Western New England Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Western New England Bancorp is the holding company for Westfield Bank, a community bank operating in western Massachusetts and northern Connecticut. Financial statements are unaudited.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest and dividend income | $16.8 million | $19.4 million | $35.4 million | $38.1 million |
| Net income | $2.8 million | $5.5 million | $8.1 million | $10.9 million |
| Diluted earnings per share | $0.13 | $0.25 | $0.37 | $0.49 |
| Net interest margin | 2.81% | 3.24% | 2.97% | 3.21% |
Q2 interest and dividend income rose 20.2% year over year, but interest expense rose 535.0%, mainly from higher deposit costs and a shift toward time deposits. The six-month figures show the same pressure: interest expense increased $10.6 million, more than offsetting the $7.9 million increase in interest income. Q2 return on average assets was 0.43% and return on average equity 4.72%; six-month returns were 0.64% and 6.98%, respectively.
Non-interest income was $1.6 million in Q2 and $4.6 million for the first half; non-interest expense was $14.6 million and $29.4 million, respectively. The Q2 efficiency ratio was 78.9% (74.3% adjusted, non-GAAP), versus 65.2% (65.0% adjusted) a year earlier. Six-month ratios were 73.8% (72.3% adjusted), versus 66.9% (66.4% adjusted).
Financial position, funding and credit
- Balance sheet: Total assets were $2.56 billion at June 30, up $9.1 million from year-end 2022. Net loans were $2.00 billion, up $24.5 million; shareholders’ equity was $234.0 million, or 9.1% of assets.
- Deposits and liquidity: Deposits declined $71.5 million (3.2%) to $2.16 billion. Core deposits fell $194.6 million (10.7%) to $1.62 billion, while time deposits increased $123.1 million to $534.8 million. Uninsured deposits were 28.2% of total deposits. Cash and cash equivalents were $31.7 million.
- Borrowings: Total borrowings, including subordinated notes, were approximately $148.1 million, versus $62.2 million at year-end. Long-term debt included $90.0 million under the Federal Reserve Bank Term Funding Program and $31.2 million of FHLB advances. The bank reported $370.6 million of additional FHLB borrowing capacity and $27.4 million of additional BTFP capacity.
- Cash flow: First-half operating cash flow was negative $1.7 million, compared with positive $8.5 million in 2022. Investing activities used $6.1 million; financing activities provided $9.2 million. Financing included $120.0 million of long-term debt proceeds, partly offset by deposit outflows and reduced short-term borrowing.
- Credit: The allowance for credit losses was $19.6 million, or 0.97% of loans. Past-due loans were 0.27% of loans; nonaccrual loans were $5.8 million, or 0.29%, with no loans 90 days past due and still accruing. Classified loans declined to $49.5 million from $64.0 million at year-end.
- Capital: The bank’s total risk-based capital ratio was 13.49%, Tier 1 risk-based ratio 12.49%, and Tier 1 leverage ratio 9.69%. The filing states the bank remained well-capitalized and exceeded applicable regulatory requirements.
Material changes and unusual items
- The company adopted CECL on January 1, 2023. Adoption produced a $1.2 million increase in the loan allowance and a $918,000 off-balance-sheet credit allowance, with a $9,000 net increase to retained earnings after tax.
- First-half net charge-offs were $1.8 million, compared with $102,000 in the prior-year period. Management attributed them to a previously acquired commercial loan relationship and said the charge-off reflected CECL gross-up accounting, with no earnings impact. The Q2 credit-loss provision was $420,000; the six-month provision was $32,000.
- The defined benefit pension plan termination generated a $1.143 million final settlement loss recorded in non-interest income in Q2, plus $154,000 of related expense. The company contributed $1.3 million to fund the plan and purchased a $6.3 million group annuity contract for remaining liabilities. Regulatory approval of termination was expected in Q3 2023.
- At June 30, available-for-sale securities had $31.2 million of unrealized losses and held-to-maturity securities had $38.0 million. Management attributed these losses primarily to higher market yields, not credit deterioration; no securities credit-loss allowance was recorded. The unrealized losses remain relevant to market value and potential liquidity if securities must be sold.
- The company redeemed its remaining $6.3 million marketable equity securities during Q2. It also repurchased 126,944 shares in Q2 for $786,000; the first-half repurchase total was $2.1 million.
Outlook, risks and contingencies
No numerical earnings or margin guidance is provided. Management says it expects sufficient funds to meet current funding commitments for the next 12 months and beyond, and anticipates that a significant portion of time deposits maturing within one year will remain on deposit. It continues to focus on core-deposit retention and loan growth. Interest-rate sensitivity modeling estimated first-year net interest income would decline 1.6% under a parallel 200-basis-point rate increase and rise 0.8% under a 200-basis-point decrease; the filing cautions this is a scenario analysis, not a forecast.
Key risks include deposit competition and further migration to higher-cost funding, rising interest rates and their effect on margins, economic and borrower stress, commercial real estate and other credit exposure, and the possibility that unrealized securities losses constrain liquidity choices. The company also cites operational, cybersecurity, regulatory, competitive, and broader economic risks. It reported ordinary-course legal claims that management believes are insured or not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether deposit outflows and the shift from core deposits to time deposits continue, and how renewal pricing affects funding costs and net interest margin.
- Available borrowing capacity, collateral requirements, and the terms and ongoing use of BTFP, FHLB and other funding sources.
- Credit performance and allowance adequacy, especially the acquired commercial relationship, criticized loans, and commercial real estate exposures.
- The effect of the pension-plan settlement and regulatory approval on subsequent-period earnings and cash flows.
- How securities unrealized losses, interest-rate sensitivity, and any need to sell or pledge securities affect liquidity and capital.