Western New England Bancorp, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. The company is the holding company for Westfield Bank, operating 25 offices in western Massachusetts and northern Connecticut. This unaudited filing covers the three and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and position
- Q3 results: Net income was $4.5 million, or $0.21 per diluted share, versus $6.0 million, or $0.28, a year earlier. Net interest income was $16.4 million, down 19.2%; non-interest income was $3.6 million; and non-interest expense was $14.1 million. Return on average assets was 0.70% and return on average equity 7.60%.
- Nine-month results: Net income was $12.6 million, or $0.58 per diluted share, versus $16.9 million, or $0.77, in 2022. Net interest income fell 11.4% to $51.7 million; non-interest income was $8.2 million and non-interest expense was $43.6 million. Return on average assets was 0.66% and return on average equity 7.19%.
- Margins and costs: Q3 net interest margin was 2.70%, down from 3.35%; nine-month margin was 2.88%, down from 3.26%. Higher deposit and borrowing costs, together with customers shifting to higher-cost time deposits, outweighed higher yields on loans and other earning assets.
- Cash flow: For the first nine months, operating cash flow was $5.9 million, versus $19.9 million in 2022; investing cash outflow was $0.7 million versus $138.3 million; and financing cash inflow was $26.7 million versus $42.1 million. Cash and cash equivalents rose $31.9 million to $62.3 million.
- Balance sheet and funding: Total assets were $2.585 billion, up 1.3% from year-end; net loans were $1.995 billion. Deposits declined $53.1 million (2.4%) to $2.176 billion, while core deposits fell $224.0 million and time deposits rose $170.9 million. Total borrowings, including subordinated debt, were $149.8 million, up $87.6 million; this included $90.0 million under the Federal Reserve Bank Term Funding Program (BTFP). Shareholders’ equity was $230.9 million, or 8.9% of assets.
- Liquidity and capital: Management reported $650.3 million in available borrowing capacity and said it expects sufficient funds to meet current funding commitments for the next 12 months and beyond. The Bank’s total risk-based capital ratio was 13.56%, Tier 1 leverage ratio 9.69%, and it remained categorized as well-capitalized.
- Credit and securities: The allowance for loan losses was $20.0 million, or 0.99% of loans. Nonaccrual loans were $6.3 million (0.31% of loans), compared with $5.7 million (0.29%) at year-end; past-due loans were 0.28% versus 0.22%. Available-for-sale securities had $38.5 million in gross unrealized losses and held-to-maturity securities $48.2 million; management attributed these primarily to higher market rates, not credit deterioration.
Material changes versus comparable periods
- Interest expense rose substantially as deposit pricing increased and deposit mix shifted toward time deposits; Q3 total interest expense was $9.5 million versus $1.5 million a year earlier.
- Higher asset yields lifted interest and dividend income, but not enough to offset funding costs. Q3 net interest margin declined 65 basis points year over year.
- Deposits moved from lower-cost core balances toward time deposits amid competition from local institutions, money-market funds, and Treasury securities. Uninsured deposits were 28.3% of total deposits at quarter-end, down from 30.8% at year-end.
- Net charge-offs for the first nine months were $1.9 million versus $129,000 in 2022. The filing says most 2023 charge-offs related to a previously acquired commercial relationship and did not affect earnings because they represented a credit mark gross-up under CECL.
- The fair value of the securities portfolio remained below amortized cost: total disclosed unrealized losses were $86.6 million at September 30, versus $71.4 million at year-end 2022.
Outlook, commentary, risks, and unusual items
- No specific earnings, margin, or growth guidance is provided. Management describes continued priorities of commercial and residential lending growth, core-deposit development, technology investment, dividends, and share repurchases.
- Management says it considers liquidity strong, monitors borrower conditions and expects time deposits maturing within one year to be retained in significant part. It cautions that actual deposit flows and funding needs depend on rates, competition, and economic conditions.
- Key stated risks include persistent inflation and high interest rates, deposit competition and funding costs, economic or real-estate deterioration and resulting credit losses, banking-industry stress, regulatory changes, operational and cybersecurity risks, and broader market and economic uncertainty.
- Unusual items affected reported results: Q3 included a $778,000 non-taxable gain from a bank-owned life-insurance death benefit. Nine-month results included a $1.1 million defined-benefit-plan termination loss; the plan was funded and remaining liabilities transferred through an annuity purchase. The company adopted CECL on January 1, 2023, recording a $9,000 net retained-earnings transition adjustment and establishing an allowance for off-balance-sheet exposures.
- The company repurchased 155,161 shares in September at an average $6.50 per share. Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting and no additional material risk-factor changes.
Important facts for investors to verify
- Whether deposit outflows and the shift from core deposits to time deposits continue, and how that affects deposit costs and net interest margin.
- The terms, collateral, repayment profile, and ongoing availability of BTFP and other borrowing sources, alongside upcoming time-deposit maturities.
- Credit trends, especially commercial real-estate and commercial-and-industrial exposures, nonaccrual loans, charge-offs, and the adequacy of the CECL allowance.
- Whether the securities’ unrealized losses remain interest-rate driven and whether any liquidity needs could require securities sales before recovery.
- Reconcile share counts: the September 30 balance sheet reports 21,927,242 shares, while the cover page reports 21,712,815 shares outstanding at October 31, 2023.