Business context and reporting period
Western New England Bancorp, Inc. is the holding company for Westfield Bank, a community bank operating 25 offices in western Massachusetts and northern Connecticut. Its primary lending and revenue activities are commercial and residential real estate, commercial and industrial lending, and investment securities. This unaudited Form 10-Q covers the quarter ended March 31, 2023; income and cash-flow comparisons are with the three months ended March 31, 2022, and balance-sheet comparisons are with December 31, 2022. Unless noted, amounts are in millions.
Financial results and position
- Earnings: Net income was $5.304 million, essentially unchanged from $5.319 million. Basic and diluted EPS were $0.24, unchanged year over year. The quarterly dividend was $0.07 per share versus $0.06.
- Interest income and margins: Interest and dividend income rose 18.5% to $23.638 million, but interest expense increased to $5.134 million from $1.245 million, principally from higher deposit costs and borrowing expense. Net interest income fell 1.0% to $18.504 million. Net interest margin was 3.14% versus 3.18% (3.16% versus 3.20% on a tax-equivalent basis). The filing says margin was pressured by higher deposit costs and a shift toward more expensive deposits.
- Other income and expenses: Non-interest income increased 26.9% to $2.979 million, including a $352,000 gain on non-marketable equity investments; the prior-year quarter included a $276,000 unrealized loss on marketable equity securities. Non-interest expense rose 3.0% to $14.896 million. The GAAP efficiency ratio was 69.3% versus 68.7%; the adjusted ratio was 70.5% versus 67.8%.
- Credit costs and asset quality: The company recorded a $388,000 reversal of credit losses, compared with a $425,000 reversal. Net charge-offs were $1.9 million versus $54,000, primarily relating to one acquired commercial loan; management said the CECL-related charge-off had no earnings impact. At quarter-end, gross loans were $2.004 billion, up 0.8% from year-end, and the allowance was $19.031 million, or 0.95% of loans. Past-due loans were $3.046 million (0.15% of loans); nonaccrual loans were $5.794 million (0.29%), versus $5.7 million at year-end.
- Cash flow: Operating activities used $5.978 million, versus $7.196 million provided in the prior-year quarter; the filing reports a $11.043 million cash outflow from changes in other liabilities as a major operating-cash-flow movement. Investing activities used $13.575 million and financing activities provided $12.441 million. Cash and cash equivalents declined $7.112 million to $23.230 million.
- Balance sheet and funding: Total assets were $2.562 billion, up 0.4% from year-end. Deposits fell $72.315 million (3.2%) to $2.157 billion; core deposits declined 6.5%, while time deposits increased 11.2%. The company attributed outflows and mix changes to competition from higher-yielding alternatives, including money-market funds and Treasury notes; 58% of the February-to-March decline reflected one customer relationship moving funds to an outside treasury investment. Short-term borrowings rose to $98.990 million from $41.350 million; long-term debt rose to $31.178 million from $1.178 million. Subordinated debt was $19.682 million.
- Securities and equity: Available-for-sale securities were $146.373 million and held-to-maturity securities were $226.996 million at amortized cost. Their respective unrealized losses were $29.543 million and $36.041 million; management attributed losses primarily to interest rates, not credit quality, and said it did not intend to sell the securities. Shareholders’ equity was $233.222 million, or 9.1% of assets. Tangible common equity to tangible assets was 8.78%, a non-GAAP measure, versus 8.52% at year-end.
- Capital and liquidity: The Bank was categorized as well-capitalized. Its total risk-based capital ratio was 13.49%, CET1 ratio 12.50%, and Tier 1 leverage ratio 9.68%. Available borrowing capacity included $281.6 million at the FHLB, $53.4 million at the FRB discount window, and $71.5 million under the Bank Term Funding Program; no FRB or BTFP advances were outstanding. Management said it expected sufficient funds to meet commitments for the next 12 months and beyond.
Material changes versus comparable periods
- Net income and EPS were stable, but higher funding costs offset growth in interest income. Average interest-bearing deposit cost increased to 1.06% from 0.25%; the average cost of time deposits increased to 1.71% from 0.35%.
- Loan balances increased $15.1 million from year-end, led by commercial real estate and residential real estate growth; commercial and industrial loans declined $1.7 million.
- Deposit balances and core-deposit share weakened: core deposits represented 78.8% of deposits at March 31, versus 81.5% at year-end. Uninsured deposits were 28.6% of deposits, down from 30.8%.
- Unrealized securities losses narrowed from year-end, and accumulated other comprehensive loss improved by $1.941 million during the quarter, mainly from higher available-for-sale securities values.
- Effective January 1, 2023, the company adopted CECL. The transition increased the loan allowance by $1.182 million and established a $918,000 reserve for off-balance-sheet exposures, with a net $9,000 retained-earnings adjustment after tax. The transition also changed certain acquired-loan balances and accounting presentation.
Outlook, commentary, risks and unusual items
- No formal earnings, margin, or growth guidance is provided. Management describes a strategy focused on commercial and residential lending, core-deposit growth, technology and service investment, shareholder distributions, and potential acquisitions. It also states that liquidity is expected to be adequate for the next 12 months and beyond.
- Management identified higher deposit competition and migration to higher-yielding products as pressures on funding costs and margin. The filing warns that confidence concerns following bank failures could accelerate deposit outflows, affect liquidity and loan funding, and reduce profitability.
- The securities portfolio carries substantial rate-related unrealized losses. A forced sale to meet liquidity needs could crystallize losses, with potential effects on capital and results. The company says it does not currently intend to sell the securities and has access to borrowing facilities, but acknowledges those measures may not be sufficient in a sudden liquidity event.
- Other stated risks include economic and credit deterioration, inflation and interest-rate changes, regulatory scrutiny and costs, competition, operational and cybersecurity risks, and changes in deposit composition. The filing notes that regulatory attention may increase, particularly regarding uninsured deposits.
- Unusual items include the $352,000 investment gain and the $1.9 million of net charge-offs tied mainly to one acquired loan. The defined-benefit pension plan termination remained subject to regulatory approval; after quarter-end, the company contributed $1.3 million on April 11, 2023, and the plan funded a $6.3 million annuity premium on April 14.
- The company reported no material legal proceedings or changes to internal controls, and management concluded disclosure controls were effective. It reported no material off-balance-sheet arrangements beyond disclosed lending commitments and unused credit lines.
Most important facts for investors to verify
- Whether deposit outflows continue, the pace of migration from core deposits to time deposits, and resulting deposit pricing and net interest margin.
- Liquidity under stress: uninsured deposits were 28.6% of deposits; verify the accessibility and collateral requirements of stated borrowing capacity and the potential consequences of securities sales.
- Credit quality and reserve adequacy, especially the acquired commercial loan charge-off, CRE and C&I risk ratings, nonaccrual trends, and the assumptions underlying the new CECL allowance.
- The effect of unrealized AFS and HTM securities losses on capital and liquidity under adverse rate or deposit scenarios.
- Whether earnings can absorb continued funding-cost increases, and how much reported non-interest income and quarter-to-quarter performance depend on investment gains or other unusual items.
- Completion, funding, and final financial effects of the pension-plan termination and settlement.