Western New England Bancorp(WNEB) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls for the reporting period Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, highlighting the adoption of CECL and a decrease in net income due to interest margin compression Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,562.3 | $2,553.2 | | Cash and cash equivalents | $31.7 | $30.3 | | Loans, net | $1,995.9 | $1,971.5 | | Total Investment Securities (AFS & HTM) | $364.4 | $377.2 | | Goodwill | $12.5 | $12.5 | | Total Liabilities | $2,328.3 | $2,325.0 | | Total deposits | $2,158.0 | $2,229.4 | | Long-term debt | $121.2 | $1.2 | | Total Shareholders' Equity | $234.0 | $228.1 | - Total assets slightly increased to $2.56 billion, driven by a $24.5 million increase in net loans, while total deposits decreased by $71.5 million[16] Consolidated Statements of Net Income Net Income Performance (in millions, except per share data) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $16.8 | $19.4 | $35.4 | $38.1 | | Provision for credit losses | $0.4 | $0.3 | $0.03 | ($0.1) | | Non-interest Income | $1.6 | $2.7 | $4.6 | $5.1 | | Non-interest Expense | $14.6 | $14.4 | $29.4 | $28.9 | | Net Income | $2.8 | $5.5 | $8.1 | $10.9 | | Diluted EPS | $0.13 | $0.25 | $0.37 | $0.49 | - Net income for Q2 2023 was $2.8 million, a 49.9% decrease from $5.5 million in Q2 2022. The decline was primarily driven by a $2.6 million decrease in net interest income, as interest expense on deposits rose sharply from $990 thousand to $6.1 million year-over-year[18] - For the six months ended June 30, 2023, net income was $8.1 million, down 25.7% from $10.9 million in the prior-year period, reflecting sustained pressure on net interest income[18] Consolidated Statements of Comprehensive Income Comprehensive Income (Loss) (in millions) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $2.8 | $5.5 | $8.1 | $10.9 | | Other Comprehensive Income (Loss) | ($0.1) | ($6.0) | $1.8 | ($14.4) | | Comprehensive Income (Loss) | $2.6 | ($0.5) | $9.9 | ($3.6) | - For the six months ended June 30, 2023, Other Comprehensive Income was positive $1.8 million, a significant improvement from a loss of $14.4 million in the same period of 2022. This was mainly due to smaller unrealized losses on available-for-sale securities and gains related to the defined benefit pension plan termination[21] Consolidated Statements of Changes in Shareholders' Equity - Total shareholders' equity increased from $228.1 million at December 31, 2022, to $234.0 million at June 30, 2023. The increase was driven by comprehensive income of $9.9 million, partially offset by common stock repurchases ($2.1 million) and cash dividends paid ($3.1 million)[25][26] - The company repurchased 270,840 shares of common stock for approximately $2.1 million during the first six months of 2023[25][26] Consolidated Statements of Cash Flows Cash Flow Summary (in millions) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($1.7) | $8.5 | | Net cash used in investing activities | ($6.1) | ($107.3) | | Net cash provided by financing activities | $9.2 | $42.9 | | Net Change in Cash and Cash Equivalents | $1.3 | ($55.9) | - Financing activities provided $9.2 million in cash, primarily from the issuance of $120.0 million in long-term debt, which offset a net decrease in deposits of $71.5 million[32] - Investing activities used $6.1 million in cash, a significant reduction from the $107.3 million used in the prior-year period, mainly due to a large decrease in net loan originations[32] Notes to Consolidated Financial Statements - On January 1, 2023, the Company adopted the CECL accounting standard (ASU 2016-13), which replaced the incurred loss methodology with an expected loss methodology for financial assets. This resulted in a net increase to retained earnings of $9 thousand, including a $1.2 million increase to the allowance for credit losses on loans and a new $918 thousand allowance for off-balance sheet exposures[41][65][66] Management's Discussion and Analysis (MD&A) Management discusses financial condition and operating results, noting decreased net income and margin due to rising interest expenses, stable assets, and increased borrowings Overview and Strategy - The company's growth-oriented strategy focuses on increasing commercial and residential lending, expanding its retail deposit franchise, and investing in technology to enhance customer experience and efficiency[158][160] - Key strategic goals include growing revenues, increasing book value, paying competitive dividends, and utilizing stock repurchases to enhance shareholder value. The company also considers growth through strategic acquisitions[160] Comparison of Financial Condition (June 30, 2023 vs. Dec 31, 2022) - Total assets increased by $9.1 million (0.4%) to $2.6 billion, primarily due to a $24.1 million (1.2%) increase in total gross loans[166][173] - Total deposits decreased by $71.5 million (3.2%), with core deposits falling by $194.6 million, while time deposits grew by $123.1 million, indicating a shift to higher-cost funding[176] - Total borrowings increased significantly by $85.9 million (138.1%) to $148.1 million, mainly through a $120.0 million increase in long-term borrowings to replace deposit outflows[179] - The allowance for credit losses as a percentage of total loans was 0.97% at June 30, 2023, compared to 1.00% at December 31, 2022[174] - Shareholders' equity increased by $5.9 million to $234.0 million, driven by net income and a decrease in accumulated other comprehensive loss[181] Comparison of Operating Results (Q2 2023 vs. Q2 2022) Q2 Operating Results Highlights | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $2.8M | $5.5M | -49.9% | | Diluted EPS | $0.13 | $0.25 | -48.0% | | Net Interest Income | $16.8M | $19.4M | -13.1% | | Net Interest Margin | 2.81% | 3.24% | -43 bps | | Non-interest Income | $1.6M | $2.7M | -41.9% | - The decrease in net interest income was driven by a 535.0% increase in interest expense, primarily from higher deposit costs, which outpaced the 20.2% growth in interest and dividend income[192] - Non-interest income decreased by $1.1 million, mainly due to a $1.1 million final termination expense for the Defined Benefit Pension Plan[202] - The provision for credit losses was $0.4 million, an increase from $0.3 million in the prior-year quarter, reflecting changes in the economic environment under the new CECL model[199] Comparison of Operating Results (Six Months 2023 vs. Six Months 2022) Six-Month Operating Results Highlights | Metric | H1 2023 | H1 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $8.1M | $10.9M | -25.7% | | Diluted EPS | $0.37 | $0.49 | -24.5% | | Net Interest Income | $35.4M | $38.1M | -7.2% | | Net Interest Margin | 2.97% | 3.21% | -24 bps | - The decrease in net interest income was due to a 424.1% increase in interest expense, which overshadowed the 19.4% increase in interest and dividend income[214] - A provision for credit losses of $32 thousand was recorded, compared to a reversal of $125 thousand in the prior-year period. Net charge-offs were $1.8 million, primarily related to a single acquired commercial loan relationship, with no impact to earnings due to CECL implementation adjustments[218][219] - Non-interest expense increased by $0.6 million (1.9%), driven by higher professional fees, FDIC insurance, and data processing costs[222] Liquidity and Capital Resources - Primary liquidity sources include deposits, loan and security repayments, and FHLB/FRB borrowings. The company actively manages liquidity to fund loan originations and deposit withdrawals[230] - As of June 30, 2023, the company had significant available borrowing capacity, including $380.1 million from the FHLB and $27.4 million from the FRB's Bank Term Funding Program (BTFP)[231] - Material cash commitments include $9.5 million for its core processing vendor and $10.6 million in undiscounted lease liabilities[239] Regulatory Capital Ratios (Bank Level) - June 30, 2023 | Ratio | Actual | Minimum To Be Well-Capitalized | | :--- | :--- | :--- | | Total Risk-Based Capital | 13.49% | 10.00% | | Tier 1 Risk-Based Capital | 12.49% | 8.00% | | Common Equity Tier 1 Capital | 12.49% | 6.50% | | Tier 1 Leverage Ratio | 9.69% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulations showing net interest income sensitivity to rate changes, potentially mitigated by derivatives Net Interest Income Sensitivity Analysis (at June 30, 2023) | Interest Rate Change | Estimated Change in Net Interest Income (1-12 Months) | | :--- | :--- | | +200 basis points | -1.6% | | -200 basis points | +0.8% | - The company's earnings are currently asset-sensitive in a falling rate environment and liability-sensitive in a rising rate environment, as indicated by the simulation results[253] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023[256] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[257] PART II – OTHER INFORMATION This section provides information on legal proceedings, risk factors, and details of the company's common stock repurchase program Legal Proceedings The company is subject to ordinary legal actions but does not anticipate any material adverse effects on its financial condition - The company states that it is not involved in any material legal proceedings that would have a significant adverse impact[258] Risk Factors No material changes to the company's risk factors were reported since the previous filings - No material changes in risk factors were reported for the quarter[259] Share Repurchases The company repurchased 126,944 shares of common stock in Q2 2023, with 806,600 shares remaining under the authorized plan Common Stock Repurchases (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | April 2023 | — | — | | May 2023 | 82,795 | $6.26 | | June 2023 | 44,149 | $6.09 | | Total | 126,944 | $6.20 | - The Board of Directors authorized a stock repurchase plan (the "2022 Plan") on July 26, 2022, for up to 1.1 million shares[261]