Western New England Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Western New England Bancorp is the holding company for Westfield Bank, a community bank operating in western Massachusetts and northern Connecticut. The results reflect the COVID-19 disruption, the Paycheck Protection Program (PPP), and the opening of new banking locations.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $16.0 million | $14.5 million | $45.6 million | $43.1 million |
| Provision for loan losses | $2.7 million | $1.3 million | $7.3 million | $1.7 million |
| Non-interest income | $2.2 million | $2.6 million | $6.8 million | $7.3 million |
| Non-interest expense | $12.9 million | $11.7 million | $37.4 million | $35.9 million |
| Net income | $2.1 million | $3.2 million | $6.2 million | $9.9 million |
| Diluted earnings per share | $0.08 | $0.12 | $0.25 | $0.38 |
| Net interest margin | 2.81% | 2.88% | 2.80% | 2.90% |
Quarterly and year-to-date net income declined, chiefly as higher credit-loss provisions more than offset higher net interest income. Net interest income benefited from lower funding costs and PPP-related income; excluding PPP income and quarterly prepayment penalties, Q3 net interest income was down 0.7% year over year. The nine-month efficiency ratio improved to 71.0% from 71.6%; the Q3 ratio was 69.1% versus 68.9%.
Financial position, cash flow and liquidity
- At September 30, 2020, total assets were $2.49 billion, up 14.0% from year-end 2019. Net loans were $1.95 billion, including $223.1 million of PPP loans; total deposits were $2.01 billion, up 19.9% from year-end.
- Cash and cash equivalents were $172.1 million, compared with $24.7 million at December 31, 2019. For the first nine months, operating cash flow was $17.2 million, investing cash outflow was $102.1 million, and financing cash inflow was $232.2 million.
- Shareholders’ equity was $230.2 million, or 9.3% of assets, versus $232.0 million, or 10.6%, at year-end. Book value per share was $8.99 and tangible book value per share was $8.39.
- FHLB borrowings were $151.3 million, down from $240.5 million at year-end; no short-term borrowings were outstanding. The Bank reported $325.3 million of available FHLB borrowing capacity, plus available correspondent-bank and Federal Reserve credit lines. Management reported that the Bank remained “well-capitalized”; its total risk-based capital ratio was 13.71%, Tier 1 risk-based ratio 12.47%, common equity Tier 1 ratio 12.47%, and leverage ratio 8.76%.
- Deposits grew substantially, largely in core and non-interest-bearing accounts. Management attributed the increase in part to government stimulus, lower consumer spending, and unspent PPP proceeds. Brokered deposits were $55.2 million, compared with $21.5 million at year-end.
Material changes and credit quality
- Total loans grew 11.2% from year-end, primarily due to $223.1 million of PPP lending. Excluding PPP, commercial and industrial loans declined $26.6 million as borrowers paid down revolving lines and utilization fell from 33% to 20%.
- The allowance for loan losses increased to $20.7 million from $14.1 million at year-end. Excluding PPP loans, allowance coverage was 1.18% of loans, compared with 0.79%; coverage of nonperforming loans was 224.7%, compared with 142.7%.
- Nonperforming loans were $9.2 million, or 0.53% of loans excluding PPP, versus $9.9 million, or 0.56%, at year-end. Special-mention loans rose to $94.8 million from $25.9 million; nine downgraded relationships totaling $44.3 million were in the hotel industry.
- The $7.3 million nine-month provision included $2.3 million attributed to asset-quality changes, $2.5 million for adding the acquired Chicopee loan portfolio to general reserves, and $1.9 million for the COVID-19 qualitative factor. Net charge-offs were $685,000 for the period.
- COVID-19 payment deferrals fell from $261.0 million across 525 loans at June 30 to $66.3 million across 50 loans at September 30, or 3.8% of loans excluding PPP. The remaining modified balances included $53.6 million of commercial real estate, of which $43.9 million was hotel exposure.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said the pandemic’s duration and effects were highly uncertain and could not be predicted with confidence; results for the interim period are not necessarily indicative of full-year results.
- Management cited continued risks from COVID-19, including borrower repayment capacity, local economic conditions and unemployment, commercial real estate and hotel exposures, and potential effects on deposits, loan demand, liquidity, capital and earnings. Persistently low interest rates may further pressure asset yields and margins.
- PPP lending totaled $223.1 million across more than 1,386 SBA-approved applications, with $7.1 million of processing fees. Fee recognition and repayment depend in part on loan forgiveness and program requirements.
- Q3 included a $2.4 million loss on termination of a cash-flow hedge after the forecasted transaction was no longer expected to occur. The Company also recognized $1.9 million of realized gains on available-for-sale securities in Q3; these items affected reported non-interest income.
- The Company repurchased $8.2 million of shares during the first nine months and paid $3.8 million in dividends. The 2019 repurchase plan was completed in October; a new plan authorized October 27 permits purchases of up to 1.3 million shares. Future repurchases and dividends are not assured.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It described pending legal matters as ordinary-course claims that it believes are insured or not expected to have a material adverse effect.
Important facts for investors to verify
- Whether remaining COVID-19 deferrals, especially hotel-related commercial real estate loans, return to regular payment and whether criticized or nonperforming loans increase.
- Whether the allowance remains adequate as pandemic conditions and borrower performance evolve, including the rationale for reserving on the acquired Chicopee portfolio.
- PPP forgiveness progress, fee recognition and the effect of PPP runoff on loan growth, liquidity and net interest income.
- How funding costs, deposit mix and asset repricing affect future net interest margin, and whether capital, liquidity and planned shareholder distributions remain consistent with management’s stated priorities.