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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Western New England Bancorp, Inc.ex32-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Western New England Bancorp, Inc.ex32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Western New England Bancorp, Inc.ex31-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Western New England Bancorp, Inc.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission File Number: 001-16767 

 

Western New England Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Massachusetts

 

73-1627673

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification Number)

 

141 Elm Street, Westfield, Massachusetts

 

01086

(Address of principal executive offices)

 

(Zip Code)

 

(413) 568-1911

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

WNEB

NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                            Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                            Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No  

 

At May 5, 2020 the registrant had 25,644,334 shares of common stock, $0.01 par value, issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

Page

 

 

FORWARD-LOOKING STATEMENTS

i

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements of Western New England Bancorp, Inc. and Subsidiaries (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets – March 31, 2020 and December 31, 2019

1

 

 

 

 

Consolidated Statements of Net Income – Three Months Ended March 31, 2020 and 2019

2

 

 

 

 

Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2020 and 2019

3

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended March 31, 2020 and 2019

4

 

 

 

 

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2020 and 2019

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

Item 3.

Defaults upon Senior Securities

44

 

 

 

Item 4.

Mine Safety Disclosures

44

 

 

 

Item 5.

Other Information

44

 

 

 

Item 6.

Exhibits

44

 

 

 

FORWARD–LOOKING STATEMENTS

 

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Quarterly Report on Form 10-Q contains “forward-looking statements” with respect to the Company’s financial condition, liquidity, results of operations, future performance, business, measures being taken in response to the coronavirus disease 2019 (“COVID-19”) pandemic and the impact of COVID-19 on the Company’s business. Forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

the duration and scope of the COVID-19 pandemic and the local, national and global impact of COVID-19;

 

actions governments, businesses and individuals take in response to the COVID-19 pandemic;

 

the pace of recovery when the COVID-19 pandemic subsides;

 

changes in the interest rate environment that reduce margins;

 

the effect on our operations of governmental legislation and regulation, including changes in accounting regulation or standards, the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), Basel guidelines, capital requirements and other applicable laws and regulations;

 

the highly competitive industry and market area in which we operate;

 

general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;

 

changes in business conditions and inflation;

 

changes in credit market conditions;

 

the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions;

 

changes in the securities markets which affect investment management revenues;

 

increases in Federal Deposit Insurance Corporation deposit insurance premiums and assessments;

 

changes in technology used in the banking business;

 

the soundness of other financial services institutions which may adversely affect our credit risk;

 

certain of our intangible assets may become impaired in the future;

 

our controls and procedures may fail or be circumvented;

 

new lines of business or new products and services, which may subject us to additional risks;

 

changes in key management personnel which may adversely impact our operations;

 

severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and

 

other factors detailed from time to time in our SEC filings.

 

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except to the extent required by law.

 

i

 

PART I – FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS.

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands, except share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

16,298

 

 

$

16,640

 

Federal Funds Sold

 

 

1,453

 

 

 

1,635

 

Interest-bearing deposits and other short-term investments

 

 

8,924

 

 

 

6,466

 

Cash and cash equivalents

 

 

26,675

 

 

 

24,741

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale, at fair value

 

 

215,118

 

 

 

227,708

 

Marketable equity securities, at fair value

 

 

6,875

 

 

 

6,737

 

Federal Home Loan Bank stock and other restricted stock , at cost

 

 

11,994

 

 

 

14,477

 

Loans, net of allowance for loan losses of $15,837 and $14,102 at March 31, 2020 and December 31, 2019, respectively

 

 

1,788,338

 

 

 

1,761,932

 

Premises and equipment, net

 

 

24,147

 

 

 

23,763

 

Accrued interest receivable

 

 

5,220

 

 

 

5,313

 

Bank-owned life insurance

 

 

71,492

 

 

 

71,051

 

Deferred tax asset, net

 

 

8,329

 

 

 

9,161

 

Goodwill

 

 

12,487

 

 

 

12,487

 

Core deposit intangible

 

 

3,219

 

 

 

3,312

 

Other assets

 

 

16,434

 

 

 

20,794

 

Total Assets

 

$

2,190,328

 

 

$

2,181,476

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest-bearing

 

$

394,669

 

 

$

393,303

 

Interest-bearing

 

 

1,311,315

 

 

 

1,284,561

 

Total deposits

 

 

1,705,984

 

 

 

1,677,864

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

45,000

 

 

 

35,000

 

Long-term debt

 

 

177,358

 

 

 

205,515

 

Other liabilities

 

 

34,177

 

 

 

31,073

 

Total Liabilities

 

 

1,962,519

 

 

 

1,949,452

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock - $0.01 par value, 5,000,000 shares authorized, none outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock - $0.01 par value, 75,000,000 shares authorized, 25,644,334 shares issued and outstanding at March 31, 2020; 26,557,981 shares issued and outstanding at December 31, 2019

 

 

256

 

 

 

266

 

Additional paid-in capital

 

 

157,133

 

 

 

164,248

 

Unearned compensation - ESOP

 

 

(4,430

)

 

 

(4,574

)

Unearned compensation - Equity Incentive Plan

 

 

(1,850

)

 

 

(1,124

)

Retained earnings

 

 

82,968

 

 

 

82,176

 

Accumulated other comprehensive loss

 

 

(6,268

)

 

 

(8,968

)

TOTAL SHAREHOLDERS’ EQUITY

 

 

227,809

 

 

 

232,024

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

2,190,328

 

 

$

2,181,476

 

 

See accompanying notes to unaudited consolidated financial statements.

1

 

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME – UNAUDITED

(Dollars in thousands, except per share data)

 

 

 

Three Months

 

 

 

Ended March 31,

 

 

 

2020

 

 

2019

 

Interest and dividend income:

 

 

 

 

 

 

 

 

Residential and commercial real estate loans

 

$

15,654

 

 

$

14,971

 

Commercial and industrial loans

 

 

3,006

 

 

 

3,002

 

Consumer loans

 

 

87

 

 

 

85

 

Debt securities, taxable

 

 

1,346

 

 

 

1,629

 

Debt securities, tax-exempt

 

 

17

 

 

 

20

 

Equity securities

 

 

36

 

 

 

41

 

Other investments

 

 

182

 

 

 

236

 

Short-term investments

 

 

62

 

 

 

76

 

Total interest and dividend income

 

 

20,390

 

 

 

20,060

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

Deposits

 

 

4,236

 

 

 

3,969

 

Long-term debt

 

 

1,014

 

 

 

1,139

 

Short-term borrowings

 

 

587

 

 

 

626

 

Total interest expense

 

 

5,837

 

 

 

5,734

 

Net interest and dividend income

 

 

14,553

 

 

 

14,326

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

2,100

 

 

 

50

 

Net interest and dividend income after provision for loan losses

 

 

12,453

 

 

 

14,276

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

Service charges and fees

 

 

1,774

 

 

 

1,633

 

Income from BOLI

 

 

441

 

 

 

425

 

Gain on available-for-sale securities, net

 

 

23

 

 

 

35

 

Net unrealized gains on marketable equity securities

 

 

102

 

 

 

70

 

Other income

 

 

185

 

 

 

8

 

Total non-interest income

 

 

2,525

 

 

 

2,171

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

Salaries and employees benefits

 

 

7,172

 

 

 

6,780

 

Occupancy

 

 

1,167

 

 

 

1,171

 

Furniture and equipment

 

 

391

 

 

 

405

 

Data processing

 

 

715

 

 

 

665

 

Professional fees

 

 

599

 

 

 

705

 

FDIC insurance assessment

 

 

151

 

 

 

176

 

Advertising

 

 

252

 

 

 

364

 

Other expenses

 

 

1,867

 

 

 

1,757

 

Total non-interest expense

 

 

12,314

 

 

 

12,023

 

Income before income taxes

 

 

2,664

 

 

 

4,424

 

Income tax provision

 

 

584

 

 

 

994

 

Net income

 

$

2,080

 

 

$

3,430

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.08

 

 

$

0.13

 

Weighted average shares outstanding

 

 

25,565,138

 

 

 

27,037,520

 

Diluted earnings per share

 

$

0.08

 

 

$

0.13

 

Weighted average diluted shares outstanding

 

 

25,617,920

 

 

 

27,153,160

 

 

See accompanying notes to unaudited consolidated financial statements.

 

2

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

(Dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Net income

 

$

2,080

 

 

$

3,430

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

Unrealized gains on available-for-sale securities:

 

 

 

 

 

 

Unrealized holding gains

 

 

4,150

 

 

 

4,334

 

Reclassification adjustment for net gains realized in income (1)

 

 

(23

)

 

 

(35

)

Unrealized gains

 

 

4,127

 

 

 

4,299

 

Tax effect

 

 

(999

)

 

 

(1,113

)

Net-of-tax amount

 

 

3,128

 

 

 

3,186

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

 

(1,123

)

 

 

(328

)

Reclassification adjustment for loss realized in interest expense (2)

 

 

163

 

 

 

68

 

Reclassification adjustment for termination fee realized in interest expense (3)

 

 

266

 

 

 

264

 

Unrealized (losses) gains on cash flow hedges

 

 

(694

)

 

 

4

 

Tax effect

 

 

195

 

 

 

(1

)

Net-of-tax amount

 

 

(499

)

 

 

3

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

Amortization of defined benefit plans actuarial loss(4)

 

 

99

 

 

 

32

 

Tax effect

 

 

(28

)

 

 

(9

)

Net-of-tax amount

 

 

71

 

 

 

23

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

2,700

 

 

 

3,212

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

4,780

 

 

$

6,642

 

 

 

(1)Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income. The tax effects applicable to net realized gains and losses were $5,000 and $10,000 for the three months ended March 31, 2020 and 2019, respectively.
(2)Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $46,000 and $19,000 for the three months ended March 31, 2020 and 2019, respectively.
(3)Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on short-term debt. Income tax effects associated with the reclassification adjustments were $75,000 and $74,000 for the three months ended March 31, 2020 and 2019.
(4)Amounts represent the reclassification of defined benefit plans amortization and have been recognized as a component of non-interest expense. Income tax effects associated with the reclassification adjustments were $28,000 and $9,000 for the three months ended March 31, 2020 and 2019, respectively.

 

See accompanying notes to unaudited consolidated financial statements.

3

 

 


WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Dollars in thousands, except share data)

 

   Common Stock        Unearned     Accumulated   
   Shares  Par Value  Additional Paid-in Capital  Unearned Compensation
- ESOP
  Compensation- Equity Incentive Plan  Retained Earnings  Other Comprehensive Loss  Total
BALANCE AT DECEMBER 31, 2018   28,393,348   $284   $182,096   $(5,171)  $(872)  $74,108   $(13,416)  $237,029 
Comprehensive income   —      —      —      —      —      3,430    3,212    6,642 
Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)                            (7)   7    —   
Common stock held by ESOP committed to be released (88,117 shares)   —      —      60    149    —      —      —      209 
Share-based compensation - equity incentive plan   —      —      —      —      195    —      —      195 
Forfeited equity incentive plan shares reissued (5,835 shares)   —      —      (45)   —      45    —      —      —   
Common stock repurchased   (1,555,352)   (15)   (15,432)   —      —      —      —      (15,447)
Issuance of common stock in connection with stock option exercises   12,550    —      64    —      —      —      —      64 
Issuance of common stock in connection with equity incentive plan   102,883    1    1,069    —      (1,070)   —      —      —   
Cash dividends declared and paid on common stock ($0.05 per share)   —      —      —      —      —      (1,375)   —      (1,375)
BALANCE AT MARCH 31, 2019   26,953,429   $270   $167,812   $(5,022)  $(1,702)  $76,156   $(10,197)  $227,317 
                                         
BALANCE AT DECEMBER 31, 2019   26,557,981   $266   $164,248   $(4,574)  $(1,124)  $82,176   $(8,968)  $232,024 
Comprehensive income   —      —      —      —      —      2,080    2,700    4,780 
Common stock held by ESOP committed to be released (85,101 shares)   —      —      47    144    —      —      —      191 
Share-based compensation - equity incentive plan   —      —      —      —      182    —      —      182 
Forfeited equity incentive plan shares reissued (18,645 shares)   —      —      (186)   —      186    —      —      —   
Common stock repurchased   (1,015,055)   (11)   (8,069)   —      —      —      —      (8,080)
Issuance of common stock in connection with equity incentive plan   101,408    1    1,093    —      (1,094)   —      —      —   
Cash dividends declared and paid on common stock ($0.05 per share)   —      —      —      —      —      (1,288)   —      (1,288)
BALANCE AT MARCH 31, 2020   25,644,334   $256   $157,133   $(4,430)  $(1,850)  $82,968   $(6,268)  $227,809 

 

 

See accompanying notes to unaudited consolidated financial statements.

4

 

 


WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

2,080

 

 

$

3,430

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

2,100

 

 

 

50

 

Depreciation and amortization of premises and equipment

 

 

494

 

 

 

529

 

Accretion of purchase accounting adjustments, net

 

 

(72

)

 

 

(10

)

Amortization of core deposit intangible

 

 

93

 

 

 

94

 

Net amortization of premiums and discounts on securities and mortgage loans

 

 

589

 

 

 

540

 

Share-based compensation expense

 

 

182

 

 

 

195

 

ESOP expense

 

 

191

 

 

 

209

 

Net gain on available-for-sale securities

 

 

(23

)

 

 

(35

)

Net change in unrealized gain on marketable equity securities

 

 

(102

)

 

 

(70

)

Income from bank-owned life insurance

 

 

(441

)

 

 

(425

)

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

93

 

 

 

12

 

Other assets

 

 

4,114

 

 

 

(7,249

)

Other liabilities

 

 

2,755

 

 

 

9,231

 

Net cash provided by operating activities

 

 

12,053

 

 

 

6,501

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Securities, available-for-sale:

 

 

 

 

 

 

 

 

Purchases

 

 

(22,345

)

 

 

(15,294

)

Proceeds from sales and redemption

 

 

8,243

 

 

 

21,642

 

Proceeds from calls, maturities, and principal collections

 

 

30,263

 

 

 

6,296

 

Loan originations and principal payments, net

 

 

(28,497

)

 

 

15,912

 

Redemption of Federal Home Loan Bank of Boston stock

 

 

2,483

 

 

 

2,288

 

Purchases of premises and equipment

 

 

(888

)

 

 

(374

)

Proceeds from sale of premises and equipment

 

 

 

 

 

27

 

Net cash (used in) provided by investing activities

 

 

(10,741

)

 

 

30,497

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

28,132

 

 

 

33,875

 

Net change in short-term borrowings

 

 

10,000

 

 

 

(24,250

)

Repayment of long-term debt

 

 

(28,142

)

 

 

(11,951

)

Cash dividends paid

 

 

(1,288

)

 

 

(1,375

)

Common stock repurchased

 

 

(8,080

)

 

 

(15,668

)

Issuance of common stock in connection with stock option exercises

 

 

 

 

 

64

 

Net cash provided by (used in) financing activities

 

 

622

 

 

 

(19,305

)

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS:

 

 

1,934

 

 

 

17,693

 

Beginning of period

 

 

24,741

 

 

 

26,789

 

End of period

 

$

26,675

 

 

$

44,482

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

5,790

 

 

$

5,655

 

Taxes paid

 

 

575

 

 

 

832

 

Net change in cash due to broker for common stock repurchased

 

 

 

 

 

(221

)

 

See the accompanying notes to unaudited consolidated financial statements.

 

5

 

WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MARCH 31, 2020

 

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’s deposits are insured up to the maximum Federal Deposit Insurance Corporation (“FDIC”) coverage limits. The Bank operates 23 banking offices in western Massachusetts and northern Connecticut, and its primary sources of revenue are interest income from loans as well as interest income from investment securities. Our newest branch in Huntington, Massachusetts opened on February 25, 2020. In addition, we have announced plans to open two full-service branches in Bloomfield, Connecticut and West Hartford, Connecticut, which are currently undergoing construction and are anticipated to open in 2020. The West Hartford branch will be a Financial Solution Center and is expected to serve as our Connecticut hub, housing Commercial Lending, Cash Management and a Mortgage Loan Officer (“MLO”).

 

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. Estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the realizability of deferred tax assets.

 

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, 2020, 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, 2020 are not necessarily indicative of the results of operations for the year ending December 31, 2020. 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, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”).

 

Reclassifications. Amounts in the prior period financial statements are reclassified when necessary to conform to the current year presentation.

 

6

 

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 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, 2020 and 2019.

 

Earnings per common share have been computed based on the following:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands, except per share data)

 

Net income applicable to common stock

 

$

2,080

 

 

$

3,430

 

 

 

 

 

 

 

 

 

 

Average number of common shares issued

 

 

26,293

 

 

 

27,834

 

Less: Average unallocated ESOP Shares

 

 

(612

)

 

 

(700

)

Less: Average unvested equity incentive plan shares

 

 

(116

)

 

 

(96

)

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding used to calculate basic earnings per common share

 

 

25,565

 

 

 

27,038

 

Effect of dilutive equity incentive plan

 

 

 

 

 

79

 

Effect of dilutive stock options

 

 

53

 

 

 

36

 

Average number of common shares outstanding used to calculate diluted earnings per common share

 

 

25,618

 

 

 

27,153

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.08

 

 

$

0.13

 

Diluted earnings per share

 

$

0.08

 

 

$

0.13

 

 

 

 

 

 

 

 

 

 

 

7

 

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,
2020

 

 

December 31,
2019

 

 

 

(In thousands)

 

Net unrealized gains (losses) on securities available-for-sale

 

$

3,734

 

 

$

(393

)

Tax effect

 

 

(928

)

 

 

71

 

Net-of-tax amount

 

 

2,806

 

 

 

(322

)

 

 

 

 

 

 

 

 

 

Fair value of derivatives used for cash flow hedges

 

 

(2,733

)

 

 

(1,773

)

Termination fee on cancelled cash flow hedges

 

 

(1,260

)

 

 

(1,526

)

Total derivatives

 

 

(3,993

)

 

 

(3,299

)

Tax effect

 

 

1,123

 

 

 

928

 

Net-of-tax amount

 

 

(2,870

)

 

 

(2,371

)

 

 

 

 

 

 

 

 

 

Unrecognized actuarial loss on the defined benefit plan

 

 

(8,629

)

 

 

(8,728

)

Tax effect

 

 

2,425

 

 

 

2,453

 

Net-of-tax amount

 

 

(6,204

)

 

 

(6,275

)

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

$

(6,268

)

 

$

(8,968

)

 

The following table presents changes in accumulated other comprehensive loss for the periods ended March 31, 2020 and 2019 by component:

 

 

 

Securities

 

 

Derivatives

 

 

Defined Benefit Pension Plan

 

 

Accumulated Other Comprehensive Loss

 

 

 

(In thousands)

 

Balance at December 31, 2018

 

$

(7,400

)

 

$

(2,770

)

 

$

(3,246

)

 

$

(13,416

)

Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Current-period other comprehensive income

 

 

3,186

 

 

 

3

 

 

 

23

 

 

 

3,212

 

Balance at March 31, 2019

 

$

(4,207

)

 

$

(2,767

)

 

$

(3,223

)

 

$

(10,197

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

$

(322

)

 

$

(2,371

)

 

$

(6,275

)

 

$

(8,968

)

Current-period other comprehensive income

 

 

3,128

 

 

 

(499

)

 

 

71

 

 

 

2,700

 

Balance at March 31, 2020

 

$

(2,806

)

 

$

(2,870

)

 

$

(6,204

)

 

$

(6,268

)

 

8

 

4. SECURITIES

 

Available-for-sale investment securities are summarized as follows:

 

 

 

March 31, 2020

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

 

(In thousands)

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal bonds

 

$

2,716

 

 

$

94

 

 

$

 

 

$

2,810

 

Corporate bonds

 

 

7,789

 

 

 

33

 

 

 

(477

)

 

 

7,345

 

Total debt securities

 

 

10,505

 

 

 

127

 

 

 

(477

)

 

 

10,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored mortgage-backed securities

 

 

190,560

 

 

 

4,192

 

 

 

(148

)

 

 

194,604

 

U.S. government guaranteed mortgage-backed securities

 

 

10,319

 

 

 

132

 

 

 

(92

)

 

 

10,359

 

Total mortgage-backed securities

 

 

200,879

 

 

 

4,324

 

 

 

(240

)

 

 

204,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale

 

$

211,384

 

 

$

4,451

 

 

$

(717

)

 

$

215,118

 

 

 

 

December 31, 2019

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

 

(In thousands)

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprise obligations

 

$

20,150

 

 

$

 

 

$

(136

)

 

$

20,014

 

State and municipal bonds

 

 

2,718

 

 

 

95

 

 

 

 

 

 

2,813

 

Corporate bonds

 

 

7,800

 

 

 

88

 

 

 

(22

)

 

 

7,866

 

Total debt securities

 

 

30,668

 

 

 

183

 

 

 

(158

)

 

 

30,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored mortgage-backed securities

 

 

186,236

 

 

 

780

 

 

 

(1,015

)

 

 

186,001

 

U.S. government guaranteed mortgage-backed securities

 

 

11,197

 

 

 

33

 

 

 

(216

)

 

 

11,014

 

Total mortgage-backed securities

 

 

197,433

 

 

 

813

 

 

 

(1,231

)

 

 

197,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale

 

$

228,101

 

 

$

996

 

 

$

(1,389

)

 

$

227,708

 

 

At March 31, 2020, mortgage-backed securities with a fair value of $56.4 million were pledged to secure public deposits and for other purposes as required or permitted by law.

 

On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends the guidance on the amortization period of premiums on certain purchased callable debt securities from maturity to the earliest call date. The cumulative-effect adjustment resulting from the adoption of this ASU was to decrease retained earnings and reduce accumulated other comprehensive loss as of January 1, 2019 by $7,000.

 

9

 

The amortized cost and fair value of available-for-sale debt securities at March 31, 2020, by final maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. Also, because mortgage-backed securities require periodic principal paydowns, they are not included in the maturity categories in the following maturity summary.

 

 

 

March 31, 2020

 

 

 

Amortized Cost

 

 

Fair Value

 

 

 

(In thousands)

 

Available-for-sale securities:

 

 

 

 

     

Debt securities::

 

 

 

 

 

 

 

 

Due after one year through five years

 

$

8,600

 

 

$

8,161

 

Due after five years through ten years

 

 

323

 

 

 

362

 

Due after ten years

 

 

1,582

 

 

 

1,632

 

Total debt securities

 

 

10,505

 

 

 

10,155

 

Mortgage-backed securities

 

 

200,879

 

 

 

204,963

 

Total available-for-sale securities

 

$

211,384

 

 

$

215,118

 

 

Gross realized gains and losses on available-for-sale securities for the three months ended March 31, 2020 and 2019 are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Gross gains realized

 

$

148

 

 

$

35

 

Gross losses realized

 

 

(125

)

 

 

 

Net gains realized

 

$

23

 

 

$

35

 

 

Proceeds from the sales and redemptions of available-for-sale securities amounted to $8.2 million for the three months ended March 31, 2020, while proceeds from the redemption of available-for-sale securities amounted to $21.6 million for the three months ended March 31, 2019.

 

10

 

Information pertaining to securities with gross unrealized losses at March 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

 

 

March 31, 2020

 

 

 

Less Than 12 Months

 

 

Over 12 Months

 

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

 

(In thousands)

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored mortgage-backed securities

 

$

11

 

 

$

1,906

 

 

$

137

 

 

$

9,245

 

U.S. government guaranteed mortgage-backed securities

 

 

 

 

 

 

 

 

92

 

 

 

3,514

 

Corporate bonds

 

 

477

 

 

 

4,208

 

 

 

 

 

 

 

Total available-for-sale

 

$

488

 

 

$

6,114

 

 

$

229

 

 

$

12,759

 

 

 

 

December 31, 2019

 

 

 

Less Than 12 Months

 

 

Over 12 Months

 

 

 

Gross
Unrealized
Losses

 

 

Fair Value

 

 

Gross
Unrealized
Losses

 

 

Fair Value

 

 

 

(In thousands)

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored mortgage-backed securities

 

$

122

 

 

$

42,834

 

 

$

893

 

 

$

70,581

 

U.S. government guaranteed mortgage-backed securities

 

 

13

 

 

 

2,783

 

 

 

203

 

 

 

4,688

 

Corporate bonds

 

 

16

 

 

 

1,623

 

 

 

6

 

 

 

3,046

 

Government-sponsored enterprise obligations

 

 

126

 

 

 

14,524

 

 

 

10

 

 

 

1,490

 

Total available-for-sale

 

$

277

 

 

$

61,764

 

 

$

1,112

 

 

$

79,805

 

 

During the three months ended March 31, 2020 and year ended December 31, 2019, the Company did not record any fair value impairment charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses. At March 31, 2020, management did not consider any debt securities to have other-than-temporary impairment (“OTTI”) and attributes the unrealized losses 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 mortgage-backed securities and 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.

 

11

 

 

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Major classifications of loans at the periods indicated were as follows:

 

   March 31,   December 31, 
   2020   2019 
   (In thousands) 
Commercial real estate  $835,750   $816,886 
Residential real estate:          
Residential 1-4 family   597,740    597,727 
Home equity   104,416    102,517 
Commercial and industrial   256,687    248,893 
Consumer   5,356    5,747 
Total gross loans   1,799,949    1,771,770 
Premiums and deferred loan fees and costs, net   4,226    4,264 
Allowance for loan losses   (15,837)   (14,102)
Net loans  $1,788,338   $1,761,932 

 

There were no residential real estate loan purchases during the three months ended March 31, 2020 and year ended December 31, 2019.

 

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, 2020 and December 31, 2019, the Company was servicing commercial loans participated out to various other institutions totaling $24.0 million and $24.2 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, 2020, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (243 PSA), weighted average internal rate of return (12.05%), weighted average servicing fee (0.25%), and net cost to service loans ($83.58 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.

 

At March 31, 2020 and December 31, 2019, the Company was servicing residential mortgage loans owned by investors totaling $47.0 million and $48.2 million, respectively. Net service fee income of $14,000 and $18,000 was recorded for the three months ended March 31, 2020 and 2019, respectively, and is included in service charges and fees on the consolidated statements of net income.

 

12 

 

 

A summary of the activity in the balances of mortgage servicing rights follows:

 

   Three Months Ended March 31, 
   2020   2019 
   (In thousands) 
Balance at the beginning of year:  $219   $286 
Capitalized mortgage servicing rights        
Amortization   (16)   (17)
Balance at the end of period  $203   $269 
Fair value at the end of period  $252   $416 

 

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. The recent COVID-19 pandemic has put significant pressure on the local business community and increased unemployment. On March 23, 2020, the Governor of Massachusetts issued an emergency order requiring all businesses and organizations that do not provide COVID-19 Essential Services to close their physical workplaces and facilities to workers, customers and the public from March 24, 2020 until April 7, 2020, which was subsequently extended to May 18, 2020. Because of the mandated shutdowns, near the end of March 2020, a record number of individuals filed for unemployment benefits. Sectors that have been materially impacted include, but are not limited to: hospitality, retail, restaurant and food service, and fuel services. As of March 31, 2020, the Bank added a new qualitative factor category to the allowance calculation – “Economic Impact of COVID-19”. The allocation of additional reserves for the COVID-19 qualitative factor at March 31, 2020 was based upon an analysis of the loan portfolio that included identifying borrowers sensitive to the shutdown (i.e. accommodation and food service, recreation, construction, manufacturing, and wholesale & retail trade) as well as a general allocation for the negative economic outlook given the record number of unemployment benefits claims during the period. Excluding the COVID-19 qualitative factor category, there were no additional changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the periods presented for disclosure.

 

13 

 

 

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. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Home equity loans are secured by first or second mortgages on one-to-four family owner occupied properties.

 

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. The extent to which COVID-19 impacts our borrower’s ability to repay and therefore the classification of a loan as impaired is highly uncertain and cannot be predicted with confidence as it is highly dependent upon the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures.

 

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.

 

14 

 

 

An analysis of changes in the allowance for loan losses by segment for the three months ended March 31, 2020 and 2019 is as follows:

 

   Commercial
Real Estate
   Residential
Real Estate
   Commercial
and Industrial
   Consumer   Unallocated   Total 
   (In thousands) 
Balance at December 31, 2018  $5,260   $3,556   $3,114   $135   $(12)  $12,053 
Provision (credit)   24    108    (127)   28    17    50 
Charge-offs   (116)   (94)   (37)   (46)       (293)
Recoveries   37    1    4    27        69 
Balance at March 31, 2019  $5,205   $3,571   $2,954   $144   $5   $11,879 
                               
Balance at December 31, 2019  $6,807   $3,920   $3,183   $203   $(11)  $14,102 
Provision (credit)   1,010    357    655    61    17    2,100 
Charge-offs   (37)   (106)   (199)   (37)       (379)
Recoveries       1    1    12        14 
Balance at March 31, 2020  $7,780   $4,172   $3,640   $239   $6   $15,837 

 

The following table presents information pertaining to the allowance for loan losses by segment for the dates indicated:

 

   Commercial
Real Estate
   Residential
Real Estate
   Commercial
and
Industrial
   Consumer   Unallocated   Total 
   (In thousands) 
March 31, 2020                        
Amount of allowance for impaired loans  $    $    $    $    $    $  
Amount of allowance for non-impaired loans   7,780    4,172    3,640    239    6    15,837 
Total allowance for loan losses  $7,780   $4,172   $3,640   $239   $6   $15,837 
                               
Impaired loans  $11,025   $3,535   $741   $39   $   $15,340 
Non-impaired loans   816,742    696,070    255,196    5,317        1,773,325 
Impaired loans acquired with deteriorated credit quality   7,983    2,551    750            11,284 
Total loans  $835,750   $702,156   $256,687   $5,356   $   $1,799,949 
                               
December 31, 2019                              
Amount of allowance for impaired loans  $   $   $   $   $   $ 
Amount of allowance for non-impaired loans   6,807    3,920    3,183    203    (11)   14,102 
Total allowance for loan losses  $6,807   $3,920   $3,183   $203   $(11)  $14,102 
                               
Impaired loans  $3,457   $3,575   $588   $42   $   $7,662 
Non-impaired loans   805,007    694,080    247,499    5,705        1,752,291 
Impaired loans acquired with deteriorated credit quality   8,422    2,589    806            11,817 
Total loans  $816,886   $700,244   $248,893   $5,747   $   $1,771,770 

 

15 

 

 

Past Due and Non-accrual Loans.

 

The following tables present an age analysis of past due 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

   Non-Accrual
Loans
 
   (In thousands) 
March 31, 2020                            
Commercial real estate  $1,473   $423   $3,273   $5,169   $830,581   $835,750   $3,653 
Residential real estate:                                   
Residential   2,477    1,463    834    4,774    592,966    597,740    4,551 
Home equity   185    123    149    457    103,959    104,416    311 
Commercial and industrial   1,212    358    442    2,012    254,675    256,687    1,110 
Consumer   17    4    15    36    5,320    5,356    39 

Total loans

  $5,364   $2,371   $4,713   $12,448   $1,787,501   $1,799,949   $9,664 
                                    
December 31, 2019                                   
Commercial real estate  $2,784   $1,234   $2,637   $6,655   $810,231   $816,886   $3,843 
Residential real estate:                                   
Residential   2,574    683    1,433    4,690    593,037    597,727    4,548 
Home equity   80    38    149    267    102,250    102,517    445 
Commercial and industrial   1,356    645    148    2,149    246,744    248,893    1,003 
Consumer   24        17    41    5,706    5,747    42 

Total loans

  $6,818   $2,600   $4,384   $13,802   $1,757,968   $1,771,770   $9,881 

 

16 

 

 

Impaired Loans.

 

The following is a summary of impaired loans by class:

     
               Three Months Ended 
   At March 31, 2020   March 31, 2020 
   Recorded Investment   Unpaid Principal Balance   Related Allowance   Average Recorded Investment   Interest Income Recognized 
   (In thousands) 
Impaired Loans (1)                         
Commercial real estate  $19,008   $21,040   $   $15,443   $110 
Residential real estate   5,687    6,479        5,691    14 
Home equity   399    454        434    3 
Commercial and industrial   1,491    3,889        1,443    57 
Consumer   39    52        40     
Total impaired loans  $26,624   $31,914   $   $23,051   $184 

 

     
               Three Months Ended 
   At December 31, 2019   March 31, 2019 
   Recorded Investment   Unpaid Principal Balance   Related Allowance   Average Recorded Investment   Interest Income Recognized 
   (In thousands) 
Impaired Loans (1)                         
Commercial real estate  $11,879   $13,914   $   $16,856   $131 
Residential real estate   5,695    6,383        7,190    44 
Home equity   469    539        417     
Commercial and industrial   1,394    4,192        3,718    37 
Consumer   42    56        57     
Total impaired loans  $19,479   $25,084   $   $28,238   $212 

 

 

(1)Includes loans acquired with deteriorated credit quality and performing troubled debt restructurings.

 

The majority of impaired loans are included within the non-accrual balances; however, not every loan on non-accrual 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 non-accrual status are applied to principal. There was no interest income recognized on non-accrual impaired loans during the three months ended March 31, 2020 and March 31, 2019. 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. As of March 31, 2020, we have lent an additional $169,000 to a customer with a loan relationship already classified as impaired. The new loan was designated impaired and classified as a TDR at March 31, 2020, and is included in the table below. At March 31, 2020, we had not committed to lend any additional funds for loans that are classified as impaired. Payments received on performing impaired loans are recorded in accordance with the contractual terms of the loan. Interest income recognized on impaired loans during the three months ended March 31, 2020 and 2019 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.

 

17 

 

 

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. Non-performing TDRs are included in non-performing loans.

 

Loans modifications classified as TDRs during the three months ended March 31, 2020 are included in the table below. There were no loan modifications classified as TDRs during the three month ended March 31, 2019. During the three months ended March 31, 2020 and 2019, 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, 2020 and 2019.

 

   Three Months Ended 
   March 31, 2020 
   Number
of
Contracts
   Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
   (Dollars in thousands) 
Troubled Debt Restructurings               
Commercial and Industrial   1   $169   $169 
Total   1   $169   $169 

 

Loans Acquired with Deteriorated Credit Quality.

 

The following is a summary of loans acquired in the Chicopee Bancorp, Inc. (“Chicopee”) acquisition with evidence of credit deterioration as of March 31, 2020 and 2019.

 

    Contractual
Required
Payments
Receivable
   Cash Expected
To Be
Collected
   Non-
Accretable
Discount
   Accretable
Yield
   Loans
Receivable
 
    (In thousands) 
Balance at December 31, 2019   $20,689   $15,909   $4,780   $4,092   $11,817 
Collections    (964)   (608)   (356)   (108)   (500)
Dispositions    (238)   (238)       (205)   (33)
Balance at March 31, 2020   $19,487   $15,063   $4,424   $3,779   $11,284 

 

    Contractual
Required
Payments
Receivable
   Cash Expected
To Be
Collected
   Non-
Accretable
Discount
   Accretable
Yield
   Loans
Receivable
 
    (In thousands) 
Balance at December 31, 2018   $24,793   $19,883   $4,910   $4,854   $15,029 
Collections    (702)   (646)   (56)   (158)   (488)
Dispositions    (71)   (71)       (31)   (40)
Balance at March 31, 2019   $24,020   $19,166   $4,854   $4,665   $14,501 

 

18 

 

 

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. Non-performing 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 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, 2020                        
Pass (Rated 1 – 4)  $784,437   $592,084   $103,942   $218,714   $5,318   $1,704,495 
Special Mention (Rated 5)   20,931            14,932        35,863 
Substandard (Rated 6)   30,382    5,656    474    23,041    38    59,591 
Total  $835,750   $597,740   $104,416   $256,687   $5,356   $1,799,949 
                               
December 31, 2019                              
Pass (Rated 1 – 4)  $766,124   $591,911   $101,908   $222,847   $5,705   $1,688,495 
Special Mention (Rated 5)   23,138            2,796        25,934 
Substandard (Rated 6)   27,624    5,816    609    23,250    42    57,341 
Total  $816,886   $597,727   $102,517   $248,893   $5,747   $1,771,770 

 

19 

 

6. GOODWILL AND OTHER INTANGIBLES

 

Goodwill.

 

At March 31, 2020 and December 31, 2019, 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, 2020 or the year ended December 31, 2019. Annually, or more frequently if events or changes in circumstances warrant such evaluation, the Company evaluates its goodwill for impairment.

 

Core Deposit Intangibles.

 

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 $93,000 for the three months ended March 31, 2020 and March 31, 2019. At March 31, 2020, future amortization of the core deposit intangible totaled $375,000 for each of the next five years and $1.3 million thereafter.

 

7. SHARE-BASED COMPENSATION

 

Stock Options.

 

A summary of stock option activity for the three months ended March 31, 2020 is presented below:

 

    Shares   Weighted Average Exercise Price  

Weighted
Average
Remaining Contractual
Term

(in years)

  

Aggregate
Intrinsic
Value

(in thousands)

 
Outstanding at December 31, 2019    218,214   $6.42    2.62   $695 
Exercised                 
Outstanding at March 31, 2020    218,214   $6.42    2.37   $77 
                      
Exercisable at March 31, 2020    218,214   $6.42    2.37   $77 

 

Cash received for options exercised during the three months ended March 31, 2019 was $64,000. There were no options exercised during the three months ended March 31, 2020.

 

Restricted Stock Awards.

 

In May 2014, the Company’s shareholders approved a stock-based compensation plan (the “RSA Plan”). Under the 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, will be available for future issuance under the RSA Plan.

 

In January 2015, there were 48,560 shares granted under the RSA Plan. These shares vest ratably over five years. The fair market value of shares awarded are based on the market price at the grant date and recorded as unearned compensation. The shares are amortized over the applicable vesting period, with the final tranche of shares vesting in January of 2020.

 

20

 

 

On an annual basis, the Compensation Committee (the “Committee”) approves long-term incentive awards out of the 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 May 2017, there were 89,042 shares granted. Of the 89,042 shares, 55,159 shares are time-based, with 21,276 vesting in one year and 33,883 vesting ratably over a three-year period. The remaining 33,883 shares granted were performance-based and are subject to the achievement of the 2017 performance metric. Vesting is realized after a three-year period. The primary performance metric for 2017 grants was return on equity. Performance-based 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. Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“maximum” performance).

 

As a result of the Tax Cuts and Jobs Act of 2017, the return on equity performance metrics were adjusted to incorporate the impact and benefits of the corporate tax rate reductions thereunder. The original and adjusted threshold, target and maximum metrics for 2019 under the 2017 grant are as follows:

 

    Return on Equity Metrics 
Performance Period Ending  

Original

Threshold

   Adjusted Threshold   Original Target   Adjusted Target   Original Maximum   Adjusted Maximum 
December 31, 2019    6.50%   7.09%   7.20%   7.85%   7.90%   8.61%

 

As of December 31, 2019, the three-year performance period for the 2017 grants ended. Performance-based shares were earned based on the Company achieving the annual 2017 performance metrics adjusted threshold, target or maximum metrics at the end of each year of the three-year performance period. Of the original 33,883 performance-based shares granted in 2017, 15,898 performance-based shares vested and were issued to eligible recipients, while 17,985 shares were forfeited in February of 2020. Shares forfeited become available for reissuance under future grants.

 

In January 2018, there were 83,812 shares granted. Of the 83,812 shares, 50,852 shares were time-based, with 17,908 vesting in one year and 32,944 vesting ratably over a three-year period. The remaining 32,960 shares granted are performance-based and are subject to the achievement of the 2018 performance metric. The primary performance metric for 2018 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 2018 grant are as follows:

 

    Return on Equity Metrics 
Performance Period Ending   Threshold   Target   Stretch 
December 31, 2019    6.85%   7.35%   7.75%
December 31, 2020    7.40%   7.90%   8.30%

 

Eligible participants will be able to earn between 50% (“threshold” performance), 100% (“target” performance) and 150% (“maximum” performance).

 

In February 2019, there were 108,718 shares 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.

 

21

 

 

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).

 

In February 2020, there were 120,053 shares 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-shares vesting for each performance metric. The primary performance metrics for the 2020 grants were 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.

 

At March 31, 2020, there were an additional 25,927 shares available for future grants under the RSA Plan.

 

22

 

 

A summary of the status of restricted stock awards at March 31, 2020 is presented below:

 

    Shares   Weighted Average
Grant Date Fair Value
 
Balance at December 31, 2019    172,866   $10.07 
Shares granted    101,408    9.11 
Shares forfeited    (16,803)   10.15 
Shares vested    (41,894)   9.54 
Shares reissued    18,645    9.11 
Balance at March 31, 2020    234,222   $9.67 

 

We recorded total expense for restricted stock awards of $182,000 and $195,000 for the three months ended March 31, 2020 and 2019, respectively.

 

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

 

As a member of the FHLB, the Bank has the potential capacity to borrow an amount up to the value of its discounted qualified collateral. Borrowings from the FHLB 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. Borrowings from the Federal Reserve Bank (“FRB”) Discount Window are secured by certain securities from the Company’s investment portfolio not otherwise pledged.

 

FHLB advances with an original maturity of less than one year totaled $45.0 million and $35.0 million at March 31, 2020 and December 31, 2019 with a weighted average rate of 0.71% and 1.86%, respectively. At March 31, 2020, based on qualifying collateral less outstanding advances, the Bank had the capacity to borrow up to approximately $247.8 million from the FHLB.

 

In addition, at March 31, 2020 and December 31, 2019, the Company had an available Ideal Way line of credit with the FHLB for up to $9.5 million. 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 and the portion not repaid will be automatically renewed. At March 31, 2020 and December 31, 2019, there were no advances outstanding under this line.

 

The Bank also had a line of credit in the amount up to $15.0 million with a correspondent bank at an interest rate determined and reset on a daily basis. There were no advances outstanding under this line at March 31, 2020 and 2019. We also had a $50.0 million line of credit with another correspondent bank at an interest rate determined and reset on a daily basis.  There were no advances outstanding under this line at March 31, 2020 and 2019. As of March 31, 2020, we also have an available line of credit of $23.9 million with the FRB Discount Window at an interest rate determined and reset on a daily basis. There were no advances outstanding under this line at March 31, 2020 or December 31, 2019.

 

Long-term debt consists of FHLB advances with an original maturity of one year or more. At March 31, 2020, we had $177.4 million in long-term debt with the FHLB, compared to $205.5 million in long-term debt with the FHLB at December 31, 2019.

 

9. 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 pension 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 pension plan’s actuaries. We have not yet determined how much we expect to contribute to our pension plan in 2020. No contributions have been made to the plan for the three months ended March 31, 2020. The pension plan 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 “Custodian”). 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.

 

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The following table provides information regarding net pension benefit costs for the periods shown:

 

  

Three Months Ended

March 31,

 
   2020   2019 
   (In thousands) 
Service cost  $356   $274 
Interest cost   293    284 
Expected return on assets   (382)   (308)
Amortization of actuarial loss   99    32 
Net periodic pension cost  $366   $282 

 

10. 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, 2020 and December 31, 2019:

 

March 31, 2020  Notional   Weighted Average   Weighted Average Rate   Estimated Fair 
   Amount   Maturity   Receive   Pay   Value 
   (In thousands)   (In years)           (In thousands) 
Cash flow hedges:                         
Interest rate swaps on FHLB borrowings  $35,000    2.5    0.74%   3.54%  $(2,777)
Non-hedging derivatives:                         
Loan-level swaps – dealer   13,688    13.2    3.40%   3.75%   (1,858)
Loan-level swaps – borrower   13,688    13.2    3.75%   3.40%   1,858 
Total  $62,376                  $(2,777)

 

December 31, 2019  Notional   Weighted Average   Weighted Average Rate   Estimated Fair 
   Amount   Maturity   Receive   Pay   Value 
   (In thousands)   (In years)           (In thousands) 
Cash flow hedges:                         
Interest rate swaps on FHLB borrowings  $35,000    2.7    1.89%   3.54%  $(1,798)
Non-hedging derivatives:                         
Loan-level swaps – dealer   6,484    13.2    3.45%   3.79%   (149)
Loan-level swaps – borrower   6,484    13.2    3.79%   3.45%   149 
Total  $47,968                  $(1,798)

 

At March 31, 2020, the Company had $35.0 million in derivatives designated as hedging instruments and $27.4 million in derivatives designated as non-hedging instruments, compared to $35.0 million in derivatives designated as hedging instruments and $13.0 million in derivatives designated as non-hedging instruments at December 31, 2019.

 

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.

 

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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 the Company’s 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 designated as hedging and non-hedging instruments as well as our classification on the balance sheet as of March 31, 2020 and December 31, 2019.

 

 March 31, 2020  Asset Derivatives  Liability Derivatives
   Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
   (In thousands)
Derivatives designated as hedging instruments:                
Interest rate swaps – cash flow hedge  Other Assets  $   Other Liabilities  $2,777 
Total derivatives designated as hedging instruments     $      $2,777 
Derivatives not designated as hedging instruments:                
Interest rate swap – with customers  Other Assets  $1,858      $ 
Interest rate swap – with counterparties         Other Liabilities   1,858 
Total derivatives not designated as hedging instruments     $1,858      $1,858 

 

 December 31, 2019  Asset Derivatives  Liability Derivatives
   Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
   (In thousands)
Derivatives designated as hedging instruments:                
Interest rate swaps – cash flow hedge  Other Assets  $   Other Liabilities  $1,798 
Total derivatives designated as hedging instruments     $      $1,798 
Derivatives not designated as hedging instruments:                
Interest rate swap – with customers  Other Assets  $149      $ 
Interest rate swap – with counterparties         Other Liabilities   149 
Total derivatives not designated as hedging instruments     $149      $149 

 

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Effect of Derivative Instruments in the Consolidated Statements of Net Income and Changes in Shareholders’ Equity.

 

The table below presents the pre-tax net losses of our cash flow hedges for the periods indicated:

 

   Amount of Loss Recognized in OCI on Derivative 
   Three Months Ended March 31, 
   2020   2019 
   (In thousands) 
Interest rate swaps  $(1,123)  $(328)

 

Amounts reported in accumulated other comprehensive loss related to these 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, 
   2020   2019 
   (In thousands) 
Interest rate swaps  $(429)  $(322)

 

During the next 12 months, we estimate that $1.8 million will be reclassified as an increase in interest expense.

 

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, 2020 and December 31, 2019, we had a net liability position of $2.8 million and $1.8 million with our counterparties, respectively. As of March 31, 2020, we had minimum collateral posting thresholds with certain of our derivative counterparties and had mortgage-backed securities with a fair value of $1.9 million and $2.8 million in cash posted as collateral against our obligations under these agreements. If we had breached any of these provisions at March 31, 2020, we could have been required to settle our obligations under the agreements at the termination value.

 

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11. 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. 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.

 

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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, 2020 
   Level 1   Level 2   Level 3   Total 
Assets:  (In thousands) 
Securities available-for-sale  $   $215,118   $   $215,118 
Marketable equity securities   6,875            6,875 
Interest rate swaps       1,858        1,858 
Total assets  $6,875   $216,976   $   $223,851 
                     
Liabilities:                    
Interest rate swaps  $   $4,635   $   $4,635 
                     
   December 31, 2019 
   Level 1   Level 2   Level 3   Total 
Assets:  (In thousands) 
Securities available-for-sale  $   $227,708   $   $227,708 
Marketable equity securities   6,737            6,737 
Interest rate swaps       149        149 
Total assets  $6,737   $227,857   $   $234,594 
                     
Liabilities:                    
Interest rate swaps  $   $1,947   $   $1,947 
                     

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. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets at March 31, 2020 and December 31, 2019. Total losses represent the change in carrying value as a result of fair value adjustments related to assets still held at the periods indicated.

 

   At   Three Months Ended 
   March 31, 2020   March 31, 2020 
               Total 
   Level 1   Level 2   Level 3   Losses 
   (In thousands)   (In thousands) 
Impaired loans  $   $   $78   $106 
                     
    At    Three Months Ended 
    December 31, 2019    March 31, 2019 
                   Total  
    Level 1    Level 2    Level 3    Losses  
    (In thousands)    (In thousands) 
Impaired loans  $   $   $1,836   $130 

 

The amount of impaired loans represents the carrying value, and net of the related write-down or valuation allowance of impaired loans for which adjustments are based on the estimated fair value of the underlying collateral.  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on real estate appraisals performed by independent licensed or certified appraisers.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Management will discount appraisals as deemed necessary based on the date of the appraisal and new information deemed relevant to the valuation.  Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. The resulting losses were recognized in earnings through the provision for loan losses.

 

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There were no liabilities measured at fair value on a non-recurring basis at March 31, 2020 and December 31, 2019.

 

Summary of Fair Values of Financial Instruments.

 

The estimated fair values of our financial instruments are as follows:

 

   March 31, 2020 
   Carrying
Value
   Fair Value 
       Level 1   Level 2   Level 3   Total 
   (In thousands) 
Assets:                    
Cash and cash equivalents  $26,675   $26,675   $   $   $26,675 
Securities available-for-sale   215,118        215,118        215,118 
Marketable equity securities   6,875    6,875            6,875 
Federal Home Loan Bank of Boston and other restricted stock   11,994            11,994    11,994 
Loans - net   1,788,338            1,764,293    1,764,293 
Accrued interest receivable   5,220            5,220    5,220 
Mortgage servicing rights   203        252        252 
Derivative assets   1,858        1,858        1,858 
                          
Liabilities:                         
Deposits   1,705,984            1,711,946    1,711,946 
Short-term borrowings   45,000        45,030        45,030 
Long-term debt   177,358        179,661        179,661 
Accrued interest payable   572            572    572 
Derivative liabilities   4,635        4,635        4,635 
                          
    December 31, 2019 
    Carrying
Value
    Fair Value                
         Level 1    Level 2    Level 3    Total 
    (In thousands) 
Assets:                         
Cash and cash equivalents  $24,741   $24,741   $   $   $24,741 
Securities available-for-sale   227,708        227,708        227,708 
Marketable equity securities   6,737    6,737            6,737 
Federal Home Loan Bank of Boston and other restricted stock   14,477            14,477    14,477 
Loans - net   1,761,932            1,729,150    1,729,150 
Accrued interest receivable   5,313            5,313    5,313 
Mortgage servicing rights   219        345        345 
Derivative assets   149        149        149 
                          
Liabilities:                         
Deposits   1,677,864            1,679,851    1,679,851 
Short-term borrowings   35,000        35,004        35,004 
Long-term debt   205,515        205,850        205,850 
Accrued interest payable   525            525    525 
Derivative liabilities   1,947        1,947        1,947