Western New England Bancorp, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The company is a Massachusetts-based bank holding company operating Westfield Bank in western Massachusetts and northern Connecticut. Unless stated otherwise, amounts below are in U.S. dollars.
Financial results and position
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net income | $11.2 million | $13.3 million | Down 16.0%; diluted EPS was $0.45 versus $0.51 |
| Net interest income | $64.4 million | $58.0 million | Up 11.1% |
| Net interest margin | 2.93% | 2.90% | Tax-equivalent margin was 2.95% versus 2.93%; excluding PPP income and specified unusual items, management reported 2.83% versus 2.88% |
| Provision for loan losses | $7.8 million | $2.7 million | Increased amid pandemic-related economic uncertainty |
| Non-interest income | $9.3 million | $9.7 million | Down 4.7% |
| Non-interest expense | $51.8 million | $47.8 million | Up 8.2%; includes a $987,000 debt-extinguishment charge |
| Efficiency ratio | 70.0% | 70.7% | Improved |
| Total assets | $2.366 billion | $2.181 billion | Up 8.5% |
| Loans, net | $1.906 billion | $1.762 billion | Up 8.2%; gross loans rose 8.8% |
| Deposits | $2.038 billion | $1.678 billion | Up 21.5%; core deposits were 71.0% of deposits versus 61.1% |
| Cash and cash equivalents | $87.4 million | $24.7 million | Increased primarily with deposit growth |
| Shareholders’ equity | $226.6 million | $232.0 million | Down; included $10.7 million of share repurchases and $5.0 million of dividends |
| FHLB advances | $57.9 million | $240.5 million | Reduced substantially; no short-term borrowings outstanding at year-end |
| Operating cash flow | $25.1 million | $15.4 million | Net cash increased $62.7 million during 2020 |
The bank reported regulatory capital ratios above applicable requirements and was classified as well-capitalized. At year-end, the bank’s total risk-based capital ratio was 13.91%, CET1 ratio 12.66%, and Tier 1 leverage ratio 8.83%. The company’s consolidated total capital ratio was 14.65%.
Material changes versus 2019
- Net interest income rose as interest expense fell 23.6%, including lower deposit costs and repayment of higher-cost FHLB advances. Interest income included $4.8 million from PPP loans and fees.
- Loan growth was substantially affected by $167.3 million of PPP loans at year-end. Excluding PPP, commercial and industrial loans fell $37.1 million, or 14.9%, as borrowers paid down revolving credit lines and utilization declined.
- Deposits grew by $360.3 million, driven by growth in core accounts. Management attributed the increase partly to government stimulus, lower consumer spending, PPP proceeds held in borrower accounts, and three new branches.
- The allowance for loan losses increased to $21.2 million, or 1.10% of loans (1.20% excluding PPP loans), from $14.1 million, or 0.79%. Net charge-offs were $720,000.
- Criticized loans rose to $147.1 million, or 7.6% of loans, from $83.3 million, or 4.7%. Non-accrual loans declined to $7.8 million from $9.9 million; impaired loans increased to $29.1 million from $19.5 million.
- Quarterly fourth-quarter net income was $5.0 million, or $0.20 diluted EPS, compared with $3.4 million, or $0.13, in fourth-quarter 2019. The 2020 quarter benefited from lower interest expense and a $500,000 loan-loss provision, while including the $987,000 FHLB prepayment charge.
Outlook, risks and unusual items
- COVID-19 and credit: Management cited continuing uncertainty around the pandemic, economic recovery, borrower repayment capacity, collateral values, and credit losses. The company added a COVID-19 qualitative reserve factor and recorded an allowance for the previously acquired Chicopee loan portfolio.
- Loan modifications: Outstanding CARES Act deferrals fell from $261.0 million across 525 loans at June 30 to $76.9 million across 47 loans at year-end. Hospitality, transportation, retail, and food-service borrowers were identified as potentially more exposed. Six hotel relationships totaling $46.6 million were downgraded during 2020; 90.5% of the hotel loan balance was reported as modified at year-end.
- PPP: The company received SBA approval for 1,386 applications totaling $223.1 million and had $167.3 million outstanding at year-end. It processed $55.8 million of forgiveness applications by year-end and expected to participate in the next PPP round beginning in January 2021.
- Unusual items: Results included a $2.4 million loss on termination of an interest-rate swap, a $987,000 charge for early repayment of $50 million of FHLB advances, and a $2.0 million realized gain on securities sales. PPP income, purchase-accounting adjustments, and loan payoff income also affected reported interest results.
- Liquidity and funding: The company reported $476.8 million of available FHLB borrowing capacity, alongside unused lines with correspondent banks. It anticipated sufficient liquidity to meet commitments and expected a significant portion of time deposits maturing within one year to remain on deposit; these are management expectations, not guarantees.
- Guidance: The filing provides no specific earnings or revenue guidance. Management said it did not anticipate material capital expenditures in 2021 except in support of strategic initiatives. It identified interest rates, competition, local economic conditions, COVID-19, credit quality, funding access, regulation, cybersecurity, and the transition from LIBOR as material risks.
- The company reported no material pending legal proceedings, no goodwill impairment, and effective internal control over financial reporting. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether pandemic-related borrower stress, especially in hotels and other exposed sectors, leads to further downgrades, deferrals, provisions, or charge-offs.
- How quickly PPP loans are forgiven or repaid, and how PPP fees and related income affect future net interest income and margin.
- Whether the unusually strong deposit growth persists and remains low-cost, and how upcoming time-deposit maturities affect funding needs.
- How much of reported earnings depended on securities gains, swap termination, purchase-accounting adjustments, PPP income, and debt-prepayment costs.
- The expected effect of the CECL credit-loss standard, scheduled for the company’s fiscal years beginning after December 15, 2022; management had not quantified its impact and expected a significant change in allowance methodology.
- Progress in transitioning LIBOR-linked loans and other financial instruments, and any resulting effects on pricing, valuation, or risk management.