Western New England Bancorp, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2020; the company filed on May 11, 2020. WNEB is a Massachusetts bank holding company whose subsidiary, Westfield Bank, operates 23 offices in western Massachusetts and northern Connecticut. Its primary revenues are loan and investment interest income.
Key financial results
| Metric | Q1 2020 | Q1 2019 or prior quarter-end |
|---|---|---|
| Net interest and dividend income | $14.6 million | $14.3 million, Q1 2019 |
| Provision for loan losses | $2.1 million | $50,000, Q1 2019 |
| Net income; diluted EPS | $2.1 million; $0.08 | $3.4 million; $0.13, Q1 2019 |
| Net interest margin | 2.87% | 2.94%, Q1 2019 |
| Non-interest income; expense | $2.5 million; $12.3 million | $2.2 million; $12.0 million, Q1 2019 |
| Operating cash flow | $12.1 million | $6.5 million, Q1 2019 |
| Cash and cash equivalents | $26.7 million | $24.7 million, Dec. 31, 2019 |
| Total assets; net loans | $2.19 billion; $1.79 billion | $2.18 billion; $1.76 billion, Dec. 31, 2019 |
| Deposits; FHLB borrowings | $1.71 billion; $222.4 million | $1.68 billion; $240.5 million, Dec. 31, 2019 |
| Shareholders’ equity | $227.8 million | $232.0 million, Dec. 31, 2019 |
Net interest income increased 1.6% year over year as higher loan income more than offset lower securities income, but the loan-loss provision substantially reduced earnings. Tax-equivalent net interest margin was 2.89%, versus 2.97% a year earlier. The efficiency ratio was 72.6%, versus 73.4%.
Material changes and financial position
- Gross loans grew $28.1 million, or 1.6%, from year-end, led by commercial real estate and commercial and industrial lending. Deposits also rose $28.1 million; core deposits increased to 62.0% of deposits from 61.1%.
- The allowance for loan losses increased to $15.8 million from $14.1 million; the allowance was 0.88% of total loans, compared with 0.79% at year-end. Net charge-offs were $365,000, versus $224,000 in Q1 2019.
- Nonperforming loans were $9.7 million, or 0.54% of loans, versus $9.9 million, or 0.56%, at year-end. Nonperforming assets were 0.44% of assets. No loans 90 or more days past due were still accruing interest.
- Available-for-sale securities declined to $215.1 million from $227.7 million. Cash flow from operations was positive, investing activities used $10.7 million, and financing activities provided $0.6 million; cash increased $1.9 million during the quarter.
- Book value per share was $8.88 and tangible book value per share was $8.27, both up 1.6% from year-end. The Bank remained “well-capitalized”: total risk-based capital was 12.80%, Common Equity Tier 1 was 11.89%, and Tier 1 leverage was 9.55%.
COVID-19, outlook, and risks
- Management added a COVID-19 economic-impact factor to its loan-loss estimate. Approximately $1.0 million of the quarter’s $2.1 million provision related to COVID-19 considerations. The filing cautions that the pandemic’s duration, severity, borrower effects, and economic consequences are uncertain and could materially affect credit losses, liquidity, capital, and results.
- As of April 17, 2020, the company had granted payment deferrals for 321 loans totaling $170.6 million, generally for up to 90 days. It elected to apply the CARES Act accounting relief for qualifying COVID-related loan modifications.
- As of April 16, the SBA had approved funding for more than 600 WNEB PPP applications totaling approximately $185 million. Estimated processing fees were approximately $5.5 million. The company reported a pipeline of qualified applicants awaiting the next funding round. These are post-quarter figures, not Q1 recognized loan balances or fee revenue.
- Branches were closed to in-person service under Massachusetts orders; drive-up windows and ATMs remained open, with appointments and online service available. The company identified hospitality, recreation, construction, manufacturing, and wholesale and retail trade as exposed sectors.
- The company repurchased approximately 1.01 million shares during Q1 for $8.1 million. The Board suspended the repurchase plan on March 24, and the company withdrew its request for additional buyback authorization on April 2. Q1 dividends paid were $1.3 million; future dividends are not assured.
- No numerical earnings guidance was provided. Management said the pandemic’s impact could not be estimated reliably. It also cited interest-rate changes, economic conditions, credit quality, and operational disruptions as risks. The filing reported no material change in market-risk assessment, no material off-balance-sheet arrangements, and pending ordinary-course legal matters that management did not expect to have a material adverse effect.
Important facts for investors to verify
- How borrower performance, COVID-related deferrals, and sector exposures affect delinquencies, nonperforming loans, charge-offs, and future provision expense.
- Whether the $170.6 million of reported payment deferrals and PPP activity have changed since the filing, and how much PPP lending and fee income were ultimately realized.
- Whether deposit trends, available borrowing capacity, and capital ratios remain adequate under prolonged economic stress.
- How lower interest rates affect net interest margin, loan yields, deposit costs, and the $1.8 million of hedge losses expected to be reclassified to interest expense over the next 12 months.
- Whether share repurchases remain suspended and whether the quarterly dividend continues.