See the accompanying notes to unaudited consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2022
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Basis of Presentation. Western New England Bancorp, Inc. (“Western New England Bancorp,” “WNEB,”
“Company,” “we,” or “us”) is a Massachusetts-chartered stock holding company for Westfield
Bank, a federally-chartered savings bank (“Bank”).
The
Bank operates 25 banking offices in Hampden and Hampshire counties in western Massachusetts and Hartford and Tolland counties
in northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment
securities. The West Hartford Financial Services Center serves as the Company’s Connecticut hub, housing Commercial Lending,
Cash Management and a Mortgage Loan Officer. The Bank’s deposits are insured up to the maximum Federal Deposit Insurance
Corporation (“FDIC”) coverage limits.
Wholly-owned
Subsidiaries of the Bank. Elm Street Securities Corporation, WFD Securities, Inc. and CSB Colts, Inc., are Massachusetts chartered
securities corporations, formed for the primary purpose of holding qualified securities. WB Real Estate Holdings, LLC, is a Massachusetts-chartered
limited liability company that holds real property acquired as security for debts previously contracted by the Bank.
Principles
of Consolidation. The consolidated financial statements include the accounts of Western New England Bancorp, the Bank, CSB
Colts, Inc., Elm Street Securities Corporation, WB Real Estate Holdings, LLC and WFD Securities, Inc. All material intercompany
balances and transactions have been eliminated in consolidation.
Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of income and expenses for each. Actual results could differ from those estimates. An estimate that is
particularly susceptible to significant change in the near-term relates to the determination of the allowance for loan losses.
Basis
of Presentation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of March 31,
2022, and the results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The
results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations for
the year ending December 31, 2022. Certain information and disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
These
unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as
of and for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the
“2021 Annual Report”).
Reclassifications.
Amounts in the prior period financial statements are reclassified when necessary to conform to the current year presentation.
2.
EARNINGS PER SHARE
Basic
earnings per share represents income available to common shareholders divided by the weighted-average number of common shares
outstanding during the period. If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered
outstanding in the computation of basic earnings per share. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by us relate to stock options and certain performance-based
restricted stock awards and are determined using the treasury stock method. Unallocated Employee Stock Ownership Plan (“ESOP”)
shares are not deemed outstanding for earnings per share calculations. There were no anti-dilutive shares outstanding during the
three months ended March 31, 2022 and 2021.
Earnings
per common share for the three months ended March 31, 2022 and 2021 have been computed based on the following:
| |
|
|
|
|
|
| |
| |
Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
| |
(In thousands, except per share data) | |
| |
| | |
| |
Net income applicable to common stock | |
$ | 5,319 | | |
$ | 5,791 | |
| |
| | | |
| | |
Average number of common shares issued | |
| 22,705 | | |
| 25,118 | |
Less: Average unallocated ESOP Shares | |
| (445 | ) | |
| (527 | ) |
Less: Average unvested equity incentive plan shares | |
| (160 | ) | |
| (105 | ) |
| |
| | | |
| | |
Average number of common shares outstanding used to
calculate basic earnings per common share | |
| 22,100 | | |
| 24,486 | |
Effect of dilutive equity incentive plan | |
| 41 | | |
| 28 | |
Effect of dilutive stock options | |
| 32 | | |
| 30 | |
Average number of common
shares outstanding used to calculate diluted earnings per common share | |
| 22,173 | | |
| 24,544 | |
| |
| | | |
| | |
Basic earnings per share | |
$ | 0.24 | | |
$ | 0.24 | |
Diluted earnings per share | |
$ | 0.24 | | |
$ | 0.24 | |
| |
| | | |
| | |
3.
COMPREHENSIVE INCOME (LOSS)
Accounting
principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income (loss).
The
components of accumulated other comprehensive loss included in shareholders’ equity are as follows:
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
(In thousands) | |
| |
| | |
| |
Net unrealized losses on available-for-sale securities | |
$ | (16,149 | ) | |
$ | (4,685 | ) |
Tax effect | |
| 4,094 | | |
| 1,160 | |
Net-of-tax amount | |
| (12,055 | ) | |
| (3,525 | ) |
| |
| | | |
| | |
Unrecognized actuarial loss on the defined benefit plan | |
| (12,067 | ) | |
| (12,225 | ) |
Tax effect | |
| 3,391 | | |
| 3,436 | |
Net-of-tax amount | |
| (8,676 | ) | |
| (8,789 | ) |
| |
| | | |
| | |
Accumulated other comprehensive loss | |
$ | (20,731 | ) | |
$ | (12,314 | ) |
4. INVESTMENT
SECURITIES
Available-for-sale
and held-to-maturity investment securities at March 31, 2022 and December 31, 2021 are summarized as follows:
| |
March 31, 2022 | |
| |
Amortized Cost | | |
Gross
Unrealized
Gains | | |
Gross
Unrealized
Losses | | |
Fair Value | |
| |
(In thousands) | |
Available-for-sale securities: | |
| | | |
| | | |
| | | |
| | |
Debt securities: | |
| | | |
| | | |
| | | |
| | |
Government-sponsored enterprise obligations | |
$ | | |
$ | | |
$ | ) | |
$ | |
State and municipal bonds | |
| 405 | | |
| 1 | | |
| — | | |
| 406 | |
Corporate bonds | |
| 3,022 | | |
| — | | |
| (26 | ) | |
| 2,996 | |
Total debt securities | |
| 18,331 | | |
| 1 | | |
| (1,784 | ) | |
| 16,548 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Government-sponsored mortgage-backed securities | |
| | |
| | |
| ) | |
| |
U.S. government guaranteed mortgage-backed securities | |
| 8,580 | | |
| — | | |
| (916 | ) | |
| 7,664 | |
Total mortgage-backed securities | |
| 171,728 | | |
| 39 | | |
| (14,405 | ) | |
| 157,362 | |
| |
| | | |
| | | |
| | | |
| | |
Total available-for-sale | |
| 190,059 | | |
| 40 | | |
| (16,189 | ) | |
| 173,910 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity securities: | |
| | | |
| | | |
| | | |
| | |
Debt securities: | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities | |
| 9,981 | | |
| — | | |
| (461 | ) | |
| 9,520 | |
Total debt securities | |
| 9,981 | | |
| — | | |
| (461 | ) | |
| 9,520 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Government-sponsored mortgage-backed securities | |
| | |
| — | | |
| ) | |
| |
Total mortgage-backed securities | |
| 227,594 | | |
| — | | |
| (16,835 | ) | |
| 210,759 | |
| |
| | | |
| | | |
| | | |
| | |
Total held-to-maturity | |
| 237,575 | | |
| — | | |
| (17,296 | ) | |
| 220,279 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 427,634 | | |
$ | 40 | | |
$ | (33,485 | ) | |
$ | 394,189 | |
| |
December 31, 2021 | |
| |
Amortized Cost | | |
Gross
Unrealized
Gains | | |
Gross
Unrealized
Losses | | |
Fair Value | |
| |
(In thousands) | |
Available-for-sale securities: | |
| | | |
| | | |
| | | |
| | |
Debt securities: | |
| | | |
| | | |
| | | |
| | |
Government-sponsored enterprise obligations | |
$ | | |
$ | | |
$ | ) | |
$ | |
State and municipal bonds | |
| 405 | | |
| 1 | | |
| — | | |
| 406 | |
Corporate bonds | |
| 3,026 | | |
| 86 | | |
| — | | |
| 3,112 | |
Total debt securities | |
| 18,333 | | |
| 87 | | |
| (676 | ) | |
| 17,744 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Government-sponsored mortgage-backed securities | |
| | |
| | |
| ) | |
| |
U.S. government guaranteed mortgage-backed securities | |
| 9,693 | | |
| 8 | | |
| (602 | ) | |
| 9,099 | |
Total mortgage-backed securities | |
| 180,704 | | |
| 435 | | |
| (4,531 | ) | |
| 176,608 | |
| |
| | | |
| | | |
| | | |
| | |
Total available-for-sale | |
| 199,037 | | |
| 522 | | |
| (5,207 | ) | |
| 194,352 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity securities: | |
| | | |
| | | |
| | | |
| | |
Debt securities: | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities | |
| 9,979 | | |
| — | | |
| (6 | ) | |
| 9,973 | |
Total debt securities | |
| 9,979 | | |
| — | | |
| (6 | ) | |
| 9,973 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Government-sponsored mortgage-backed securities | |
| | |
| — | | |
| ) | |
| |
Total mortgage-backed securities | |
| 212,293 | | |
| — | | |
| (2,518 | ) | |
| 209,775 | |
| |
| | | |
| | | |
| | | |
| | |
Total held-to-maturity | |
| 222,272 | | |
| — | | |
| (2,524 | ) | |
| 219,748 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 421,309 | | |
$ | 522 | | |
$ | (7,731 | ) | |
$ | 414,100 | |
At
March 31, 2022, U.S. Treasury securities with a fair value of $4.7 million, government-sponsored enterprise obligations with a
fair value of $ million and mortgage-backed securities with a fair value of $55.4 million were pledged to secure public deposits
and for other purposes as required or permitted by law. The securities collateralizing public deposits are subject to fluctuations
in fair value. We monitor the fair value of the collateral on a periodic basis, and pledge additional collateral if necessary
based on changes in fair value of collateral or the balances of such deposits.
The
amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31, 2022, by final maturity, are
shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay
obligations.
| |
Available-for-Sale | | |
Held-to-Maturity | |
| |
Amortized Cost | | |
Fair Value | | |
Amortized Cost | | |
Fair Value | |
| |
(In thousands) | |
Debt securities: | |
| | | |
| | | |
| | | |
| | |
Due after one year through five years | |
$ | 3,427 | | |
$ | 3,402 | | |
$ | 9,981 | | |
$ | 9,520 | |
Due after five years through ten years | |
| 9,904 | | |
| 8,869 | | |
| — | | |
| — | |
Due after ten years | |
| 5,000 | | |
| 4,277 | | |
| — | | |
| — | |
Total debt securities | |
| 18,331 | | |
| 16,548 | | |
| 9,981 | | |
| 9,520 | |
Mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Due after five years through ten years | |
| 1,901 | | |
| 1,823 | | |
| — | | |
| — | |
Due after ten years | |
| 169,827 | | |
| 155,539 | | |
| 227,594 | | |
| 210,759 | |
Total mortgage-backed securities | |
| 171,728 | | |
| 157,362 | | |
| 227,594 | | |
| 210,759 | |
| |
| | | |
| | | |
| | | |
| | |
Total securities | |
$ | 190,059 | | |
$ | 173,910 | | |
$ | 237,575 | | |
$ | 220,279 | |
Gross
realized gains and losses on sales of available-for-sale securities for the three months ended March 31, 2022 and 2021 are as
follows:
| |
|
|
|
|
|
| |
| |
Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
| |
(In thousands) | |
| |
| | |
| |
Gross gains realized | |
$ | — | | |
$ | — | |
Gross losses realized | |
| (4 | ) | |
| (62 | ) |
Net loss realized | |
$ | (4 | ) | |
$ | (62 | ) |
Proceeds
from the sales and redemption of available-for-sale securities totaled $20,000 and $14,000 for the three months ended March 31,
2022 and 2021, respectively.
Information
pertaining to securities with gross unrealized losses at March 31, 2022 and December 31, 2021, aggregated by investment category
and length of time that individual securities have been in a continuous loss position are as follows:
| |
March
31, 2022 | |
| |
Less
Than Twelve Months | | |
Over
Twelve Months | |
| |
Number
of Securities | | |
Fair
Value | | |
Gross
Unrealized Loss | | |
Depreciation
from Amortized Cost Basis (%) | | |
Number
of Securities | | |
Fair
Value | | |
Gross
Unrealized Loss | | |
Depreciation
from Amortized Cost Basis (%) | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Government-sponsored
mortgage-backed securities | |
| | |
$ | | |
$ | | |
| % | |
| | |
$ | | |
$ | | |
| % |
U.S. government guaranteed
mortgage-backed securities | |
| 2 | | |
| 1,093 | | |
| 55 | | |
| 4.8 | | |
| 7 | | |
| 6,571 | | |
| 861 | | |
| 11.6 | |
Government-sponsored
enterprise obligations | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Corporate
Bonds | |
| 1 | | |
| 2,996 | | |
| 26 | | |
| 0.9 | | |
| — | | |
| — | | |
| — | | |
| | |
Total
available-for-sale | |
| 42 | | |
| 78,986 | | |
| 5,958 | | |
| | | |
| 37 | | |
| 90,507 | | |
| 10,231 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities | |
| 2 | | |
| 9,520 | | |
| 461 | | |
| 4.6 | % | |
| — | | |
| — | | |
| — | | |
| — | % |
Government-sponsored
mortgage-backed securities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Total
held-to-maturity | |
| 35 | | |
| 207,766 | | |
| 15,984 | | |
| | | |
| 2 | | |
| 12,513 | | |
| 1,312 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| 77 | | |
$ | 286,752 | | |
$ | 21,942 | | |
| | | |
| 39 | | |
$ | 103,020 | | |
$ | 11,543 | | |
| | |
| |
December 31, 2021 | |
| |
Less Than Twelve Months | | |
Over Twelve Months | |
| |
Number of Securities | | |
Fair Value | | |
Gross Unrealized Loss | | |
Depreciation from Amortized Cost Basis (%) | | |
Number of Securities | | |
Fair Value | | |
Gross Unrealized Loss | | |
Depreciation from Amortized Cost Basis (%) | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Government-sponsored mortgage-backed securities | |
| | |
$ | | |
$ | | |
| % | |
| | |
$ | | |
$ | | |
| % |
U.S. government guaranteed mortgage-backed securities | |
| 2 | | |
| 2,426 | | |
| 142 | | |
| 5.5 | | |
| 5 | | |
| 5,107 | | |
| 460 | | |
| 8.3 | |
Government-sponsored enterprise obligations | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Total available-for-sale | |
| 36 | | |
| 107,647 | | |
| 2,230 | | |
| | | |
| 26 | | |
| 61,839 | | |
| 2,977 | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities | |
| 2 | | |
| 9,973 | | |
| 6 | | |
| 0.1 | % | |
| — | | |
| — | | |
| — | | |
| — | % |
Government-sponsored mortgage-backed securities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Total held-to-maturity | |
| 33 | | |
| 219,748 | | |
| 2,524 | | |
| | | |
| — | | |
| — | | |
| — | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| 69 | | |
$ | 327,395 | | |
$ | 4,754 | | |
| | | |
| 26 | | |
$ | 61,839 | | |
$ | 2,977 | | |
| | |
During
the three months ended March 31, 2022 and year ended December 31, 2021, the Company did not record any other-than-temporary impairment
(“OTTI”) charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses.
Management attributed the unrealized losses at March 31, 2022 to increases in current market yields compared to the yields at
the time the investments were purchased by the Company and not due to credit quality.
The
process for assessing investments for OTTI may vary depending on the type of security. In assessing the Company's investments
in government-sponsored and U.S. government guaranteed mortgage-backed securities and government-sponsored enterprise obligations,
the contractual cash flows of these investments are guaranteed by the respective government-sponsored enterprise; Federal Home
Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Federal Farm Credit
Bank (“FFCB”), or Federal Home Loan Bank (“FHLB”). Accordingly, it is expected that the securities would
not be settled at a price less than the par value of the Company's investments. Management's assessment of other debt securities
within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments' materiality,
and duration of the investments' unrealized loss position. At March 31, 2022, the Company's corporate and municipal bond portfolios
did not contain any securities rated below investment grade, as reported by major credit rating agencies.
5.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Major
classifications of loans at the periods indicated were as follows:
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(In thousands) | |
Commercial real estate | |
$ | 1,039,487 | | |
$ | 979,969 | |
Residential real estate: | |
| | | |
| | |
Residential one-to-four family | |
| 564,339 | | |
| 552,332 | |
Home equity | |
| 100,165 | | |
| 99,759 | |
Total residential real estate | |
| 664,504 | | |
| 652,091 | |
| |
| | | |
| | |
Commercial and industrial: | |
| | | |
| | |
Paycheck Protection Program (“PPP”) loans | |
| 6,052 | | |
| 25,329 | |
Commercial and industrial | |
| 209,890 | | |
| 201,340 | |
Total commercial and industrial | |
| 215,942 | | |
| 226,669 | |
| |
| | | |
| | |
Consumer | |
| 4,252 | | |
| 4,250 | |
Total gross loans | |
| 1,924,185 | | |
| 1,862,979 | |
Unamortized PPP loan fees | |
| (255 | ) | |
| (781 | ) |
Unearned premiums and deferred loan fees and costs, net | |
| 2,355 | | |
| 2,518 | |
Total loans, net | |
| 1,926,285 | | |
| 1,864,716 | |
Allowance for loan losses | |
| (19,308 | ) | |
| (19,787 | ) |
Net loans | |
$ | 1,906,977 | | |
$ | 1,844,929 | |
Loans
Serviced for Others.
The
Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been
accounted for as sales and are therefore not included in our accompanying consolidated balance sheets. We continue to service
the loans on behalf of the participating lenders. We share with participating lenders, on a pro-rata basis, any gains or losses
that may result from a borrower’s lack of compliance with contractual terms of the loan. At March 31, 2022 and December
31, 2021, the Company was servicing commercial loans participated out to various other institutions totaling $78.3 million and
$63.2 million, respectively.
Residential
real estate mortgages are originated by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell
its loans to institutional investors such as the FHLMC. Under loan sale and servicing agreements with the investor, the Bank generally
continues to service the residential real estate mortgages. The Bank pays the investor an agreed upon rate on the loan, which
is less than the interest rate received from the borrower. The Bank retains the difference as a fee for servicing the residential
real estate mortgages. The Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes
the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions
used by a third party to estimate the fair value of capitalized servicing rights at March 31, 2022, include weighted average prepayment
speed for the portfolio using the Public Securities Association Standard Prepayment Model (122 PSA), weighted average internal
rate of return (9.02%), weighted average servicing fee (0.25%), and average cost to service loans ($83.63 per loan). The estimated
fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest
rates, and their effect on prepayment speeds and discount rates. For the three months ended March 31, 2022 and 2021, the Company
sold $277,000 and $7.6 million in residential real estate mortgages with servicing retained and recorded gains on the sale of
mortgages of $2,000 and $227,000, respectively, within non-interest income.
At
March 31, 2022 and December 31, 2021, the Company was servicing residential mortgage loans owned by investors totaling $85.5 million
and $88.2 million, respectively. Servicing fee income of $53,000 and $24,000 was recorded for the three months ended March 31,
2022 and 2021, respectively, and is included in service charges and fees on the consolidated statements of net income.
A
summary of the activity in the balances of mortgage servicing rights follows:
| |
|
|
|
|
|
| |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
| |
(In thousands) | |
| |
| | |
| |
Balance at the beginning of year: | |
$ | 693 | | |
$ | 153 | |
Capitalized mortgage servicing rights | |
| 2 | | |
| 48 | |
Amortization | |
| (36 | ) | |
| (15 | ) |
Balance at the end of period | |
$ | 659 | | |
$ | 186 | |
Fair value at the end of period | |
$ | 813 | | |
$ | 235 | |
Loans
are recorded at the principal amount outstanding, adjusted for charge-offs, unearned premiums and deferred loan fees and costs.
Interest on loans is calculated using the effective yield method on daily balances of the principal amount outstanding and is
credited to income on the accrual basis to the extent it is deemed collectable. Our general policy is to discontinue the accrual
of interest when principal or interest payments are delinquent 90 days or more based on the contractual terms of the loan, or
earlier if the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent
cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection
of the principal balance is not in question. Loans are returned to accrual status when they become current as to both principal
and interest and perform in accordance with contractual terms for a period of at least six months, reducing the concern as to
the collectability of principal and interest. Loan fees and certain direct loan origination costs are deferred, and the net fee
or cost is recognized as an adjustment to interest income over the estimated average lives of the related loans.
The
allowance for loan losses is established through provisions for loan losses charged to expense. Loans are charged-off against
the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are
credited to the allowance.
The
allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general,
allocated, and unallocated components, as further described below.
General
component
The
general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified
by the following loan segments: residential real estate (includes one-to-four family and home equity), commercial real estate,
commercial and industrial, and consumer. Management uses a rolling average of historical losses based on a time frame appropriate
to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors:
trends in delinquencies and nonperforming loans; trends in volume and terms of loans; effects of changes in risk selection and
underwriting standards and other changes in lending policies, procedures and practices; and national and local economic trends
and industry conditions. There were no changes to the Company’s policies and procedures surrounding the allowance for loan
losses during the three months ended March 31, 2022. In addition, during the year ended December 31, 2020, the Company determined
that it was prudent to provide an allowance for loan losses related to the loan portfolio acquired on October 24, 2016 from Chicopee
Bancorp, Inc. (“Chicopee”) due to the ongoing impacts and extended nature of the pandemic.
The
qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant
to each portfolio segment are as follows:
Residential
real estate. We require private mortgage insurance for all loans originated with a loan-to-value ratio greater than 80% and
we do not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment
is dependent on the credit quality of the individual borrower. Home equity loans are secured by first or second mortgages on one-to-four
family owner occupied properties. The overall health of the economy, including unemployment rates and housing prices, will have
an effect on the credit quality in this segment.
Commercial
real estate. Loans in this segment are primarily income-producing investment properties and owner-occupied commercial
properties throughout New England. The underlying cash flows generated by the properties or operations can be adversely impacted
by a downturn in the economy due to increased vacancy rates or diminished cash flows, which in turn, would have an effect on the
credit quality in this segment. Management obtains financial information annually and continually monitors the cash flows of these
loans.
Commercial
and industrial loans. Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment
is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect
on the credit quality in this segment.
Consumer
loans. Loans in this segment are secured or unsecured and repayment is dependent on the credit quality of the individual borrower.
Allocated
component
The
allocated component relates to loans that are classified as impaired. Impaired loans are identified by analysis of loan performance,
internal credit ratings and watch list loans that management believes are subject to a higher risk of loss. Impairment is measured
on a loan by loan basis for commercial real estate and commercial and industrial loans by either the present value of expected
future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral
dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than
the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, we do not separately identify individual consumer and residential real estate loans for impairment disclosures, unless
such loans are subject to a troubled debt restructuring agreement.
A
loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the
scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered
by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally
are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal
and interest owed.
Unallocated
component
An
unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses.
The unallocated component of the allowance, if any, reflects the margin of imprecision inherent in the underlying assumptions
used in the methodologies for estimating allocated and general reserves in the portfolio.
An
analysis of changes in the allowance for loan losses by segment for the three months ended March 31, 2022 and 2021 is as follows:
| |
Commercial Real Estate | | |
Residential Real Estate | | |
Commercial and Industrial | | |
Consumer | | |
Unallocated | | |
Total | |
| |
(In thousands) | |
Balance at December 31, 2020 | |
$ | 13,020 | | |
$ | 4,240 | | |
$ | 3,630 | | |
$ | 241 | | |
$ | 26 | | |
$ | 21,157 | |
Provision (credit) | |
| 295 | | |
| (135 | ) | |
| (60 | ) | |
| (13 | ) | |
| (12 | ) | |
| 75 | |
Charge-offs | |
| — | | |
| — | | |
| (9 | ) | |
| (24 | ) | |
| — | | |
| (33 | ) |
Recoveries | |
| — | | |
| 8 | | |
| 1 | | |
| 19 | | |
| — | | |
| 28 | |
Balance at March 31, 2021 | |
$ | 13,315 | | |
$ | 4,113 | | |
$ | 3,562 | | |
$ | 223 | | |
$ | 14 | | |
$ | 21,227 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at December 31, 2021 | |
$ | 12,970 | | |
$ | 3,964 | | |
$ | 2,643 | | |
$ | 197 | | |
$ | 13 | | |
$ | 19,787 | |
Provision (credit) | |
| (639 | ) | |
| 90 | | |
| 89 | | |
| 27 | | |
| 8 | | |
| (425 | ) |
Charge-offs | |
| (37 | ) | |
| (16 | ) | |
| (7 | ) | |
| (45 | ) | |
| — | | |
| (105 | ) |
Recoveries | |
| — | | |
| 30 | | |
| 1 | | |
| 20 | | |
| — | | |
| 51 | |
Balance at March 31, 2022 | |
$ | 12,294 | | |
$ | 4,068 | | |
$ | 2,726 | | |
$ | 199 | | |
$ | 21 | | |
$ | 19,308 | |
The
following table presents information pertaining to the allowance for loan losses by segment, excluding PPP loans, for the dates
indicated:
| |
Commercial Real Estate | | |
Residential Real Estate | | |
Commercial and Industrial | | |
Consumer | | |
Unallocated | | |
Total | |
| |
(In thousands) | |
March 31, 2022 | |
| | |
| | |
| | |
| | |
| | |
| |
Amount of allowance for impaired loans | |
$ |
— | | |
$ |
— | | |
$ |
— | | |
$ |
— | | |
$ |
— | | |
$ |
— | |
Amount of allowance for non-impaired loans | |
| 12,294 | | |
| 4,068 | | |
| 2,726 | | |
| 199 | | |
| 21 | | |
| 19,308 | |
Total allowance for loan losses | |
$ | 12,294 | | |
$ | 4,068 | | |
$ | 2,726 | | |
$ | 199 | | |
$ | 21 | | |
$ | 19,308 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Impaired loans | |
$ | 9,527 | | |
$ | 2,976 | | |
$ | 620 | | |
$ | — | | |
$ | — | | |
$ | 13,123 | |
Non-impaired loans | |
| 1,025,725 | | |
| 659,784 | | |
| 208,907 | | |
| 4,252 | | |
| — | | |
| 1,898,668 | |
Impaired loans acquired with deteriorated credit quality | |
| 4,235 | | |
| 1,744 | | |
| 363 | | |
| — | | |
| — | | |
| 6,342 | |
Total loans | |
$ | 1,039,487 | | |
$ | 664,504 | | |
$ | 209,890 | | |
$ | 4,252 | | |
$ | — | | |
$ | 1,918,133 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Amount of allowance for impaired loans | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Amount of allowance for non-impaired loans | |
| 12,970 | | |
| 3,964 | | |
| 2,643 | | |
| 197 | | |
| 13 | | |
| 19,787 | |
Total allowance for loan losses | |
$ | 12,970 | | |
$ | 3,964 | | |
$ | 2,643 | | |
$ | 197 | | |
$ | 13 | | |
$ | 19,787 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Impaired loans | |
$ | 9,601 | | |
$ | 3,223 | | |
$ | 699 | | |
$ | 22 | | |
$ | — | | |
$ | 13,545 | |
Non-impaired loans | |
| 965,577 | | |
| 647,098 | | |
| 200,271 | | |
| 4,228 | | |
| — | | |
| 1,817,174 | |
Impaired loans acquired with deteriorated credit quality | |
| 4,791 | | |
| 1,770 | | |
| 370 | | |
| — | | |
| — | | |
| 6,931 | |
Total loans | |
$ | 979,969 | | |
$ | 652,091 | | |
$ | 201,340 | | |
$ | 4,250 | | |
$ | — | | |
$ | 1,837,650 | |
Past
Due and Nonaccrual Loans.
The
following tables present an age analysis of past due loans, excluding PPP loans, as of the dates indicated:
| |
30 – 59 Days Past Due | | |
60 – 89 Days Past Due | | |
90 Days or More Past Due | | |
Total
Past
Due Loans | | |
Total
Current
Loans | | |
Total Loans | | |
Nonaccrual Loans | |
| |
(In thousands) | |
March 31, 2022 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial real estate | |
$ | 301 | | |
$ | — | | |
$ | 436 | | |
$ | 737 | | |
$ | 1,038,750 | | |
$ | 1,039,487 | | |
$ | 660 | |
Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
| 561 | | |
| 270 | | |
| 853 | | |
| 1,684 | | |
| 562,655 | | |
| 564,339 | | |
| 2,846 | |
Home equity | |
| 230 | | |
| — | | |
| 88 | | |
| 318 | | |
| 99,847 | | |
| 100,165 | | |
| 112 | |
Commercial and industrial | |
| 42 | | |
| — | | |
| 24 | | |
| 66 | | |
| 209,824 | | |
| 209,890 | | |
| 370 | |
Consumer | |
| 3 | | |
| — | | |
| — | | |
| 3 | | |
| 4,249 | | |
| 4,252 | | |
| — | |
Total
loans | |
$ | 1,137 | | |
$ | 270 | | |
$ | 1,401 | | |
$ | 2,808 | | |
$ | 1,915,325 | | |
$ | 1,918,133 | | |
$ | 3,988 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate | |
$ | 139 | | |
$ | — | | |
$ | 436 | | |
$ | 575 | | |
$ | 979,394 | | |
$ | 979,969 | | |
$ | 1,224 | |
Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
| 787 | | |
| 41 | | |
| 507 | | |
| 1,335 | | |
| 550,997 | | |
| 552,332 | | |
| 3,214 | |
Home equity | |
| 57 | | |
| 5 | | |
| 63 | | |
| 125 | | |
| 99,634 | | |
| 99,759 | | |
| 94 | |
Commercial and industrial | |
| 58 | | |
| 10 | | |
| 22 | | |
| 90 | | |
| 201,250 | | |
| 201,340 | | |
| 410 | |
Consumer | |
| 5 | | |
| — | | |
| 11 | | |
| 16 | | |
| 4,234 | | |
| 4,250 | | |
| 22 | |
Total loans | |
$ | 1,046 | | |
$ | 56 | | |
$ | 1,039 | | |
$ | 2,141 | | |
$ | 1,835,509 | | |
$ | 1,837,650 | | |
$ | 4,964 | |
Impaired
Loans.
The
following is a summary of impaired loans by class:
| |
| | |
| | |
| | |
Three Months Ended | |
| |
At March 31, 2022 | | |
March 31, 2022 | |
| |
Recorded Investment | | |
Unpaid Principal Balance | | |
Related Allowance | | |
Average Recorded Investment | | |
Interest Income Recognized | |
| |
(In thousands) | |
Impaired Loans (1) | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate | |
$ | 13,762 | | |
$ | 14,907 | | |
$ | — | | |
$ | 14,078 | | |
$ | 53 | |
Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| 4,590 | | |
| 5,422 | | |
| — | | |
| 4,735 | | |
| 16 | |
Home equity | |
| 130 | | |
| 153 | | |
| — | | |
| 121 | | |
| 1 | |
Commercial and industrial | |
| 983 | | |
| 3,748 | | |
| — | | |
| 1,026 | | |
| 15 | |
Consumer | |
| — | | |
| — | | |
| — | | |
| 11 | | |
| — | |
Total impaired loans | |
$ | 19,465 | | |
$ | 24,230 | | |
$ | — | | |
$ | 19,971 | | |
$ | 85 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | |
| | |
| | |
Three Months Ended | |
| |
At December 31, 2021 | | |
March 31, 2021 | |
| |
Recorded Investment | | |
Unpaid Principal Balance | | |
Related Allowance | | |
Average Recorded Investment | | |
Interest Income Recognized | |
| |
(In thousands) | |
Impaired Loans (1) | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate | |
$ | 14,392 | | |
$ | 15,563 | | |
$ | — | | |
$ | 17,403 | | |
$ | 108 | |
Residential rea estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| 4,881 | | |
| 5,381 | | |
| — | | |
| 6,357 | | |
| 104 | |
Home equity | |
| 112 | | |
| 136 | | |
| — | | |
| 143 | | |
| 4 | |
Commercial and industrial | |
| 1,069 | | |
| 3,850 | | |
| — | | |
| 4,827 | | |
| 62 | |
Consumer | |
| 22 | | |
| 37 | | |
| — | | |
| 26 | | |
| — | |
Total impaired loans | |
$ | 20,476 | | |
$ | 24,967 | | |
$ | — | | |
$ | 28,756 | | |
$ | 278 | |
(1) | | Includes loans
acquired with deteriorated credit quality and performing troubled debt restructurings. |
With
the exception of loans acquired with deteriorated credit quality, the majority of impaired loans are included within the nonaccrual
balances; however, not every loan on nonaccrual status has been designated as impaired. Impaired loans include loans that have
been modified in a troubled debt restructuring (“TDR”). Impaired loans are individually evaluated and exclude large
groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated
for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.
All
payments received on impaired loans in nonaccrual status are applied to principal. There was no interest income recognized on
nonaccrual impaired loans during the three months ended March 31, 2022 and March 31, 2021. The Company's obligation to fulfill
the additional funding commitments on impaired loans is generally contingent on the borrower's compliance with the terms of the
credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's
discretion. At March 31, 2022 and 2021, we had not committed to lend any additional funds for loans that are classified as impaired.
Payments received on impaired loans in accrual status are recorded in accordance with the contractual terms of the loan. Interest
income recognized on impaired loans during the three months ended March 31, 2022 and 2021 pertained to performing TDRs and purchased
impaired loans.
Troubled
Debt Restructurings.
Loans
are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial
difficulties of the borrower, the Bank grants the borrower a concession on the terms that would not otherwise be considered. Typically,
such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of
the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal
or interest) which materially alters the Bank's position or significantly extends the note's maturity date, such that the present
value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans
that are modified are reviewed by the Company to identify if a TDR has occurred. All TDR loans are classified as impaired.
When
we modify loans in a TDR, we measure impairment similar to other impaired loans based on the present value of expected future
cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral,
less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded
investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment
is recognized through a specific allowance or a charge-off to the allowance. Nonperforming TDRs are included in nonperforming
loans.
There
were no loan modifications classified as TDRs during the three months ended March 31, 2022 and 2021. During the three months ended
March 31, 2022 and 2021, no TDRs defaulted (defined as 30 days or more past due) within 12 months of restructuring. There were
no charge-offs on TDRs during the three months ended March 31, 2022 or 2021.
Loans
Acquired with Deteriorated Credit Quality.
The
following is a summary of loans acquired with deteriorated credit quality in the Chicopee acquisition.
| | |
Contractual Required Payments Receivable | | |
Cash Expected To Be Collected | | |
Non- Accretable Discount | | |
Accretable Yield | | |
Loans Receivable | |
| | |
(In thousands) | |
Balance at December 31, 2021 | | |
$ | 12,134 | | |
$ | 9,430 | | |
$ | 2,704 | | |
$ | 2,499 | | |
$ | 6,931 | |
Collections | | |
| (669 | ) | |
| (639 | ) | |
| (30 | ) | |
| (50 | ) | |
| (589 | ) |
Dispositions | | |
| (58 | ) | |
| (58 | ) | |
| — | | |
| (58 | ) | |
| — | |
Balance at March 31, 2022 | | |
$ | 11,407 | | |
$ | 8,733 | | |
$ | 2,674 | | |
$ | 2,391 | | |
$ | 6,342 | |
Credit
Quality Information.
The
Company utilizes an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans. Performing
residential real estate, home equity and consumer loans are grouped with “Pass” rated loans. Nonperforming residential
real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “substandard.”
Loans
rated 1 – 4: Loans rated 1-4 represent groups of loans that are not subject to adverse criticism as defined in regulatory
guidance. Loans in these groups exhibit characteristics that represent acceptable risk.
Loans
rated 5: Loans rated 5 are considered “Special Mention” and may exhibit potential credit weaknesses or
downward trends and are being monitored by management. Loans in this category are currently protected based on collateral and
repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration
of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s
financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
Loans
rated 6: Loans rated 6 are considered “Substandard.” A loan is classified as substandard if the borrower
exhibits a well-defined weakness and may be inadequately protected by the current net worth and cash flow capacity to pay the
current debt.
Loans
rated 7: Loans rated 7 are considered “Doubtful.” Loans classified as doubtful have all the weaknesses
inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation of the
loan highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors
that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more
exact status may be determined.
Loans
rated 8: Loans rated 8 are considered uncollectible. The loss classification does not mean that the asset has absolutely no
recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and
collection time may be affected in the future.
On
an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial
loans. In addition, management utilizes delinquency reports, the criticized loan report and other loan reports to monitor credit
quality. In addition, at least on an annual basis, the Company contracts with an external loan review company to review the internal
credit ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating,
and overall risk of the loan. During the course of its review, the third party examines a sample of loans, including new loans,
existing relationships over certain dollar amounts and classified assets.
The
following table presents our loans by risk rating for the periods indicated:
| |
Commercial Real Estate | | |
Residential 1-4 Family | | |
Home Equity | | |
Commercial and Industrial | | |
Consumer | | |
Total | |
| |
(In thousands) | |
March 31, 2022 | |
| | |
| | |
| | |
| | |
| | |
| |
Pass (Rated 1 – 4) | |
$ | 973,892 | | |
$ | 560,425 | | |
$ | 99,891 | | |
$ | 199,763 | | |
$ | 4,232 | | |
$ | 1,838,203 | |
Special Mention (Rated 5) | |
| 47,729 | | |
| — | | |
| — | | |
| 7,464 | | |
| — | | |
| 55,193 | |
Substandard (Rated 6) | |
| 17,866 | | |
| 3,914 | | |
| 274 | | |
| 8,715 | | |
| 20 | | |
| 30,789 | |
Total | |
$ | 1,039,487 | | |
$ | 564,339 | | |
$ | 100,165 | | |
$ | 215,942 | | |
$ | 4,252 | | |
$ | 1,924,185 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass (Rated 1 – 4) | |
$ | 913,063 | | |
$ | 547,980 | | |
$ | 99,503 | | |
$ | 215,605 | | |
$ | 4,228 | | |
$ | 1,780,379 | |
Special Mention (Rated 5) | |
| 48,765 | | |
| — | | |
| — | | |
| 2,777 | | |
| — | | |
| 51,542 | |
Substandard (Rated 6) | |
| 18,141 | | |
| 4,352 | | |
| 256 | | |
| 8,287 | | |
| 22 | | |
| 31,058 | |
Total | |
$ | 979,969 | | |
$ | 552,332 | | |
$ | 99,759 | | |
$ | 226,669 | | |
$ | 4,250 | | |
$ | 1,862,979 | |
6. GOODWILL
AND OTHER INTANGIBLES
Goodwill.
At
March 31, 2022 and December 31, 2021, the Company’s goodwill was related to the acquisition of Chicopee in October 2016.
There was no goodwill impairment recorded during the three months ended March 31, 2022 or the year ended December 31, 2021. Annually,
or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment.
Core
Deposit Intangible.
In
connection with the acquisition of Chicopee, the Bank recorded a core deposit intangible of $4.5 million which is amortized over
twelve years using the straight-line method. Amortization expense was $94,000 for the three months ended March 31, 2022 and $93,000
for the three months ended March 31, 2021. At March 31, 2022, future amortization of the core deposit intangible totaled $375,000
for each of the next five years and $594,000 thereafter.
7.
SHARE-BASED COMPENSATION
Stock
Options.
A
summary of stock option activity for the three months ended March 31, 2022 is presented below:
| | |
Shares | | |
Weighted Average Exercise Price | | |
Weighted
Average Remaining
Contractual Term (in
years) | | |
Aggregate
Intrinsic Value (in
thousands) | |
| | |
| | |
| | |
| | |
| |
Outstanding at December 31, 2021 | | |
| 177,881 | | |
$ | 6.57 | | |
| 0.81 | | |
$ | 388 | |
Exercised | | |
| (80,881 | ) | |
| 6.29 | | |
| 0.43 | | |
| 211 | |
Outstanding at March 31, 2022 | | |
| 97,000 | | |
$ | 6.80 | | |
| 0.81 | | |
$ | 206 | |
| | |
| | | |
| | | |
| | | |
| | |
Exercisable at March 31, 2022 | | |
| 97,000 | | |
$ | 6.80 | | |
| 0.81 | | |
$ | 206 | |
Cash
received for options exercised during the three months ended March 31, 2022 and 2021 was $510,000 and $113,000, respectively.
Restricted
Stock Awards.
In
May 2014, the Company’s shareholders approved the 2014 Omnibus Incentive Plan, a stock-based compensation plan (the “2014
RSA Plan”). Under the 2014 RSA Plan, up to 516,000 shares of the Company’s common stock were reserved for grants of
stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee
director of WNEB. Any shares that are not issued because vesting requirements are not met were available for future issuance under
the 2014 RSA Plan.
On
an annual basis, the Compensation Committee (the “Committee”) approves long-term incentive awards out of the 2014
RSA Plan, whereby shares will be granted to eligible participants of the Company that are nominated by the Chief Executive Officer
and approved by the Committee, with vesting over a three-year term for employees and a one-year term for directors. Annual employee
grants provide for a periodic award that is both performance and time-based and is designed to recognize the executive’s
responsibilities, reward performance and leadership and as a retention tool. The objective of the award is to align compensation
for the named executive officers and directors over a multi-year period directly with the interests of our shareholders by motivating
and rewarding creation and preservation of long-term financial strength, shareholder value and relative shareholder return.
In
February 2019, 108,718 shares were granted. Of the 108,718 shares, 64,496 shares were time-based, with 20,262 vesting in one year
and 44,234 vesting ratably over a three-year period. The remaining 44,222 shares granted are performance-based and are subject
to the achievement of the 2019 long-term incentive performance metric. The primary performance metric for 2019 grants was return
on equity. Performance shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute
goals (i.e. Company-specific, not relative to a peer index) on an annual performance period, but will be distributed at the end
of the three-year period.
The
threshold, target and stretch metrics under the 2019 grants are as follows:
| | |
| | | |
| | | |
| | |
| | |
Return on Equity Metrics | |
Performance Period Ending | | |
| Threshold | | |
| Target | | |
| Stretch | |
December 31, 2019 | | |
| 5.75 | % | |
| 6.13 | % | |
| 7.00 | % |
December 31, 2020 | | |
| 6.00 | % | |
| 6.75 | % | |
| 7.75 | % |
December 31, 2021 | | |
| 6.25 | % | |
| 7.00 | % | |
| 8.00 | % |
Eligible
participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and
150% (“maximum” performance). As of December 31, 2021, the three-year performance period for the 2019 grants ended.
The 2019 long term incentive plan included a “catch-up” provision allowing unearned performance-based shares from
the 2019 and 2020 performance periods to be earned at the end of the three-year period based on the final year performance. Of
the original 44,222 performance-based shares granted in 2019, 40,003 shares were eligible for vesting based on achieving target.
Because of the “catch-up” provision within the plan, 60,009 performance-based shares vested and were issued to eligible
recipients in February 2022 based on achieving stretch for each performance period.
In
February 2020, 120,053 shares were granted. Of the 120,053 shares, 69,898 shares were time-based, with 19,760 vesting in one year
and 50,138 vesting ratably over a three-year period. The remaining 50,155 shares granted are performance-based and are subject
to the achievement of the 2020 long-term incentive performance metrics, with 50% of the performance-based shares vesting for each
performance metric. The primary performance metrics for the 2020 grants are return on equity and earnings per share. Performance
shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific,
not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance
period for earnings per share, but will be distributed at the end of the three-year period as earned.
The
threshold, target and stretch metrics under the 2020 grants are as follows:
| | |
| | | |
| | | |
| | |
| | |
Return on Equity Metrics | |
Performance Period Ending | | |
| Threshold | | |
| Target | | |
| Stretch | |
| | |
| | | |
| | | |
| | |
December 31, 2020 | | |
| 5.00 | % | |
| 5.48 | % | |
| 6.00 | % |
December 31, 2021 | | |
| 5.62 | % | |
| 6.24 | % | |
| 6.86 | % |
December 31, 2022 | | |
| 6.29 | % | |
| 6.99 | % | |
| 7.69 | % |
| | |
| | | |
| | | |
| | |
|
| |
Earnings Per Share Metrics | |
Performance Period Ending |
| |
Threshold | | |
Target | | |
Stretch | |
|
| |
| | |
| | |
| |
Three-year Cumulative Diluted Earnings Per Share |
| |
$ | 1.50 | | |
$ | 1.65 | | |
$ | 1.80 | |
Eligible
participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and
150% (“maximum” performance).
The
fair market value of shares awarded is based on the market price at the grant date, recorded as unearned compensation and amortized
over the applicable vesting period. Performance-based metrics are monitored on a quarterly basis in order to compare actual results
to the performance metric, with any necessary adjustments being recognized through share-based compensation expense and unearned
compensation.
In
February 2021, 19,827 shares were granted to our directors, with a one-year vesting period. At December 31, 2021, there were no
remaining shares available to grant under the 2014 RSA Plan.
In
May 2021, the Company’s shareholders approved the 2021 Omnibus Incentive Plan, a stock-based compensation plan (the “2021
RSA Plan”). Under the 2021 RSA Plan, up to 700,000 shares of the Company’s common stock were reserved for grants of
stock awards, including stock options and restricted stock, which may be granted to any officer, key employee or non-employee
director of the Company. Any shares that are not issued because vesting requirements are not met will be available for future
issuance under the 2021 RSA Plan.
In
May 2021, 122,362 shares were granted. Of the 122,362 shares, 61,181 shares were time-based, vesting ratably over a three-year
period. The remaining 61,181 shares granted are performance-based and are subject to the achievement of the 2021 long-term incentive
performance metrics, with 50% of the performance-based shares vesting for each performance metric. The primary performance metrics
for the 2021 grants are return on equity and earnings per share. Performance shares will be earned based upon how the Company
performs relative to threshold, target and maximum absolute goals (i.e. Company-specific, not relative to a peer index) on an
annual performance period for return on equity metrics and for a three-year cumulative performance period for earnings per share,
but will be distributed at the end of the three-year period as earned.
The
threshold, target and stretch metrics under the 2021 grants are as follows:
| | |
| | | |
| | | |
| | |
| | |
Return on Equity Metrics | |
Performance Period Ending | | |
Threshold | | |
Target | | |
Stretch | |
| | |
| | |
| | |
| |
December 31, 2021 | | |
| 5.63 | % | |
| 6.25 | % | |
| 7.50 | % |
December 31, 2022 | | |
| 5.85 | % | |
| 6.50 | % | |
| 7.80 | % |
December 31, 2023 | | |
| 6.08 | % | |
| 6.75 | % | |
| 8.10 | % |
| | |
| | | |
| | | |
| | |
|
| |
Earnings Per Share Metrics | |
Performance Period Ending |
| |
Threshold | | |
Target | | |
Stretch | |
|
| |
| | |
| | |
| |
Three-year Cumulative Diluted Earnings Per Share |
| |
$ | 1.58 | | |
$ | 1.97 | | |
$ | 2.36 | |
|
| |
| | | |
| | | |
| | |
In
March 2022, 137,151 shares were granted. Of the 137,151 shares, 77,463 shares were time-based, with 17,775 vesting in one year
and 59,688 vesting ratably over a three-year period. The remaining 59,688 shares granted are performance-based and are subject
to the achievement of the 2022 long-term incentive performance metrics, with 50% of the performance-based shares vesting for each
performance metric. The primary performance metrics for the 2022 grants are return on equity and earnings per share. Performance
shares will be earned based upon how the Company performs relative to threshold, target and maximum absolute goals (i.e. Company-specific,
not relative to a peer index) on an annual performance period for return on equity metrics and for a three-year cumulative performance
period for earnings per share, but will be distributed at the end of the three-year period as earned.
The
threshold, target and stretch metrics under the 2022 grants are as follows:
| | |
| | | |
| | | |
| | |
| | |
Return on Equity Metrics | |
Performance Period Ending | | |
Threshold | | |
Target | | |
Stretch | |
| | |
| | |
| | |
| |
December 31, 2022 | | |
| 7.79 | % | |
| 8.20 | % | |
| 8.61 | % |
December 31, 2023 | | |
| 7.93 | % | |
| 8.35 | % | |
| 8.77 | % |
December 31, 2024 | | |
| 8.03 | % | |
| 8.45 | % | |
| 8.87 | % |
| | |
| | | |
| | | |
| | |
|
| |
Earnings Per Share Metrics | |
Performance Period Ending |
| |
Threshold | | |
Target | | |
Stretch | |
|
| |
| | |
| | |
| |
Three-year Cumulative Diluted Earnings Per Share |
| |
$ | 2.35 | | |
$ | 2.61 | | |
$ | 2.85 | |
|
| |
| | | |
| | | |
| | |
At
March 31, 2022, there were 440,487 remaining shares available to grant under the 2021 RSA Plan.
A
summary of the status of restricted stock awards at March 31, 2022 and 2021 is presented below:
| | |
Shares | | |
Weighted Average Grant Date Fair Value | |
Balance at December 31, 2021 | | |
| 213,381 | | |
$ | 8.91 | |
Shares granted | | |
| 144,440 | | |
| 9.14 | |
Shares forfeited | | |
| (6,651 | ) | |
| 8.66 | |
Shares
vested | | |
| (60,009 | ) | |
| 9.77 | |
Balance at March 31, 2022 | | |
| 291,161 | | |
$ | 8.85 | |
| | |
Shares | | |
Weighted Average Grant Date Fair Value | |
Balance at December 31, 2020 | | |
| 178,766 | | |
$ | 9.63 | |
Shares granted | | |
| 19,827 | | |
| 8.17 | |
Shares forfeited | | |
| (19,154 | ) | |
| 11.05 | |
Shares vested | | |
| (27,727 | ) | |
| 9.81 | |
Balance at March 31, 2021 | | |
| 151,712 | | |
$ | 9.23 | |
We
recorded total expense for restricted stock awards of $301,000 and $231,000 for the three months ended March 31, 2022 and 2021,
respectively.
8.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Total
borrowing capacity includes borrowing arrangements at the FHLB, the Federal Reserve Bank (“FRB”), and borrowing arrangements
with correspondent banks.
The
Company is a member of the FHLB and uses borrowings as an additional source of funding to finance the Company’s lending
and investing activities and to provide liquidity for daily operations. FHLB advances also provide more pricing and option alternatives
for particular asset/liability needs. The FHLB provides a central credit facility primarily for member institutions. As an FHLB
member, the Company is required to own capital stock of the FHLB, calculated periodically based primarily on its level of borrowings
from the FHLB. FHLB borrowings are secured by certain securities from the Company’s investment portfolio not otherwise pledged
as well as certain residential real estate and commercial real estate loans. Advances are made under several different credit
programs with different lending standards, interest rates and range of maturities. This relationship is an integral component
of the Company’s asset-liability management program. At March 31, 2022, the Bank had $464.1 million in additional borrowing
capacity from the FHLB.
The
Company also has an available overnight Ideal Way line of credit with the FHLB of $9.5 million as of March 31, 2022. Interest
on this line of credit is payable at a rate determined and reset by the FHLB on a daily basis. The outstanding principal is due
daily but the portion not repaid will be automatically renewed. As of March 31, 2022 and December 31, 2021, there were no advances
outstanding under this line.
The
Company has an available line of credit of $5.7 million with the FRB Discount Window at an interest rate determined and reset
on a daily basis. Borrowings from the FRB Discount Window are secured by certain securities from the Company’s investment
portfolio not otherwise pledged. As of March 31, 2022 and December 31, 2021, there were no advances outstanding under this line.
The
Company also has pre-established, non-collateralized overnight borrowing arrangements with large national and regional correspondent
banks to provide additional overnight and short-term borrowing capacity for the Company. The Company has a $15.0 million line
of credit with a correspondent bank and a $50.0 million line of credit with another correspondent bank, both at an interest rate
determined and reset on a daily basis. As of March 31, 2022 and December 31, 2021, there were no advances outstanding under these
lines.
Long-term
debt consists of FHLB advances with an original maturity of one year or more. At March 31, 2022, we had $1.7 million in long-term
debt with the FHLB, compared to $2.7 million in long-term debt with the FHLB at December 31, 2021.
9.
SUBORDINATED DEBT
On
April 20, 2021, the Company completed an offering of $20 million in aggregate principal amount of its 4.875% fixed-to-floating
rate subordinated notes (the “Notes”) to certain qualified institutional buyers in a private placement transaction.
Unless
earlier redeemed, the Notes mature on May 1, 2031. The Notes will bear interest from the initial issue date to, but excluding,
May 1, 2026, or the earlier redemption date, at a fixed rate of 4.875% per annum, payable quarterly in arrears on May 1, August
1, November 1 and February 1 of each year, beginning August 1, 2021, and from and including May 1, 2026, but excluding the maturity
date or earlier redemption date, equal to the benchmark rate, which is the 90-day average secured overnight financing rate, plus
412 basis points, determined on the determination date of the applicable interest period, payable quarterly in arrears on May
1, August 1, November 1 and February 1 of each year. The Company may also redeem the Notes, in whole or in part, on or after May
1, 2026, and at any time upon the occurrence of certain events, subject in each case to the approval of the Board of Governors
of the Federal Reserve System (the “Federal Reserve”). The Notes were designed to qualify as Tier 2 capital under
the Federal Reserve’s capital adequacy regulations.
The
Notes are presented net of issuance costs of $357,000 as of March 31, 2022, which is being amortized into interest expense over
the life of the Notes. Amortization of issuance costs into interest expense was $10,000 for the three months ended March 31, 2022.
10.
PENSION BENEFITS
We
provide a defined benefit pension plan for eligible employees (the “Plan”). Employees must work a minimum of 1,000
hours per year to be eligible for the Plan. Eligible employees become vested in the Plan after five years of service. We plan
to contribute to the Plan the amount required to meet the minimum funding standards under Section 412 of the Internal Revenue
Code of 1986, as amended. Additional contributions will be made as deemed appropriate by management in conjunction with the Plan’s
actuaries. We have not yet determined how much we expect to contribute to the Plan in 2022. No contributions have been made to
the Plan for the three months ended March 31, 2022. The Plan’s assets are invested in various pooled separate investment
accounts offered by Principal Life Insurance Company, a division of Principal Financial Group, who is the custodian of the Plan.
The Plan is administered by an officer of Westfield Bank. On September 30, 2016, we effected a soft freeze on the Plan and therefore
no new participants will be included in the Plan after such effective date.
The
following table provides information regarding net pension benefit costs for the periods shown:
| |
|
|
|
|
|
| |
| |
Three
Months Ended March
31, | |
| |
2022 | | |
2021 | |
| |
(In thousands) | |
Service cost | |
$ | 334 | | |
$ | 454 | |
Interest cost | |
| 313 | | |
| 295 | |
Expected return on assets | |
| (427 | ) | |
| (439 | ) |
Amortization of actuarial loss | |
| 158 | | |
| 234 | |
Net periodic pension cost | |
$ | 378 | | |
$ | 544 | |
11.
DERIVATIVES AND HEDGING ACTIVITIES
Risk
Management Objective of Using Derivatives.
The
Company is exposed to certain risks arising from both our business operations and economic conditions. We principally manage our
exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic
risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets
and liabilities and the use of derivative financial instruments. Specifically, we entered into derivative financial instruments
to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash
amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences
in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally
related to certain variable rate loan assets and variable rate borrowings.
The
following table presents information about interest rate swaps at March 31, 2022 and December 31, 2021:
March 31, 2022 | |
Notional | | |
Weighted Average | | |
Weighted Average Rate | | |
Fair | |
| |
Amount | | |
Maturity | | |
Receive | | |
Pay | | |
Value | |
| |
(In thousands) | | |
(In years) | | |
| | |
| | |
(In thousands) | |
Non-hedging derivatives: | |
| | | |
| | | |
| | | |
| | | |
| | |
Loan-level swaps – dealer counterparties | |
$ | 15,951 | | |
| 10.9 | | |
| 2.13 | % | |
| 3.76 | % | |
$ | 449 | |
Loan-level swaps – borrower counterparties | |
| 15,951 | | |
| 10.9 | | |
| 3.76 | % | |
| 2.13 | % | |
| (449 | ) |
Forward starting loan-level swaps - dealer counterparties | |
| 22,390 | | |
| 10.3 | | |
| | | |
| | | |
| 2,363 | |
Forward starting loan-level swaps - borrower counterparties | |
| 22,390 | | |
| 10.3 | | |
| | | |
| | | |
| (2,363 | ) |
Total | |
$ | 76,682 | | |
| | | |
| | | |
| | | |
$ | 0 | |
December 31, 2021 | |
Notional | | |
Weighted Average | | |
Weighted Average Rate | | |
Fair | |
| |
Amount | | |
Maturity | | |
Receive | | |
Pay | | |
Value | |
| |
(In thousands) | | |
(In years) | | |
| | |
| | |
(In thousands) | |
Non-hedging derivatives: | |
| | | |
| | | |
| | | |
| | | |
| | |
Loan-level swaps – dealer counterparties | |
$ | 16,023 | | |
| 11.1 | | |
| 1.99 | % | |
| 3.76 | % | |
$ | (662 | ) |
Loan-level swaps – borrower counterparties | |
| 16,023 | | |
| 11.1 | | |
| 3.76 | % | |
| 1.99 | % | |
| 662 | |
Forward starting loan-level swaps - dealer counterparties | |
| 22,390 | | |
| 10.5 | | |
| | | |
| | | |
| 1,030 | |
Forward starting loan-level swaps - borrower counterparties | |
| 22,390 | | |
| 10.5 | | |
| | | |
| | | |
| (1,030 | ) |
Total | |
$ | 76,826 | | |
| | | |
| | | |
| | | |
$ | 0 | |
Cash
Flow Hedges of Interest Rate Risk.
The
Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage
its exposure to interest rate movements. To accomplish these objectives, we entered into interest rate swaps as part of our interest
rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable
rate amounts from a counterparty in exchange for our making fixed payments.
For
derivatives designated as cash flow hedges, the changes in the fair value of the derivative is initially reported in other comprehensive
income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings.
We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of six years
(excluding forecasted payment of variable interest on existing financial instruments).
Non-hedging
Derivatives.
Derivatives
not designated as hedges are not speculative, but rather result from a service the Company provides to certain customers. The
Company executes loan level derivative products such as interest-rate swap agreements with commercial banking customers to aid
them in managing their interest-rate risk by converting floating-rate loan payments to fixed-rate loan payments. The Company concurrently
enters into offsetting swaps with a third party financial institution, effectively minimizing its net risk exposure resulting
from such transactions. The third-party financial institution exchanges the customer's fixed-rate loan payments for floating-rate
loan payments. As the interest-rate swap agreements associated with this program do not meet hedge accounting requirements, changes
in the fair value are recognized directly in earnings.
Fair
Values of Derivative Instruments on the Balance Sheet.
The
table below presents the fair value of our derivative financial instruments not designated as hedging instruments as well as our
classification on the balance sheet as of March 31, 2022 and December 31, 2021.
March 31, 2022 | |
Asset Derivatives | |
Liability Derivatives |
| |
Balance Sheet Location | |
Fair Value | |
Balance Sheet Location | |
Fair Value | |
| |
(In thousands) |
Derivatives not designated as hedging instruments: | |
| |
| |
| |
| |
Interest rate swap – with borrower counterparties | |
| |
$ | 0 | |
| |
$ | 2,812 | |
Interest rate swap – with dealer counterparties | |
| |
| 2,812 | |
| |
| 0 | |
Total derivatives not designated as hedging instruments | |
Other Assets | |
$ | 2,812 | |
Other Liabilities | |
$ | 2,812 | |
December 31, 2021 | |
Asset Derivatives | |
Liability Derivatives |
| |
Balance Sheet Location | |
Fair Value | |
Balance Sheet Location | |
Fair Value | |
| |
(In thousands) |
Derivatives not designated as hedging instruments: | |
| |
| |
| |
| |
Interest rate swap – with borrower counterparties | |
| |
$ | 662 | |
| |
$ | 1,030 | |
Interest rate swap – with dealer counterparties | |
| |
| 1,030 | |
| |
| 662 | |
Total derivatives not designated as hedging instruments | |
Other Assets | |
$ | 1,692 | |
Other Liabilities | |
$ | 1,692 | |
Effect
of Derivative Instruments in the Consolidated Statements of Net Income and Changes in Shareholders’ Equity.
There
were gains or losses recognized in accumulated other comprehensive income during the three months ended March 31, 2021 or 2020.
Amounts
reported in accumulated other comprehensive loss related to cash flow hedge derivatives are reclassified to interest expense as
interest payments are made on our designated rate sensitive liabilities. The table below presents the amount reclassified from
accumulated other comprehensive loss into net income for interest rate swaps and termination fees:
| |
Amount of Loss Reclassified from OCI into Expense (Effective Portion) | |
| |
Three Months Ended March 31, | |
| |
| | |
| |
| |
2022 | | |
2021 | |
| |
| | | |
| | |
Interest rate swaps | |
$ | 0 | | |
$ | 140 | |
As
of December 31, 2021, the Company no longer has any outstanding cash flow hedges.
Credit-risk-related
Contingent Features
By
using derivative financial instruments, we expose ourselves to credit risk. Credit risk is the risk of failure by the counterparty
to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty
owes us, which creates credit risk for us. When the fair value of a derivative is negative, we owe the counterparty and, therefore,
it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated
counterparties that we believe to be creditworthy and by limiting the amount of exposure to each counterparty.
We
have agreements with our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default
where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default
on our derivative obligations. We also have agreements with certain of our derivative counterparties that contain a provision
where if we fail to maintain our status as well capitalized, then the counterparty could terminate the derivative positions and
we would be required to settle our obligations under the agreements. Certain of our agreements with our derivative counterparties
contain provisions where if a formal administrative action by a federal or state regulatory agency occurs that materially changes
our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.
At
March 31, 2022, we had minimum collateral posting thresholds with certain of our derivative counterparties. As of March 31, 2022,
we were not required to post collateral under these agreements because we did not have any derivatives in a liability position
with those counterparties.
12.
FAIR VALUE OF ASSETS AND LIABILITIES
Determination
of Fair Value.
We
use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted
market prices. However, in many instances, there are no quoted market prices for our various financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Fair
Value Hierarchy.
We
group our assets and liabilities that are measured at fair value in three levels, based on the markets in which the assets are
traded and the reliability of the assumptions used to determine fair value.
Level
1: Valuation is based on quoted prices in active markets for identical assets. Level 1 assets generally include debt and equity
securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market
transactions involving identical assets.
Level
2: Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level
3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets. Level 3 assets include financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant
management judgment or estimation.
Methods
and assumptions for valuing our financial instruments measured at fair value on a recurring basis are set forth below. Estimated
fair values are calculated based on the value without regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications or estimated transaction cost.
Securities
Available-for-Sale.
The
securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities
include marketable equity securities and U.S. Treasury securities. All other securities are measured at fair value in Level 2
and are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest
rate volatilities, broker/dealer quotes, credit spreads and new issue data. These securities include government-sponsored enterprise
obligations, state and municipal obligations, residential mortgage-backed securities guaranteed and sponsored by the U.S. government
or an agency thereof. Fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
Interest
Rate Swaps.
The
valuation of our interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash
flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual
terms of the derivatives, including the period to maturity and interest rate curves. We have determined that the majority of the
inputs used to value our interest rate derivatives fall within Level 2 of the fair value hierarchy.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis.
Assets
and liabilities measured at fair value on a recurring basis are summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
March 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets: | |
(In thousands) | |
Securities available-for-sale | |
$ | — | | |
$ | 173,910 | | |
$ | — | | |
$ | 173,910 | |
Marketable equity securities | |
| 11,643 | | |
| — | | |
| — | | |
| 11,643 | |
Interest rate swaps | |
| — | | |
| 2,812 | | |
| — | | |
| 2,812 | |
Total assets | |
$ | 11,643 | | |
$ | 176,722 | | |
$ | — | | |
$ | 188,365 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Interest rate swaps | |
$ | — | | |
$ | 2,812 | | |
$ | — | | |
$ | 2,812 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December 31, 2021 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets: | |
(In thousands) | |
Securities available-for-sale | |
$ | — | | |
$ | 194,352 | | |
$ | — | | |
$ | 194,352 | |
Marketable equity securities | |
| 11,896 | | |
| — | | |
| — | | |
| 11,896 | |
Interest rate swaps | |
| — | | |
| 1,692 | | |
| — | | |
| 1,692 | |
Total assets | |
$ | 11,896 | | |
$ | 196,044 | | |
$ | — | | |
$ | 207,940 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Interest rate swaps | |
$ | — | | |
$ | 1,692 | | |
$ | — | | |
$ | 1,692 | |
| |
| | | |
| | | |
| | | |
| | |
Assets
Measured at Fair Value on a Non-recurring Basis.
We
may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance
with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs
of individual assets. There were no assets measured at fair value on a non-recurring basis at March 31, 2022 or 2021.
Summary
of Fair Values of Financial Instruments.
The
estimated fair values of our financial instruments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
March 31, 2022 | |
| |
Carrying
Value | | |
Fair Value | |
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
(In thousands) | |
Assets: | |
| | |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
$ | 62,898 | | |
$ | 62,898 | | |
$ | — | | |
$ | — | | |
$ | 62,898 | |
Securities held-to-maturity | |
| 237,575 | | |
| 9,520 | | |
| 210,759 | | |
| — | | |
| 220,279 | |
Securities available-for-sale | |
| 173,910 | | |
| — | | |
| 173,910 | | |
| — | | |
| 173,910 | |
Marketable equity securities | |
| 11,643 | | |
| 11,643 | | |
| — | | |
| — | | |
| 11,643 | |
Federal Home Loan Bank of Boston and other restricted stock | |
| 2,594 | | |
| — | | |
| — | | |
| 2,594 | | |
| 2,594 | |
Loans - net | |
| 1,906,977 | | |
| — | | |
| — | | |
| 1,882,419 | | |
| 1,882,419 | |
Accrued interest receivable | |
| 7,723 | | |
| — | | |
| — | | |
| 7,723 | | |
| 7,723 | |
Mortgage servicing rights | |
| 659 | | |
| — | | |
| 813 | | |
| — | | |
| 813 | |
Derivative asset | |
| 2,812 | | |
| — | | |
| 2,812 | | |
| — | | |
| 2,812 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
| 2,278,164 | | |
| — | | |
| — | | |
| 2,275,572 | | |
| 2,275,572 | |
Long-term debt | |
| 21,329 | | |
| — | | |
| 21,835 | | |
| — | | |
| 21,835 | |
Accrued interest payable | |
| 168 | | |
| — | | |
| — | | |
| 168 | | |
| 168 | |
Derivative liabilities | |
| 2,812 | | |
| — | | |
| 2,812 | | |
| — | | |
| 2,812 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December 31, 2021 | |
| |
Carrying Value | | |
Fair Value | |
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
(In thousands) | |
Assets: | |
| | |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
$ | 103,456 | | |
$ | 103,456 | | |
$ | — | | |
$ | — | | |
$ | 103,456 | |
Securities held-to-maturity | |
| 222,272 | | |
| 9,973 | | |
| 209,775 | | |
| — | | |
| 219,748 | |
Securities available-for-sale | |
| 194,352 | | |
| — | | |
| 194,352 | | |
| — | | |
| 194,352 | |
Marketable equity securities | |
| 11,896 | | |
| 11,896 | | |
| — | | |
| — | | |
| 11,896 | |
Federal Home Loan Bank of Boston and other restricted stock | |
| 2,594 | | |
| — | | |
| — | | |
| 2,594 | | |
| 2,594 | |
Loans - net | |
| 1,844,929 | | |
| — | | |
| — | | |
| 1,838,045 | | |
| 1,838,045 | |
Accrued interest receivable | |
| 7,775 | | |
| — | | |
| — | | |
| 7,775 | | |
| 7,775 | |
Mortgage servicing rights | |
| 693 | | |
| — | | |
| 739 | | |
| — | | |
| 739 | |
Derivative asset | |
| 1,692 | | |
| — | | |
| 1,692 | | |
| — | | |
| 1,692 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
| 2,256,898 | | |
| — | | |
| — | | |
| 2,256,834 | | |
| 2,256,834 | |
Long-term debt | |
| 22,286 | | |
| — | | |
| 23,099 | | |
| — | | |
| 23,099 | |
Accrued interest payable | |
| 191 | | |
| — | | |
| — | | |
| 191 | | |
| 191 | |
Derivative liabilities | |
| 1,692 | | |
| — | | |
| 1,692 | | |
| — | | |
| 1,692 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
13. RECENT
ACCOUNTING PRONOUNCEMENTS
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit
losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts. The ASU also requires enhanced disclosures to help financial statement users better understand significant
estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s
portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts
recorded in the financial statements. This ASU, as amended, is effective for the Company in fiscal years beginning after December
15, 2022. The Company is in the process of implementing the standard. We have put together a project team that has begun
to identify appropriate loan segments along with related historical losses for each segment and potential models that would be
most appropriate for each individual segment. We have not quantified the effects of any models, but do expect the standard
to significantly change the approach to calculating our allowance for loan losses.