WESTFIELD, Mass., Oct. 24, 2023 (GLOBE NEWSWIRE) -- Western New England Bancorp, Inc. (the “Company” or “WNEB”) (NasdaqGS: WNEB), the holding company for Westfield Bank (the “Bank”), announced today the unaudited results of operations for the three and nine months ended September 30, 2023. For the three months ended September 30, 2023, the Company reported net income of $4.5 million, or $0.21 per diluted share, compared to net income of $6.0 million, or $0.28 per diluted share, for the three months ended September 30, 2022. On a linked quarter basis, net income was $4.5 million, or $0.21 per diluted share, as compared to net income of $2.8 million, or $0.13 per diluted share, for the three months ended June 30, 2023. For the nine months ended September 30, 2023, net income was $12.6 million, or $0.58 per diluted share, compared to net income of $16.9 million, or $0.77 per diluted share, for the nine months ended September 30, 2022.
The Company also announced that the Board of Directors declared a quarterly cash dividend of $0.07 per share on the Company’s common stock. The dividend will be payable on or about November 22, 2023 to shareholders of record on November 8, 2023.
James C. Hagan, President and Chief Executive Officer, commented, “We are pleased overall with our third quarter results and the success of our deposit growth, as well as our continued expense management initiatives. We were able to successfully grow deposits by $18.3 million in the third quarter, and at September 30, 2023, 72% of total deposits were insured. The Company also maintains a strong liquidity position, which covers approximately 137% of uninsured deposits as of September 30, 2023. We remain focused on expense management initiatives, and were able to decrease expenses by $778,000, or 5.2%, from the first quarter of 2023 to the third quarter of 2023. Total loans increased $23.4 million, or 1.2%, since December 31, 2022, and our asset quality continues to remain strong, with nonperforming loans to total loans at 0.31% as of September 30, 2023, and classified assets decreasing 28.7% from December 31, 2022.”
Hagan concluded, “In order to continue to increase shareholder value, during the nine months ended September 30, 2023, we repurchased 404,905 shares of our common stock at an average price per share of $7.27. We believe that share repurchases represents a prudent use of capital, especially when they are accretive to book value. Our team remains committed to our community and to our existing and new customers in our local market area with our competitive products and services that are based on true relationship banking, while providing continued access to local decision makers. We believe our various growth, customer and expense initiatives are creating positive impacts to our performance and are positioning the Company for future growth and increased profitability.”
Key Highlights:
Loans and Deposits
At September 30, 2023, total loans of $2.0 billion increased $23.4 million, or 1.2%, from December 31, 2022. During the same period, total deposits decreased $53.1 million, or 2.4%, to $2.2 billion at September 30, 2023, but increased $18.3 million, or 0.9%, from June 30, 2023. Core deposits, which are defined by the Company as all deposits except for time deposits, decreased $224.0 million, or 12.3%, from $1.8 billion, or 81.5% of total deposits, at December 31, 2022, to $1.6 billion, or 73.2% of total deposits, at September 30, 2023. The decrease in core deposits was partially offset by a $170.9 million, or 41.5%, increase in time deposits from $411.7 million at December 31, 2022 to $582.6 million at September 30, 2023. The loan-to-deposit ratio increased from 89.3% at December 31, 2022 to 92.6% at September 30, 2023.
Liquidity
The Company’s liquidity position remains strong with solid core deposit relationships, cash, unencumbered securities, a diversified deposit base and access to diversified borrowing sources. At September 30, 2023, the Company had $845.4 million in immediate liquidity compared to $615.9 million in uninsured deposits, or 28.3% of total deposits, representing a coverage ratio of 137%. Uninsured deposits of the bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep (ICS) account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (CDARS). IntraFi allows for up to $250.0 million per customer of pass-through FDIC insurance which would more than cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance.
Allowance for Loan Losses and Credit Quality
At September 30, 2023, the allowance for credit losses was $20.0 million, or 0.99% of total loans and 317.6% of nonperforming loans, compared to $19.9 million, or 1.00% of total loans and 350.0% of nonperforming loans, at December 31, 2022. At September 30, 2023, nonperforming loans totaled $6.3 million, or 0.31% of total loans, compared to $5.7 million, or 0.29% of total loans, at December 31, 2022. Total delinquent loans increased $1.1 million, or 25.8%, from $4.5 million, or 0.22% of total loans, at December 31, 2022, to $5.6 million, or 0.28% of total loans, at September 30, 2023.
Current Expected Credit Loss
On January 1, 2023, the Company implemented the accounting rules for the measurement of Credit Losses on Financial Instruments (“CECL”). The January 1, 2023, or “Day 1” tax-effected transitional impact to retained earnings was $9,000 due to the following: a decrease in the pooled credit reserve of $931,000 and the establishment of a reserve liability for unfunded commitments of $918,000. Additionally, the allowance for credit losses includes $2.1 million in reserves related to purchase credit deteriorated (“PCD”) loans. For PCD loans, the allowance for credit losses recorded is recognized through a gross-up that increases the amortized cost basis of loans with a corresponding increase to the allowance for credit losses, and therefore results in no impact to shareholders’ equity.
Net Interest Margin
The net interest margin was 2.70% for the three months ended September 30, 2023 compared to 2.81% for the three months ended June 30, 2023. The net interest margin, on a tax-equivalent basis, was 2.72% for the three months ended September 30, 2023, compared to 2.83% for the three months ended June 30, 2023.
Stock Repurchase Program
On July 26, 2022, the Board of Directors authorized a stock repurchase plan (the “2022 Plan”), pursuant to which the Company is authorized to repurchase up to 1.1 million shares, representing approximately 5.0% of the Company’s outstanding common stock as of the time the 2022 Plan was announced. During the three months ended September 30, 2023, the Company repurchased 155,161 shares of common stock under the 2022 Plan, with an average price per share of $6.50. During the nine months ended September 30, 2023, the Company repurchased 404,905 shares of common stock under the 2022 Plan, with an average price per share of $7.27. As of September 30, 2023, there were 651,439 shares of common stock available for repurchase under the 2022 Plan.
The repurchase of shares under the stock repurchase program is administered through an independent broker. The shares of common stock repurchased under the 2022 Plan will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, or otherwise, depending upon market conditions. There is no guarantee as to the exact number, or value, of shares that will be repurchased by the Company, and the Company may discontinue repurchases at any time that the Company’s management (“Management”) determines additional repurchases are not warranted. The timing and amount of additional share repurchases under the 2022 Plan will depend on a number of factors, including the Company’s stock price performance, ongoing capital planning considerations, general market conditions, and applicable legal requirements.
Book Value and Tangible Book Value
Book value per share was $10.53 at September 30, 2023, compared to $10.27 at December 31, 2022, while tangible book value per share, a non-GAAP financial measure, increased $0.26, or 2.7%, from $9.61 at December 31, 2022 to $9.87 at September 30, 2023. As of September 30, 2023, the Company’s and the Bank’s regulatory capital ratios continued to exceed the levels required to be considered “well-capitalized” under federal banking regulations. See pages 19-22 for the related tangible book value calculation and a reconciliation of GAAP to non-GAAP financial measures.
Westfield Bank Defined Benefit Pension Plan
The Board of Directors previously announced the termination of the Westfield Bank Defined Benefit Plan (the “DB Plan”) on October 31, 2022, subject to required regulatory approval. At December 31, 2022, the Company reversed $7.3 million in net unrealized losses recorded in accumulated other comprehensive income attributed to both the DB Plan curtailment resulting from the termination of the DB Plan as well as changes in discount rates. In addition, during the three months ended December 31, 2022, the Company recorded a gain on curtailment of $2.8 million through non-interest income. During the nine months ended September 30, 2023, the Company made an additional cash contribution of $1.3 million in order to fully fund the DB Plan on a plan termination basis. In addition, for those participants who did not opt for a one-time lump sum payment, the Company funded $6.3 million to purchase a group annuity contract to transfer its remaining liabilities under the DB Plan. In addition, during the nine months ended September 30, 2023, the Company recognized the final termination expense of $1.1 million related to the DB Plan termination, which was recorded through non-interest income.
Net Income for the Three Months Ended September 30, 2023 Compared to the Three Months Ended June 30, 2023
The Company reported net income of $4.5 million, or $0.21 per diluted share, for the three months ended September 30, 2023, compared to net income of $2.8 million, or $0.13 per diluted share, for the three months ended June 30, 2023. Net interest income decreased $463,000, or 2.7%, non-interest income increased $2.0 million or 126.9%, non-interest expense decreased $433,000, or 3.0%, and provision for credit losses decreased $66,000, or 15.7%, during the same period. For the three months ended September 30, 2023, non-interest income included a non-taxable gain of $778,000 on bank-owned life insurance (“BOLI”) death benefits. For the three months ended June 30, 2023, non-interest income included a one-time, non-recurring final termination expense of $1.1 million, due to the termination of the Company’s DB Plan.
Return on average assets and return on average equity were 0.70% and 7.60%, respectively, for the three months ended September 30, 2023, compared to 0.43% and 4.72%, respectively, for the three months ended June 30, 2023.
Net Interest Income and Net Interest Margin
On a sequential quarter basis, net interest income, our primary source of revenues, decreased $463,000, or 2.7%, to $16.4 million for the three months ended September 30, 2023, from $16.8 million for the three months ended June 30, 2023. The decrease in net interest income was primarily due to an increase in interest expense of $1.6 million, or 19.5%, partially offset by an increase in interest income of $1.1 million, or 4.4%. The increase in interest expense was a result of competitive pricing on deposits due to the continued high interest rate environment and the unfavorable shift in the deposit mix from low cost core deposits to high cost time deposits.
The net interest margin decreased 11 basis points to 2.70%, for the three months ended September 30, 2023, from 2.81% for the three months ended June 30, 2023. The net interest margin, on a tax-equivalent basis, was 2.72% for the three months ended September 30, 2023, compared to 2.83% for the three months ended June 30, 2023. The decrease in the net interest margin was primarily due to an increase in the average cost of interest-bearing liabilities, which was partially offset with an increase in the average yield on interest-earning assets.
The average yield on interest-earning assets, without the impact of tax-equivalent adjustments, was 4.28% for the three months ended September 30, 2023, compared to 4.14% for the three months ended June 30, 2023. The average loan yield, without the impact of tax-equivalent adjustments, was 4.64% for the three months ended September 30, 2023, compared to 4.49% for the three months ended June 30, 2023. During the three months ended September 30, 2023, average interest-earning assets decreased $2.1 million, or 0.1% to $2.4 billion, primarily due to a decrease in average securities of $13.3 million, or 3.6%, and a decrease in average other investments of $1.2 million, or 8.8%, partially offset by an increase in average short-term investments, consisting of cash and cash equivalents, of $12.0 million, or 116.4%.
The average cost of total funds, including non-interest bearing accounts and borrowings, increased 25 basis points from 1.39% for the three months ended June 30, 2023 to 1.64% for the three months ended September 30, 2023. The average cost of core deposits, which the Company defines as all deposits except time deposits, increased 6 basis points to 0.70% for the three months ended September 30, 2023, from 0.64% for the three months ended June 30, 2023. The average cost of time deposits increased 72 basis points from 2.74% for the three months ended June 30, 2023 to 3.46% for the three months ended September 30, 2023. The average cost of borrowings, including subordinated debt, decreased 7 basis points from 4.88% for the three months ended June 30, 2023 to 4.81% for the three months ended September, 2023. During the same period, average demand deposits, an interest-free source of funds, remained virtually unchanged at $591.9 million, or 27.5% of total average deposits, for the three months ended September 30, 2023.
Provision for (Reversal of) Credit Losses
During the three months ended September 30, 2023, the Company recorded a provision for credit losses of $354,000, compared to a provision for credit losses of $420,000 during the three months ended June 30, 2023. The provision for credit losses includes a $55,000 negative provision for unfunded commitments primarily due to the impact of decreased unfunded loan commitments. Total unfunded loan commitments decreased $6.7 million, or 3.7%, to $172.9 million at September 30, 2023 from $179.6 million at June 30, 2023. The provision for credit losses was determined by a number of factors: the continued strong credit performance of the Company’s loan portfolio, changes in the loan portfolio mix and Management’s consideration of existing economic conditions and the economic outlook from the Federal Reserve’s actions to control inflation. The Company also increased the qualitative reserve to consider the potential losses resulting from future recessionary pressures. Management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believes it is appropriately reserved for the current economic environment and supportable forecast period.
During the three months ended September 30, 2023, the Company recorded net charge-offs of $78,000, compared to net recoveries of $25,000 for the three months ended June 30, 2023.
Non-Interest Income
On a sequential quarter basis, non-interest income increased $2.0 million, or 126.9%, to $3.6 million for the three months ended September 30, 2023, from $1.6 million for the three months ended June 30, 2023. During the three months ended September 30, 2023, non-interest income included a non-taxable gain of $778,000 on BOLI death benefits. During the three months ended June 30, 2023, the Company recorded a $1.1 million final termination expense related to the DB Plan termination.
Service charges and fees on deposits decreased $96,000, or 4.3%, from the three months ended June 30, 2023 to $2.1 million for the three months ended September 30, 2023. Income from BOLI decreased $40,000, or 8.1%, from the three months ended June 30, 2023, to $454,000 for the three months ended September 30, 2023. During the three months ended September 30, 2023, the Company reported a gain on non-marketable equity investments of $238,000. At June 30, 2023, the Company did not have comparable non-interest income from non-marketable equity investments. During the three months ended September 30, 2023, the Company reported a loss on the disposal of premises and equipment of $3,000. The Company did not have a comparable loss during the three months ended June 30, 2023.
Non-Interest Expense
For the three months ended September 30, 2023, non-interest expense decreased $433,000, or 3.0%, to $14.1 million from $14.6 million for the three months ended June 30, 2023.
Salaries and employee benefits decreased $134,000, or 1.7%, to $8.0 million. Other non-interest expense decreased $191,000, or 7.5%, professional fees decreased $160,000, or 19.9%, occupancy expense decreased $44,000, or 3.7%, and furniture and equipment expense decreased $10,000, or 2.0%. These decreases were partially offset by an increase in advertising expense of $23,000, or 6.8%, an increase in FDIC insurance expense of $51,000, or 17.6%, and an increase in data processing expense of $32,000, or 4.0%.
For the three months ended September 30, 2023, the efficiency ratio was 70.6% compared to 78.9% for the three months ended June 30, 2023. For the three months ended September 30, 2023, the adjusted efficiency ratio, a non-GAAP financial measure, was 74.4% compared to 74.3% for the three months ended June 30, 2023. See pages 19-22 for the related ratio calculation and a reconciliation of GAAP to non-GAAP financial measures.
Income Tax Provision
Income tax expense for the three months ended September 30, 2023 was $1.0 million, or an effective tax rate of 18.7%, compared to $704,000, or an effective tax rate of 20.3%, for the three months ended June 30, 2023. The decrease in the Company’s effective tax rate was primarily due to BOLI death benefits recognized during the three months ended September 30, 2023.
Net Income for the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022.
The Company reported net income of $4.5 million, or $0.21 per diluted share, for the three months ended September 30, 2023, compared to net income of $6.0 million, or $0.28 per diluted share, for the three months ended September 30, 2022. Net interest income decreased $3.9 million, or 19.2%, non-interest income increased $1.0 million or 39.5%, non-interest expense decreased $225,000, or 1.6%, and provision for credit losses decreased $321,000, or 47.6%, during the same period. During the three months ended September 30, 2023, non-interest income included a non-taxable gain of $778,000 in BOLI death benefits. Return on average assets and return on average equity were 0.70% and 7.60%, respectively, for the three months ended September 30, 2023, compared to 0.93% and 10.90%, respectively, for the three months ended September 30, 2022.
Net Interest Income and Net Interest Margin
Net interest income decreased $3.9 million, or 19.2%, to $16.4 million, for the three months ended September 30, 2023, from $20.3 million for the three months ended September 30, 2022. The decrease in net interest income was due to an increase in interest expense of $8.1 million, or 549.2%, partially offset by an increase in interest and dividend income of $4.1 million, or 19.1%. Interest expense on deposits increased $6.5 million and interest expense on borrowings increased $1.5 million. The increase in interest expense was a result of competitive pricing on deposits due to the continued higher interest rate environment and the unfavorable shift in the deposit mix from low cost core deposits to high cost time deposits.
The net interest margin was 2.70% for the three months ended September 30, 2023, compared to 3.35% for the three months ended September 30, 2022. The net interest margin, on a tax-equivalent basis, was 2.72% for the three months ended September 30, 2023, compared to 3.37% for the three months ended September 30, 2022. The decrease in the net interest margin was primarily due to an increase in the average cost of interest-bearing liabilities and the unfavorable shift in the deposit mix from low cost core deposits to high cost time deposits, which was partially offset with an increase in the average yield on interest-earning assets.
The average yield on interest-earning assets, without the impact of tax-equivalent adjustments, was 4.28% for the three months ended September 30, 2023, compared to 3.59% for the three months ended September 30, 2022. The average loan yield, without the impact of tax-equivalent adjustments, was 4.64% for the three months ended September 30, 2023, compared to 3.93% for the three months ended September 30, 2022. During the three months ended September 30, 2023, average interest-earning assets increased $1.5 million, or 0.1%, to $2.4 billion primarily due to an increase in average loans of $33.7 million, or 1.7%, an increase in average other investments of $2.1 million, or 21.1%, and an increase in average short-term investments, consisting of cash and cash equivalents, of $8.4 million, or 60.7%, partially offset by a decrease in average securities of $42.8 million, or 10.6%.
The average cost of total funds, including non-interest bearing accounts and borrowings, increased 139 basis points from 0.25% for the three months ended September 30, 2022 to 1.64% for the three months ended September 30, 2023. The average cost of core deposits, which the Company defines as all deposits except time deposits, increased 51 basis points to 0.70% for the three months ended September 30, 2023, from 0.19% for the three months ended September 30, 2022. The average cost of time deposits increased 316 basis points from 0.30% for the three months ended September 30, 2022 to 3.46% for the three months ended September 30, 2023. The average cost of borrowings, including subordinated debt, increased 69 basis points from 4.12% for the three months ended September 30, 2022 to 4.81% for the three months ended September 30, 2023. Average demand deposits, an interest-free source of funds, decreased $67.0 million, or 10.2%, from $658.9 million, or 29.0% of total average deposits, for the three months ended September 30, 2022, to $591.9 million, or 27.5% of total average deposits, for the three months ended September 30, 2023.
Provision for Credit Losses
During the three months ended September, 30, 2023, the Company recorded a provision for credit losses of $354,000, under the CECL model, compared to a provision for credit losses of $675,000 during the three months ended September 30, 2022, under the incurred loss model. The decrease was primarily due to changes in the economic environment and related adjustments to the quantitative components of the CECL methodology. The provision for credit losses was determined by a number of factors: the continued strong credit performance of the Company’s loan portfolio, changes in the loan portfolio mix and Management’s consideration of existing economic conditions and the economic outlook from the Federal Reserve’s actions to control inflation. Management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believes it is appropriately provisioned for the current economic environment and supportable forecast period.
The Company recorded net charge-offs of $78,000 for the three months ended September 30, 2023, as compared to net charge-offs of $27,000 for the three months ended September 30, 2022.
Non-Interest Income
Non-interest income increased $1.0 million, or 39.5%, to $3.6 million for the three months ended September 30, 2023, from $2.6 million for the three months ended September 30, 2022. During the three months ended September 30, 2023, the Company recorded a non-taxable gain of $778,000 in BOLI death benefits. Service charges and fees decreased $78,000, or 3.5%, from the three months ended September 30, 2022 to $2.1 million for the three months ended September 30, 2023, primarily due to changes in the Company’s overdraft program that were implemented in the first quarter of 2023. Income from BOLI increased $63,000, or 16.1%, for the three months ended September 30, 2022 to $454,000 for the three months ended September 30, 2023. During the three months ended September 30, 2023, the Company reported a gain of $238,000 on non-marketable equity investments compared to a gain of $211,000 during the three months ended September 30, 2022. During the three months ended September 30, 2022, the Company reported unrealized losses on marketable equity securities of $235,000. During the three months ended September 30, 2023, the Company did not have comparable gains or losses. During the three months ended September 30, 2023, the Company reported a loss on the disposal of premises and equipment of $3,000. The Company did not have a comparable gain or loss during the same period in 2022.
Non-Interest Expense
For the three months ended September 30, 2023, non-interest expense decreased $225,000, or 1.6%, to $14.1 million from $14.3 million for the three months ended September 30, 2022. The decrease in non-interest expense was due to a decrease in professional fees of $160,000, or 19.9%, a decrease in salaries and benefits of $70,000, or 0.9%, a decrease in occupancy expense of $67,000, or 5.5%, a decrease in advertising expense of $57,000, or 13.6%, and a decrease in other non-interest expense of $73,000, or 3.0%. These decreases were partially offset by an increase in data processing of $117,000, or 16.5%, an increase in FDIC insurance expense of $68,000, or 24.9%, and an increase in furniture and equipment of $17,000, or 3.7%.
For the three months ended September 30, 2023, the efficiency ratio was 70.6%, compared to 62.7% for the three months ended September 30, 2022. For the three months ended September 30, 2023, the adjusted efficiency ratio, a non-GAAP financial measure, was 74.4% compared to 62.6% for the three months ended September 30, 2022. The efficiency ratio increase was driven by decreased revenues, defined as net interest income and non-interest income, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. See pages 19-22 for the related ratio calculation and a reconciliation of GAAP to non-GAAP financial measures.
Income Tax Provision
Income tax expense for the three months ended September 30, 2023 was $1.0 million, representing an effective tax rate of 18.7%, compared to $1.9 million, representing an effective tax rate of 23.7%, for three months ended September 30, 2022. The decrease in the Company’s effective tax rate was primarily due to BOLI death benefits recognized during the three months ended September 30, 2023.
Net Income for the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022
For the nine months ended September 30, 2023, the Company reported net income of $12.6 million, or $0.58 per diluted share, compared to $16.9 million, or $0.77 per diluted share, for the nine months ended September 30, 2022. Return on average assets and return on average equity were 0.66% and 7.19% for the nine months ended September 30, 2023, respectively, compared to 0.88% and 10.26% for the nine months ended September 30, 2022, respectively.
Net Interest Income and Net Interest Margin
During the nine months ended September 30, 2023, net interest income decreased $6.7 million, or 11.4%, to $51.7 million, compared to $58.4 million for the nine months ended September 30, 2022. The decrease in net interest income was due to an increase in interest expense of $18.7 million, or 470.4%, partially offset by an increase in interest and dividend income of $12.0 million, or 19.3%. The increase in interest expense was due to an increase in interest expense on deposits of $14.7 million, or 468.2%, and an increase in interest expense on borrowings of $3.9 million, or 478.6%. For the nine months ended September 30, 2023, interest and dividend income included $52,000 in Paycheck Protection Program (“PPP Income”), compared to $710,000 during the nine months ended September 30, 2022.
The net interest margin for the nine months ended September 30, 2023 was 2.88% compared to 3.26% during the nine months ended September 30, 2022. The net interest margin, on a tax-equivalent basis, was 2.90% for the nine months ended September 30, 2023, compared to 3.28% for the nine months ended September 30, 2022. The decrease in the net interest margin was primarily due to an increase in the average cost of interest-bearing liabilities and the unfavorable shift in the deposit mix from low cost core to high cost time deposits, which was partially offset with an increase in the average yield on interest-earning assets.
The average yield on interest-earning assets, without the impact of tax-equivalent adjustments, was 4.14% for the nine months ended September 30, 2023, compared to 3.48% for the nine months ended September 30, 2022. The average loan yield, without the impact of tax-equivalent adjustments, was 4.49% for the nine months ended September 30, 2023, compared to 3.86% for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, average interest-earning assets increased $5.2 million, or 0.2% to $2.4 billion, primarily due to an increase in average loans of $62.9 million, or 3.2%, and an increase in average other investments of $2.4 million, or 23.2%, partially offset by a decrease in average securities of $41.2 million, or 10.0%, and a decrease in average short-term investments, consisting of cash and cash equivalents, of $18.9 million, or 59.4%.
The average cost of total funds, including non-interest bearing accounts and borrowings, increased 109 basis points from 0.23% for the nine months ended September 30, 2022 to 1.32% for the nine months ended September 30, 2023. The average cost of core deposits, which the Company defines as all deposits except time deposits, increased 46 basis points to 0.62% for the nine months ended September 30, 2023, from 0.16% for the nine months ended September 30, 2022. The average cost of time deposits increased 239 basis points from 0.33% for the nine months ended September 30, 2022 to 2.72% for the nine months ended September 30, 2023. The average cost of borrowings, including subordinated debt, increased 60 basis points from 4.24% for the nine months ended September 30, 2022 to 4.84% for the nine months ended September 30, 2023. Average demand deposits, an interest-free source of funds, decreased $35.3 million, or 5.5%, from $642.6 million, or 28.4% of total average deposits, for the nine months ended September 30, 2022, to $607.3 million, or 28.0% of total average deposits, for the nine months ended September 30, 2023.
Provision for Credit Losses
During the nine months ended September 30, 2023, the Company recorded a provision for credit losses of $386,000, under the CECL model, compared to a provision for credit losses of $550,000 during the nine months ended September 30, 2022 under the incurred loss model. The increase in reserves was primarily due to changes in the economic environment and related adjustments to the quantitative components of the CECL methodology. The Company recorded net charge-offs of $1.9 million for the nine months ended September 30, 2023, as compared to net charge-offs of $129,000 for the nine months ended September 30, 2022.
Non-Interest Income
For the nine months ended September 30, 2023, non-interest income increased $504,000, or 6.6%, from $7.7 million during the nine months ended September 30, 2022 to $8.2 million. During the nine months ended September 30, 2023, the Company recorded a $1.1 million final termination expense related to the DB Plan termination and also recorded a non-taxable gain of $778,000 on BOLI death benefits. During the same period, service charges and fees decreased $170,000, or 2.5%, primarily due to changes in the Company’s overdraft program that were implemented in 2023 and income from BOLI increased $91,000, or 7.0%. Other income from loan-level swap fees on commercial loans decreased $25,000 for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. During the nine months ended September 30, 2023, the Company reported a gain of $590,000 on non-marketable equity investments compared to a gain of $352,000 during the nine months ended September 30, 2022. During the nine months ended September 30, 2022, the Company reported unrealized losses on marketable equity securities of $736,000 and realized losses on the sale of securities of $4,000. The Company did not have comparable investment activity in 2023. During the nine months ended September 30, 2023, the Company reported a loss on the disposal of premises and equipment of $3,000. The Company did not have a comparable gain or loss during the same period in 2022.
Non-Interest Expense
For the nine months ended September 30, 2023, non-interest expense increased $333,000, or 0.8%, to $43.6 million, compared to $43.2 million for the nine months ended September 30, 2022. The increase in non-interest expense was primarily due to an increase in data processing of $208,000, or 9.6%, and increase in FDIC insurance expense of $190,000, or 24.0%, an increase in professional fees of $104,000, or 5.0%, and an increase in other non-interest expense of $111,000, or 1.6%. These increases were partially offset by a decrease in advertising expense of $112,000, or 9.1%, a decrease in furniture and equipment expense of $87,000, or 5.6%, a decrease in occupancy expense of $56,000, or 1.5%, and decrease in salaries and employee benefits of $25,000, or 0.1%. During the nine months ended September 30, 2023, other non-interest expense included $154,000 in expense related to the DB Plan termination.
For the nine months ended September 30, 2023, the efficiency ratio was 72.7%, compared to 65.5% for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, the adjusted efficiency ratio, a non-GAAP financial measure, was 73.0%, compared to 65.1% for the nine months ended September 30, 2022. The adjusted efficiency ratio is a non-GAAP measure. See pages 19-22 for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP financial measures.
Income Tax Provision
Income tax expense for the nine months ended September 30, 2023 was $3.4 million, representing an effective tax rate of 21.3%, compared to $5.4 million, representing an effective tax rate of 24.3%, for nine months ended September 30, 2022. The decrease in the Company’s effective tax rate was primarily due to lower pre-tax income for the nine months ended September 30, 2023 compared to the same period in 2022 as well as BOLI death benefits recognized during the three months ended September 30, 2023.
Balance Sheet
At September 30, 2023, total assets were $2.6 billion and increased $31.8 million, or 1.3%, from December 31, 2022. The increase in total assets was mainly related to an increase in total loans of $23.4 million, or 1.2%, an increase in cash and cash equivalents of $31.9 million, or 105.2%, to $62.3 million, partially offset by a decrease in investment securities of $27.7 million, or 7.2%, to $355.7 million.
Investments
At September 30, 2023, the available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities portfolio represented 13.8% of total assets compared to 14.8% at December 31, 2022. At September 30, 2023, the Company’s AFS securities portfolio, recorded at fair market value, decreased $16.3 million, or 11.1%, from $147.0 million at December 31, 2022 to $130.7 million. The HTM securities portfolio, recorded at amortized cost, decreased $5.2 million, or 2.2%, from $230.2 million at December 31, 2022 to $225.0 million at September 30, 2023. The marketable equity securities portfolio decreased $6.2 million, or 100.0%, from $6.2 million at December 31, 2022 due to the redemption of marketable equity securities during the nine months ended September 30, 2023. The decrease in the AFS and HTM securities portfolios was primarily due to amortization and payoffs recorded during the nine months ended September 30, 2023.
At September 30, 2023, the Company reported unrealized losses on the AFS securities portfolio of $38.5 million, or 22.7% of the amortized cost basis of the AFS securities portfolio, compared to unrealized losses of $32.2 million, or 18.0% of the amortized cost basis of the AFS securities at December 31, 2022. At September 30, 2023, the Company reported unrealized losses on the HTM securities portfolio of $48.2 million, or 21.4%, of the amortized cost basis of the HTM securities portfolio, compared to $39.2 million, or 17.0% of the amortized cost basis of the HTM securities portfolio at December 31, 2022.
The securities in which the Company may invest are limited by regulation. Federally chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks, corporate debt instruments and marketable equity securities. The securities, with the exception of $6.8 million in corporate bonds, are issued by the United States government or government-sponsored enterprises and are therefore either explicitly or implicitly guaranteed as to the timely payment of contractual principal and interest. These positions are deemed to have no credit impairment, therefore, the disclosed unrealized losses with the securities portfolio relate primarily to changes in prevailing interest rates. In all cases, price improvement in future periods will be realized as the issuances approach maturity.
Management regularly reviews the portfolio for securities in an unrealized loss position. At September 30, 2023 and December 31, 2022, the Company did not record any impairment charges on its securities portfolio and attributed the unrealized losses primarily due to fluctuations in general interest rates or changes in expected prepayments and not due to credit quality. The primary objective of the Company’s investment portfolio is to provide liquidity and to secure municipal deposit accounts while preserving the safety of principal. The Company expects to strategically redeploy available cash flows from the securities portfolio to fund loan growth and deposit outflows.
Total Loans
At September 30, 2023, total loans increased $23.4 million, or 1.2%, to $2.0 billion from December 31, 2022. Residential real estate loans, including home equity loans, increased $18.7 million, or 2.7%, commercial real estate loans increased $11.0 million, or 1.0%, and commercial and industrial loans decreased $7.3 million, or 3.3%.
The following table is a summary of our outstanding loan balances for the periods indicated:
| September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Commercial real estate loans | $ | 1,080,361 | $ | 1,075,429 | $ | 1,079,664 | $ | 1,069,323 | |||||||
| Residential real estate loans: | |||||||||||||||
| Residential | 606,221 | 597,812 | 595,097 | 589,503 | |||||||||||
| Home equity | 107,561 | 107,004 | 105,801 | 105,557 | |||||||||||
| Total residential real estate loans | 713,782 | 704,856 | 700,898 | 695,060 | |||||||||||
| Commercial and industrial loans: | |||||||||||||||
| PPP loans | 1,415 | 1,864 | 2,129 | 2,274 | |||||||||||
| Commercial and industrial loans | 211,162 | 225,229 | 215,971 | 217,574 | |||||||||||
| Total commercial and industrial loans | 212,577 | 227,093 | 218,100 | 219,848 | |||||||||||
| Consumer loans | 5,768 | 5,986 | 5,667 | 5,045 | |||||||||||
| Total gross loans | 2,012,488 | 2,013,364 | 2,004,329 | 1,989,276 | |||||||||||
| Unamortized PPP loan fees | (70 | ) | (78 | ) | (99 | ) | (109 | ) | |||||||
| Unamortized premiums and net deferred loans fees and costs | 2,402 | 2,307 | 2,269 | 2,233 | |||||||||||
| Total loans | $ | 2,014,820 | $ | 2,015,593 | $ | 2,006,499 | $ | 1,991,400 | |||||||
Credit Quality
Credit quality remains sound and our loan portfolio continues to perform well. Total delinquency was 0.28% of total loans at September 30, 2023, compared to 0.22% of total loans at December 31, 2022. At September 30, 2023, nonperforming loans totaled $6.3 million, or 0.31% of total loans, compared to $5.7 million, or 0.29% of total loans, at December 31, 2022. At September 30, 2023, there were no loans 90 or more days past due and still accruing interest. Nonperforming assets to total assets was 0.24% at September 30, 2023 and 0.22% at December 31, 2022. At September 30, 2023 and at December 31, 2022, the Company did not have any other real estate owned. The allowance for credit losses as a percentage of total loans was 0.99% at September 30, 2023, compared to 1.00% at December 31, 2022. At September 30, 2023, the allowance for credit losses as a percentage of nonperforming loans was 317.6%, compared to 350.0% at December 31, 2022. Total classified loans, defined as special mention and substandard loans, decreased $18.4 million, or 28.7%, from $64.0 million, or 3.2% of total loans, at December 31, 2022 to $45.6 million, or 2.3%, of total loans at September 30, 2023.
We continue to maintain diversity among property types and within our geographic footprint. More details on the diversification of the loan portfolio are available in the supplementary earnings presentation. Management will continue to remain attentive to any signs of deterioration in borrowers’ fina
