Western New England Bancorp, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparative results are primarily for 2022. The filing also reports unaudited fourth-quarter results. Western New England Bancorp is the parent of Westfield Bank, a community bank operating 25 branches in western Massachusetts and northern Connecticut.
Financial results and condition
| Metric | FY 2023 / Dec. 31, 2023 | FY 2022 / Dec. 31, 2022 |
|---|---|---|
| Net income | $15.1 million | $25.9 million |
| Diluted EPS | $0.70 | $1.18 |
| Net interest income | $67.9 million | $79.2 million |
| Net interest margin | 2.82% | 3.31% |
| Non-interest income | $10.9 million | $13.3 million |
| Non-interest expense | $58.4 million | $57.2 million |
| Provision for credit losses | $872,000 | $700,000 |
| Operating cash flow | $14.8 million | $36.8 million |
| Total assets | $2.565 billion | $2.553 billion |
| Net loans | $2.007 billion | $1.971 billion |
| Total deposits | $2.144 billion | $2.229 billion |
| Shareholders’ equity | $237.4 million | $228.1 million |
Profitability weakened materially: net income declined 41.8%, while return on average assets fell to 0.59% from 1.02% and return on average equity to 6.47% from 11.85%. The efficiency ratio rose to 74.0% from 61.8%. Fourth-quarter 2023 net income was $2.5 million, or $0.12 diluted EPS, versus $9.0 million, or $0.42, in fourth-quarter 2022.
Interest and dividend income grew $15.2 million, but interest expense increased $26.5 million, driving the $11.3 million reduction in net interest income. Average yield on interest-earning assets rose to 4.22% from 3.61%, while the average cost of interest-bearing liabilities rose to 1.95% from 0.41%. The average cost of total deposits increased to 1.23% from 0.24%.
Loan growth was modest: gross loans increased 1.8% year over year. Commercial real estate represented 53.3% of loans; residential one-to-four-family loans 30.3%; and commercial and industrial loans 10.7%. Deposits fell 3.8%; core deposits declined 15.7% and their share of deposits fell to 71.5% from 81.5%. Time deposits increased 48.5%, with $596.3 million scheduled to mature within one year.
Cash and cash equivalents were $28.8 million. Borrowings at year-end included $16.1 million short-term borrowings, $120.6 million long-term debt and $19.7 million subordinated debt. Long-term debt included $90.0 million under the Federal Reserve’s Bank Term Funding Program (BTFP), due in May 2024, and $30.6 million of FHLB advances. The company reported $607.8 million in net available borrowing capacity across the FHLB, BTFP and Federal Reserve Discount Window facilities. Bank capital exceeded applicable requirements; the Bank was classified as well-capitalized.
Material changes and notable items
- Unrealized securities losses remained substantial but narrowed: $29.2 million on available-for-sale securities and $35.7 million on held-to-maturity securities, versus $32.2 million and $39.2 million, respectively, in 2022. Management attributed the losses to interest rates, reported no credit losses on the securities, and said it did not plan to sell them and did not expect to be required to sell before recovery.
- Asset-quality measures were mixed. Criticized loans fell to $39.5 million (1.9% of loans) from $64.0 million (3.2%); classified loans fell to $33.7 million from $42.3 million. Nonaccrual loans increased to $6.4 million (0.32%) from $5.7 million (0.29%). Net charge-offs rose to $2.0 million from $556,000, including a significant charge-off associated with one acquired commercial relationship.
- The allowance for credit losses was $20.3 million, or 1.00% of loans. WNEB adopted the CECL methodology on January 1, 2023; adoption increased the loan allowance by $1.2 million and established a $918,000 reserve for off-balance-sheet exposures. The transition increased retained earnings by a net $9,000.
- The defined benefit pension plan was terminated and settled in 2023. The company contributed $1.3 million, funded a $6.3 million group annuity contract for remaining liabilities, and recorded a $1.1 million final termination expense. The prior-year comparison included a $2.8 million curtailment gain.
- Non-interest expense included a $510,000 accrual for a proposed settlement of two class-action cases involving overdraft and insufficient-funds fee disclosures. The proposed settlement is approximately $510,000 and remains subject to court approval.
- Shareholders received $0.28 per share in dividends, up from $0.24. The company repurchased $5.0 million of stock during 2023. Tangible book value per share increased to $10.30 from $9.61.
Outlook, risks and contingencies
Management provided no quantified earnings or balance-sheet guidance. It said available liquidity was adequate for expected needs in the normal course and anticipated sufficient funding for current commitments over the next 12 months and beyond. Management also noted that recession, deposit outflows and market conditions could pressure liquidity. Its strategy emphasizes commercial and residential lending, core-deposit growth, technology and service investment, shareholder returns, and possible acquisitions.
Key risks include continued deposit competition and higher funding costs; interest-rate movements that may compress margins or affect securities values; commercial real estate and business-credit exposure; potential increases in credit losses; dependence on the FHLB and other wholesale funding; regulatory and liquidity scrutiny; cybersecurity and third-party service-provider risks; and local economic weakness. The company’s interest-rate simulation estimated that a parallel 200-basis-point increase would reduce net interest income 4.1% over months 1–12, while a 200-basis-point decline would increase it 3.4%; these are scenario estimates, not forecasts.
Other commitments include $444.5 million in commitments to extend credit, including unused lines and construction commitments; $22.4 million in standby letters of credit; $11.6 million remaining under a core-services vendor contract; and $3.8 million of unfunded SBIC investment commitments. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified the allowance for credit losses and goodwill impairment analysis as critical audit matters; goodwill was not impaired.
Important facts for investors to verify
- Whether deposit balances stabilize and how much of the $596.3 million of time deposits maturing within a year renews, including at what cost.
- How the May 2024 BTFP maturity was repaid or refinanced after year-end, and the resulting funding cost and liquidity position.
- Whether net interest margin and earnings stabilize as deposit pricing, borrowing needs and asset yields change.
- Whether nonaccrual loans, charge-offs and commercial real estate credit trends worsen, and whether the $20.3 million allowance remains adequate.
- Whether the proposed overdraft-fee settlement receives final court approval and whether any additional costs or claims arise.
- How the company manages the substantial unrealized securities losses and any effects on liquidity, capital or future earnings.