were described as adequately insured or not expected to have a material adverse effect. Management reported effective disclosure controls, no material change in internal control, and no material change in risk factors.
Important facts for investors to verify
- Whether deposit repricing and time-deposit costs continue to pressure net interest margin and earnings.
- Credit quality trends, including nonperforming loans, commercial real estate and commercial-and-industrial exposures, and the adequacy of the allowance.
- The sustainability of reported earnings after removing unusual 2018 BOLI income, purchase-accounting effects, prepayment penalties and 2019 non-recurring fee income.
- Progress and capital impact of the share-repurchase program, alongside dividends, lending growth and regulatory capital levels.
- The eventual impact of the expected-credit-loss standard and any changes in economic, interest-rate or funding conditions.