Western New England Bancorp, Inc. (WNEB) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company is a Massachusetts bank holding company operating through Westfield Bank in western Massachusetts and northern Connecticut. Figures below are in U.S. dollars; financial statement amounts are reported in thousands unless stated otherwise.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $17.8 million | $15.1 million | $35.8 million | $29.6 million |
| Net income | $5.7 million | $2.0 million | $11.4 million | $4.1 million |
| Diluted EPS | $0.24 | $0.08 | $0.47 | $0.16 |
| Net interest margin | 3.06% | 2.74% | 3.15% | 2.80% |
| Provision for loan losses | Credit of $1.2 million | Expense of $2.5 million | Credit of $1.1 million | Expense of $4.6 million |
| Non-interest expense | $13.7 million | $12.2 million | $27.0 million | $24.6 million |
Q2 return on average assets was 0.92% and return on average equity was 10.16%, versus 0.35% and 3.54%, respectively, a year earlier. The Q2 efficiency ratio improved to 66.1% from 71.5%; the six-month ratio was 65.3%, compared with 72.1%.
Financial position, liquidity and capital
- At June 30, 2021, total assets were $2.477 billion, up 4.7% from December 31, 2020. Cash and cash equivalents were $105.5 million.
- Deposits were $2.181 billion, up $142.5 million (7.0%) since year-end. Core deposits rose to $1.7 billion, or 79.2% of total deposits; time deposits declined $136.7 million to $453.6 million.
- Net loans were $1.857 billion, down $49.1 million (2.6%) from year-end. Total loans declined mainly because PPP balances fell $61.7 million; excluding PPP loans, loans increased $11.4 million.
- Shareholders’ equity was $223.7 million, or 9.0% of assets, compared with $226.6 million, or 9.6%, at year-end. Book value per share was $9.29 and tangible book value per share was $8.66.
- Total borrowings and debt were $24.6 million: $5.0 million of FHLB advances and $19.6 million of subordinated debt, net of issuance costs. FHLB advances had been $57.9 million at year-end. The company reported $511.7 million of additional FHLB borrowing capacity and unused correspondent-bank and Federal Reserve credit lines.
- The Bank remained classified as well-capitalized. At June 30, its total risk-based capital ratio was 13.56%, CET1 ratio 12.41%, and Tier 1 leverage ratio 8.70%.
For the first six months, operating activities generated $13.3 million of cash; investing activities used $91.4 million; and financing activities provided $96.2 million. Cash and cash equivalents increased $18.1 million to $105.5 million.
Material changes and drivers
- Net income increased substantially year over year, primarily reflecting lower loan-loss provisions and lower funding costs. Net interest income rose 18.0% in Q2 and 20.9% for the six-month period. Lower deposit and borrowing costs more than offset reduced interest income and asset yields.
- The allowance for loan losses declined to $19.9 million from $21.2 million at year-end. Nonperforming loans were $6.0 million, or 0.34% of loans excluding PPP, versus $7.8 million, or 0.45%, at year-end. Allowance coverage of nonperforming loans was 331.8%.
- Non-interest income for the six months was $5.4 million, including a $546,000 gain on non-marketable equity investments, a $402,000 loss on termination of an interest-rate swap, and $469,000 of mortgage-sale gains. Q2 also included a $45,000 loss on prepayment of borrowings.
- The company repurchased 1.35 million shares during the first half for $10.8 million. A new plan authorizes repurchases of up to 2.4 million shares; 2.09 million remained authorized at June 30. A quarterly dividend of $0.05 per share was paid.
Outlook, risks and other items
- No formal earnings or margin guidance is provided. Management expected the majority of the PPP portfolio to be repaid through forgiveness by year-end 2021 and expected PPP income to benefit earnings over the following two quarters. PPP loans outstanding were $105.5 million; $4.0 million of PPP income was recognized in the first half.
- COVID-related payment modifications fell from a peak of $261.0 million across 525 loans in June 2020 to $57.0 million across 20 loans at June 30, 2021. Most of the remaining modified balances had resumed interest-only payments. Management said pandemic effects remain uncertain, including the effects of variants, economic recovery, and borrower repayment capacity.
- Management cited improving economic trends in explaining the loan-loss reserve release, while warning that weaker-than-expected economic, real-estate, or borrower conditions could require future reserve increases and adversely affect results, liquidity, or financial condition. Commercial real estate exposure was 49.5% of loans excluding PPP; hospitality, retail, and restaurant borrowers were identified as potentially more exposed.
- The $20 million subordinated notes issued in April carry a 4.875% fixed rate until May 2026, then a floating rate, and mature in 2031. Proceeds are for general corporate purposes, including growth and share repurchases.
- Management reported effective disclosure controls and no material change in internal controls. The company said ordinary-course legal claims were not expected to have a material adverse effect; no material risk-factor changes were reported.
Most important facts for investors to verify
- Whether the reserve release and lower credit costs are sustainable as pandemic-related support and borrower modifications run off.
- PPP forgiveness and fee-income timing, and the resulting effects on loan balances and net interest income.
- Deposit growth, deposit mix and funding costs, alongside interest-rate sensitivity and the effect of changing market rates on margins.
- Commercial real estate and other criticized-credit exposures, remaining modified loans, and subsequent trends in delinquencies and nonperforming assets.
- Capital and liquidity after subordinated-debt issuance, debt prepayments, dividends and ongoing share repurchases.