Western New England Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Western New England Bancorp is the holding company for Westfield Bank, a community bank serving western Massachusetts and northern Connecticut. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $20.3 | $18.8 | $58.4 | $54.6 |
| Net interest margin | 3.35% | 3.18% | 3.26% | 3.16% |
| Provision (credit) for loan losses | $0.675 | ($0.100) | $0.550 | ($1.225) |
| Non-interest income | $2.6 | $3.3 | $7.7 | $8.7 |
| Non-interest expense | $14.3 | $14.0 | $43.2 | $41.0 |
| Net income | $6.0 | $6.0 | $16.9 | $17.5 |
| Diluted earnings per share | $0.28 | $0.27 | $0.77 | $0.74 |
Q3 return on average assets was 0.93% and return on average equity was 10.90%; for the nine-month period, those measures were 0.88% and 10.26%. Adjusted efficiency ratio, a non-GAAP measure, was 62.6% for Q3 and 65.1% for the nine months.
Balance sheet, liquidity and capital
- Total assets were $2.579 billion, up 1.6% from December 31, 2021. Gross loans reached $2.006 billion, up 7.7%; excluding PPP loans, management reported loan growth of 9.0%.
- Deposits were $2.288 billion, up 1.4%. Core deposits rose to 85.0% of deposits; time deposits declined 14.6% to $343.3 million. The company reported no brokered deposits.
- Cash and cash equivalents were $27.1 million, down from $103.5 million at year-end 2021. Available-for-sale securities were $148.7 million and held-to-maturity securities were $234.4 million at amortized cost; HTM fair value was $193.1 million.
- Total borrowings were approximately $42.3 million, including $21.5 million in short-term borrowings, $1.2 million in long-term debt and $19.7 million in subordinated debt. The Bank had $424.5 million of additional FHLB borrowing capacity.
- Shareholders’ equity was $211.7 million, or 8.2% of assets, versus $223.7 million, or 8.8%, at year-end. Book value per share was $9.52 and tangible book value per share was $8.85. Regulatory capital ratios remained above well-capitalized minimums; the Bank’s total risk-based capital ratio was 13.1% and Tier 1 leverage ratio was 9.3%.
- For the first nine months, operating activities provided $19.3 million of cash; investing activities used $137.8 million and financing activities provided $42.1 million. Cash and cash equivalents declined $76.3 million over the period.
Material changes and notable items
- Quarterly net interest income increased 8.1% year over year, while nine-month net interest income rose 6.9%. Management attributed the improvement to asset growth and margin expansion. PPP income fell sharply: $19,000 in Q3 versus $1.8 million a year earlier, and $0.7 million for nine months versus $5.8 million.
- Net income was nearly unchanged in Q3 and declined 3.6% for nine months. Lower non-interest income—including less mortgage-sale activity and market-value losses on equity securities—offset net interest income growth. Nine-month expenses increased 5.4%, including higher compensation, professional fees and other expenses.
- Higher market interest rates drove substantial unrealized securities losses. AFS securities had $33.9 million of gross unrealized losses at quarter-end; accumulated other comprehensive loss increased to $33.7 million from $12.3 million at year-end. Management said the losses reflected rate changes, not credit deterioration, and recorded no securities impairment charges.
- Credit indicators remained low: nonperforming loans were $4.4 million, or 0.22% of loans, and the allowance was 1.01% of loans. The Q3 provision reflected loan growth; management noted that future allowance changes may be needed if economic or credit conditions worsen.
- The Board approved termination of the defined benefit pension plan, effective October 31, 2022, subject to regulatory approval; settlement was anticipated in 2023. The company contributed $2.1 million to the plan during the first nine months.
- The 2021 stock repurchase plan was completed after quarter-end on October 13, 2022. A new plan authorizes repurchases of up to 1.1 million shares. Dividends were $0.06 per share for Q3; continued dividends are subject to regulatory and other constraints.
Outlook, risks and contingencies
No specific earnings or financial guidance was provided. Management said it expects sufficient liquidity to meet current funding commitments for the next 12 months and beyond. Its stated strategy emphasizes commercial lending and deposits, residential lending, technology and service investment, shareholder returns, and potential acquisitions.
- CECL was scheduled for adoption on January 1, 2023. Based on then-current estimates, management expected the transition adjustment to retained earnings to be 1%–3% of the September 30 allowance; the estimate remained subject to refinement.
- Key risks include interest-rate changes and their effects on margins, securities values and deposit costs; economic deterioration and credit quality; competition, regulation, technology and operational controls; and continuing uncertainty related to COVID-19 and broader economic conditions.
- Commitments included approximately $160.1 million of loan commitments and letters of credit and $314.1 million of available home-equity and other unused credit lines. The company reported $10.9 million of remaining core-provider contractual obligations and $9.4 million of lease liabilities.
- Management stated that ordinary-course legal claims were either insured or not expected to have a material adverse effect. It reported no material changes to risk factors and no material changes in market-risk assessment.
Important facts for investors to verify
- Whether deposit pricing and funding costs rise enough to pressure the reported margin as rates and competition change.
- How the securities portfolio’s unrealized losses affect tangible book value, capital and liquidity, and whether management’s no-credit-impairment assessment remains appropriate.
- Loan growth, commercial real estate and C&I credit trends, nonperforming loans, charge-offs and the adequacy of the allowance.
- The final CECL transition impact compared with the estimated 1%–3% range.
- Execution and capital effects of the new share-repurchase plan, dividend capacity and pension-plan termination and settlement.