Western New England Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited. Western New England Bancorp is the holding company for Westfield Bank, serving western Massachusetts and northern Connecticut.
Financial results and position
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.0 million; diluted EPS $0.08 | Q2 2019: $3.3 million; $0.12 |
| Six-month net income and diluted EPS | $4.1 million; $0.16 | First half 2019: $6.7 million; $0.25 |
| Net interest income | Q2: $15.1 million; first half: $29.6 million | Q2 2019: $14.2 million; first half 2019: $28.5 million |
| Net interest margin | Q2: 2.74%; first half: 2.80% | Q2 2019: 2.89%; first half 2019: 2.92% |
| Provision for loan losses | Q2: $2.45 million; first half: $4.55 million | Q2 2019: $0.35 million; first half 2019: $0.40 million |
| Total assets | $2.435 billion | $2.181 billion at Dec. 31, 2019 |
| Net loans / deposits | $1.981 billion / $1.948 billion | $1.762 billion / $1.678 billion at Dec. 31, 2019 |
| Cash and cash equivalents | $62.8 million | $24.7 million at Dec. 31, 2019 |
| Debt and borrowings | $35.0 million short-term; $188.2 million long-term | $35.0 million short-term; $205.5 million long-term at Dec. 31, 2019 |
| Shareholders’ equity | $229.5 million; 9.4% of assets | $232.0 million; 10.6% at Dec. 31, 2019 |
Six-month cash flows: operating activities provided $11.8 million, investing activities used $215.9 million, and financing activities provided $242.1 million. Cash increased $38.1 million. The Bank reported regulatory capital ratios above “well-capitalized” thresholds; its total risk-based capital ratio was 13.27% and Tier 1 leverage ratio was 8.96%.
Material changes versus comparable periods
- Net income fell 38% in Q2 and 39% for the first half year over year, principally reflecting much higher loan-loss provisions associated with COVID-19 and economic disruption.
- Net interest income increased, helped by lower funding costs and loan growth, but margin declined amid historically low interest rates. PPP interest and fee income contributed about $1.3 million in the first half; excluding PPP income, management said first-half net interest income declined 0.4% year over year.
- At June 30, total assets rose 11.6% from year-end and deposits rose 16.1%. Loan growth included $221.9 million of PPP loans; excluding PPP, commercial and industrial loans were down $17.8 million from year-end.
- The allowance for loan losses increased to $18.3 million from $14.1 million at year-end. Nonperforming loans were $10.4 million, or 0.59% of loans excluding PPP, versus $9.9 million, or 0.56%, at year-end.
- Non-interest income was down 17% in Q2 year over year, while non-interest expense rose 0.9%. The Q2 efficiency ratio was 71.5%, versus 72.5% in Q2 2019.
Outlook, risks, contingencies and unusual items
- COVID-19 and credit risk: Management said the pandemic’s duration and financial effects were highly uncertain and could materially harm borrowers, credit quality, liquidity, results and capital. The filing provides no earnings or margin guidance.
- Reserves and loan performance: Management attributed approximately $1.5 million of first-half loan-loss provision to COVID-19 factors. Special-mention loans increased to $96.3 million from $25.9 million at year-end; nine downgraded hotel relationships represented $46.0 million. Management anticipated possible future downgrades and charge-offs.
- Deferrals: As of June 30, payment deferrals covered $261.0 million across 525 loans, about 14.7% of the portfolio excluding PPP. Subsequent information through July 28 showed $100.6 million, or 38.5% of modified balances, had returned to regular principal-and-interest payments and made a first payment.
- PPP: The Bank had approximately 1,358 SBA-approved PPP applications totaling $221.9 million and about $7.1 million in processing fees. PPP loans are federally guaranteed, subject to program terms and potential forgiveness; fee repayment may be required for loans returned under the program’s safe-harbor rules.
- Funding and capital actions: FHLB borrowing capacity was approximately $268.3 million, with additional correspondent-bank and Federal Reserve credit lines available. The stock repurchase plan was suspended March 24, 2020; the company paid regular dividends of $0.05 per share each quarter and said future dividends were not assured.
- Other exposures: Contractual credit commitments totaled $448.3 million, in addition to lease obligations and debt. Management reported no material off-balance-sheet arrangements and said pending ordinary-course legal matters were not expected to have a material adverse effect. No material change in market-risk assessment was reported.
Important facts for investors to verify
- How loan deferrals perform after expiration, and whether the marked increase in special-mention loans converts into delinquencies, nonperforming loans or charge-offs.
- Whether the allowance remains adequate as COVID-related economic conditions and borrower cash flows evolve, especially in hotel, retail, restaurant and other affected sectors.
- The sustainability of net interest margin and earnings after the temporary contribution from PPP interest and fee income, given continued low rates.
- PPP forgiveness, processing-fee recognition or repayment, and any resulting effects on loan balances and income.
- Liquidity, deposit trends, regulatory capital and dividend capacity if credit losses or funding needs rise; the filing gives no forward earnings guidance.