Western New England Bancorp, Inc. — FY 2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparative results are primarily for FY 2020. The company is a Massachusetts-based bank holding company operating Westfield Bank across western Massachusetts and northern Connecticut.
Business context and financial results
At year-end, the company reported $2.538 billion in assets, $1.845 billion in net loans, $2.257 billion in deposits and $223.7 million in shareholders’ equity. It operates 25 banking offices and focuses on commercial and residential lending, deposits and wealth management.
| Metric | FY 2021 / Dec. 31, 2021 | FY 2020 / Dec. 31, 2020 |
|---|---|---|
| Net income | $23.7 million | $11.2 million |
| Diluted earnings per share | $1.02 | $0.45 |
| Net interest income | $73.2 million | $64.4 million |
| Net interest margin | 3.14% | 2.93% |
| Non-interest income | $12.6 million | $9.3 million |
| Non-interest expense | $54.9 million | $51.8 million |
| Efficiency ratio | 64.6% | 68.6% |
| Cash and cash equivalents | $103.5 million | $87.4 million |
| Operating cash flow | $27.5 million | $25.1 million |
| Shareholders’ equity | $223.7 million | $226.6 million |
The company recorded a $925,000 credit for loan losses in 2021, versus a $7.8 million provision in 2020. Net charge-offs were $445,000, or 0.02% of average loans. The allowance was $19.8 million, equal to 1.06% of total loans and 398.6% of nonperforming loans.
Material changes and balance-sheet developments
- Assets increased 7.3% to $2.538 billion. Deposits grew 10.5% to $2.257 billion; core deposits rose to 82.1% of deposits from 71.0%. The company reported no brokered deposits at year-end, compared with $55.3 million in 2020.
- Gross loans declined 3.3% to $1.863 billion, largely because PPP loans fell $141.9 million to $25.3 million. Excluding PPP, loans grew 4.5%, led by a 17.5% increase in commercial real estate loans. CRE comprised 52.6% of gross loans.
- Investment securities increased to $428.5 million from $213.8 million, including $222.3 million in held-to-maturity securities, a category the company did not hold in 2020.
- Borrowings fell to $22.3 million from $57.9 million. This included $2.7 million of FHLB advances and $19.6 million of subordinated debt, net of issuance costs. The company issued $20 million of 4.875% fixed-to-floating subordinated notes in April 2021, due in 2031.
- Shareholders’ equity declined to $223.7 million. Net income was partly offset by $23.1 million of share repurchases, $4.7 million of dividends and an increase in accumulated other comprehensive loss. Book value per share was $9.87; tangible book value per share was $9.21.
- Cash increased by $16.0 million during the year. Net cash used in investing activities was $161.7 million, substantially reflecting securities purchases; financing activities provided $150.1 million.
Outlook, commentary, risks and unusual items
- Management’s strategy emphasizes commercial lending and deposits, residential lending, technology and customer experience, competitive dividends and use of the repurchase plan. No specific earnings or growth guidance is provided. Management stated it expected sufficient liquidity to meet funding commitments for the next 12 months and beyond.
- Management attributed improved earnings primarily to lower funding costs, higher net interest income and the move from a pandemic-related loan-loss provision to a credit. Net interest income benefited from $6.8 million of PPP income, including accelerated recognition of fees as loans were forgiven.
- Non-interest income included a $555,000 BOLI death benefit, $1.4 million of mortgage banking income from loan sales and an $898,000 gain on non-marketable equity investments. The company sold $59.7 million of low-coupon residential loans to manage interest-rate risk.
- COVID-19 remained an uncertainty. Nine CARES Act-modified loans totaling $42.5 million remained at year-end; eight hotel loans accounted for $33.5 million, and one assisted-living loan accounted for $9.0 million. The filing says $33.5 million of these loans had resumed interest-only payments.
- Asset quality improved: nonperforming loans were $5.0 million, or 0.27% of loans, versus $7.8 million, or 0.41%, in 2020. Criticized loans declined to $82.6 million from $147.1 million. Management cautioned that economic conditions, CRE exposure and borrower performance could affect future credit losses.
- Interest-rate sensitivity modeling estimated that a parallel +200 basis-point shock would reduce net interest income 3.9% in months 1–12 and 4.5% in months 13–24; a −100 basis-point shock would reduce it 2.8% and 8.6%, respectively. The filing cautions these scenarios are not forecasts.
- Available-for-sale securities had $5.2 million of gross unrealized losses and held-to-maturity securities had $2.5 million at year-end. Management attributed losses to higher market yields rather than credit deterioration; no OTTI charges were recorded in 2021 or 2020.
- Liquidity sources included $480.5 million of additional FHLB borrowing capacity and unused correspondent and other credit lines. Commitments to extend credit, including unused lines, loan commitments, construction agreements and standby letters of credit, totaled approximately $543.2 million.
- The company identified adoption of the expected-credit-loss standard (CECL) for fiscal years beginning after December 15, 2022 as a significant accounting change; it had not quantified the effect and expected the standard to change its allowance methodology. Other stated risks include COVID-19, interest rates, credit quality, CRE concentration, competition, cybersecurity, regulation and the LIBOR transition.
- The company reported no material pending legal proceedings. The independent auditor gave unqualified opinions on the financial statements and internal control; management also concluded internal controls were effective.
Important facts for investors to verify
- Whether commercial real estate growth and the hotel-related modified loans remain current, and how concentrations affect credit performance.
- How much 2021 earnings and margin benefited from PPP fee acceleration, lower deposit costs and other nonrecurring items; assess earnings without those effects.
- Whether core-deposit growth persists as stimulus and PPP-related balances normalize, and how the $363.3 million of time deposits due within one year renews.
- The effect of rising rates on net interest income, securities values and the substantial fixed-rate loan exposure; review the sensitivity assumptions and securities marks.
- Capital and shareholder-return capacity after the $20 million subordinated debt issuance, $23.1 million of repurchases and dividends, including regulatory limits on bank-to-parent dividends.