Western New England Bancorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results. The company is a bank holding company whose Westfield Bank operates 22 offices in western Massachusetts and northern Connecticut.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $15.9m | $14.7m | $30.6m | $29.2m |
| Net interest margin | 3.24% | 3.05% | 3.17% | 3.04% |
| Provision for loan losses | $0.75m | $0.35m | $1.25m | $0.65m |
| Non-interest income | $2.9m | $2.1m | $4.7m | $4.1m |
| Non-interest expense | $11.5m | $11.3m | $23.0m | $22.3m |
| Net income | $5.1m | $3.8m | $8.7m | $8.9m |
| Diluted earnings per share | $0.18 | $0.12 | $0.29 | $0.30 |
- Q2 net income increased year over year; first-half net income declined slightly. Q2 effective tax rate was 21.0%, versus 27.4% a year earlier. First-half rate was 21.8%, versus 15.0%; the prior-year period included $1.8m of tax benefits from reversal of a deferred-tax valuation allowance and stock-option exercises.
- At June 30, total assets were $2.096bn, loans $1.664bn, deposits $1.552bn, and shareholders’ equity $242.1m (11.6% of assets). Loans rose 2.3% and deposits 3.0% from year-end 2017.
- Cash and cash equivalents were $22.9m, down from $27.1m at year-end. First-half operating cash flow was $12.9m; investing activities used $23.0m and financing activities provided $5.9m, resulting in a $4.2m net cash decrease.
- Borrowings totaled $280.7m: $66.0m short term and $214.7m long term. Total borrowings declined $28.7m from year-end as short-term funding fell and long-term debt increased. Management said it shifted toward longer-term fixed-rate funding to manage rising funding costs.
- First-half net charge-offs were $0.095m. The allowance for loan losses was $12.0m, or 0.72% of loans, versus $10.8m, or 0.66%, at year-end. Nonperforming loans were $13.0m (0.78% of loans), compared with $12.8m (also 0.78%) at year-end.
- The Bank was categorized as well-capitalized. At June 30, its total risk-based capital ratio was 14.84%, common equity Tier 1 ratio 14.11%, and Tier 1 leverage ratio 11.08%.
Material changes and management commentary
- Net interest income growth reflected higher loan balances and yields; the Q2 average yield on interest-earning assets rose to 4.20% from 3.84%. Funding costs also increased: average cost of interest-bearing liabilities was 1.20%, versus 0.96%, with deposit and borrowing costs rising amid higher Federal Funds rates.
- First-half net interest margin was 3.19% on a tax-equivalent basis. Management stated that excluding $1.1m of purchase-accounting accretion tied to the Chicopee acquisition, first-half margin was 3.08%, compared with 2.99% in 2017.
- Q2 non-interest income included a $0.715m bank-owned life insurance death benefit. First-half results also included $0.147m of unrealized losses on marketable equity securities and $0.250m of net realized securities losses. These items make reported non-interest income less representative of recurring trends.
- First-half non-interest expense rose 3.2%; excluding prior-year merger-related costs, management reported a 5.7% increase, citing salaries and benefits and higher data-processing costs after merger-related credits expired.
- During the first half, the company repurchased $9.1m of shares and paid $2.3m in dividends. It repurchased 391,376 shares in Q2 at an average $10.89 per share; 1,597,592 shares remained authorized for repurchase at quarter end.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue, or margin guidance. Management said liquidity was sufficient for current operating needs; additional FHLB borrowing capacity was $157.5m, with separate available credit lines of $4.0m and $50.0m.
- Key disclosed risks include interest-rate changes affecting margins and funding costs, regional economic weakness and credit quality, competition, regulatory changes, and the accuracy of loan-loss and deferred-tax estimates. The company cautioned that actual results may differ from forward-looking statements.
- The company said adoption of the expected-credit-loss standard (CECL) is expected to significantly change its allowance methodology; the impact had not been quantified. Management did not expect the pending lease standard to have a material impact.
- Contractual credit commitments totaled $338.8m, including available lines of credit, other loan commitments, and letters of credit. Operating lease obligations were $9.0m. Management stated that these commitments and guarantees are subject to credit controls and that it had no material off-balance-sheet arrangements.
- Legal claims in the ordinary course were described by management as insured or not expected to have a material adverse effect. No material changes to risk factors or market-risk assessment were reported.
Important facts for investors to verify
- Whether loan growth and margin improvement persist as deposit and borrowing costs rise, and how much earnings continue to depend on Chicopee purchase-accounting accretion.
- Credit trends behind the higher provision and allowance, particularly commercial real estate and commercial and industrial exposures; review delinquency, risk-rating, and nonperforming-loan trends.
- How much of reported non-interest income is recurring after the life-insurance death benefit and securities losses, and whether expense growth moderates.
- Liquidity and funding implications of deposit mix changes, the shift from short-term to long-term borrowing, and the substantial undrawn credit commitments.
- Future effects of CECL implementation, securities valuation changes, share repurchases, and capital levels on earnings and book value.