Western New England Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; balance-sheet comparisons are against December 31, 2021. Amounts are in U.S. dollars unless noted. The company is the holding company for Westfield Bank, operating 25 offices in western Massachusetts and northern Connecticut.
Financial results and position
- Q2 earnings: Net income was $5.5 million, down from $5.7 million in Q2 2021. Diluted EPS was $0.25 versus $0.24, reflecting fewer weighted-average shares. Return on average assets was 0.87%; return on average equity was 10.22%.
- First-half earnings: Net income was $10.9 million versus $11.4 million; diluted EPS was $0.49 versus $0.47. Return on average assets was 0.86% versus 0.95%, and return on average equity was 9.93% versus 10.25%.
- Net interest income and margin: Q2 net interest income rose 8.9% to $19.4 million; net interest margin increased to 3.24% from 3.06% (3.26% versus 3.08% on a tax-equivalent basis). First-half net interest income rose 6.3% to $38.1 million; margin was 3.21% versus 3.15% (3.23% versus 3.17% tax-equivalent). Management attributed the improvement to lower funding costs and growth in earning assets.
- Other income and expenses: Q2 non-interest income increased 13.8% to $2.7 million, while non-interest expense rose 5.6% to $14.4 million. First-half non-interest income was $5.1 million, down from $5.4 million; expense increased 7.0% to $28.9 million. The adjusted efficiency ratio was 65.0% for Q2 and 66.4% for the first half, versus 66.1% and 65.3%, respectively.
- Loans and credit: Total loans were $1.974 billion, up 6.0% since year-end; excluding PPP loans, they rose 7.3%. Commercial real estate lending drove growth. Nonperforming loans were $4.1 million, or 0.21% of loans, versus $5.0 million, or 0.27%, at year-end. The allowance was $19.6 million, 0.99% of loans, versus $19.8 million and 1.06%. First-half net charge-offs were $102,000.
- Deposits, liquidity, and debt: Deposits totaled $2.302 billion, up 2.0%; core deposits were 84.8% of deposits, up from 82.2% at year-end, and there were no brokered deposits. Cash and cash equivalents were $47.5 million, down from $103.5 million. Borrowings totaled about $25.8 million, including $19.7 million of subordinated debt. The company reported $473.2 million of additional FHLB borrowing capacity and expects sufficient funds to meet commitments for the next 12 months and beyond.
- Capital and equity: Shareholders’ equity was $215.3 million, or 8.4% of assets, versus $223.7 million, or 8.8%, at year-end. The decline included a $14.4 million increase in accumulated other comprehensive loss, largely related to securities fair-value declines. Consolidated Tier 1 leverage, common equity Tier 1, and total risk-based capital ratios were 8.9%, 11.7%, and 13.7%; the Bank was reported as well-capitalized.
- Cash flow: First-half operating cash flow was $8.1 million, versus $13.5 million in 2021. Investing activities used $106.9 million and financing activities provided $42.9 million; cash and equivalents declined $55.9 million over the period.
Material changes and notable items
- Loan growth and lower deposit interest expense supported higher net interest income. However, higher interest rates reduced the fair value of securities: gross unrealized losses on debt securities were $53.4 million at June 30, versus $7.7 million at year-end; accumulated other comprehensive loss widened to $26.7 million from $12.3 million.
- PPP loans fell to $2.6 million from $25.3 million at year-end. Q2 PPP income declined to $129,000 from $1.6 million a year earlier; first-half PPP income was $691,000 versus $4.0 million.
- Management reported no material COVID-related deterioration in delinquency or nonperforming assets. Two loans remained under CARES Act modification: a $9.0 million commercial real estate loan and a $123,000 residential loan.
- The company repurchased 405,847 shares during the first half. The board authorized a new plan on July 26, 2022 for up to 1.1 million shares, to begin after completion of the existing plan. Quarterly dividends were $0.06 per share.
- First-half investment in the defined benefit pension plan was $2.1 million; management had not determined total 2022 contributions. The company is implementing CECL, effective for it in fiscal 2023, and said the standard is expected to significantly change its allowance methodology; the effect had not been quantified.
Outlook, risks, and contingencies
The filing gives no quantified earnings or margin guidance. Management describes a growth strategy focused on commercial lending, deposits, residential lending, technology and customer experience, with possible acquisitions. It expects adequate liquidity, but deposit retention, funding costs, loan demand, and securities and loan cash flows can vary with rates, competition, and economic conditions.
Key risks include interest-rate changes affecting margins and securities values; deterioration in regional economic conditions and borrower credit quality; the continuing, uncertain effects of COVID-19; inflation, competition, regulation, technology, and operational or control failures. Management attributed securities losses primarily to higher market yields rather than credit deterioration and reported no other-than-temporary impairment. The filing states pending ordinary-course legal claims are either insured or not expected to have a material adverse effect. No material changes to risk factors or market-risk assessment were reported.
Important facts for investors to verify
- Whether net interest margin and deposit costs hold up as rates and competitive pricing change.
- Whether strong loan growth is accompanied by any deterioration in criticized loans, delinquencies, nonperforming loans, or allowance needs.
- The impact of continued rate moves on securities valuations, accumulated other comprehensive loss, tangible book value, and capital.
- Deposit retention and liquidity, including the maturity of $296.0 million of time deposits within one year and availability of borrowing capacity.
- Execution and eventual quantified impact of CECL adoption, and pension funding requirements for the remainder of 2022.
- Progress on the existing and new repurchase plans, and the sustainability of dividends given capital, liquidity, and regulatory constraints.