Western New England Bancorp(WNEB) - 2021 Q4 - Annual Report

Part I Item 1. Business Western New England Bancorp, Inc. is a Massachusetts-chartered bank holding company with $2.5 billion in assets, focusing on commercial real estate lending and operating 25 branches under extensive regulation - Total Assets: $2.5 billion[18] - Total Net Loans: $1.8 billion[18] - Total Deposits: $2.3 billion[18] - Total Shareholders' Equity: $0.2237 billion[18] - Westfield Bank is a full-service community financial institution with 25 branches and numerous ATMs serving Massachusetts and Connecticut[19] - The company's primary lending focus is on commercial relationships, including commercial real estate, construction, and commercial and industrial loans[34] - As of June 30, 2021, the company held approximately 14.0% of deposits in Hampden County, ranking second among 16 banks and thrifts[28] Lending Activities The company's $1.9 billion loan portfolio is dominated by commercial real estate (52.6%), with active management to mitigate concentration and interest rate risks Loan Portfolio Composition (December 31, 2021 vs 2020) | Loan Category | 2021 Amount (Millions) | % of Total (2021) | 2020 Amount (Millions) | % of Total (2020) | | :--- | :--- | :--- | :--- | :--- | | Commercial Real Estate | $980.0 | 52.6% | $833.9 | 43.3% | | Residential One-to-Four Family | $552.3 | 29.6% | $604.7 | 31.4% | | Home Equity | $99.8 | 5.4% | $103.9 | 5.4% | | Commercial and Industrial (incl. PPP) | $226.7 | 12.2% | $379.1 | 19.7% | | Consumer | $4.3 | 0.2% | $5.2 | 0.2% | | Total Gross Loans | $1,863.0 | 100.0% | $1,926.8 | 100.0% | - In 2021, the company sold $59.7 million of fixed-rate, low-coupon residential real estate loans to the secondary market to reduce interest rate risk, with no loans sold in 2020[51] - Paycheck Protection Program (PPP) loans decreased significantly from $167.3 million at year-end 2020 to $25.3 million at year-end 2021 due to loan forgiveness[43][45] Asset Quality Asset quality improved in 2021, with nonperforming assets and criticized loans decreasing, and a credit for loan losses recorded due to reduced pandemic-related provisions Nonperforming Assets Trend | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Nonperforming Loans | $5.0 million | $7.8 million | | Foreclosed Real Estate, net | $0 | $0 | | Total Nonperforming Assets | $5.0 million | $7.8 million | | Nonperforming Loans to Total Loans | 0.27% | 0.41% | | Nonperforming Assets to Total Assets | 0.20% | 0.33% | - Criticized loans decreased to $82.6 million (4.4% of total loans) at year-end 2021 from $147.1 million (7.6% of total loans) at year-end 2020[65] - The allowance for loan losses was 1.06% of total loans at December 31, 2021, down slightly from 1.10% at year-end 2020, and 1.08% excluding government-guaranteed PPP loans in 2021 compared to 1.20% in 2020[82] - The company recorded a credit for loan losses of $925,000 in 2021, compared to a provision of $7.8 million in 2020, which was significantly increased due to COVID-19 economic uncertainties[88] Investment Activities The investment portfolio grew to $414.1 million in 2021, primarily in mortgage-backed and debt securities, with a new held-to-maturity segment for liquidity and returns Securities Portfolio Composition (Amortized Cost) | Security Type | Dec 31, 2021 (Millions) | Dec 31, 2020 (Millions) | | :--- | :--- | :--- | | Available-for-sale | | | | Debt Securities | $18.3 | $18.3 | | Mortgage-backed Securities | $180.7 | $182.3 | | Held-to-maturity | | | | Debt Securities | $10.0 | $0 | | Mortgage-backed Securities | $212.3 | $0 | | Total | $421.3 | $200.6 | - The investment portfolio is an integral part of the company's asset liability management, providing liquidity and maximizing returns while ensuring safety and diversification[95] Deposits and Other Funding Total deposits increased to $2.3 billion in 2021, driven by core deposits, while FHLB borrowings significantly decreased, diversifying funding sources Deposit Composition | Deposit Type | Dec 31, 2021 (Millions) | % of Total (2021) | Dec 31, 2020 (Millions) | % of Total (2020) | | :--- | :--- | :--- | :--- | :--- | | Demand Deposits (Noninterest-bearing) | $641.3 | 28.4% | $541.8 | 26.5% | | Interest-bearing Checking | $145.7 | 6.5% | $94.9 | 4.7% | | Regular Savings | $217.6 | 9.6% | $175.6 | 8.6% | | Money Market | $850.3 | 37.7% | $640.8 | 31.4% | | Time Deposits | $402.0 | 17.8% | $590.3 | 28.9% | | Total Deposits | $2,256.9 | 100.0% | $2,043.4 | 100.0% | - Core deposits represented 82.1% of total deposits at year-end 2021, an increase from 71.0% at year-end 2020, indicating a shift to lower-cost funding sources[108] - The company has access to significant borrowing capacity, including $480.5 million from the FHLB and $65.0 million in lines of credit with correspondent banks as of December 31, 2021[121][124] Supervision and Regulation The company and its bank are extensively regulated by federal and state authorities, complying with Basel III capital standards and maintaining a "well-capitalized" status - As a savings and loan holding company, WNEB is regulated by the Federal Reserve Board, while Westfield Bank, a federal savings association, is primarily regulated by the OCC[131][132] - The company and the Bank are subject to the Basel III Capital Rules, requiring minimum ratios for Common Equity Tier 1, Tier 1, and Total Capital, plus a capital conservation buffer, with both entities in compliance at year-end 2021[141][145][149] - Under Prompt Corrective Action (PCA) regulations, the Bank was categorized as "well-capitalized" as of December 31, 2021[153] - The Bank met the Qualified Thrift Lender (QTL) test, requiring at least 65% of its portfolio assets in qualified thrift investments[158][159] Item 1A. Risk Factors Key risks include COVID-19 impacts, credit risk in the loan portfolio, interest rate volatility, intense competition, regulatory changes like LIBOR transition, and cybersecurity threats - The COVID-19 pandemic continues to pose a risk, potentially leading to higher credit losses, reduced demand for products, and other negative impacts on financial performance[188][189] - The loan portfolio, with its concentration in commercial real estate and commercial/industrial loans, carries a higher risk of loss compared to residential real estate loans[191][192] - Interest rate volatility could adversely affect net interest income, as the repricing of assets and liabilities may not occur in tandem[202] - The planned phase-out of LIBOR after 2021 and transition to an alternative reference rate like SOFR could adversely impact the value of financial instruments and require changes to risk models and hedging strategies[211][212] - The company faces significant cybersecurity risks, including cyber-attacks and data breaches, which could disrupt operations, compromise confidential information, and result in financial loss[225][226] Item 2. Properties The company operates 25 banking offices and numerous ATMs across Massachusetts and Connecticut, with owned premises and equipment valued at $26.2 million - The company operates a network of 25 banking offices and numerous ATMs, with a combination of owned and leased properties[244] - The net book value of owned premises and equipment was $26.2 million as of December 31, 2021[244] Item 3. Legal Proceedings The company is not involved in any material pending legal proceedings beyond routine business operations, with no expected material adverse effects - There are no material pending legal proceedings against the company outside of the ordinary course of business[250] Part II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ (WNEB), with 22.6 million shares outstanding, and it actively repurchased shares in Q4 2021 - The company's common stock is listed on the NASDAQ Global Select Market under the ticker symbol "WNEB"[252] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share ($) | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | October 2021 | 155,240 | 8.89 | 155,240 | | November 2021 | — | — | — | | December 2021 | 50,720 | 8.76 | 36,838 | | Total | 205,960 | 8.86 | 192,078 | - On April 27, 2021, the Board authorized a new stock repurchase plan for up to 2,400,000 shares, or 10% of its outstanding common stock[262] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income more than doubled to $23.7 million in 2021, driven by increased net interest income, a credit for loan losses, and asset growth funded by deposits Key Performance Indicators (2021 vs. 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Income | $23.7 million | $11.2 million | | Diluted EPS | $1.02 | $0.45 | | Net Interest Income | $73.2 million | $64.4 million | | (Credit) Provision for Loan Losses | ($0.9 million) | $7.8 million | | Net Interest Margin | 3.14% | 2.93% | - The significant increase in net income was primarily due to lower interest expense, a credit for loan losses, and higher non-interest income[267] - Total assets increased by $172.5 million (7.3%) to $2.5 billion, while total deposits increased by $213.5 million (10.5%) to $2.3 billion[297][304] - The company processed 1,982 PPP loan forgiveness applications totaling $276.9 million as of December 31, 2021, leading to a decrease in the PPP loan balance to $25.3 million[274] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using an asset/liability model, with sensitivity analysis showing potential impacts on net interest income from rate changes Net Interest Income Sensitivity Analysis (as of Dec 31, 2021) | Change in Interest Rates | Estimated Change in NII (1-12 Months) | Estimated Change in NII (13-24 Months) | | :--- | :--- | :--- | | +200 basis points | -3.9% | -4.5% | | -100 basis points | -2.8% | -8.6% | - The company's main market risk is interest rate risk, which affects net interest income and the market value of assets and liabilities[344] Item 9A. Controls and Procedures Management and independent auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[363] - Based on an assessment using the COSO framework, management concluded that internal control over financial reporting was effective as of December 31, 2021[364] - The independent auditor provided an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021[369] Part III Items 10-14 Information for Items 10-14, covering governance, compensation, and related matters, is incorporated by reference from the 2022 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, and other related matters is incorporated by reference from the company's Proxy Statement[377][378][379] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists exhibits for the 10-K, with consolidated financial statements in Item 8 and schedules omitted as information is provided elsewhere - The consolidated financial statements are referenced in Item 8, and all required financial statement schedules have been omitted because the necessary information is provided elsewhere or is not applicable[380][381] Financial Statements and Supplementary Data Consolidated Financial Statements Consolidated financial statements show total assets grew to $2.54 billion in 2021, with net income significantly increasing to $23.7 million Consolidated Balance Sheet Highlights | Account | Dec 31, 2021 (Millions) | Dec 31, 2020 (Millions) | | :--- | :--- | :--- | | Total Assets | $2,538.4 | $2,365.9 | | Loans, Net | $1,844.9 | $1,906.2 | | Total Deposits | $2,256.9 | $2,043.4 | | Total Liabilities | $2,314.7 | $2,139.2 | | Total Shareholders' Equity | $223.7 | $226.6 | Consolidated Income Statement Highlights | Account | 2021 (Millions) | 2020 (Millions) | 2019 (Millions) | | :--- | :--- | :--- | :--- | | Net Interest Income | $73.2 | $64.4 | $58.0 | | (Credit) Provision for Loan Losses | ($0.9) | $7.8 | $2.7 | | Non-interest Income | $12.6 | $9.3 | $9.7 | | Non-interest Expense | $54.9 | $51.8 | $47.8 | | Net Income | $23.7 | $11.2 | $13.3 | Notes to Consolidated Financial Statements Notes detail accounting policies, loan and investment portfolios, deposits, borrowings, regulatory capital, and employee benefit plans, including COVID-19 impacts - The allowance for loan losses methodology includes a qualitative factor for the economic impact of COVID-19, which was added in March 2020[446] - In April 2021, the company issued $20 million in 4.875% fixed-to-floating rate subordinated notes, which qualify as Tier 2 capital[541][542] - The company's and the Bank's regulatory capital ratios exceeded the levels required to be considered "well-capitalized" under federal banking regulations as of December 31, 2021[593] - During 2021, the company repurchased 2,758,051 shares of its common stock at an average price of $8.33 per share[597]