WNEB Western New England Bancorp
Securities and Exchange Commission
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
Commission File No.: 001-16767
Western New England Bancorp, Inc.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of incorporation or organization)||(I.R.S. Employer Identification No.)|
141 Elm Street, Westfield, Massachusetts 01085
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)
(Name of each exchange on which registered)
|Common Stock, $0.01 par value per share||WNEB||The NASDAQ Global Select Market|
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 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. (Check one):
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2020, was $148,480,694. This amount was based on the closing price as of June 30, 2020 on the NASDAQ Global Select Market (“NASDAQ”) for a share of the registrant’s common stock, which was $ on June 30, 2020.
As of March 5, 2021, the registrant had shares of common stock, $0.01 per value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
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 Annual Report on Form 10-K 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.
Unless the context indicates otherwise, all references in this prospectus to “Western New England Bancorp,” “WNEB,” “we,” “us,” “our company,” and “our” refer to Western New England Bancorp, Inc. and its subsidiaries (including Westfield Bank, CSB Colts, Inc., Elm Street Securities Corporation, WFD Securities, Inc. and WB Real Estate Holdings, LLC).
Western New England Bancorp, Inc. (“WNEB” or “Company”) (f/k/a “Westfield Financial, Inc.”) headquartered in Westfield, Massachusetts, is a Massachusetts-chartered stock holding company and is registered as a savings and loan holding company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). In 2001, the Company reorganized from a Massachusetts-chartered savings bank holding company to a Massachusetts-chartered stock corporation with the second step conversion being completed in 2007. WNEB is the parent company and owns all of the capital stock of Westfield Bank (“Westfield” or “Bank”). The Company is also subject to the jurisdiction of the SEC and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Western New England Bancorp is traded on the NASDAQ under the ticker symbol “WNEB” and is subject to the NASDAQ stock market rules. At December 31, 2020, WNEB had consolidated total assets of $2.4 billion, total net loans of $1.9 billion, total deposits of $2.0 billion and total shareholders’ equity of $226.6 million.
Westfield Bank, headquartered in Westfield, Massachusetts, is a federally-chartered savings bank organized in 1853 and is regulated by the Office of the Comptroller of the Currency (“OCC”). The Bank is a full-service, community oriented financial institution offering a full range of commercial and retail products and services as well as wealth management financial products. As of December 31, 2020, the Bank had 25 branches and 25 free-standing automated teller machines (“ATMs”), and an additional 23 seasonal or temporary ATMs, serving Hampden County and Hampshire County in western Massachusetts and northern Connecticut. The Bank also provides a variety of banking services including automated teller machines, telephone and online banking, remote deposit capture, cash management services, overdraft facilities, night deposit services, and safe deposit facilities. As a member of the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s deposits are insured up to the maximum FDIC insurance coverage limits. The Bank is also a member of the Federal Home Loan Bank of Boston (“FHLB”).
On October 21, 2016, the Company acquired Chicopee Bancorp, Inc. (“Chicopee”), the holding company for Chicopee Savings Bank and in conjunction with the acquisition, the name of the Company was changed to Western New England Bancorp, Inc. The transaction qualified as a tax-free reorganization for federal income tax purposes.
Western New England Bancorp, Inc. has two subsidiaries that are included in the Company’s consolidated financial statements:
|●||Westfield Bank: The Company conducts its principal business activities through its wholly owned subsidiary Westfield Bank.|
|●||WFD Securities, Inc. (“WFD”). WFD is a Massachusetts chartered security corporation, for the primary purpose of holding qualified securities.|
Westfield Bank has three wholly owned subsidiaries that are included in the Company’s consolidated financial statements:
|●||Elm Street Securities Corporation (“Elm”). Elm is a Massachusetts-chartered security corporation, formed for the primary purpose of holding qualified securities.|
|●||WB Real Estate Holdings, LLC. (“WB”). WB is a Massachusetts-chartered limited liability company formed for the primary purpose of holding other real estate owned (“OREO”).|
|●||CSB Colts, Inc. (“CSB Colts”). CSB Colts is a Massachusetts-chartered security corporation, formed for the primary purpose of holding qualified securities. CSB Colts was acquired on October 21, 2016, in conjunction with the acquisition of Chicopee.|
Westfield Bank’s headquarters are located at 141 Elm Street in Westfield, Massachusetts. The Bank’s primary lending and deposit market areas include all of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut. The Bank operates 25 banking offices in Agawam, Chicopee, Feeding Hills, East Longmeadow, Holyoke, Huntington, Ludlow, South Hadley, Southwick, Springfield, Ware, West Springfield and Westfield, Massachusetts and Bloomfield, Enfield, Granby and West Hartford, Connecticut. We operate full-service ATMs at our branch locations and we also have 25 free-standing ATM locations in Chicopee, Holyoke, Ludlow, Southwick, Springfield, West Springfield and Westfield, Massachusetts and 23 traveling/seasonal ATMs. In addition, we provide online banking services, including online deposit account opening and residential mortgage and consumer loan applications through our website at www.westfieldbank.com.
The markets served by our branches are primarily suburban market areas located in western Massachusetts and in northern Connecticut. Our middle market and commercial real estate lending team is located in Springfield, the Pioneer Valley’s primary urban market. Westfield, Massachusetts, is located near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike) and 91. The Pioneer Valley of western Massachusetts encompasses the sixth largest metropolitan area in New England. The Springfield Metropolitan area covers a relatively diverse area ranging from densely populated urban areas, such as Springfield, to outlying rural areas.
A diversified mix of industry groups also operate within Hampden and Hampshire County, including manufacturing, health care, higher education, wholesale and retail trade and service. The economy of our primary market area has benefited from the presence of large employers such as Baystate Medical Center, Big Y World Class Supermarkets, University of Massachusetts, MassMutual Financial Group, Berkshire Medical Center, Mercy Medical Center, MGM Springfield, Peter Pan Bus Lines, Westover Air Reserve Base, Westfield-Barnes Regional Airport, Smith and Wesson, Inc. and Yankee Candle Company. Other employment and economic activity is provided by financial institutions, nine other colleges and universities, eight other hospitals, and a variety of wholesale and retail trade business. Our Hampden County market also enjoys a strong tourism business with attractions such as the Eastern States Exposition called the Big E, the largest fair in the northeast, the Basketball Hall of Fame, Six Flags New England and MGM.
The Company faces significant competition to attract and retain customers within existing and neighboring geographic markets. This competition stems from national and larger regional banks, numerous local savings banks, commercial banks, cooperative banks and credit unions which have a large presence in the region. Competition for loans, deposits and cash management services, and investment advisory assets also comes from other businesses that provide financial services, including consumer finance companies, mortgage brokers and lenders, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors, non-bank electronic payment and funding channels, internet-based banks and other financial intermediaries.
We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to market entry, allowed banks and other lenders to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal laws permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry.
At June 30, 2020, which is the most recent date for which data is available from the FDIC, we held approximately 13.1% of the deposits in Hampden County, which was the third largest market share out of the 16 banks and thrifts with offices in Hampden County.
Human Capital Management
We remain focused on being a good corporate citizen and creating a culture where we prioritize providing an exceptional customer experience and empowering our employees. The Company believes that it has had and continues to have good employee relations. Our human capital management strategy ensures we leverage the talent needed, not just for today, but also for our future. Our employees are the foundation of our success and are responsible for upholding our guiding principles, of integrity, trust, empathy, collaboration, work ethic, courage, inclusion and positive attitude.
As of December 31, 2020, the Bank employed 358 total employees, with 298 employed full-time and 60 employed part-time. Employee retention helps the Company operate efficiently and effectively. Management promotes its core values through prioritizing concern for employees’ well-being, supporting employees’ career goals, offering competitive wages, and providing valuable fringe benefits. In addition, Bank employees may become stockholders of the Company through participation in its Employee Stock Ownership Plan (ESOP) and its 401(k) retirement plan, which offers a Company stock investment option.
The Company actively encourages and supports the growth and development of its employees. Management generally seeks to fill positions by promotion and transfer from within the organization, whenever practical. Career development is advanced through ongoing mentoring and development programs, as well as internally developed training programs, customized corporate training engagements and educational reimbursement programs. Reimbursement is available to employees enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relevant to the financial services industry. Each year, we attract rising juniors and seniors from colleges and universities across our footprint. They work directly with business areas where they have the opportunity to be assigned a position upon graduation.
Inclusion and Diversity
The Company strives to create an intentionally inclusive, diverse and thriving workplace where each person feels valued, respected and understood. The Company aims to maintain a workplace that presents a respectful, productive environment for everyone and enables individuals to achieve their full potential. At December 31, 2020, our employees were representative of our commitment to recruit, develop, and retain diverse individuals, wherein approximately 68% of our employees were women and 20% of our employees are either ethnic minorities, veterans, or persons with disabilities. We remain focused on bolstering our workforce through inclusive hiring and retention practices, which we feel reflects and better serves our communities.
Health and Safety/Well-Being
The safety, health and wellness of our employees is considered a top priority. The COVID-19 pandemic has presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our employees, we were able to transition, over a short period of time, the substantial majority of our non-customer-facing employees to effectively working from remote locations and ensuring a safely-distanced working environment for employees performing customer-facing activities at banking and operational centers. All employees have been asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided additional paid time off to cover compensation during such absences. On an ongoing basis, the Company promotes the health and wellness of its employees and striving to keep the employee portion of health care premiums competitive with local competition.
General. The Company’s loan portfolio totaled $1.9 billion, or 81.5% of total assets, at December 31, 2020, compared to $1.8 billion, or 81.4% of total assets, at December 31, 2019. The Company lends to individuals, business entities, non-profit organizations and professional practices. The Company’s primary lending focus is on the development of high quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial developers, community involvement, and focused marketing strategies. Loans made to businesses, non-profits, and professional practices may include commercial mortgage loans, construction and land development loans, commercial and industrial loans, including lines of credit and letters of credit. Loans made to individuals may include conventional residential mortgage loans, home equity loans and lines, residential construction loans on owner-occupied primary and secondary residences, and secured and unsecured personal loans and lines of credit. The Company manages its loan portfolio to avoid concentration by industry, relationship size, and source of repayment to lessen its credit risk exposure.
Interest rates on loans may be fixed or variable and variable rate loans may have fixed initial periods before periodic rate adjustments begin. Individual rates offered are dependent on the associated degree of credit risk, term, underwriting and servicing costs, loan amount, and the extent of other banking relationships maintained with the borrower, and may be subject to interest rate floors. Rates are also subject to competitive pressures, the current interest rate environment, availability of funds, and government regulations.
The Company employs a seasoned commercial lending staff, with commercial lenders supporting the Company’s loan growth strategy. 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 their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets. The Company's internal residential origination and underwriting staff originate residential loans and are responsible for compliance with residential lending regulations, consumer protection and internal policy guidelines. The Company's internal compliance department monitors the residential loan origination activity for regulatory compliance.
The Executive Committee of the Company’s Board of Directors (the “Board”) approves loan relationships exceeding certain prescribed dollar limits as outlined in the Company’s lending policy.
At December 31, 2020, our general regulatory limit on loans to one borrower was $34.8 million. Our largest lending exposure was a $22.9 million commercial lending relationship, of which $16.9 million was outstanding at December 31, 2020. The relationship is primarily secured by commercial real estate located in Springfield, Massachusetts. At December 31, 2020, this relationship was performing in accordance with its original terms.
Commercial Real Estate Loans and Commercial and Industrial Loans.
At December 31, 2020, commercial real estate loans totaled $833.9 million, or 43.3% of total loans, compared to $816.9 million, or 46.1% of total loans, at December 31, 2019.
The Company originates commercial real estate loans throughout its market area for the purpose of acquiring, developing, and refinancing commercial real estate where the property is the primary collateral securing the loan. These loans are typically secured by a variety of commercial and industrial property types, including one-to-four and multi-family apartment buildings, office, industrial, or mixed-use facilities, or other commercial properties, and are generally guaranteed by the principals of the borrower. Commercial real estate loans generally have repayment periods of approximately fifteen to twenty years. Variable interest rate loans in the commercial real estate loan portfolio have a variety of adjustment terms and underlying interest rate indices, and are generally fixed for an initial period before periodic rate adjustments begin.
Commercial construction loans may include the development of residential housing and condominium projects, the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by underlying real estate collateral and are generally guaranteed by the principals of the borrowers. Construction lenders work to cultivate long-term relationships with established developers. The Company limits the amount of financing provided to any single developer for the construction of properties built on a speculative basis. Funds for construction projects are disbursed as pre-specified stages of construction are completed. Regular site inspections are performed, prior to advancing additional funds, at each construction phase, either by experienced construction lenders on staff or by independent outside inspection companies. Commercial construction loans generally are variable rate loans and lines with interest rates that are periodically adjusted and generally have terms of one to three years. At both December 31, 2020 and December 31, 2019, there was $103.3 million in commercial construction loans included within commercial real estate loans.
At December 31, 2020, our total commercial and industrial loan portfolio totaled $379.1 million, or 19.7% of our total loans, with commercial and industrial loans totaling $211.8 million, or 11.0% of total loans, and Paycheck Protection Program (“PPP”) loans totaling $167.3 million at December 31, 2020. This compares to commercial and industrial loans of $248.9 million, or 14.0% of total loans, at December 31, 2019. Commercial and industrial loans include seasonal revolving lines of credit, working capital loans, equipment financing and term loans. Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower. Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods. Commercial and industrial loans have average repayment periods of one to seven years. Our commercial and industrial loan portfolio does not have any significant loan concentration by type of property or borrower.
As a Preferred Lender with the Small Business Administration (“SBA”), the Company offered PPP loans through the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) launched by the U.S. Department of Treasury (“Treasury”) and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. PPP loans totaled $167.3 million, or 8.7% of total loans, at December 31, 2020.
The largest concentration of commercial loans to an industry was to hotels and accommodation, which comprised approximately 5.5% of the commercial loan portfolio inclusive of commercial and industrial owner-occupied real estate loans as of December 31, 2020. At December 31, 2020, our largest commercial and industrial loan relationship was $22.9 million to a college. The loan relationship is secured by business assets and real estate. At December 31, 2020, this relationship was performing according to its original terms.
Letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. If the letter of credit is drawn upon, a loan is created for the customer, generally a commercial loan, with the same criteria associated with similar commercial loans.
The Company participates with other banks in the financing of certain commercial projects. Participating loans with other institutions provide banks the opportunity to retain customer relationships and reduce credit risk exposure among each participating bank, while providing customers with larger credit facilities than the individual bank might be willing or able to offer independently. In some cases, the Company may act as the lead lender, originating and servicing the loans, but participating out a portion of the funding to other banks. In other cases, the Company may participate in loans originated by other institutions. In each case, the participating bank funds a percentage of the loan commitment and takes on the related pro-rata risk. In each case in which the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks. The Company performs an independent credit analysis of each commitment and a review of the participating institution prior to participation in the loan, and an annual review of the borrower thereafter. Loans originated by other banks in which the Company is a participating institution are carried in the loan portfolio at the Company’s pro-rata share of ownership. Loans originated by other banks in which the Company is a participating institution amounted to $113.0 million at December 31, 2020 and $138.7 million at December 31, 2019. The Company was servicing commercial loans originated by the Company and participated out to various other institutions totaling $52.9 million and $24.2 million at December 31, 2020 and December 31, 2019, respectively.
Residential Real Estate Loans.
At December 31, 2020 and December 31, 2019, the residential real estate loan portfolio totaled $604.7 million, or 31.4% of total loans, and $597.7 million, or 33.7%, of total loans, respectively. In 2020 and 2019, the Company did not purchase any residential real estate loans.
The Company originates and funds residential real estate loans secured by one-to-four family residential properties primarily located in western Massachusetts and northern Connecticut. The Company processes and underwrites all of its originations internally through its Residential Loan Center located in Westfield, MA.
These residential properties may serve as the borrower’s primary residence, or as vacation homes or investment properties. Loans are originated in amounts up to 97% of the lesser of the appraised value or purchase price of the property. Private mortgage insurance is required on all loans with a loan-to-value ratios greater than 80%. In addition, financing is provided for the construction of owner-occupied primary and secondary residences. Residential mortgage loans may have terms of up to 30 years at either fixed or adjustable rates of interest. Fixed and adjustable rate residential mortgage loans are generally originated using secondary market underwriting and documentation standards.
Depending on the current interest rate environment, management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market, or hold some or all of this residential loan production for the Company’s portfolio. The Company may retain or sell the servicing when selling the loans. The Company is an approved seller and servicer with Fannie Mae, Freddie Mac and the FHLB. In order to reduce interest rate risk, at December 31, 2020 and December 31, 2019, the Company serviced $38.1 million and $48.2 million, respectively, in residential loans sold to the secondary market. The servicing rights will continue to be retained on all loans sold over the life of the loan. The largest owner-occupied residential real estate loan was $1.7 million and was performing according to its original terms as of December 31, 2020.
Home Equity Loans.
At December 31, 2020 and December 31, 2019, home equity loans totaled $103.9 million, or 5.4% of total loans, and $102.5 million, or 5.8% of total loans, respectively. The Company originates home equity revolving loans and lines of credit for one-to-four family residential properties with maximum original loan-to-value ratios generally up to 85%. Home equity lines generally have interest rates that adjust monthly based on changes in the Wall Street Journal Prime Rate, although minimum rates may be applicable. Some home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity lines require interest only payments for the first ten years of the lines. Generally at the end of ten years, the line may be frozen to future advances, and principal plus interest payments are collected over a fifteen-year amortization schedule or, for eligible borrowers meeting certain requirements, the line availability may be extended for an additional interest only period.
At December 31, 2020, consumer loans totaled $5.2 million, or 0.2%, of total loans and $5.7 million, or 0.4%, of total loans, at December 31, 2019. Consumer loans are generally originated at higher interest rates than residential and commercial real estate loans, but they also generally tend to have a higher credit risk than residential real estate loans because they are usually unsecured or secured by rapidly depreciable assets. Management, however, believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. We offer a variety of consumer loans to retail customers in the communities we serve. Examples of our consumer loans include automobile loans, spa and pool loans, collateral loans and personal lines of credit tied to deposit accounts to provide overdraft protection.
The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.
|At December 31,|
|Percent of||Percent of||Percent of||Percent of||Percent of|
|(Dollars in thousands)|
|Real estate loans:|
|Total real estate loans||1,542,573||80.1||1,517,130||85.6||1,443,760||85.3||1,382,967||85.1||1,334,907||85.5|
|Commercial and industrial loans:|
|Commercial and industrial||211,823||11.0||248,893||14.0||243,493||14.4||238,502||14.7||222,286||14.2|
|Total commercial and industrial||379,081||19.7||248,893||14.0||243,493||14.4||238,502||14.7||222,286||14.2|
|Unamortized PPP loan fees||(3,050||)||—||—||—||—|
|Premiums and deferred loan fees and costs, net||3,587||4,264||4,401||4,734||4,867|
|Allowance for loan losses||(21,157||)||(14,102||)||(12,053||)||(10,831||)||(10,068||)|
|Total loans, net||$||1,906,226||$||1,761,932||$||1,684,804||$||1,619,850||$||1,556,416|
Loan Maturity and Repricing.
The following table shows the repricing dates or contractual maturity dates of our loans as of December 31, 2020. The table does not reflect prepayments or scheduled principal amortization. Demand loans, loans having no stated maturity, and overdrafts are shown as due in within one year.
|At December 31, 2020|
|Within one year||$||185,958||$||33,017||$||63,255||$||86,169||$||218||$||—||$||368,617|
|After one year:|
|One to three years||160,885||32,744||752||144,567||1,273||—||340,221|
|Three to five years||177,338||29,663||2,441||85,186||2,642||—||297,270|
|Five to ten years||287,863||40,552||10,346||53,707||297||—||392,765|
|Ten to twenty years||17,245||77,136||27,015||207||185||—||121,788|
|Over twenty years||4,660||391,607||96||9,245||577||—||406,185|
|Total due after one year||647,991||571,702||40,650||292,912||4,974||—||1,558,229|
|Total amount due:||833,949||604,719||103,905||379,081||5,192||—||1,926,846|
|Unamortized PPP loan fees||—||—||—||(3,050||)||—||—||(3,050||)|
|Net deferred loan origination fees and costs and premiums||(417||)||2,633||695||644||32||—||3,587|
|Allowance for loan losses||(13,020||)||(3,618||)||(622||)||(3,630||)||(241||)||(26||)||(21,157||)|
The following table presents, as of December 31, 2020, the dollar amount of all loans contractually due or scheduled to reprice after December 31, 2021, and whether such loans have fixed interest rates or adjustable interest rates.
|Due After December 31, 2021|
|Real estate loans:|
|Commercial real estate||197,550||450,441||647,991|
|Total real estate loans||729,696||530,647||1,260,343|
|Commercial and industrial||282,591||10,321||292,912|
|Total other loans||287,565||10,321||297,886|
The following table presents our loan originations, purchases and principal payments for the years indicated:
|For the Years Ended December 31,|
|Balance outstanding at beginning of year||$||1,771,770||$||1,692,456||$||1,625,947|
|Real estate loans:|
|Total mortgage originations||343,476||279,422||256,511|
|Commercial and industrial loans||308,788||90,389||98,635|
|Principal repayments, unadvanced funds and other, net||498,776||292,769||290,468|
|Loan charge-offs, net||720||626||678|
Maintaining a high level of asset quality continues to be one of the Company’s key objectives. Credit Administration reports directly to the Chief Credit Officer and is responsible for the completion of independent credit analyses for all loans above a specific threshold.
The Company’s policy requires that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis. These reports include information on concentration levels, delinquent loans, non-accrual loans, criticized loans and foreclosed real estate, as well as our actions and plans to cure the non-accrual status of the loans and to dispose of the foreclosed property.
The Company contracts with an external loan review company to review the internal risk 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 their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets. The findings are reported to the Chief Credit Officer and the full report is then presented to the Audit Committee.
Potential Problem Loans.
The Company performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan.
All loans risk rated “Special Mention (5)”, “Substandard (6)”, “Doubtful (7)” and “Loss (8)” are listed on the Company’s criticized report and are reviewed by management not less than on a quarterly basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as containing a loss are partially charged-off or fully charged-off. In addition, the Company closely monitors the classified loans for signs of deterioration to mitigate the growth in nonaccrual loans, including performing additional due diligence, updating valuations and requiring additional financial reporting from the borrower. At December 31, 2020, criticized loans, inclusive of “adversely classified loans”, totaled $147.1 million, or 7.6% of total loans, compared to $83.3 million, or 4.7% of total loans, at December 31, 2019.
The Company’s adversely classified loans (defined as “Substandard (6)”, “Doubtful (7)” or “Loss (8)”) totaled $55.0 million, or 2.9% of total loans, at December 31, 2020 and $57.3 million, or 3.2%, of total loans, at December 31, 2019. Adversely classified loans that were performing but possessed potential weaknesses and, as a result, could ultimately become non-performing loans totaled $47.2 million, or 2.4% of total loans, at December 31, 2020 and $47.5 million, or 2.7% of total loans, at December 31, 2019. The remaining balance of adversely classified loans were non-accrual loans totaling $7.8 million, or 0.40% of total loans, at December 31, 2020 and $9.9 million, or 0.56% of total loans, at December 31, 2019.
Total impaired loans totaled $29.1 million, or 1.5% of total loans, at December 31, 2020 and $19.5 million, or 1.1% of total loans, at December 31, 2019. Total accruing impaired loans totaled $21.3 million and $9.6 million at December 31, 2020 and December 31, 2019, respectively, while non-accrual impaired loans totaled $7.8 million and $9.9 million as of December 31, 2020 and December 31, 2019, respectively.
In management’s opinion, all impaired loan balances at December 31, 2020 and 2019, were supported by expected future cash flows or, for those collateral dependent loans, the net realizable value of the underlying collateral. Based on management’s assessment at December 31, 2020 and December 31, 2019, no impaired loans required a specific reserve. Management closely monitors these relationships for collateral or credit deterioration.
At December 31, 2020, 2019, 2018, non-accrual loans totaled $7.8 million, or 0.41% of total loans, $9.9 million, or 0.56% of total loans, and $13.5 million, and 0.79% of total loans, respectively. If all non-accrual loans had been performing in accordance with their terms, we would have earned additional interest income of $275,000, $651,000 and $900,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
At December 31, 2020, 2019 and 2018, the Company carried no OREO balances.
The following table presents information regarding non-performing commercial real estate loans, commercial and industrial term loans, residential real estate loans, consumer loans, and foreclosed real estate as of the dates indicated. All loans where the payment is 90 days or more in arrears as of the closing date of each month are placed on non-accrual status unless the loan is well secured and in the process of collection.
|At December 31,|
|(Dollars in thousands)|
|Non-accrual real estate loans:|
|Commercial real estate||1,632||3,843||4,701||2,959||4,452|
|Total non-accrual real estate loans||7,109||8,836||10,948||9,616||10,316|
|Commercial and industrial||705||1,003||2,476||3,019||3,714|
|Total non-accrual other loans||732||1,045||2,536||3,139||3,741|
|Total non-performing loans||7,841||9,881||13,484||12,755||14,057|
|Foreclosed real estate, net||—||—||—||155||298|
|Total non-performing assets (1)||$||7,841||$||9,881||$||13,484||$||12,910||$||14,355|
|Non-performing loans to total loans||0.41||%||0.56||%||0.79||%||0.78||%||0.90||%|
|Non-performing assets to total assets||0.33||0.45||0.64||0.63||0.69|
(1) Troubled debt restructurings on accrual status not included above totaled $9.8 million, $1.5 million, $2.4 million, $1.8 million and $2.1 million at December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
Allowance for Loan Losses.
The allowance for loan losses is an estimate of probable credit risk inherent in the loan portfolio as of the specified balance sheet dates. On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from specifically known and other credit risks associated with the portfolio.
The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. Our methodology for assessing the appropriateness of the allowance consists of a review of the components, which includes a general allowance for non-impaired loans.
The specific valuation allowance incorporates the results of measuring impairment for specifically identified non-homogenous problem loans and, as applicable, troubled debt restructurings (“TDRs”). A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. 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. Once an impairment has been determined, the Company recognizes the charge-off.
The general allowance is calculated by applying loss factors to outstanding loans by loan type, excluding loans determined to be impaired. As part of this analysis, each quarter we prepare an allowance for loan losses worksheet which categorizes the loan portfolio by risk characteristics such as loan type and loan grade. The general allowance is inherently subjective as it requires material estimates that may be susceptible to significant change. There are a number of factors that are considered when evaluating the appropriate level of the allowance. These factors include current economic and business conditions that affect our key lending areas, collateral values, loan volumes and concentrations, credit quality trends such as non-performing loans, delinquency and loan losses, and specific industry concentrations within the portfolio segments that may impact the collectability of the loan portfolio. During the year ended December 31, 2020, the Company significantly increased the general allowance as a result of the COVID-19 pandemic. For information on our methodology for assessing the appropriateness of the allowance for loan losses please see Footnote 1 – “Summary of Significant Accounting Policies” of our notes to consolidated financial statements.
The allowance for loan losses is established through a provision for loan losses, which is a direct charge to earnings. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance for loan losses.
In making its assessment on the adequacy of the allowance for loan losses, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio. Management closely monitors the credit quality of individual delinquent and non-performing relationships, the levels of impaired and adversely classified loans, net charge-offs, the growth and composition of the loan portfolio, expansion in geographic market area, and any material changes in underwriting criteria, and the strength of the local and national economy, among other factors.
The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment and the individual business circumstances of borrowers. Despite prudent loan underwriting, adverse changes within the Company’s market area, or deterioration in local, regional or national economic conditions, could negatively impact management’s estimate of probable credit losses.
Management continues to closely monitor the necessary allowance levels, including specific reserves. The allowance for loan losses to total loans ratio was 1.10% at December 31, 2020 compared to 0.79% at December 31, 2019. The allowance for loan losses to total loans ratio, excluding PPP loans, was 1.20% at December 31, 2020.
Based on the foregoing, as well as management’s judgment as to the existing credit risks inherent in the loan portfolio, management believes that the Company’s allowance for loan losses is adequate to absorb probable losses from specifically known and other probable credit risks associated with the portfolio as of December 31, 2020.
The following table presents the activity in our allowance for loan losses and other ratios at or for the dates indicated.
|At or for Years Ended December 31,|
|(Dollars in thousands)|
|Balance at beginning of year||$||14,102||$||12,053||$||10,831||$||10,068||$||8,840|
|Commercial real estate||(107||)||(669||)||(35||)||(292||)||(170||)|
|Commercial and industrial||(543||)||(514||)||(299||)||(289||)||—|
|Commercial real estate||58||873||369||142||1,065|
|Commercial and industrial||51||74||20||81||25|
|Net (charge-offs) recoveries||(720||)||(626||)||(678||)||(597||)||653|
|Provision for loan losses||7,775||2,675||1,900||1,360||575|
|Balance at end of year||$||21,157||$||14,102||$||12,053||$||10,831||$||10,068|
|Total loans receivable (1)||$||1,926,846||$||1,771,770||$||1,692,456||$||1,625,947||$||1,561,617|
|Average loans outstanding||$||1,922,607||$||1,721,884||$||1,666,266||$||1,597,599||$||1,013,611|
|Allowance for loan losses as a percent of total loans receivable||1.10||%||0.79||%||0.71||%||0.67||%||0.64||%|
|Allowance for loan losses as a percent of total loans receivable, excluding PPP loans||1.20||%||—||%||—||%||—||%||—||%|
|Net loans charged-off as a percent of average loans outstanding||0.04||0.04||0.04||0.04||(0.06||)|
(1) Does not include premiums, deferred costs and fees, or the allowance for loan losses.
A summary of the components of the allowance for loan losses is as follows:
|December 31, 2020||December 31, 2019||December 31, 2018|
|Commercial real estate||$||—||$||13,020||$||13,020||$||—||$||6,807||$||6,807||$||—||$||5,260||$||5,260|
|Residential real estate:|
|Commercial and industrial||—||3,630||3,630||—||3,183||3,183||—||3,114||3,114|
|December 31, 2017||December 31, 2016|
|Commercial real estate||$||—||$||4,712||$||4,712||$||—||$||4,083||$||4,083|
|Residential real estate:|
|Commercial and industrial||—||2,733||2,733||—||3,085||3,085|
For the years ended December 31, 2020 and December 31, 2019, the Company recorded a provision of $7.8 million and $2.7 million, respectively, to the allowance for loan losses based on our evaluation of the items discussed above. We believe that the allowance for loan losses adequately reflects the level of incurred losses in the current loan portfolio as of December 31, 2020.
Allocation of Allowance for Loan Losses.
The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans, excluding PPP loans.
|December 31, 2020||December 31, 2019||December 31, 2018|
|Loan Category||Amount of|
|Commercial real estate||$||13,020||$||833,949||47.4||%||$||6,807||$||816,886||46.1||%||$||5,260||$||768,881||45.4||%|
|Real estate mortgage:|
|Commercial and industrial loans||3,630||211,823||12.0||3,183||248,893||14.0||3,114||243,493||14.4|
|Total allowances for loan losses||$||21,157||$||1,759,588||100.0||%||$||14,102||$||1,771,770||100.0||%||$||12,053||$||1,692,456||100.0||%|
|December 31, 2017||December 31, 2016|
|Commercial real estate||$||4,712||$||732,616||45.1||%||$||4,083||$||720,741||46.2||%|
|Real estate mortgage:|
|Commercial and industrial loans||2,733||238,502||14.7||3,085||222,286||14.2|
|Total allowances for loan losses||$||10,831||$||1,625,947||100.0||%||$||10,068||$||1,561,617||100.0||%|
Loans Acquired with Deteriorated Credit Quality.
Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans, provided that the timing and amount of future cash flows is reasonably estimated. The difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent to acquisition, probable decreases in expected cash flows are recognized through a provision for loan losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment. At December 31, 2020 and 2019, the Company had $8.5 million and $11.8 million in purchased credit- impaired loans.
The Board of Directors reviews and approves our investment policy on an annual basis. The Chief Executive Officer and Chief Financial Officer, as authorized by the Board of Directors, implement this policy based on the established guidelines within the written policy. The Company’s internal investment policy sets limits as a percentage of the total portfolio, identifies acceptable and unacceptable investment practices, and denotes approved security dealers. The effect of changes in interest rates, market values, timing of principal payments and credit risk are considered when purchasing securities.
The Company’s investment portfolio activities are an integral part of the overall asset liability management program of the Company. The investment function provides readily available funds to support loan growth, as well as to meet withdrawals and maturities of deposits, and attempts to provide maximum return consistent with liquidity constraints and general prudence, including diversification and safety of investments.
The securities in which the Company may invest are limited by regulation. Federally-chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks, corporate debt instruments and marketable equity securities.
As of the balance sheet dates reflected in this annual report, available-for-sale securities are carried at fair value. On a quarterly basis, we review securities available-for-sale with a decline in fair value below the amortized cost of the investment to determine whether the decline in fair value is temporary or other-than-temporary (“OTTI”). In estimating OTTI losses for securities available-for-sale, impairment is required to be recognized if (1) we intend to sell the security; (2) it is “more likely than not” that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the other-than-temporary impairment is recognized through earnings. For all other impaired debt securities, credit-related other-than-temporary impairment is recognized through earnings, while non-credit-related other-than-temporary impairment is recognized in other comprehensive income/loss, net of applicable taxes. Prior to January 1, 2018, marketable equity securities were evaluated for OTTI based upon the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value were reflected in earnings as realized losses. Marketable equity securities are measured at fair value with changes in fair value reported on the Company’s income statement as a component of non-interest income, regardless of whether such gains and losses are realized.
Management reports investment transactions, portfolio allocation, effective duration, market value at risk and projected cash flows to the Board on a periodic basis. The Board also approves the Company’s ongoing investment strategy.
Restricted Equity Securities.
At December 31, 2020 and 2019, the Company held $4.7 million and $14.1 million, respectively, of FHLB stock. This stock is classified as a restricted investment and carried at cost which management believes approximates the fair value. The investment must be held as a condition of membership in the FHLB and as a condition for the Bank to borrow from the FHLB. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition.
At both December 31, 2020 and 2019, the Company held $423,000 of Atlantic Community Bankers Bank stock. The stock is restricted and carried in other assets at cost. The stock is evaluated for impairment based on an estimate of the ultimate recovery to the par value. No impairment losses have been recorded through December 31, 2020.
The following table sets forth the composition of our securities portfolio at the dates indicated.
|At December 31,|
|Government-sponsored enterprise obligations||$||14,871||$||14,775||$||20,150||$||20,014||$||25,150||$||23,947|
|State and municipal bonds||405||406||2,718||2,813||2,976||2,944|
|Total debt securities||18,315||18,256||30,668||30,693||77,945||75,059|
|Government-sponsored mortgage-backed securities||161,290||162,729||186,236||186,001||165,605||159,351|
|U.S. government guaranteed mortgage-backed securities||20,973||20,895||11,197||11,014||20,089||19,338|
|Total mortgage-backed securities||182,263||183,624||197,433||197,015||185,694||178,689|
|Total available-for-sale securities||$||200,578||$||201,880||$||228,101||$||227,708||$||263,639||$||253,748|
Securities Portfolio Maturities.
The composition and maturities of the debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2020 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur.
|More than One Year||More than Five Years|
|through Five Years||through Ten Years||More than Ten Years||Total Securities|
|Debt securities available-for-sale:|
|Government-sponsored enterprise obligations||$||—||—||%||$||9,891||1.23||%||$||4,980||1.86||%||$||14,871||$||14,775||1.44||%|
|State and municipal bonds||405||3.00||—||—||—||—||405||406||3.00|
|Total debt securities available-for-sale||3,444||3.29||9,891||1.23||4,980||1.86||18,315||18,256||1.79|
|Mortgage-backed securities available-for-sale:|
|Government-sponsored residential mortgage-backed||—||—||2,595||2.10||158,695||1.37||161,290||162,729||1.38|
|U.S. government guaranteed residential mortgage-backed||—||—||—||—||20,973||2.19||20,973||20,895||2.19|
|Total mortgage-backed securities available-for-sale||—||—||2,595||2.10||179,668||1.47||182,263||183,624||1.48|
Deposits have traditionally been the principal source of the Company’s funds. The Company offers commercial checking, business and municipal savings accounts, term certificates of deposit, money market and business sweep accounts, and Interest on Lawyers Trust Accounts. A broad selection of competitive retail deposit products are also offered, including personal checking accounts earning interest, savings accounts, money market accounts, individual retirement accounts and time deposits. Terms on time deposits are offered ranging from three months to sixty months. As a member of the FDIC, the Bank’s depositors are provided deposit protection up to the maximum FDIC insurance coverage limits.
Management determines the interest rates offered on deposit accounts based on current and expected economic conditions, competition, liquidity needs, the volatility of existing deposits, the asset/liability position of the Company and the overall objectives of the Company regarding the growth and retention of relationships. The Company may also utilize brokered deposits, both term and overnight, from a number of available sources, as part of the Company’s asset liability management strategy and as an alternative to borrowed funds to support asset growth in excess of internally generated deposits. Brokered deposits along with borrowed funds may be referred to as wholesale funding. At December 31, 2020 and 2019, brokered deposits were included within time deposits and totaled $55.3 million and $21.5 million, respectively.
Core deposits (defined as regular accounts, money market accounts, interest-bearing and noninterest-bearing demand accounts) represented 71.0% of total deposits on December 31, 2020 and 61.1% on December 31, 2019. At December 31, 2020 and December 31, 2019, time deposits with remaining terms to maturity of less than one year amounted to $503.2 million and $548.6 million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net Interest and Dividend Income” for information relating to the average balances and costs of our deposit accounts for the years ended December 31, 2020, 2019 and 2018.
Cash Management Services.
In addition to the deposit products discussed above, commercial banking and municipal customers may take advantage of cash management services including remote deposit capture, Automated Clearing House credit and debit origination, check payment fraud prevention, international and domestic wire transfers and corporate credit cards.
Deposit Distribution and Weighted Average Rates.
The following table sets forth the distribution of our deposit accounts, by account type, at the dates indicated.
|At December 31,|
|(Dollars in thousands)|
|Interest-bearing checking accounts||94,936||4.7||0.45||70,182||4.2||0.49||63,620||4.0||0.46|
|Money market accounts||640,790||31.4||0.40||435,396||26.0||0.66||398,396||25.0||0.58|
|Total core deposit accounts||1,447,794||71.0||0.21||1,025,233||61.1||0.33||935,947||58.6||0.29|
|Due within the year||503,187||24.7||0.75||548,559||32.7||2.17||443,186||27.7||1.74|
|Over 1 year through 3 years||81,847||4.0||0.86||91,776||5.5||1.94||190,655||12.0||2.26|
|Over 3 years||5,302||0.3||0.84||12,296||0.7||1.98||26,205||1.6||1.91|
|Total time deposit accounts||590,336||29.0||0.77||652,631||38.9||2.13||660,046||41.4||1.90|
Time Deposit Maturities.
A summary of time deposits totaling $250,000 or more by maturity is as follows:
|December 31, 2020||December 31, 2019|
|3 months or less||$||54,472||0.71||%||$||16,574||2.32||%|
|Over 3 months through 6 months||62,404||0.50||52,577||2.45|
|Over 6 months through 12 months||47,682||0.58||94,558||2.26|
|Over 12 months||14,801||1.09||20,366||2.15|
Time Deposit Balances by Rates.
A summary of time deposits by maturity is as follows:
|At December 31, 2020|
|Period to Maturity|
|Less than One Year||One to Two Years||Two to Three Years||More than Three Years||Total||Percent of Total|
|0.25% and under||$||93,635||$||9,575||$||1,282||$||665||$||105,157||17.8||%|
|0.26% to 0.50%||124,306||41,610||1,148||374||167,438||28.3|
|0.51% to 0.75%||196,000||1,111||192||1,640||198,943||33.7|
|0.76% to 1.00%||12,240||2,679||3,102||621||18,642||3.2|
|1.01% and over||77,006||13,945||7,203||2,002||100,156||17.0|
Other Sources of Funds.
As discussed above, deposit gathering has been the Company’s principal source of funds. Asset growth in excess of deposits may be funded through cash flows from our loan and investment portfolios, or the following sources:
Total borrowing capacity includes borrowing arrangements at the FHLB, the Federal Reserve Bank (“FRB”), and borrowing arrangements with correspondent banks.
The Company is a member of the FHLB and uses borrowings as an additional source of funding to finance the Company’s lending and investing activities and to provide liquidity for daily operations. FHLB advances also provide more pricing and option alternatives for particular asset/liability needs. The FHLB provides a central credit facility primarily for member institutions. As an FHLB member, the Company is required to own capital stock of the FHLB, calculated periodically based primarily on its level of borrowings from the FHLB. FHLB borrowings are secured by certain securities from the Company’s investment portfolio not otherwise pledged as well as certain residential real estate and commercial real estate loans. Advances are made under several different credit programs with different lending standards, interest rates and range of maturities. This relationship is an integral component of the Company’s asset-liability management program. The Company also has an overnight Ideal Way line of credit with the FHLB for $9.5 million for the years ended December 31, 2020 and 2019. Interest on this line of credit is payable at a rate determined and reset by the FHLB on a daily basis. The outstanding principal is due daily but the portion not repaid will be automatically renewed. There were no advances outstanding under this line at December 31, 2020 and 2019, respectively.
The Company has an available line of credit of $16.1 million with the FRB Discount Window at an interest rate determined and reset on a daily basis. Borrowings from the FRB Discount Window are secured by certain securities from the Company’s investment portfolio not otherwise pledged. As of December 31, 2020 and 2019, there were no advances outstanding under this line of credit. In addition, the Company has access to the Federal Reserve Bank’s PPP Loan Facility (“PPPLF”), which carries a fixed rate for the term of the advance with interest due at maturity. The Bank secures the borrowings by pledging eligible PPP loans as collateral for the borrowings. There were no advances outstanding under the PPPLF at December 31, 2020 or December 31, 2019.
The Company also has pre-established, non-collateralized overnight borrowing arrangements with large national and regional correspondent banks to provide additional overnight and short-term borrowing capacity for the Company. The Company has a $15.0 million line of credit with a correspondent bank and a $50.0 million line of credit with another correspondent bank, both at an interest rate determined and reset on a daily basis. At December 31, 2020 and 2019, we had no advances outstanding under these lines.
Westfield Bank also provides access to insurance and investment products through Westfield Investment Services. In conjunction with our acquisition of Chicopee Savings Bank in October of 2016, the Company retained a partnership with LPL Financial (“LPL”), a third-party registered broker-dealer, while discontinuing our strategic alliance with the previous service provider, Charter Oak, a division of MassMutual. Westfield Investment Services is in the business of helping clients meet all of their financial needs. Westfield Investment Services representatives provide a broad range of wealth management, investment, insurance and financial planning services and strategic asset management services.
Securities and advisory services are offered through LPL, a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Westfield Bank and Westfield Investment Services are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Westfield Investment Services, and may also be employees of Westfield Bank. These products and services are being offered through LPL or its affiliates, which are separate entities from and not affiliates of Westfield Bank or Westfield Investment Services. Securities and insurance offered through LPL or its affiliates are:
|Not Insured by FDIC or Any Other Government Agency||Not Bank Guaranteed|
|Not Bank Deposits or Obligations||May Lose Value|
Supervision and Regulation.
The Company and the Bank are subject to extensive regulation under federal and state laws. The regulatory framework applicable to savings and loan holding companies and their insured depository institution subsidiaries is intended to protect depositors, the federal deposit insurance fund (the “DIF”), consumers and the U.S. banking system, rather than investors.
Set forth below is a summary of the significant laws and regulations applicable to Western New England Bancorp and its subsidiaries. The summary description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Such statutes, regulations, and policies are subject to ongoing review by Congress and state legislatures and federal and state regulatory agencies. A change in any of the statutes, regulations, or regulatory policies applicable to Western New England Bancorp and its subsidiaries could have a material effect on the results of the Company.
Western New England Bancorp is a separate and distinct legal entity from the Bank. The Company is a Massachusetts-chartered stock holding company as a registered savings and loan holding company under the Home Owners’ Loan Act (the “HOLA”), as amended, and is subject to the supervision of and regular examination by the Board of Governors of the Federal Reserve System (the “FRB,” the “Federal Reserve Board” or the “Federal Reserve”) as its primary federal regulator. In addition, the Federal Reserve Board has enforcement authority over Western New England Bancorp and its non-savings association subsidiaries. Western New England Bancorp is also subject to the jurisdiction of the SEC and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Western New England Bancorp is traded on the NASDAQ under the ticker symbol, “WNEB,” and is subject to the NASDAQ stock market rules.
Westfield Bank is organized as a federal savings association under the HOLA. The Bank is subject to the supervision of, and to regular examination by, the OCC as its chartering authority and primary federal regulator. To a limited extent, the Bank is also subject to the supervision and regulation of the FDIC as its deposit insurer. Financial products and services offered by Western New England Bancorp and the Bank are subject to federal consumer protection laws and implementing regulations promulgated by the Consumer Financial Protection Bureau (the “CFPB”). Western New England Bancorp and the Bank are also subject to oversight by state attorneys general for compliance with state consumer protection laws. The Bank’s deposits are insured by the FDIC up to the applicable deposit insurance limits in accordance with FDIC laws and regulations. The Bank is a member of the FHLB, and is subject to the rules and requirements of the FHLB. The subsidiaries of Western New England Bancorp and the Bank are subject to federal and state laws and regulations, including regulations of the FRB and the OCC, respectively.
Set forth below is a description of the significant elements of the laws and regulations applicable to Western New England Bancorp and its subsidiaries. Statutes, regulations and policies are subject to ongoing review by Congress, state legislatures and federal and state agencies. A change in any statute, regulation or policy applicable to Western New England Bancorp may have a material effect on the results of Western New England Bancorp and its subsidiaries.
Federal Savings and Loan Holding Company Regulation.
Western New England Bancorp is a savings and loan holding company as defined by the HOLA. In general, the HOLA restricts the business activities of savings and loan holding companies to those permitted for financial holding companies under the BHC Act. Permissible businesses activities include banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking “as to be a proper incident thereto,” as well as any activity that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as determined solely by the FRB). Activities that are financial in nature include, among others, securities underwriting and dealing, insurance underwriting and making merchant banking investments.
Mergers and Acquisitions.
The HOLA, the federal Bank Merger Act and other federal and state statutes regulate direct and indirect acquisitions of savings associations by savings and loan holding companies or other savings associations. The HOLA requires the prior approval of the FRB for the direct or indirect acquisition of more than 5% of the voting shares of a savings association or its parent holding company and for a company, other than a savings and loan holding company, to acquire 25% or more of any class of voting securities of a savings association or a savings and loan holding company. Under the Change in Bank Control Act, no person, including a company, may acquire, directly or indirectly, control of an insured depository institution without providing 60 days’ prior notice and receiving a non-objection from the appropriate federal banking agency.
Under the Bank Merger Act, the prior approval of the OCC is required for a federal savings association to merge with another insured depository institution, where the resulting institution is a federal savings association, or to purchase the assets or assume the deposits of another insured depository institution. In reviewing applications seeking approval of merger and acquisition transactions, the federal bank regulatory agencies must consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, performance records under the Community Reinvestment Act of 1977 (see the section captioned “Community Reinvestment Act of 1977” included elsewhere in this section) and the effectiveness of the subject organizations in combating money laundering.
Source of Strength Doctrine.
FRB policy requires savings and loan holding companies to act as a source of financial and managerial strength to their subsidiary savings associations. Section 616 of the Dodd-Frank Act codified the requirement that holding companies act as a source of financial strength to their insured depository institution subsidiaries. As a result, Western New England Bancorp is expected to commit resources to support the Bank, including at times when Western New England Bancorp may not be in a financial position to provide such resources. Any capital loans by a savings and loan holding company to any of its subsidiary savings associations are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary savings associations. In the event of a savings and loan holding company’s bankruptcy, any commitment by the savings and loan holding company to a federal banking agency to maintain the capital of a subsidiary insured depository institution will be assumed by the bankruptcy trustee and entitled to priority of payment.
The principal source of Western New England Bancorp’s liquidity is dividends from the Bank. The OCC imposes various restrictions and requirements on the Bank’s ability to make capital distributions, including cash dividends. The OCC’s prior approval is required if the total of all distributions, including the proposed distribution, declared by a federal savings association in any calendar year would exceed an amount equal to the Bank’s net income for the year-to-date plus the Bank’s retained net income for the previous two years, or that would cause the Bank to be less than well capitalized. In addition, section 10(f) of the HOLA requires a subsidiary savings association of a savings and loan holding company, such as the Bank, to file a notice with the Federal Reserve prior to declaring certain types of dividends.
Western New England Bancorp and the Bank are also subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal banking agency is authorized to determine, under certain circumstances relating to the financial condition of a savings and loan holding company or a savings association, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The federal banking agencies have indicated that paying dividends that deplete an insured depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
In July 2013, the FRB, the OCC and the FDIC approved final rules (the “Capital Rules”) that established a new capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision’s December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. In addition, the Capital Rules implement certain provisions of the Dodd-Frank Act. Pursuant to the Dodd-Frank Act, Western New England Bancorp, as a savings and loan holding company, is subject to the Capital Rules.
The Capital Rules substantially revised the risk-based capital requirements applicable to holding companies and their depository institution subsidiaries as compared to prior U.S. general risk-based capital rules. The Capital Rules revised the definitions and the components of regulatory capital and impacted the calculation of the numerator in banking institutions’ regulatory capital ratios. The Capital Rules became effective on January 1, 2015, subject to phase-in periods for certain components and other provisions.
The Capital Rules: (i) require a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules, for most banking organizations, including Western New England Bancorp, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the Capital Rules’ specific requirements.
Pursuant to the Capital Rules, the minimum capital ratios as of January 1, 2015 are:
|●||4.5% CET1 to risk-weighted assets;|
|●||6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;|
|●||8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and|
|●||4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).|
The Capital Rules also require a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. The capital conservation buffer became fully phased-in on January 1, 2019 and requires an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until reaching 2.5% on January 1, 2019.
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. In November 2017, the FRB finalized a rule pausing the phase-in of these deductions and adjustments for non-advanced approaches institutions. In July 2019, the OCC, FRB and FDIC adopted a final rule intended to simply the Capital Rules described above for non-advanced approaches institutions. Institutions may implement the provisions of the simplification rule beginning on January 1, 2020 and must implement them by April 1, 2020. The transition provisions to the Capital Rules issued by these agencies in November 2017 will cease to apply to an institution in the quarter in which it adopts the simplification rule.
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio) under generally accepted accounting principles in the United States of America (“GAAP”) are reversed for the purposes of determining regulatory capital ratios. Under the Capital Rules, the effects of certain AOCI items are not excluded; however, banking organizations not using advanced approaches, were permitted to make a one-time permanent election to continue to exclude these items in January 2015. The Company and the Bank made this election.
The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of assets. The implementation of the Capital Rules did not have a material impact on the Company’s or the Bank’s consolidated capital levels.
The Company is in compliance with the targeted capital ratios under the Capital Rules at December 31, 2020. The Bank is subject to the Capital Rules as well. We believe that Western New England Bancorp and the Bank are in compliance with the targeted capital ratios.
In September 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC adopted a final rule that is intended to further simplify the Capital Rules for depository institutions and their holding companies that have less than $10 billion in total consolidated assets, such as us, if such institutions meet certain qualifying criteria. This final rule became effective on January 1, 2020. Under this final rule, if we meet the qualifying criteria, including having a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, we will be eligible to opt into the community bank leverage ratio framework. If we opt into this framework, we will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the Capital Rules (as modified pursuant to the simplification rule) and will be considered to have met the well-capitalized ratio requirements for PCA (as defined below) purposes. The Company and the Bank evaluated the simplified Capital Rules to determine our adoption status for the applicable filings periods beginning in 2020 and elected to opt-out of the community bank leverage ratio framework.
Prompt Corrective Action.
Pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”), federal banking agencies are required to take “prompt corrective action” (“PCA”) should an insured depository institutions fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
For purposes of PCA, to be: (i) well-capitalized, an insured depository institution must have a total risk based capital ratio of at least 10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (ii) adequately capitalized, an insured depository institution must have a total risk based capital ratio of at least 8%, a Tier 1 risk based capital ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (iii) undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (iv) significantly undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%.; and (v) critically undercapitalized, an insured depository institution would have a ratio of tangible equity to total assets that is less than or equal to 2%. As of December 31, 2020, the most recent notification from the OCC categorized the Bank as “well-capitalized” under the PCA framework.
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as Western New England Bancorp, to: (i) engage in “proprietary trading” and (ii) invest in or sponsor certain types of funds (“Covered Funds”), subject to certain limited exceptions. The implementing regulation defines a Covered Fund to include certain investments such as collateralized loan obligation (“CLO”) and collateralized debt obligation securities. The regulation also provides, among other exemptions, an exemption for CLOs meeting certain requirements. As of December 31, 2020, Western New England Bancorp is compliant with the Volcker Rule.
The Bank derives its lending and investment powers from the HOLA and its implementing regulations promulgated by the OCC. Those laws and regulations limit the Bank’s authority to invest in certain types of assets and to make certain types of loans. Permissible investments include, but are not limited to, mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage.
Loans to One Borrower.
Generally, a federal savings bank may not make a loan or extend credit to a single borrower or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2020, we were in compliance with these limitations on loans to one borrower.
Concentrated Commercial Real Estate Lending Regulations.
The federal banking agencies, including the OCC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and nonfarm nonresidential properties (excluding loans secured by owner-occupied properties) and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
If a concentration is present, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. On December 18, 2015, the federal banking agencies jointly issued a “Statement on Prudent Risk Management for Commercial Real Estate Lending” reminding banks of the need to engage in risk management practices for commercial real estate lending.
Qualified Thrift Lender Test.
Under federal law, as a federal savings association, the Bank must comply with the qualified thrift lender, or “QTL” test. Under the QTL test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” in at least nine months of the most recent twelve-month period. “Portfolio assets” means, in general, the Bank’s total assets less the sum of:
|●||specified liquid assets up to 20% of total assets;|
|●||goodwill and other intangible assets; and|
|●||value of property used to conduct the Bank’s business.|
“Qualified thrift investments” include certain assets that are includable without limit, such as residential and manufactured housing loans, home equity loans, education loans, small business loans, credit card loans, mortgage backed securities, Federal Home Loan Bank stock and certain U.S. government obligations. In addition, certain assets are includable as “qualified thrift investments” in an amount up to 20% of portfolio assets, including certain consumer loans and loans in “credit-needy” areas.
The Bank may also satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code. Failure by the Bank to maintain its status as a QTL would result in restrictions on activities, including restrictions on branching and the payment of dividends. If the Bank were unable to correct that failure within a specified period of time, it must either continue to operate under those restrictions on its activities or convert to a national bank charter. The Bank met the QTL test in each of the prior 12 months and, therefore, is a “qualified thrift lender.”
The Community Reinvestment Act.
The Community Reinvestment Act of 1977 (the “CRA”) and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their entire assessment area, including low and moderate income neighborhoods, consistent with the safe and sound operations of such banks. The CRA requires the OCC to evaluate the record of each financial institution in meeting such credit needs. The CRA evaluation is also considered by the bank regulatory agencies in evaluating approvals for mergers, acquisitions, and applications to open, relocate or close a branch or facility. Failure to adequately meet the criteria within CRA guidelines could impose additional requirements and limitations on the Bank. Additionally, the Bank must publicly disclose the ability to request the Bank’s CRA Performance Evaluation and other various related documents. The Bank received a rating of “Outstanding” on its most recent Community Reinvestment Act examination.
Consumer Protection and CFPB Supervision.
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent federal agency responsible for implementing, enforcing, and examining compliance with federal consumer financial laws. As Western New England Bancorp has less than $10 billion in total consolidated assets, the OCC continues to exercise primary examination authority over the Bank with regard to compliance with federal consumer financial laws and regulations. Under the Dodd-Frank Act, state attorneys general are empowered to enforce rules issued by the CFPB.
The Company and the Bank are subject to a number of federal and state laws designed to protect borrowers and promote fair lending. These laws include, among others, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010.
Transactions with Affiliates and Loans to Insiders.
Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (“FRA”), and the FRB’s implementing Regulation W. In a holding company context, at a minimum, the parent holding company of a bank or savings association, and any companies which are controlled by such parent holding company, are “affiliates” of the bank or savings association. Generally, sections 23A and 23B are intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates, by limiting the extent to which a depository institution or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the depository institution in the aggregate, and by requiring that such transactions be on terms that are consistent with safe and sound banking practices.
Section 22(h) of the FRA restricts loans to directors, executive officers, and principal stockholders (“Insiders”). Under Section 22(h), loans to Insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the insured depository institution’s total capital and surplus. Loans to Insiders above specified amounts must receive the prior approval of the Board. Further, under Section 22(h), loans to insiders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such Insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.
The OCC has primary enforcement responsibility over federal savings associations, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to unsafe or unsound practices, and any violation of laws and regulations.
Standards for Safety and Soundness.
The Bank is subject to certain standards designed to maintain the safety and soundness of individual insured depository institutions and the banking system. The OCC has prescribed safety and soundness guidelines relating to (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth, concentration, and quality; (vi) earnings; and (vii) compensation and benefit standards for officers, directors, employees and principal shareholders. A savings association not meeting one or more of the safety and soundness guidelines may be required to file a compliance plan with the OCC.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management is not aware of any practice, condition or violation that might lead to the termination of the Bank’s deposit insurance.
Federal Deposit Insurance.
The FDIC’s deposit insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. The deposits of the Bank are insured up to applicable limits by the DIF of the FDIC. The Bank is subject to deposit insurance assessments to maintain the DIF. The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account an insured depository institution’s capital level and supervisory rating, commonly known as the “CAMELS” rating. The risk matrix utilizes different risk categories which are distinguished by capital levels and supervisory ratings. As a result of the Dodd-Frank Act, the base for insurance assessments is now consolidated average assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed.
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Federal Home Loan Bank System.
The Bank is a member of the FHLB, which is one of the regional Federal Home Loan Banks comprising the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB. Required percentages of stock ownership are subject to change by the FHLB, and the Bank was in compliance with this requirement with an investment in FHLB capital stock at December 31, 2020. If there are any developments that cause the value of our stock investment in the FHLB to become impaired, we would be required to write down the value of our investment, which could affect our net income and shareholders’ equity.
FRB regulations require insured depository institutions to maintain non-interest earning reserves against their transaction accounts (primary interest-bearing and regular checking accounts). The Bank’s required reserves can be in the form of vault cash. If vault cash does not fully satisfy the required reserves, they may be satisfied in the form of a balance maintained with the Federal Reserve Bank of Boston.
Financial Privacy and Data Security.
Western New England Bancorp is subject to federal laws, including the Gramm-Leach Bliley Act, and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-affiliated institutions. These provision require notice of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations.
The Gramm-Leach Bliley Act requires that financial institutions implement comprehensive written information security programs that include administrative, technical, and physical safeguards to protect consumer information. Further, pursuant to interpretive guidance issued under the Gramm-Leach Bliley Act and certain state laws, financial institutions are required to notify customers of security breaches that result in unauthorized access to their nonpublic personal information.
Preventing Suspicious Activity.
Under Title III of the USA PATRIOT Act (“Patriot Act”), all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of Gramm-Leach Bliley Act and other privacy laws. Financial institutions are required to have anti-money laundering programs in place, which include, among other things, performing risk assessments and customer due diligence. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. As of May 11, 2018, the Bank must comply with the new Customer Due Diligence Rule, which clarifies and strengthens the existing obligations for identifying new and existing customers and explicitly include risk-based procedures for conducting ongoing customer due diligence. Financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of institutions in combating money laundering activities is a factor to be considered in any application submitted by an insured depository institution under the Bank Merger Act. Western New England Bancorp and the Bank have in place a Bank Secrecy Act and Patriot Act compliance program and engage in limited transactions with foreign financial institutions or foreign persons.
The Fair Credit Reporting Act’s Red Flags Rule requires financial institutions with covered accounts (e.g. consumer bank accounts and loans) to develop, implement, and administer an identity theft prevention program. This program must include reasonable policies and procedures to detect suspicious patterns or practices that indicate the possibility of identity theft, such an inconsistencies in personal information or changes in account activity.
Office of Foreign Assets Control Regulation.
The U.S. has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the Office of Foreign Assets Control, which is an office within the U.S. Department of Treasury (the “OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, the sanctions contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without an OFAC license. Failure to comply with these sanctions could have legal and reputational consequences.
Home Mortgage Disclosure Act (“HMDA”).
On October 15, 2015, pursuant to section 1094 of the Dodd-Frank Act, the CFPB issued amended rules in regards to the collection, reporting and disclosure of certain residential mortgage transactions under the Home Mortgage Disclosure Act (the “HMDA Rules”). The Dodd-Frank Act mandated additional loan data collection points in addition to authorizing the CFPB to require other data collection points under implementing Regulation C. Most of the provisions of the HMDA Rule went into effect on January 1, 2018 and apply to data collected in 2018 and reporting in 2019 and later years. The HMDA Rule adopts a uniform loan volume threshold for all financial institutions, modifies the types of transactions that are subject to collection and reporting, expands the loan data information being collected and reported, and modifies procedures for annual submission and annual public disclosures.
UDAP and UDAAP.
Banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” referred to as UDAAP, which have been delegated to the CFPB for rule-making. The federal banking agencies have the authority to enforce such rules and regulations.
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on “golden parachute” payments in connection with approvals of mergers and acquisitions. The legislation also authorized the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured.
The Dodd-Frank Act also gives the SEC authority to prohibit broker discretionary voting on elections of directors, executive compensation matters and any other significant matter. At the 2012 and 2017 Annual Meeting of Shareholders, Western New England Bancorp’s shareholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the compensation of named executive officers of Western New England Bancorp annually. In light of the results, the Western New England Bancorp Board of Directors determined to hold the vote annually.
Future Legislative and Regulatory Initiatives.
Various legislative and regulatory initiatives are introduced by Congress, state legislatures and different financial regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies, savings and loan holding companies and/or depository institutions. Proposed legislation and regulatory initiatives could change banking statutes and the operating environment of Western New England Bancorp in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. Western New England Bancorp cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of Western New England Bancorp. Other legislation may be introduced in Congress, which would further regulate, deregulate or restructure the financial services industry, including proposals to substantially reform the financial regulatory framework. It is not possible to predict whether any such proposals will be enacted into law or, if enacted, the effect which they may have on our business and earnings.
We maintain a website at www.westfieldbank.com. The website contains information about us and our operations. Through a link to the Investor Relations section of our website, copies of each of our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports Form 10-Q and Current Reports on Form 8-K and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish such information electronically with the SEC. The information found on our website or the website of the SEC is not incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.
|ITEM 1A.||RISK FACTORS|
An investment in the Company’s common stock is subject to a variety of risks and uncertainties including, without limitation, those set forth below, any of which could cause the Company’s actual results to vary materially from recent results, or from the other forward looking statements that the Company may make from time to time in news releases, annual reports and other written or oral communications. The material risks and uncertainties that management believes may affect the Company are described below. These risks and uncertainties are not listed in any particular order of priority and are not necessarily the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business, financial condition and results of operations.
This annual report on Form 10-K is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Company’s business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and stockholders could lose some or all of their investment.
Risks Related to our Business and Industry
The COVID-19 pandemic is adversely impacting us and our customers, counterparties, employees and third-party service providers. Further, the COVID-19 pandemic has severely disrupted the U.S. economy and may continue disrupting banking and other financial activity in the areas in which we operate and the adverse impacts on our business, financial position, results of operations and prospects could continue to be significant. Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The ongoing COVID-19 global public health crisis and the resulting “stay-at-home” orders have resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular, deterioration in household, business, economic and market conditions. The extent of the continued impact of the COVID-19 pandemic and actions taken in response to the pandemic on our capital, liquidity and other financial positions and on our business, results of operations and prospects will depend on a number of evolving factors, including:
|●||The duration, extent, and severity of the pandemic. COVID-19 does not yet appear to be contained and could affect significantly more households and businesses. The duration and severity of the pandemic continue to be impossible to predict.|
|●||The effects on our customers, counterparties, employees and third-party service providers. COVID-19 and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly. In the near-term if not longer, however, our credit, operational and other risks are generally expected to increase.|
|●||The effects on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional and local economies and markets could suffer disruptions that are lasting. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect our results of operations and financial condition.|
|●||The efficacy and availability of widespread vaccinations.|
Additionally, if the ongoing COVID-19 pandemic has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services, (iv) other aspects of our business operations, or (v) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the decline in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected. We are unable to estimate the impact of COVID-19 on our business and operations at this time. The global pandemic could cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, further reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects. Sustained adverse effects may also prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements or result in downgrades in our credit ratings.
Our Loan Portfolio Includes Loans with a Higher Risk of Loss. The Company originates commercial and industrial loans, commercial real estate loans, consumer loans, and residential mortgage loans primarily within its market area. The lending strategy focuses on residential real estate lending as well as servicing commercial customers, including increased emphasis on commercial and industrial lending and commercial deposit relationships. Commercial and industrial loans, commercial real estate loans, and consumer loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial real estate and commercial and industrial loans may also involve relatively large loan balances to individual borrowers or groups of borrowers.
These loans also have greater credit risk than residential real estate for the following reasons:
|●||Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service.|
|●||Commercial and Industrial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business.|
|●||Consumer Loans. Consumer loans are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage or loss.|
Any downturn in the real estate market or local economy could adversely affect the value of the properties securing the loans or revenues from the borrowers’ businesses thereby increasing the risk of non-performing loans.
The Company’s Allowance for Loan Losses May Not be Adequate to Cover Loan Losses, Which Could Have a Material Adverse Effect on the Company’s Business, Financial Condition and Results of Operations. A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Bank are secured, but some loans are unsecured based upon management’s evaluation of the creditworthiness of the borrowers. With respect to secured loans, the collateral securing the repayment of these loans principally includes a wide variety of real estate, and to a lesser extent personal property, either of which may be insufficient to cover the obligations owed under such loans.
Collateral values and the financial performance of borrowers may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates and debt service levels, changes in oil and gas prices, changes in monetary and fiscal policies of the federal government, widespread disease, terrorist activity, environmental contamination and other external events, which are beyond the control of the Company. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards might create the impression that a loan is adequately collateralized when in fact it is not. Although the Company may acquire any real estate or other assets that secure defaulted loans through foreclosures or other similar remedies, the amounts owed under the defaulted loans may exceed the value of the assets acquired.
The Company maintains an allowance for loan losses, which is established through a provision for loan losses charged to earnings, that represents management’s estimate of probable losses inherent within the existing portfolio of loans. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and trends, all of which may undergo material changes. In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that differ from those of the Company’s management. While the Company strives to carefully monitor credit quality and to identify loans that may become non-performing, it may not be able to identify deteriorating loans before they become non-performing assets, or be able to limit losses on those loans that have been identified to be non-performing. The FASB has announced changes to accounting standards that will impact the way banking organizations estimate their allowance for loan losses beginning in January 2020, with the implementation of these changes becoming effective for the Company in fiscal years beginning after December 15, 2022. These changes or any others to accounting rules governing credit impairment estimates and recognition may increase the level of the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, depending upon the magnitude of the changes, could have a material adverse effect on the Company’s financial condition and results of operations.
Increases in the Company’s Non-performing Assets Could Adversely Affect the Company’s Results of Operations and Financial Condition in the Future. Non-performing assets adversely affect net income in various ways. While the Company pays interest expense to fund non-performing assets, no interest income is recorded on non-accrual loans or other real estate owned, thereby adversely affecting income and returns on assets and equity. In addition, loan administration and workout costs increase, resulting in additional reductions of earnings. When taking collateral in foreclosures and similar proceedings, the Company is required to carry the property or loan at its then-estimated fair market value less estimated cost to sell, which, when compared to the carrying value of the loan, may result in a loss. These non-performing loans and other real estate owned also increase the Company’s risk profile and the capital that regulators believe is appropriate in light of such risks, and have an impact on the Company’s FDIC risk based deposit insurance premium rate. The resolution of non-performing assets requires significant time commitments from management and staff. The Company may experience further increases in non-performing loans in the future, and non-performing assets may result in further costs and losses in the future, either of which could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s Use of Appraisals in Deciding Whether to Make a Loan Does Not Ensure the Value of the Collateral. In considering whether to make a loan secured by real property or other business assets, the Company generally requires an internal evaluation or independent appraisal of the asset. However, these assessment methods are only an estimate of the value of the collateral at the time the assessment is made, and involve a large degree of estimates and assumptions and an error in fact or judgment could adversely affect the reliability of the valuation. Changes in those estimates resulting from continuing change in the economic environment and events occurring after the initial assessment may cause the value of the assets to decrease in future periods. As future events and their effects cannot be determined with precision, actual values could differ significantly from these estimates. As a result of any of these factors, the value of collateral backing a loan may be less than estimated at the time of assessment, and if a default occurs the Company may not recover the outstanding balance of the loan.
The Company is Subject to Environmental Risks Associated with Real Estate Held as Collateral or Occupied. When a borrower defaults on a loan secured by real property, the Company may purchase the property in foreclosure or accept a deed to the property surrendered by the borrower. The Company may also take over the management of commercial properties whose owners have defaulted on loans. The Company also occupies owned and leased premises where branches and other bank facilities are located. While the Company’s lending, foreclosure and facilities policies and guidelines are intended to exclude properties with an unreasonable risk of contamination, hazardous substances could exist on some of the properties that the Company may own, acquire, manage or occupy. Environmental laws could force the Company to clean up the properties at the Company’s expense. The Company may also be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The cost associated with investigation or remediation activities could be substantial and could increase the Company’s operating expenses. It may cost much more to clean a property than the property is worth and it may be difficult or impossible to sell contaminated properties. The Company could also be liable for pollution generated by a borrower’s operations if the Company takes a role in managing those operations after a default. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
The Company’s Investment Securities Portfolio is Subject to Credit Risk and Liquidity Risk and Declines in Value in its Investment Securities Portfolio May Require the Company to Record OTTI Charges That Could Have a Material Adverse Effect on the Company’s Results of Operations and Financial Condition. There are inherent risks associated with the Company’s investment activities, many of which are beyond the Company’s control. These risks include the impact from changes in interest rates, weakness in real estate, municipalities, government sponsored enterprises, or other industries, the impact of changes in income tax rates on the value of tax exempt securities, adverse changes in regional or national economic conditions, and general turbulence in domestic and foreign financial markets, among other things. These conditions could adversely impact the fair market value and/or the ultimate collectability of the Company’s investments. In addition to fair market value impairment, carrying values may be adversely impacted due to a fundamental deterioration of the individual municipality, government agency, or corporation whose debt obligations the Company owns or of the individual company or fund in which the Company has invested.
If an investment’s value is deemed other than temporarily impaired, then the Company is required to write down the carrying value of the investment which may involve a charge to earnings. The determination of the level of OTTI involves a high degree of judgment and requires the Company to make significant estimates of current market risks and future trends, all of which may undergo material changes. Any OTTI charges, depending upon the magnitude of the charges, could have a material adverse effect on the Company’s financial condition and results of operations.
Interest Rate Volatility Could Adversely Affect our Results of Operations and Financial Condition. The Company’s earnings and cash flows are largely dependent upon its net interest income, meaning the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities. The re-pricing frequency and magnitude of the Company’s assets and liabilities are not identical, and therefore subject the Company to the risk of adverse changes in interest rates. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including monetary policy of the federal government, inflation and deflation, volatility of domestic and global financial markets, volatility of credit markets, and competition. If the interest rates paid on interest-bearing deposits and other liabilities increase at a faster rate or magnitude than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly or steeply than falling interest rates paid on interest-bearing liabilities.
Competition in Our Primary Market Area May Reduce Our Ability to Attract and Retain Deposits and Originate Loans. We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Historically, our most direct competition for deposits has come from savings and commercial banks. Our competition for loans comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. We also face additional competition from internet-based institutions, brokerage firms and insurance companies. Competition for loan originations and deposits may limit our future growth and earnings prospects.
Deposit Outflows May Increase Reliance on Borrowings and Brokered Deposits as Sources of Funds. The Company has traditionally funded asset growth principally through deposits and borrowings. As a general matter, deposits are typically a lower cost source of funds than external wholesale funding (brokered deposits and borrowed funds), because interest rates paid for deposits are typically less than interest rates charged for wholesale funding. If, as a result of competitive pressures, market interest rates, alternative investment opportunities that present more attractive returns to customers, general economic conditions or other events, the balance of the Company’s deposits decreases relative to the Company’s overall banking operations, the Company may have to rely more heavily on wholesale or other sources of external funding, or may have to increase deposit rates to maintain deposit levels in the future. Any such increased reliance on wholesale funding, or increases in funding rates in general could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial condition.
The Company, as Part of its Strategic Plans, Periodically Considers Potential Acquisitions. The Risks Presented by Acquisitions Could Adversely Affect Our Financial Condition and Results of Operations. Any acquisitions will be accompanied by the risks commonly encountered in acquisitions including, among other things: our ability to realize anticipated cost savings and avoid unanticipated costs relating to the merger, the difficulty of integrating operations and personnel, the potential disruption of our or the acquired company’s ongoing business, the inability of our management to maximize our financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management. These risks may prevent us from fully realizing the anticipated benefits of an acquisition or cause the realization of such benefits to take longer than expected.
The Company Relies on Third-Party Service Providers. The Company relies on independent firms to provide critical services necessary to conducting its business. These services include, but are not limited to: electronic funds delivery networks; check clearing houses; electronic banking services; investment advisory, management and custodial services; correspondent banking services; information security assessments and technology support services; and loan underwriting and review services. The occurrence of any failures or interruptions of the independent firms’ systems or in their delivery of services, or failure to perform in accordance with contracted service level agreements, for any number of reasons could also impact the Company’s ability to conduct business and process transactions and result in loss of customer business and damage to the Company’s reputation, any of which may have a material adverse effect on the Company’s business, financial condition and results of operation.
The Company Relies on Dividends from the Bank for Substantially All of its Revenue. The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends paid by the Bank. These dividends are the principal source of funds used to pay dividends on the Company’s common stock and interest and principal on the Company’s subordinated debt. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank, due to its capital position, inadequate net income levels, or otherwise, is unable to pay dividends to the Company, then the Company will be unable to service debt, pay obligations or pay dividends on the Company’s common stock. The OCC also has the authority to use its enforcement powers to prohibit the Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. The Bank’s inability to pay dividends could have a material adverse effect on the Company’s business, financial condition, results of operations and the market price of the Company’s common stock.
The Carrying Value of the Company’s Goodwill Could Become Impaired. In accordance with GAAP, the Company does not amortize goodwill and instead, at least annually, evaluates whether the carrying value of goodwill has become impaired. Impairment of goodwill may occur when the estimated fair value of the Company is less than its recorded book value (i.e., the net book value of its recorded assets and liabilities). This may occur, for example, when the estimated fair value of the Company declines due to changes in the assumptions and inputs used in management’s estimate of fair value. A determination that goodwill has become impaired results in an immediate write-down of goodwill to its determined value with a resulting charge to operations. Any write down of goodwill will result in a decrease in net income and, depending upon the magnitude of the charge, could have a material adverse effect on the Company’s financial condition and results of operations.
Risks Related to Legal, Governmental and Regulatory Changes
If Dividends Are Not Paid on Our Investment in the FHLB, or if Our Investment is Classified as Other-Than-Temporarily Impaired, Our Earnings and/or Shareholders’ Equity Could Decrease. As a member of the FHLB, the Company is required to own a minimum required amount of FHLB capital stock, calculated periodically based primarily on its level of borrowings from the FHLB. This stock is classified as a restricted investment and carried at cost, which management believes approximates fair value of the FHLB stock. If negative events or deterioration in the FHLB financial condition or capital levels occurs, the Company’s investment in FHLB capital stock may become other-than-temporarily impaired to some degree. There can be no assurance that FHLB stock dividends will be declared in the future. If either of these were to occur, the Company’s results of operations and financial condition may be adversely affected.
Concentration in Commercial Real Estate Lending is Subject to Heightened Risk Management and Regulatory Review. If a concentration in commercial real estate lending is present, as measured under government banking regulations, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If a concentration is determined to exist, the Company may incur additional operating expenses in order to comply with additional risk management practices and increased capital requirements which could have a material adverse effect on the Company’s financial condition and results of operations.
Replacement of the London Interbank Offered Rate (“LIBOR”) Could Adversely Affect Our Business, Financial Condition, and Results of Operations. On November 30, 2020, the ICE Benchmark Administration (“IBA”) announced that it intends to publish one week and two month USD-LIBOR (as defined below) settings until December 31, 2021, and the remaining USD-LIBOR settings until the end of June 2023. The IBA announcement was supported by similar announcements from the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, and the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency (collectively, the ” U.S. Regulators”). Both the FCA and the U.S. Regulators in their announcements also encouraged banks to cease entering into new contracts referencing USD-LIBOR after December 2021. These announcements indicate that the continuation of LIBOR on the current basis may not be assured after 2021. In April 2018, the New York Federal Reserve commenced publishing an alternative reference rate to LIBOR as calculated for the U.S. dollar (“USD-LIBOR”), the Secured Overnight Financing Rate (“SOFR”), proposed by a group of major market participants (the Alternative Reference Rates Committee (“ARRC”)), convened by the U.S. Federal Reserve with participation by SEC Staff and other regulators. SOFR is based on transactions in the more robust U.S. Treasury repurchase market and has been proposed as the alternative to USD-LIBOR for use in derivatives and other financial contracts that currently rely on USD-LIBOR as a reference rate. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. Though an alternative reference rate for USD-LIBOR, SOFR, exists, significant uncertainties still remain. We can provide no assurance regarding the future of LIBOR and when our LIBOR-based instruments will transition from USD-LIBOR as a reference rate to SOFR or another reference rate.
We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR, or any changes or reforms to the determination or supervision of LIBOR, could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, could create considerable costs and additional risk and could have an adverse impact on our overall financial condition or results of operations. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
Sources of External Funding Could Become Restricted and Impact the Company’s Liquidity. The Company’s external wholesale funding sources include borrowing capacity at the FHLB, capacity in the brokered deposit markets, other borrowing arrangements with correspondent banks, as well as accessing the public markets through offerings of the Company’s stock or issuance of debt. If, as a result of general economic conditions or other events, these sources of external funding become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company’s operations and growth. Any such increase in funding costs or restrictions could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial condition.
We Operate In a Highly-Regulated Environment That is Subject to Extensive Government Supervision and Regulation, Which May Interfere With Our Ability to Conduct Business and May Adversely Impact the Results of our Operations. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the interests of stockholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. The Company is subject to extensive federal and state supervision and regulation that govern nearly all aspects of our operations and can have a material impact on our business. Federal banking agencies have significant discretion regarding the supervision, regulation and enforcement of banking laws and regulations.
Financial laws, regulations and policies are subject to amendment by Congress, state legislatures and federal and state regulatory agencies. Changes to statutes, regulations or policies, including changes in the interpretation of regulations or policies, could materially impact our business. These changes could also impose additional costs on us and limit the types of products and services that we may offer our customers. Compliance with laws and regulations can be difficult and costly, and the failure to comply with any law, regulation or policy could result in sanctions by financial regulatory agencies, including civil monetary penalties, private lawsuits, or reputational damage, any of which could adversely affect our business, financial condition, or results of operations. While we have policies and procedures designed to prevent such violations, there can be no assurance that violations will not occur. See the section titled, “Supervision and Regulation” in ITEM 1. Business.
Since the 2008 global financial crisis, financial institutions have been subject to increased scrutiny from Congress, state legislatures and federal and state financial regulatory agencies. Changes to the legal and regulatory framework have significantly altered the laws and regulations under which we operate. Compliance with these changes and any additional or amended laws, regulations and regulatory policies may reduce our ability to effectively compete in attracting and retaining customers. The passage and continued implementation of the Dodd-Frank Act, among other laws and regulations, has increased our costs of doing business and resulted in decreased revenues and net income. We cannot provide assurance that future changes in laws, regulations and policies will not adversely affect our business.
State and Federal Regulatory Agencies Periodically Conduct Examinations of Our Business, Including for Compliance With Laws and Regulations, and Our Failure to Comply With Any Supervisory Actions to Which We Are or Become Subject as a Result of Such Examinations May Adversely Affect Our Business. Federal and state regulatory agencies periodically conduct examinations of our business, including our compliance with applicable laws and regulations. If, as a result of an examination, an agency were to determine that the financial, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or violates any law or regulation, such agency may take certain remedial or enforcement actions it deems appropriate to correct any deficiency. Remedial or enforcement actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced against a bank, to direct an increase in the bank’s capital, to restrict the bank’s growth, to assess civil monetary penalties against a bank’s officers or directors, and to remove officers and directors. In the event that the FDIC concludes that, among other things, our financial conditions cannot be corrected or that there is an imminent risk of loss to our depositors, it may terminate our deposit insurance. The OCC, as the supervisory and regulatory authority for federal savings associations, has similar enforcement powers with respect to our business. The CFPB also has authority to take enforcement actions, including cease-and-desist orders or civil monetary penalties, if it finds that we offer consumer financial products and services in violation of federal consumer financial protection laws.
If we were unable to comply with future regulatory directives, or if we were unable to comply with the terms of any future supervisory requirements to which we may become subject, then we could become subject to a variety of supervisory actions and orders, including cease and desist orders, prompt corrective actions, memoranda of understanding, and other regulatory enforcement actions. Such supervisory actions could, among other things, impose greater restrictions on our business, as well as our ability to develop any new business. We could also be required to raise additional capital, or dispose of certain assets and liabilities within a prescribed time period, or both. Failure to implement remedial measures as required by financial regulatory agencies could result in additional orders or penalties from federal and state regulators, which could trigger one or more of the remedial actions described above. The terms of any supervisory action and associated consequences with any failure to comply with any supervisory action could have a material negative effect on our business, operating flexibility and overall financial condition.
The Company’s Capital Levels Could Fall Below Regulatory Minimums. The Company and the Bank are subject to the capital adequacy guidelines of the FRB and the OCC, respectively. Failure to meet applicable minimum capital ratio requirements (including the capital conservation “buffer” imposed by Basel III) may subject the Company and/or the Bank to various enforcement actions and restrictions. If the Company’s capital levels decline, or if regulatory requirements increase, and the Company is unable to raise additional capital to offset that decline or meet the increased requirements, then its capital ratios may fall below regulatory capital adequacy levels. The Company’s capital ratios could decline due to it experiencing rapid asset growth, or due to other factors, such as, by way of example only, possible future net operating losses, impairment charges against tangible or intangible assets, or adjustments to retained earnings due to changes in accounting rules.
The Company’s failure to remain “adequately-capitalized” for bank regulatory purposes could affect customer confidence, restrict the Company’s ability to grow (both assets and branching activity), increase the Company’s costs of funds and FDIC insurance costs, prohibit the Company’s ability to pay dividends on common shares, and its ability to make acquisitions, and have a negative impact on the Company’s business, results of operation and financial conditions, generally. If the Bank ceases to be a “well-capitalized” institution for bank regulatory purposes, its ability to accept brokered deposits and the interest rates that it pays may be restricted.
Changes in Accounting Standards Could Materially Impact the Company’s Financial Condition and Results of Operations. From time to time, the FASB changes the accounting and reporting standards that govern the recording of financial transactions and preparation of financial statements. Future changes may be difficult to implement and may materially impact how the Company records and reports its financial transactions, financial condition, and results of operations and could impact the Company’s business activities and strategy.
Changes in Tax Policies at Both the Federal and State Levels Could Impact the Company’s Financial Condition and Results of Operations. The Company’s financial performance is impacted by federal and state tax laws. Enactment of new legislation, or changes in the interpretation of existing law, may have a material effect on the Company’s financial condition and results of operations. A deferred tax asset is created by the tax effect of the differences between an asset’s book value and its tax basis. The deferred tax asset is measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. Accordingly, a reduction in enacted tax rates may result in a decrease in current tax expense and a decrease to the Company’s deferred tax asset, with an offsetting charge to current tax expense. The alternative would occur with an increase to enacted tax rates. In addition, certain tax strategies taken in the past derive their tax benefit from the current enacted tax rates. Accordingly, a change in enacted tax rates may result in a decrease/increase to anticipated benefit of the Company’s previous transactions which in turn, could have a material effect on the Company’s financial condition and results of operations.
Risks Related to Cybersecurity and Data Privacy
We Face Cybersecurity Risks and Risks Associated With Security Breaches Which Have the Potential to Disrupt Our Operations, Cause Material Harm to Our Financial Condition, Result in Misappropriation of Assets, Compromise Confidential Information and/or Damage Our Business Relationships and Can Provide No Assurance That the Steps We and Our Service Providers Take in Response to These Risks Will Be Effective. We depend upon data processing, communication and information exchange on a variety of computing platforms and networks and over the internet. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. We face cybersecurity risks and risks associated with security breaches or disruptions such as those through cyber-attacks or cyber intrusions over the internet, malware, computer viruses, attachments to emails, social engineering and phishing schemes or persons inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusions, including by computer hackers, nation-state affiliated actors, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. These incidents may result in disruption of our operations, material harm to our financial condition, cash flows and the market price of our common stock, misappropriation of assets, compromise or corruption of confidential information collected in the course of conducting our business, liability for stolen information or assets, increased cybersecurity protection and insurance costs, regulatory enforcement, litigation and damage to our stakeholder relationships. These risks require continuous and likely increasing attention and other resources from us to, among other actions, identify and quantify these risks, upgrade and expand our technologies, systems and processes to adequately address them and provide periodic training for our employees to assist them in detecting phishing, malware and other schemes. Such attention diverts time and other resources from other activities and there is no assurance that our efforts will be effective.
In the normal course of business, we collect and retain certain personal information provided by our customers, employees and vendors. We also rely extensively on computer systems to process transactions and manage our business. We can provide no assurance that the data security measures designed to protect confidential information on our systems established by us will be able to prevent unauthorized access to this personal information. There can be no assurance that our efforts to maintain the security and integrity of the information we and our service providers collect and our and their computer systems will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
We Continually Encounter Technological Change and The Failure to Understand and Adapt to These Changes Could Hurt Our Business. The financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products and services and technological advances are likely to intensify competition. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
General Risk Factors
The Possibility of the Economy’s Return to Recessionary Conditions and the Possibility of Further Turmoil or Volatility in the Financial Markets Would Likely Have an Adverse Effect on the Company’s Business, Financial Position and Results of Operations. The Company continues to face risks resulting from the aftermath of the severe recession generally and the moderate pace of the current recovery. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on the Company and on others in the financial services industry. In particular, the Company may face the following risks in connection with the economic or market environment:
|●||The Company’s and the Bank’s ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.|
|●||The Company faces increased regulation of the banking and financial services industry. Compliance with such regulation may increase its costs and limit its ability to pursue business opportunities.|
|●||Market developments may affect customer confidence levels and may cause increases in loan delinquencies and default rates, which management expects would adversely impact the Bank’s charge-offs and provision for loan losses.|
|●||Market developments may adversely affect the Bank’s securities portfolio by causing other-than-temporary-impairments, prompting write-downs and securities losses.|
|●||Competition in banking and financial services industry could intensify as a result of the consolidation of financial services companies in connection with current market conditions.|
Changes in the Local Economy May Affect our Future Growth Possibilities. The Company’s success depends principally on the general economic conditions of the primary market areas in which the Company operates. The local economic conditions in these regions have a significant impact on the demand for the Company’s products and services, as well as the ability of the Company’s customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources. The Company’s market area is principally located in Hampden and Hampshire Counties, Massachusetts and Hartford and Tolland Counties in northern Connecticut. The local economy may affect future growth possibilities. The Company’s future growth opportunities depend on the growth and stability of our regional economy and the ability to expand in our market area.
Natural Disasters, Acts of Terrorism, Public Health Issues and Other External Events Could Harm Our Business. Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. The emergence of widespread health emergencies or pandemics, such as the spread of COVID-19, could lead to regional quarantines, business shutdowns, labor shortages, disruptions to supply chains, and overall economic instability. Events such as these may become more common in the future and could cause significant damage such as disruptions to power and communication services, impacting the stability of our facilities and result in additional expenses, impairing the ability of our borrowers to repay outstanding loans or reducing the value of collateral securing the repayment of our loans, which could result in the loss of revenue and/or cause us to incur additional expenses. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest, violence or human error could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.
The Company May Not be Able to Attract, Retain or Develop Key Personnel. The Company’s success depends, in large part, on its ability to attract, retain and develop key personnel. Competition for the best people in most activities engaged in by the Company can be intense, and the Company may not be able to hire or retain the key personnel that it depends upon for success. The unexpected loss of key personnel or the inability to identify and develop individuals for planned succession to key senior positions within management, or on the Board, could have a material adverse impact on the Company’s business because of the loss of their skills, knowledge of the Company’s market, years of industry or business experience and the difficulty of promptly finding qualified replacements.
Controls and Procedures Could Fail, or Be Circumvented by Theft, Fraud or Robbery. Management regularly reviews and updates the Company’s internal controls over financial reporting, corporate governance policies, compensation policies, Code of Business Conduct and Ethics and security controls to prevent and detect theft, fraud or robbery from both internal and external sources. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s internal controls and procedures, or failure to comply with regulations related to controls and procedures, or a physical theft or robbery, whether by employees, management, directors, or external elements, or any illegal activity conducted by a Bank customer, could result in loss of assets, regulatory actions against the Company, financial loss, damage the Company’s reputation, cause a loss of customer business, and expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s business, results of operations and financial condition.
Damage to the Company’s Reputation Could Affect the Company’s Profitability and Shareholders’ Value. The Company is dependent on its reputation within its market area, as a trusted and responsible financial company, for all aspects of its business with customers, employees, vendors, third-party service providers, and others, with whom the Company conducts business or potential future business. Any negative publicity or public complaints, whether real or perceived, disseminated by word of mouth, by the general media, by electronic or social networking means, or by other methods, regarding, among other things, the Company’s current or potential business practices or activities, cyber-security issues, regulatory compliance, an inability to meet obligations, employees, management or directors’ ethical standards or actions, or about the banking industry in general, could harm the Company’s reputation. Any damage to the Company’s reputation could affect its ability to retain and develop the business relationships necessary to conduct business which in turn could negatively impact the Company’s profitability and shareholders’ value.
The Company is Exposed to Legal Claims and Litigation. The Company is subject to legal challenges under a variety of circumstances in the course of its normal business practices in regards to laws and regulations, duties, customer expectations of service levels, in addition to potentially illegal activity (at a federal or state level) conducted by any of our customers, use of technology and patents, operational practices and those of contracted third-party service providers and vendors, and stockholder matters, among others. Regardless of the scope or the merits of any claims by potential or actual litigants, the Company may have to engage in litigation that could be expensive, time-consuming, disruptive to the Company’s operations, and distracting to management. Whether claims or legal action are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability, damage the Company’s reputation, subject the Company to additional regulatory scrutiny and restrictions, and/or adversely affect the market perception of our products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s Insurance Coverage May Not be Adequate to Prevent Additional Liabilities or Expenses. The Company maintains insurance policies that provide coverage for various risks at levels the Company deems adequate to provide reasonable coverage for losses. The coverage applies to incidents and events which may impact such areas as: loss of bank facilities; accidental injury or death of employees; injuries sustained on bank premises; cyber and technology attacks or breaches; loss of customer nonpublic personal information; processing of fraudulent transactions; robberies, embezzlement and theft; improper processing of negotiable items or electronic transactions; improper loan underwriting and perfection of collateral, among others. These policies will provide varying degrees of coverage for losses under specific circumstances, and in most cases after related deductible amounts are paid by the Company. However, there is no guarantee that the circumstance of an incident will meet the criteria for insurance coverage under a specific policy, and despite the insurance policies in place the Company may experience a loss incident or event which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations.
The Trading Volume in the Company’s Common Stock is Less Than That of Larger Companies. Although the Company’s common stock is listed for trading on the NASDAQ, the trading volume in the Company’s common stock is substantially less than that of larger companies. Given the lower trading volume of the Company’s common stock, significant purchases or sales of the Company’s common stock, or the expectation of such purchases or sales, could cause significant volatility in the price for the Company’s common stock.
The Market Price of the Company’s Common Stock May Fluctuate Significantly, and This May Make it Difficult for You to Resell Shares of Common Stock Owned by You at Times or at Prices You Find Attractive. The price of the Company’s common stock on the NASDAQ constantly changes. The Company expects that the market price of its common stock will continue to fluctuate, and the Company cannot give you any assurances regarding any trends in the market prices for its common stock.
The Company’s stock price may fluctuate as a result of a variety of factors, many of which are beyond its control. These factors include the Company’s:
|●||past and future dividend practice;|
|●||financial condition, performance, creditworthiness and prospects;|
|●||quarterly variations in the Corporation’s operating results or the quality of the Corporation’s assets;|
|●||operating results that vary from the expectations of management, securities analysts and investors;|
|●||changes in expectations as to the Corporation’s future financial performance;|
|●||announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by the Corporation or its competitors;|
|●||the operating and securities price performance of other companies that investors believe are comparable to the Corporation;|
|●||future sales of the Corporation’s equity or equity-related securities;|
|●||the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally; and|
|●||instability in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility, budget deficits or sovereign debt level concerns and other geopolitical, regulatory or judicial events.|
In addition, the banking industry may be more affected than other industries by certain economic, credit, regulatory or information security issues. Although the Company itself may or may not be directly impacted by such issues, the Company’s stock price may vary due to the influence, both real and perceived, of these issues, among others, on the banking industry in general. Investment in the Company’s stock is not insured against loss by the FDIC, or any other public or private entity. As a result, and for the other reasons described in this “Risk Factors” section and elsewhere in this report, if you acquire our common stock, you may lose some or all of your investment.
Shareholder Dilution Could Occur if Additional Stock is Issued in the Future. If the Company’s Board of Directors should determine in the future that there is a need to obtain additional capital through the issuance of additional shares of the Company’s common stock or securities convertible into shares of common stock, such issuances could result in dilution to existing stockholders’ ownership interest. Similarly, if the Board of Directors decides to grant additional stock awards or options for the purchase of shares of common stock, the issuance of such additional stock awards and/or the issuance of additional shares upon the exercise of such options would expose stockholders to dilution.
The Company’s Financial Condition and Results of Operation Rely in Part on Management Estimates and Assumptions. In preparing the financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies, estimates and assumptions to be utilized. These estimates and assumptions affect the reported values of assets and liabilities at the balance sheet date and income and expenses for the years then ended. Changes in those estimates resulting from continuing change in the economic environment and other factors will be reflected in the financial statements and results of operations in future periods. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates and be adversely affected should the assumptions and estimates used be incorrect, or change over time due to changes in circumstances.
business, financial condition, results of operations and the market price of the Company’s common stock.
|ITEM 1B.||UNRESOLVED STAFF COMMENTS.|
The Company currently conducts business through our 25 banking offices, 25 off-site ATMs and 23 seasonal/traveling ATMs. The following table sets forth certain information regarding our properties as of December 31, 2020. As of this date, the premises and equipment, net of depreciation, owned by us had an aggregate net book value of $25.1 million. We believe that our existing facilities are sufficient for our current needs.
|Location||Ownership||Year Opened||Year of Lease|
141 Elm Street
9-13 Chapel Street
136 Elm Street
|Commercial Lending & Middle Market:|
1500 Main Street
|Commercial Lending/Credit Admin and Training Center:|
219/229 Exchange Street
206 Park Street
West Springfield, MA
655 Main Street
26 Arnold Street
300 Southampton Road
462 College Highway
382 North Main Street
East Longmeadow, MA
1500 Main Street
1650 Northampton Street
560 East Main Street
|Location||Ownership||Year Opened||Year of Lease|
237 South Westfield Street
Feeding Hills, MA
10 Hartford Avenue
47 Palomba Drive
39 Morgan Road
West Springfield, MA
1342 Liberty Street
70 Center Street
569 East Street
599 Memorial Drive
435 Burnett Road
477A Center Street
350 Palmer Road
32 Willamansett Street (1)
South Hadley, MA
14 Russell Road
337 Cottage Grove Road
977 Farmington Avenue
West Hartford, CT
|Ownership||Year Opened||Year of Lease|
516 Carew Street
|Tenant at will||2002||NA|
1000 State Street
|Tenant at will||2003||NA|
788 Memorial Avenue
West Springfield, MA
2620 Westfield Street
West Springfield, MA
98 Southwick Road
115 West Silver Street
|Tenant at will||2005||NA|
98 Lower Westfield Road
Westfield State University
577 Western Avenue
214 College Highway
110 Cherry Street
|Tenant at will||2018||NA|
291 Springfield Street
Springfield Visitors Center
1319 Main Street
55 Frank B. Murray Street
|Location||Ownership||Year Opened||Year of Lease|
|Big E ATMs:|
1305 Memorial Avenue
West Springfield, MA
|Better Living Center||Tenant at will||2011||N/A|
|Better Living Center||Tenant at will||2011||N/A|
|Better Living Center (Door 6)||Tenant at will||2011||N/A|
|Better Living Center (Dunkin Donuts)||Tenant at will||2019||N/A|
|Big E Coliseum||Tenant at will||2015||N/A|
|Big E Young Building||Tenant at will||2011||N/A|
|Big E Mallary Complex||Tenant at will||2011||N/A|
|701 Center Street||Tenant at will||2015||N/A|
627 Randall Road
|Tenant at will||2015||N/A|
|(1)||This lease is for the land only, the building is owned by Westfield Bank.|
|ITEM 3.||LEGAL PROCEEDINGS.|
There are no material pending legal proceedings to which the Company or its subsidiaries are a party or to which any of its property is subject, other than routine legal proceedings occurring in the ordinary course of business. Management does not believe resolution of any present litigation will have a material adverse effect on the business, consolidated financial condition or results of operations of the Company.
|ITEM 4.||MINE SAFETY DISCLOSURES.|
|ITEM 5.||MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.|
The Company’s common stock is currently listed on NASDAQ under the trading symbol “WNEB.” As of December 31, 2020, there were 25,276,193 shares of the Company’s common stock outstanding by approximately 2,086 shareholders, as obtained through our transfer agent. Such number of shareholders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.
The Company maintains a dividend reinvestment and direct stock purchase plan (the “DRSPP”). The DRSPP enables stockholders, at their discretion, to continue to elect to reinvest cash dividends paid on their shares of the Company’s common stock by purchasing additional shares of common stock from the Company at a purchase price equal to fair market value. Under the DRSPP, stockholders and new investors also have the opportunity to purchase shares of the Company’s common stock without brokerage fees, subject to monthly minimums and maximums.
Although the Company has historically paid quarterly dividends on its common stock, the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will be paid in the future.
Recent Sales of Unregistered Securities.
There were no sales by the Company of unregistered securities during the year ended December 31, 2020.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
The following table sets forth information with respect to purchases made by the Company during the three months ended December 31, 2020.
|Total Number of|
Shares Purchased as
Part of Publicly
of Shares that May
Yet Be Purchased
Under the Program
|October 1 - 31, 2020||79,558||6.38||79,558||1,288,800|
|November 1 - 30, 2020||125,702||6.45||125,702||1,163,098|
|December 1 - 31, 2020||147,270||6.78||127,728||1,035,370|
|(1)||On January 29, 2019, the Board of Directors authorized an additional stock repurchase program under which the Company may purchase up to 2,814,200 shares, or 10%, of its outstanding common stock (the “2019 Plan”). On October 19, 2020, the Company announced the completion of the 2019 Plan.|
|(2)||Repurchase of 19,542 shares related to tax obligations for shares of restricted stock that vested on December 31, 2020 under our 2014 Omnibus Incentive Plan. These repurchases were reported by each reporting person on January 5, 2021.|
|(3)||On October 27, 2020, the Board of Directors authorized an additional stock repurchase plan under which the Company may purchase up to 1,300,000 shares, or 5%, of its outstanding common stock.|
Stock Performance Graph.
The following graph compares our total cumulative shareholder return (which assumes the reinvestment of all dividends) by an investor who invested $100.00 on December 31, 2015 to December 31, 2020, to the total return by an investor who invested $100.00 in the NASDAQ Bank Index and the SNL U.S. Thrift $1 Billion - $5 Billion Index for the same period.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Western New England Bancorp, Inc., the NASDAQ Bank Index and the SNL U.S. Thrift $1 Billion - $5 Billion Index
|Western New England Bancorp, Inc.||100.00||113.04||133.37||124.75||122.22||90.44|
|SNL U.S. Thrift $1 Billion - $5 Billion||100.00||136.30||138.06||96.07||116.56||93.62|
|ITEM 6.||SELECTED FINANCIAL DATA.|
|ITEM 7.||MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.|
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto, each appearing elsewhere in this Annual Report on Form 10-K.
We strive to remain a leader in meeting the financial service needs of the local community and to provide quality service to the individuals and businesses in the market areas that we have served since 1853. Historically, we have been a community-oriented provider of traditional banking products and services to business organizations and individuals, including products such as residential and commercial real estate loans, consumer loans and a variety of deposit products. We meet the needs of our local community through a community-based and service-oriented approach to banking.
We have adopted a growth-oriented strategy that continues to focus on increasing commercial lending and residential lending. Our strategy also calls for increasing deposit relationships, specifically core deposits, and broadening our product lines and services. We believe that this business strategy is best for our long-term success and viability, and complements our existing commitment to high quality customer service.
In connection with our overall growth strategy, we seek to:
|●||Grow the Company’s commercial loan portfolio and related commercial deposits by targeting businesses in our primary market area of Hampden County and Hampshire County in western Massachusetts and Hartford and Tolland Counties in northern Connecticut to increase the net interest margin and loan income;|
|●||Supplement the commercial portfolio by growing the residential real estate portfolio to diversify the loan portfolio and deepen customer relationships;|
|●||Focus on expanding our retail banking deposit franchise and increase the number of households served within our designated market area;|
|●||Invest in people, systems and technology to grow revenue, improve efficiency and enhance the overall customer experience;|
|●||Grow revenues, increase tangible book value, continue to pay competitive dividends to shareholders and utilize the Company’s stock repurchase plan to leverage our capital and enhance franchise value; and|
|●||Consider growth through acquisitions. We may pursue expansion opportunities in existing or adjacent strategic locations with companies that add complementary products to our existing business and at terms that add value to our existing shareholders.|
You should read the following financial results for the year ended December 31, 2020 in the context of this strategy.
For the twelve months ended December 31, 2020, net income was $11.2 million, or $0.45 diluted earnings per share, compared to net income of $13.3 million, or $0.51 diluted earnings per share, for the twelve months ended December 31, 2019. The results for the twelve months ended December 31, 2020 showed an increase in interest and dividend income and a decrease in interest expense, which were both offset by an increase in interest expense and an increase in the provision for loan losses. The provision for loan losses was $7.8 million for the year ended December 31, 2020, compared to $2.7 million for the year ended December 31, 2019. The allowance for loan losses was $21.2 million, or 1.10% of total loans, at December 31, 2020 and $14.1 million, or 0.79%, at December 31, 2019. Excluding PPP loans, the allowance for loan losses as a percentage of total loans was 1.20% at December 31, 2020. At December 31, 2020, the allowance for loan losses as a percentage of non-performing loans was 269.8%, compared to 142.7% at December 31, 2019. The twelve months ended 2020 was impacted by a higher provision for loan losses resulting from the COVID-19 pandemic mandated shutdowns and economic disruption that caused elevated unemployment levels and deterioration in household, business, economic and market conditions.
Net interest income increased $6.4 million, or 11.1%, to $64.4 million, for the twelve months ended December 31, 2020, compared to $58.0 million for the twelve months ended December 31, 2019. The increase in net interest income was due to an increase of $759,000, or 0.9%, in interest and dividend income and a decrease of $5.7 million, or 23.6%, in interest expense. For the twelve months ended December 31, 2020, interest and dividend income included $4.8 million in interest income and origination fees from PPP loans. During the twelve months ended December 31, 2020, the Company recorded $976,000 in positive purchase accounting adjustments and $193,000 in interest income and late charges from the full payoff of a $3.5 million credit-marked substandard classified loan, compared to $16,000 in positive purchase accounting adjustments during the twelve months ended December 31, 2019. The Company recorded prepayment penalties of $409,000 and $496,000 during the twelve months ended December 31, 2020 and 2019, respectively. Excluding the items mentioned above, net interest income increased $544,000, or 0.9%, from the same period in 2019. The decrease in interest expense of $5.7 million, or 23.6%, was due to a $3.7 million, or 21.5%, decrease in interest expense on deposits and a decrease in interest expense on FHLB advances of $2.0 million, or 28.6%.
Our consolidated results of operations depend primarily on net interest and dividend income. Net interest and dividend income is the difference between the interest income earned on interest-earning assets and the interest paid on interest-bearing liabilities. Interest-earning assets consist primarily of commercial real estate loans, commercial and industrial loans, residential real estate loans and securities. Interest-bearing liabilities consist primarily of certificates of deposit and money market accounts, demand deposit accounts and savings account deposits and borrowings from the FHLB. The consolidated results of operations also depend on the provision for loan losses, non-interest income, and non-interest expense. Non-interest income includes service fees and charges, income on bank-owned life insurance, and gains (losses) on securities. Non-interest expense includes salaries and employee benefits, occupancy expenses, data processing, advertising expense, FDIC insurance assessment, professional fees and other general and administrative expenses.
RECENT DEVELOPMENTS: CORONAVIRUS PANDEMIC RESPONSE AND ACTIONS.
Beginning in the first quarter of 2020, we responded to the ongoing COVID-19 pandemic while prioritizing the health and safety of our community. 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. As a consequence of the order, we closed our branches and started the transition to working remotely. Our drive-up windows and ATMs remained open while we continued to service our customers through scheduled appointments and online channels. On June 29, 2020, we re-opened our branch lobbies to customers under Massachusetts recommended social distancing, safety and sanitation guidelines, while still offering appointments and online channel transactions as a means of promoting social distancing where possible.
The Governor implemented a four-phase reopening plan for the Company’s market area. State and local governments closely monitored key public health data as the situation evolved. On July 8, 2020, Massachusetts entered the first step of Phase 3 of the re-opening plan; however, on August 7, 2020, Massachusetts’ Governor Baker, indefinitely postponed the second step of Phase 3 of the reopening plan. On September 29, 2020, Governor Baker announced that effective October 5, 2020, the Commonwealth of Massachusetts would transition to the second step of Phase 3 only in lower-risk communities. Lower-risk communities are defined as cities or towns that have not been a “red” community in any of the last three Department of Public Health weekly reports. Under the final phase of the reopening plan, the “new normal,” businesses will not be allowed to resume normal operations until an effective treatment or vaccine is discovered.
On November 27, 2020, as public health data demonstrated an increase in case numbers within our market area, we made the decision to once again close our branch lobbies and conduct business through scheduled appointments, online channels, drive-throughs and ATMs. On December 22, 2020, Governor Baker announced a series of new COVID-19 restrictions on businesses and gatherings. The restrictions began on December 26, 2020, and on January 21, 2021, Governor Baker extended restrictions through February 8, 2021. The capacity limits for most industries (including restaurants, theaters, personal services, casinos, officer buildings, places of worship, retail, libraries, fitness centers, etc.) were reduced to 25% and the number of people allowed to gather outside was limited to 25 and indoor gathering were limited to 10 people.
Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health crisis and the resulting “stay-at-home” orders resulted in widespread volatility, severe disruptions in the U.S. economy at large, and for small businesses in particular, deterioration in household, business, economic and market conditions.
Paycheck Protection Program.
As a Preferred Lender with the SBA, the Company was in a position to react quickly to the PPP component of the March 27, 2020 $2.2 trillion fiscal stimulus bill known as the CARES Act launched by the Treasury and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June 5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. As of December 31, 2020, the Company received funding approval from the SBA for 1,386 applications totaling $223.1 million, with $7.1 million of processing fees.
On October 8, 2020, the SBA and Treasury released a simplified PPP loan forgiveness application for loans with balances of $50,000 or less, and on December 27, 2020, the SBA announced that the simplified PPP loan forgiveness amount had been increased to $150,000. Since April 6, 2020, the Company has originated 1,113 PPP loans with balances of $150,000 or less totaling $43.4 million. The Company started processing PPP loan forgiveness requests in October 2020. As of December 31, 2020, the Company processed 273 loan forgiveness applications totaling $55.8 million. Total PPP loans decreased $55.8 million, or 25.0%, from $223.1 million at September 30, 2020 to $167.3 million at December 31, 2020.
As part of the $900 billion COVID-19 relief bill that was signed into law on December 27, 2020, the SBA and Treasury announced a new $284.5 billion PPP, and started accepting applications from the Company on January 19, 2021. The closing date for the new PPP is March 31, 2021. The Company looks forward to building on new small business relationships enabled by the new PPP with a keen focus on cross-selling opportunities and increasing profitability.
Loan Modifications/Troubled Debt Restructurings.
The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, have encouraged financial institutions to work “prudently” with borrowers who request loan modifications or deferrals as a result of the economic impacts of COVID-19. Pursuant to Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. Financial institutions can then suspend the requirements under U.S. GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting under U.S. GAAP. The Company has adopted this policy election to address COVID-19 loan modification requests that have been received from the earlier of either January 1, 2022 or the 60th day after the end of the COVID-19 national emergency.
As a result of the COVID-19 pandemic, the Company granted deferred loan payments for impacted commercial, residential and consumer customers who experienced financial hardship due to COVID-19. The loan payment deferrals can be up to 90 days, depending upon the financial needs of each customer. Further deferrals will be re-evaluated on a customer-by-customer basis upon the expiration of the existing deferral period. As of June 30, 2020, the deferred loan payment modifications totaled $261.0 million (525 loans), for which principal and interest payments were deferred, and represented 15% of the total loan portfolio, excluding PPP loans. As of December 31, 2020, deferred loan payment modifications declined to $76.9 million (47 loans), or 4.4% of total loans, excluding PPP loans, in outstanding loans that continue to be modified under the CARES Act.
The table below breaks out the remaining modifications granted under the CARES Act at December 31, 2020:
|December 31, 2020|
|CARES Act Modifications|
|Loan Segment(1)(2)||Total Loan|
|% of Total|
|# of Loans|
% of Loan
|($ in millions)|
|Commercial real estate||$||833.9||47.4||%||$||64.0||19||7.7||%|
|Commercial and industrial||211.9||12.0||%||9.3||10||4.4||%|
|Residential real estate||708.6||40.3||%||3.6||16||0.5||%|
The table below breaks out the status of the remaining modifications granted under the CARES Act as of December 31, 2020:
|Loans Under 1st Modification||Loans Granted Subsequent Modification||Total Remaining CARES Act Modifications|
|# of Loans||% of|
|($ in millions)|
|Commercial real estate||$||6.2||2||0.7||%||$||57.8||17||6.9||%||$||64.0||19||7.7||%|
|Commercial and industrial||1.1||4||0.5||%||8.2||6||3.9||%||9.3||10||4.4||%|
|Residential real estate||1.2||8||0.2||%||2.4||8||0.3||%||3.6||16||0.5||%|
|(1)||Excludes PPP loans and deferred fees|
|(2)||Residential includes home equity loans and lines of credit|
The following table provides some insight into the composition of the Bank’s loan portfolio and remaining loan modifications, excluding PPP loans, as of December 31, 2020:
|Commercial Real Estate||% of|
|Adult care/Assisted living||2.0||%||14.7||%||20.9||%|
|Gas station/convenience store||0.6||%||4.5||%||—|
|Total commercial real estate loans||47.4||%||7.7||%|
|Commercial and Industrial Loans||% of|
|Heavy and civil engineering construction||0.8||%||5.5||%||2.4||%|
|Transportation and warehouse||0.7||%||5.0||%||55.3||%|
|Healthcare and social assistance||0.4||%||3.0||%||15.4||%|
|All other C&I (3)||3.6||%||25.5||%||1.3||%|
|Total commercial and industrial loans||12.0||%||4.4||%|
|Residential and Consumer Loans||% of|
|Residential real estate||40.3||%||289.8||%||0.5||%|
|Total residential and consumer loans||40.6||%||0.5||%|
|Total Portfolio||% of|
|Commercial real estate||47.4||%||341.0||%||7.7||%|
|Commercial and industrial||12.0||%||86.7||%||4.4||%|
|Residential real estate||40.3||%||289.8||%||0.5||%|
|(1)||Excludes PPP loans of $167.3 million as of December 31, 2020.|
|(2)||Modified balances as of December 31, 2020 (Commercial real estate loans $64.0 million; Commercial and industrial loans $9.3 million; and Residential loans $3.6 million).|
|(3)||Other consists of multiple industries.|
Although the Bank’s loan portfolio contains impacted sectors and the commercial real estate and residential real estate sectors represent more than 100% of the Bank’s total risk-based capital, the concentration limits remain acceptable. The Company monitors lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure. As stated above, as a result of the COVID-19 pandemic, the Company identified sectors that have been materially impacted including, but not limited to: hospitality, transportation, retail, and restaurants and food service. These sectors potentially carry a higher level of credit risk, as many of these borrowers have incurred a significant negative impact to their businesses resulting from the governmental stay-at-home orders as well as travel limitations.
Allowance for Loan Losses.
The COVID-19 pandemic materially impacted the Company’s determination of the allowance for loan losses for the twelve months ended December 31, 2020. In determining the allowance for loan losses, the Company considers quantitative loss factors and a number of qualitative factors, such as underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral and the financial strength of the borrower. Beginning at the end of March 2020, a record number of Americans filed for unemployment benefits. The global pandemic could cause the Company to experience higher credit losses in its lending portfolio, reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects.
To appropriately reserve for the impact of the COVID-19 pandemic on the Company’s loan portfolio, the Bank added a new qualitative factor category to the allowance calculation - “Economic Impact of COVID-19” at March 31, 2020. The allocation of additional reserves for the twelve months ended December 31, 2020 was based upon an analysis of the Company’s 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 as described above. The Company’s provision for loan losses was $7.8 million for the twelve months ended December 31, 2020. Of the total provision, $2.3 million was related to asset quality changes, $2.5 million was related to the inclusion of the acquired loan portfolio into the general reserves, and $2.3 million was related to the addition of the COVID-19 factor to the allowance. The total increase was based on management’s evaluation of certain qualitative factors included in the determination of the allowance, primarily a result of the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Massachusetts to close all non-essential businesses in the state as well as the dramatic rise in the unemployment rate. Local unemployment rates continue to trail the national averages due to the slower reopening plan for Massachusetts relative to other states. Loans demonstrating cash flow declines and borrowers sensitive to the prolonged shutdown were identified and contributed to an overall increase in reserves for the twelve months ended December 31, 2020.
In addition, on an ongoing basis, the Company has continually evaluated the loan portfolio acquired on October 24, 2016 from Chicopee. The acquired portfolio was initially recorded at fair value without a related allowance for loan losses. Subsequent to acquisition, there have been no indications that there has been any subsequent deterioration to the acquired portfolio. Due to the ongoing impacts and extended nature of the pandemic, during the three months ended September 30, 2020, the Company determined that it was prudent to provide an allowance for loan losses related to the acquired portfolio, which increased the provision by $2.5 million. The Company is continuing to monitor COVID-19’s impact on its business and its customers, however, the extent to which COVID-19 will impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including 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.
Based upon an analysis of the portfolio to identify potentially impacted industries from the COVID-19 pandemic, including the downgrade of several lending relationships, specifically within the hotel portfolio, we allocated a total provision for loan losses of $7.8 million for the twelve months ended December 31, 2020. Of the total provision, $2.3 million was related to asset quality changes, $2.5 million was related to the inclusion of the acquired loan portfolio into the general reserves, and $2.3 million was related to COVID-19 factors. Our allowance as a percentage of total loans, excluding PPP loans, was 1.20% at December 31, 2020 and 0.79% at December 31, 2019.
As mentioned above, due to the ongoing pandemic, the Company evaluated the loan portfolio acquired on October 24, 2016 from Chicopee for COVID-19 sensitive industries. The acquired portfolio was initially recorded at fair value without a related allowance for loan losses. During the three months ended September 30, 2020, the Company provided an allowance for loan losses related to the acquired portfolio, which increased the provision by $2.5 million for the twelve months ended December 31, 2020. In addition, during the twelve months ended December 31, 2020, special mention loans increased $66.2 million to $92.1 million at December 31, 2020, from $25.9 million at December 31, 2019. During the twelve months ended December 31, 2020, we downgraded six relationships totaling $46.6 million in the hotel industry. The hotel industry has experienced disruption as a direct result of the negative economic impacts of the COVID-19 pandemic.
Critical Accounting Policies.
Our accounting policies are disclosed in Note 1 to our consolidated financial statements. Given our current business strategy and asset/liability structure, the more critical policies are the allowance for loan losses and provision for loan losses, accounting for non-performing loans and the ability to realize on our net deferred tax assets. In addition to the informational disclosure in the notes to the consolidated financial statements, our policy on each of these accounting policies is described in detail in the applicable sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Senior management has discussed the development and selection of these accounting policies and the related disclosures with the Audit Committee of our Board of Directors.
The process of evaluating the loan portfolio, classifying loans and determining the allowance and provision is described in detail in Part I under “Business – Lending Activities - Allowance for Loan Losses.” This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. Our methodology for assessing the allocation of the allowance consists of two key components, which are a specific allowance for impaired loans and a general allowance for the remainder of the portfolio. Measurement of impairment can be based on present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. The allocation of the allowance is also reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio. Although management believes it has established and maintained the allowance for loan losses at adequate levels, if management’s assumptions and judgments prove to be incorrect due to continued deterioration in economic, real estate and other conditions, and the allowance for loan losses is not adequate to absorb inherent losses, our earnings and capital could be significantly and adversely affected.
Our general policy regarding recognition of interest on loans is to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more, or earlier if collection of principal or interest is doubtful. 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 when subsequent performance reduces 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.
We must make certain estimates in determining income tax expense for financial statement purposes. These estimates occur in the calculation of the deferred tax assets and liabilities, which arise from the temporary differences between the tax basis and financial statement basis of our assets and liabilities. The carrying value of our net deferred tax asset is based on our historic taxable income as well as our belief that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets. Judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws or other factors which could result in a change in the assessment of the realization of the net deferred tax asset.
Analysis of Net Interest Income.
The Company’s earnings are largely dependent on its net interest income, which is the difference between interest earned on loans and investments and the cost of funding (primarily deposits and borrowings). Net interest income expressed as a percentage of average interest-earning assets is referred to as net interest margin. The Company reports net interest margin on a tax-equivalent basis throughout this entire annual report.
Average Balance Sheet.
The following table sets forth information relating to the Company for the years ended December 31, 2020, 2019 and 2018. The average yields and costs are derived by dividing interest income or interest expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include fees which are considered adjustments to yields. Loan interest and yield data does not include any accrued interest from non-accruing loans.
|For the Years Ended December 31,|
|(Dollars in thousands)|
|Other investments - at cost||14,915||587||3.94||16,061||833||5.19||17,453||863||4.94|
|Total interest-earning assets||2,197,692||83,340||3.79||1,996,821||82,653||4.14||1,962,546||79,502||4.05|
|Total non-interest-earning assets||140,725||137,000||134,174|
|LIABILITIES AND EQUITY:|
|Interest-bearing checking accounts||$||86,086||387||0.45||$||72,690||377||0.52||$||87,072||340||0.39|
|Money market accounts||521,692||2,838||0.54||405,785||2,532||0.62||414,686||1,911||0.46|
|Total interest-bearing deposits||1,394,962||13,500||0.97||1,273,502||17,207||1.35||1,234,368||11,683||0.95|
|Short-term borrowings and long-term debt||190,752||4,945||2.59||240,416||6,930||2.88||277,151||7,295||2.63|
|Other non-interest-bearing liabilities||32,251||23,098||16,653|
|Total non-interest-bearing liabilities||521,853||389,309||344,521|
|Total liabilities and equity||$||2,338,417||$||2,133,821||$||2,096,720|
|Less: Tax-equivalent adjustment(2)||(465||)||(537||)||(512||)|
|Net interest and dividend income||$||64,430||$||57,979||$||60,012|
|Net interest rate spread||2.61||%||2.52||%||2.77||%|
|Net interest rate spread, on a tax-equivalent basis (4)||2.63||%||2.55||%||2.79||%|
|Net interest margin||2.93||%||2.90||%||3.06||%|
|Net interest margin, on a tax-equivalent basis (5)||2.95||%||2.93||%||3.08||%|
|Ratio of average interest-earning assets to average interest-bearing liabilities||138.59||%||131.90||%||129.84||%|
|(1)||Loans, including non-accrual loans, are net of deferred loan origination costs, and unadvanced funds and allowance for loan losses.|
|(2)||Securities income, loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21% for 2020 and 2019 and 2018. The tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the consolidated statements of net income.|
|(3)||Short-term investments include federal funds sold.|
|(4)||Net interest rate spread, on a tax-equivalent basis, represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. See “Explanation of Use of Non-GAAP Financial Measurements”.|
|(5)||Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. See “Explanation of Use of Non-GAAP Financial Measurements”.|
The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.
The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
|Year Ended December 31, 2020 Compared to Year Ended|
December 31, 2019
|Year Ended December 31, 2019 Compared to Year Ended|
December 31, 2018
|Increase (Decrease) Due to||Increase (Decrease) Due to|
|Interest-earning assets||(In thousands)||(In thousands)|
|Investment securities (1)||(790||)||(1,086||)||(1,876||)||(620||)||(325||)||(945||)|
|Other investments - at cost||(59||)||(187||)||(246||)||(69||)||39||(30||)|
|Total interest-earning assets||8,489||(7,802||)||687||1,746||1,405||3,151|
|Interest-bearing checking accounts||69||(59||)||10||(56||)||93||37|
|Money market accounts||723||(417||)||306||(41||)||662||621|
|Short-term borrowing and long-term debt||(1,432||)||(553||)||(1,985||)||(967||)||602||(365||)|
|Total interest-bearing liabilities||(1,337||)||(4,355||)||(5,692||)||49||5,110||5,159|
|Change in net interest and dividend income||$||9,826||$||(3,447||)||$||6,379||$||1,697||$||(3,705||)||$||(2,008||)|
(1) Securities and loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 21% for 2020, 2019 and 2018. The tax-equivalent adjustment is deducted from tax-equivalent net interest income to agree to the amount reported in the consolidated statements of net income.
Explanation of Use of Non-GAAP Financial Measurements.
We believe that it is common practice in the banking industry to present interest income and related yield information on tax-exempt loans and securities on a tax-equivalent basis and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax-exempt loans and securities to a tax-equivalent amount is considered a non-GAAP financial measure. A reconciliation from GAAP to non-GAAP is provided below.
|Twelve Months Ended December 31,|
|(Dollars in thousands)|
|Loans (no tax adjustment)||$||77,837||4.05||%||$||74,837||4.35||%||$||70,795||4.25||%|
|Tax-equivalent adjustment (1)||447||517||488|
|Loans (tax-equivalent basis)||$||78,284||4.07||%||$||75,354||4.38||%||$||71,283||4.28||%|
|Securities (no tax adjustment)||$||4,342||2.03||%||$||6,216||2.53||%||$||7,157||2.66||%|
|Tax-equivalent adjustment (1)||18||20||24|
|Securities (tax-equivalent basis)||$||4,360||2.03||%||$||6,236||2.54||%||$||7,181||2.67||%|
|Net interest income (no tax adjustment)||$||64,430||$||57,979||$||60,012|
|Tax-equivalent adjustment (1)||465||537||512|
|Net interest income (tax-equivalent basis)||$||64,895||$||58,516||$||60,524|
|Interest rate spread (no tax adjustment)||2.61||%||2.52||%||2.77||%|
|Net interest margin (no tax adjustment)||2.93||%||2.90||%||3.06||%|
|(1)||The tax equivalent adjustment is based upon a 21% tax rate for 2020, 2019 and 2018.|
Comparison of Financial Condition at December 31, 2020 and December 31, 2019.
At December 31, 2020, total assets of $2.4 billion increased $184.4 million, or 8.5%, from December 31, 2019. The balance sheet composition and changes since December 31, 2019 are discussed below.
Cash and Cash Equivalents.
Cash and cash equivalents is comprised of cash on hand and amounts due from banks, interest-earning deposits in other financial institutions and federal funds sold. Cash and cash equivalents totaled $87.4 million, or 3.7% of total assets, at December 31, 2020 and $24.7 million, or 1.1% of total assets, at December 31, 2019. Balances in cash and cash equivalents will fluctuate due primarily to the timing of net deposit flows, borrowing and loan inflows and outflows, investment purchases and maturities, calls and sales proceeds, and the immediate liquidity needs of the Company. The increase in cash and cash equivalents at December 31, 2020 is primarily due to an increase in deposits during 2020.
At December 31, 2020, the investment portfolio of $213.8 million, or 9.0% of total assets, decreased $20.6 million, or 9.9%, compared to $234.4 million, or 10.7% of total assets, at December 31, 2019. Available-for-sale securities comprised the majority of the fair value of the portfolio and represented 94.4% and 97.1% of total investments at December 31, 2020 and 2019, respectively. The marketable equity securities portfolio totaled $12.0 million and $6.7 million at December 31, 2020 and 2019. At December 31, 2020 and 2019, all securities were carried at fair market value.
The Bank is required to purchase FHLB stock at par value in association with advances from the FHLB. The stock is classified as a restricted investment and carried at cost which management believes approximates fair value. The Company’s investment in FHLB capital stock amounted to $4.7 million and $14.1 million at December 31, 2020 and December 31, 2019, respectively.
At December 31, 2020 and 2019, the Company held $423,000 of Atlantic Community Bankers Bank stock. The stock is restricted and carried in other assets at cost. The stock is evaluated for impairment based on an estimate of the ultimate recovery to the par value.
Total loans of $1.9 billion represented 81.5%, of total assets, at December 31, 2020, compared to 81.2% of total assets, at December 31, 2019. Total loans increased $151.3 million, or 8.5%, primarily due to an increase in commercial and industrial loans of $130.2 million, or 52.3%. Excluding PPP loans of $167.3 million, commercial and industrial loans decreased $37.1 million, or 14.9%, from December 31, 2019. As compared to December 31, 2019, commercial real estate loans increased $17.0 million, or 2.1%, and residential real estate loans, which include home equity loans, increased $8.4 million, or 1.2%. The decrease in commercial and industrial loans of $37.1 million, or 14.9%, was due to pay downs on existing revolving lines of credit of approximately $36.4 million, or 42.5%, from December 31, 2019 to December 31, 2020. Commercial line utilization decreased from 33% at December 31, 2019 to 16.8% at December 31, 2020. In order to reduce interest rate risk, the Company currently services $38.1 million in residential loans sold to the secondary market.
Bank-Owned Life Insurance (“BOLI”).
The Company indirectly utilizes the earnings on BOLI to offset the cost of the Company’s benefit plans. The cash surrender value of BOLI was $72.9 million and $71.1 million at December 31, 2020 and 2019, respectively.
At December 31, 2020, total deposits were $2.0 billion, an increase of $360.3 million, or 21.5%, from December 31, 2019, primarily due to an increase in core deposits of $422.6 million, or 41.2%. Core deposits, which the Company defines as all deposits except time deposits, increased from $1.0 billion, or 61.1% of total deposits, at December 31, 2019, to $1.4 billion, or 71.0% of total deposits, at December 31, 2020. Non-interest-bearing deposits increased $148.5 million, or 37.7%, to $541.8 million, interest-bearing checking accounts increased $24.8 million, or 35.3%, to $94.9 million, savings accounts increased $44.0 million, or 34.8%, to $170.3 million, and money market accounts increased $205.4 million, or 47.2%, to $640.8 million. The increase in core deposits of $422.6 million, or 41.2%, can be attributed to the government stimulus for individuals, lower consumer spending over the last several months, PPP loan proceeds deposited into borrower checking accounts, as well as the three new branches in 2020. Time deposits decreased $62.3 million, or 9.5%, from $652.6 million at December 31, 2019 to $590.3 million at December 31, 2020. Brokered deposits, which are included within time deposits, were $55.3 million at December 31, 2020 and $21.5 million at December 31, 2019.
At December 31, 2020, FHLB advances decreased $182.7 million, or 75.9%, from $240.5 million at December 31, 2019, to $57.9 million. The increase in low cost deposits provided the opportunity to repay approximately $132.7 million, or 55.2%, of high cost maturing FHLB advances. In addition, during the three months ended December 31, 2020, the Company extinguished $50.0 million of FHLB advances that had a weighted average rate of 2.05%. The extinguishment of debt resulted in a prepayment penalty charge of $987,000 recognized in non-interest expense during the three months ended December 31, 2020. The earn-back on the expenses related to the extinguishment is less than 12 months. At December 31, 2020, the $57.9 million in outstanding FHLB advances carried a weighted average rate of 1.17%. Of the $57.9 million in outstanding FHLB advances, $42.3 million, or 73.3%, are scheduled to mature by December 31, 2021, and carry a weighted average rate of 1.45%. The remaining balance of $15.6 million has a remaining maturity of 2.1 years and a weighted average rate of 0.40%. The increase in low cost deposits provided funding for the PPP loan portfolio. The Company has access to the Paycheck Protection Program Liquidity Fund through March 31, 2021 to fund the PPP loan portfolio, if necessary.
At December 31, 2020, shareholders’ equity was $226.6 million, or 9.6% of total assets, compared to $232.0 million, or 10.6% of total assets, at December 31, 2019. The decrease in shareholders’ equity reflects $10.7 million for the repurchase of the Company’s common stock, the payment of regular cash dividends of $5.0 million and a decrease in accumulated other comprehensive loss of $2.3 million, partially offset by net income of $11.2 million. Total shares outstanding as of December 31, 2020 were 25,276,193.
The Company’s book value per share was $8.97 at December 31, 2020, compared to $8.74 at December 31, 2019, while tangible book value per share increased $0.22, or 2.7%, from $8.14 at December 31, 2019 to $8.36 at December 31, 2020. As of December 31, 2020, the Company’s and the Bank’s regulatory capital ratios continued to exceed the levels required to be considered “well-capitalized” under federal banking regulations.
Assets under Management.
Total assets under management includes loans serviced for others and investment assets under management. Loans serviced for others and investment assets under management are not carried as assets on the Company’s consolidated balance sheet, and as such, total assets under management is not a financial measurement recognized under GAAP, however, management believes its disclosure provides information useful in understanding the trends in total assets under management.
The Company provides a wide range of investment advisory and wealth management services. Investment assets under management of $171.7 million, increased $21.9 million, or 14.6%, for the year ended December 31, 2020, from $149.8 million for the year ended December 31, 2019.
Comparison of Operating Results for Years Ended December 31, 2020 and 2019.
For the twelve months ended December 31, 2020, the Company reported net income of $11.2 million, or $0.45 per diluted share, compared to $13.3 million, or $0.51 per diluted share, for the twelve months ended December 31, 2019.
Net Interest Income and Net Interest Margin.
During the twelve months ended December 31, 2020, net interest income increased $6.4 million, or 11.1%, to $64.4 million, compared to $58.0 million for the twelve months ended December 31, 2019. The increase in net interest income was due to an increase of $759,000, or 0.9%, in interest and dividend income and a decrease of $5.7 million, or 23.6%, in interest expense. For the twelve months ended December 31, 2020, interest and dividend income included $4.8 million in interest income and origination fees from PPP loans. During the twelve months ended December 31, 2020, the Company recorded $976,000 in positive purchase accounting adjustments and $193,000 in interest income and late charges from the full payoff of a $3.5 million credit-marked substandard classified loan, compared to $16,000 in positive purchase accounting adjustments during the twelve months ended December 31, 2019. The Company recorded prepayment penalties of $409,000 and $496,000 during the twelve months ended December 31, 2020 and 2019, respectively. Excluding the items mentioned above, net interest income increased $544,000, or 0.9%, from the same period in 2019. The decrease in interest expense of $5.7 million, or 23.6%, was due to a $3.7 million, or 21.5%, decrease in interest expense on deposits and a decrease in interest expense on FHLB advances of $2.0 million, or 28.6%.
The net interest margin for the twelve months ended December 31, 2020 was 2.93%, compared to 2.90% for the twelve months ended December 31, 2019. The net interest margin, on a tax-equivalent basis, was 2.95% for the twelve months ended December 31, 2020, compared to 2.93% for the twelve months ended December 31, 2019. Excluding $4.8 million in interest income and origination fees from PPP loans, the prepayment penalties and the purchase accounting adjustments discussed above, the net interest margin decreased from 2.88% for the twelve months ended December 31, 2019 to 2.83% for the twelve months ended December 31, 2020. The decrease in the net interest margin was due to the continuing trend of market interest rates falling to historically low levels.
The average yield on interest-earning assets decreased 35 basis points from 4.14% for the twelve months ended December 31, 2019 to 3.79% for the twelve months ended December 31, 2020. The yield on average loans decreased from 4.38% during the twelve months ended December 31, 2019 to 4.07% during the twelve months ended December 31, 2020. Excluding the adjustments discussed above of $6.4 million and $513,000 for the twelve months ended December 31, 2020 and 2019, respectively, the yield on average loans decreased from 4.34% for the twelve months ended December 31, 2019 to 4.04% for the twelve months ended December 31, 2020.
During the twelve months ended December 31, 2020, the average cost of total funds, including non-interest bearing demand accounts and FHLB advances, decreased 39 basis points from 1.28% for the twelve months ended December 31, 2019 to 0.89%. For the twelve months ended December 31, 2020, the average cost of core deposits, including non-interest-bearing demand deposits, decreased 4 basis points to 0.27%, from 0.31% for same period in 2019. The average cost of time deposits decreased 52 basis points from 2.12% for the twelve months ended December 31, 2019 to 1.60% during the same period in 2020. The average cost of borrowings decreased 29 basis points from 2.88% for the twelve months ended December 31, 2019 to 2.59% for the twelve months ended December 31, 2020. For the twelve months ended December 31, 2020, average demand deposits, an interest-free source of funds, increased $123.4 million, or 33.7%, from $366.2 million, or 22.3% of total average deposits, for the twelve months ended December 31, 2019 to $489.6 million, or 26.0% of total average deposits, for the twelve months ended December 31, 2020.
During the twelve months ended December 31, 2020, average interest-earning assets increased $200.9 million, or 10.1%, to $2.2 billion. The increase in average interest-earning assets was due to an increase in average loans of $200.7 million, or 11.7%, partially offset by a decrease in average securities of $31.1 million, or 12.7%. Excluding average PPP loans of $145.5 million, average interest-earning assets and average loans increased $55.4 million, or 2.8%, and $55.2 million, or 3.2%, respectively.
Provision for Loan Losses.
The provision for loan losses is reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio.
The Company increased the provision for loan losses by $5.1 million, or 190.7%, from $2.7 million for the twelve months ended December 31, 2019, to $7.8 million for the twelve months ended December 31, 2020. As previously mentioned, this increase was reflective of the impact of the COVID-19 pandemic on the Company’s allowance for loan losses including the previously acquired Chicopee portfolio.
The Company recorded net charge-offs of $720,000 for the twelve months ended December 31, 2020, as compared to net charge-offs of $626,000 for the twelve months ended December 31, 2019. During the twelve months ended December 31, 2020, the Company recorded charge-offs of $963,000, compared to $1.7 million during the same period in 2019. During the twelve months ended December 31, 2020, the Company recorded recoveries of $243,000, compared to recoveries of $1.1 million during the same period in 2019.
The allowance for loan losses as a percentage of total loans was 1.10% at December 31, 2020, compared to 0.79% at December 31, 2019. At December 31, 2020, the allowance for loan losses as a percentage of non-performing loans was 269.8%, compared to 142.7% at December 31, 2019. The allowance for loan losses as a percentage of total loans, excluding PPP loans, was 1.20% at December 31, 2020.
Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.
For the twelve months ended December 31, 2020, non-interest income of $9.3 million decreased $454,000, or 4.7%, compared to $9.7 million for the twelve months ended December 31, 2019. The decrease in non-interest income was due to a $297,000, or 4.0%, decrease in service charges and fees, partially offset by an increase in other income from swap fees on commercial loans of $180,000, or 38.0%. During the twelve months ended December 31, 2019, service charges and fees included $110,000 in non-recurring interchange fee income as well as seasonal income in ATM surcharges of $180,000, which typically occurs each year in the third quarter. Due to the COVID-19 pandemic, the annual event did not occur this year. During the twelve months ended December 31, 2020, NSF fee income decreased $434,000, or 25.1%, from the same period in 2019. Transaction-based deposit account balances have increased significantly during the twelve months ended December 31, 2020 compared to the same period in 2019. The lack of deposit withdrawals resulting from a decline in normal consumer spending habits due to the closure of nonessential businesses to mitigate the spread of the COVID-19 virus has reduced transaction activity and the occurrence of overdrafts on deposit accounts.
During the twelve months ended December 31, 2020, the Company reported unrealized gains on marketable equity securities of $109,000 and a realized gain on the sale of securities of $2.0 million, compared to unrealized gains on marketable equity securities of $165,000 and a realized loss on the sale of securities of $97,000 during the same period in 2019. As mentioned previously, the Company also incurred a non-recurring $2.4 million loss on a terminated interest rate swap during the twelve months ended December 31, 2020.
For the twelve months ended December 31, 2020, non-interest expense increased $3.9 million, or 8.2%, to $51.8 million compared to $47.8 million, for the twelve months ended December 31, 2019. As mentioned above, during the three months ended December 31, 2020, the Company prepaid $50.0 million of FHLB borrowings. The transaction was accounted for as an early debt extinguishment resulting in a loss of $987,000. Excluding the loss, non-interest expense increased $3.0 million, or 6.2%, from the twelve months ended December 31, 2019 to the twelve months ended December 31, 2020.
The increase in non-interest expense was primarily due to an increase in salaries and employee benefits expenses of $1.7 million, or 6.1%. The increase in salary and employee benefits was due to several factors, including higher commissions and incentives associated with increased residential loan production of $720,000, compared to $350,000 from the same period in 2019. Also contributing to the increase was staffing for the three new branches opened in 2020, as well as annual staff salary increases. The funding of PPP loans and increase in loan volume resulted in an increase in deferred loan origination costs of $721,000, or 69.0%, against salary expense compared to the same period in 2019. FDIC insurance expense increased $602,000, or 140.0%. During the twelve months ended December 31, 2019, the FDIC applied small bank credits against the quarterly assessments. The Company fully utilized its small bank assessment credits during the three months ended March 31, 2020. Occupancy expenses increased $346,000, or 8.3%, due to the opening of three branches in 2020, and an increase of $141,000, or 36.6%, due to COVID-19 cleaning related expenses. Data processing expenses increased $121,000, or 4.4%, other non-interest expense increased $620,000, or 8.5%, due to several factors but primarily due to swap fees paid to third parties of $165,000, and approximately $126,000 in PPP software costs. These increases were partially offset by a decrease in advertising expenses of $226,000, or 17.0%, a decrease in furniture and equipment of $136,000, or 8.1%, and a decrease in professional fees of $67,000, or 2.7%. For the twelve months ended December 31, 2020, the efficiency ratio was 70.0%, compared to 70.7% for the twelve months ended December 31, 2019.
Income tax expense for the twelve months ended December 31, 2020 was $2.9 million, or an effective tax rate of 20.8%, compared to $3.9 million, or an effective tax rate of 22.4%, for twelve months ended December 31, 2019. The decrease in the Company’s effective tax rate was primarily due to the effect of lower pre-tax income for the fiscal year ended December 31, 2020.
Liquidity and Capital Resources.
The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. We also can borrow funds from the FHLB based on eligible collateral of loans and securities.
At December 31, 2020 and December 31, 2019, outstanding borrowings from the FHLB were $57.9 million and $240.5 million, respectively. At December 31, 2020, we had $476.8 million in available borrowing capacity with the FHLB. We have the ability to increase our borrowing capacity with the FHLB by pledging investment securities or additional loans.
In addition, we have available lines of credit of $15.0 million and $50.0 million with other correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. At December 31, 2020 and 2019, we did not have an outstanding balance under either of these lines of credit. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral.
We also have outstanding at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated under agreements with the FHLB to repay borrowed funds and are obligated under leases for certain of our branches and equipment.
A summary of lease obligations, borrowings and credit commitments at December 31, 2020 follows:
|Within 1 Year||After 1 Year|
But Within 3
|After 3 Year|
But Within 5
|After 5 Years||Total|
|Operating lease obligations||$||1,482||$||2,586||$||2,132||$||5,629||$||11,829|
|Borrowings and Debt|
|Federal Home Loan Bank||42,388||14,816||646||—||57,850|
|Available lines of credit||232,958||—||—||92,609||325,567|
|Other loan commitments||77,772||31,261||580||4,441||114,054|
|Letters of credit||13,808||6,307||451||255||20,821|
|Total credit commitments||324,538||37,568||1,031||97,305||460,442|
Maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.
The Company’s primary activities are the origination of commercial real estate loans, commercial and industrial loans and residential real estate loans, as well as and the purchase of mortgage-backed and other investment securities. During the year ended December 31, 2020, we originated $654.6 million in loans, compared to $372.7 million in 2019. We purchased securities totaling $159.0 million for the year ended December 31, 2020, compared to purchases of $74.5 million for the year ended December 31, 2019. At December 31, 2020, the Company had approximately $134.9 million in loan commitments and letters of credit to borrowers and approximately $325.5 million in available home equity and other unadvanced lines of credit.
Deposit in flows and out flows are affected by the level of interest rates, the products and interest rates offered by competitors and by other factors. At December 31, 2020, time deposit accounts scheduled to mature within one year totaled $503.2 million. Based on the Company’s deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain on deposit. We monitor our liquidity position frequently and anticipate that it will have sufficient funds to meet our current funding commitments.
At December 31, 2020, the Company and the Bank exceeded each of the applicable regulatory capital requirements (See Note 12, Regulatory Capital, to our consolidated financial statements for further information on our regulatory requirements).
We do not anticipate any material capital expenditures during the calendar year 2021, except in pursuance of the Company’s strategic initiatives. The Company does not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above.
Off-Balance Sheet Arrangements.
The Company does not have any off-balance sheet arrangements, other than noted above and in Note 16, Commitments and Contingencies, to our consolidated financial statements, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Management of Market Risk.
As a financial institution, our primary market risk is interest rate risk since substantially all transactions are denominated in U.S. dollars with no direct foreign exchange or changes in commodity price exposure. Fluctuations in interest rates will affect both our level of income and expense on a large portion of our assets and liabilities. Fluctuations in interest rates will also affect the market value of all interest-earning assets and interest-bearing liabilities.
The Company’s interest rate management strategy is to limit fluctuations in net interest income as interest rates vary up or down and control variations in the market value of assets, liabilities and net worth as interest rates vary. We seek to coordinate asset and liability decisions so that, under changing interest rate scenarios, net interest income will remain within an acceptable range.
In order to achieve the Company’s objectives of managing interest rate risk, the Asset and Liability Management Committee (“ALCO”) meets periodically to discuss and monitor the market interest rate environment relative to interest rates that are offered on our products. ALCO presents quarterly reports to the Board of Directors which includes the Company’s interest rate risk position and liquidity position.
The Company’s primary source of funds are deposits, consisting primarily of time deposits, money market accounts, savings accounts, demand accounts and interest-bearing checking accounts, which have shorter terms to maturity than the loan portfolio. Several strategies have been employed to manage the interest rate risk inherent in the asset/liability mix, including but not limited to:
|●||maintaining the diversity of our existing loan portfolio through residential real estate loans, commercial and industrial loans and commercial real estate loans;|
|●||emphasizing investments with an expected average duration of five years or less; and|
|●||when appropriate, using interest rate swaps to manage the interest rate position of the balance sheet.|
In 2020, cash flows from deposit inflows were used to pay down high cost FHLB borrowings and fund loan growth. The Company continues its emphasis on growing commercial loans which typically have variable interest rates and shorter maturities than residential loans.
The actual amount of time before loans are repaid can be significantly affected by changes in market interest rates. Prepayment rates will also vary due to a number of other factors, including the regional economy in the area where the loans were originated, seasonal factors, demographic variables and the assumability of the loans. However, the major factors affecting prepayment rates are prevailing interest rates, related financing opportunities and competition. We monitor interest rate sensitivity so that we can adjust our asset and liability mix in a timely manner and minimize the negative effects of changing rates.
The Company’s liquidity sources are vulnerable to various uncertainties beyond our control. Loan amortization and investment cash flows are a relatively stable source of funds, while loan and investment prepayments and calls, as well as deposit flows vary widely in reaction to market conditions, primarily prevailing interest rates. Asset sales are influenced by pledging activities, general market interest rates and unforeseen market conditions. Our financial condition is affected by our ability to borrow at attractive rates, retain deposits at market rates and other market conditions. We consider our sources of liquidity to be adequate to meet expected funding needs and also to be responsive to changing interest rate markets.
Interest Rate Risk.
Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, thereby impacting net interest income, the primary component of our earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.
The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on our consolidated balance sheet, as well as for derivative financial instruments. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one and two-year horizon, assuming no balance sheet growth.
The repricing and/or new rates of assets and liabilities moved in tandem with market rates. However, in certain deposit products, the use of data from a historical analysis indicated that the rates on these products would move only a fraction of the rate change amount. Pertinent data from each loan account, deposit account and investment security was used to calculate future cash flows. The data included such items as maturity date, payment amount, next repricing date, repricing frequency, repricing index, repricing spread, caps and floors. Prepayment speed assumptions were based upon the difference between the account rate and the current market rate. We also evaluate changes in interest rate sensitivity under various scenarios including but not limited to nonparallel shifts in the yield curve, variances in prepayment speeds and variances to correlations of instrument rates to market indexes.
The table below shows our net interest income sensitivity analysis reflecting the following changes to net interest income for the first and second years of the simulation model. The analysis assumes no balance sheet growth, a parallel shift in interest rates, and all rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the simulation horizon.
|Estimated Changes in Net Interest Income|
|Changes in Interest Rates|
|1 – 12 Months|
|+200 basis points||-1.6||%||-3.0||%|
|-100 basis points||-1.3||%||0.0||%|
|13 – 24 Months|
|+200 basis points||-4.9||%||-5.8||%|
|-100 basis points||-9.1||%||2.6||%|
The preceding sensitivity analysis does not represent a forecast of net interest income, nor do the calculations represent any actions that management may undertake in response to changes in interest rates. They should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.
Periodically, if deemed appropriate, we may use interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge our interest rate exposure to interest rate movements. The Board of Directors has approved hedging policy statements governing the use of these instruments. 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. We did not have any interest rate swap agreements designated as cash flow hedges at December 31, 2020.
Recent Accounting Pronouncements.
Refer to Note 1 to our consolidated financial statements for a summary of the recent accounting pronouncements.
Impact of Inflation and Changing Prices.
The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than do the effects of inflation.
|ITEM 7A.||QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.|
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market Risk,” for a discussion of quantitative and qualitative disclosures about market risk.
|ITEM 8.||FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.|
Our consolidated financial statements and the accompanying notes may be found on pages F-1 through F-52 of this report.
|ITEM 9.||CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.|
|ITEM 9A.||CONTROLS AND PROCEDURES.|
Evaluation of Disclosure Controls and Procedures
Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act (i) is recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management including the Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The management of Western New England Bancorp, Inc. and Subsidiaries (collectively, the “Company”), including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
To the Shareholders and Board of Directors
of Western New England Bancorp, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Western New England Bancorp, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Consolidated Financial Statements of the Company and our report dated March 11, 2021 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Wolf & Company, P.C.
March 11, 2021
|ITEM 9B.||OTHER INFORMATION.|
|ITEM 10.||DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.|
The following information included in the Proxy Statement is incorporated herein by reference: “Information About Our Board of Directors,” “Information About Our Executive Officers Who Are Not Directors,” and “Corporate Governance.”
|ITEM 11.||EXECUTIVE COMPENSATION.|
The following information included in the Proxy Statement is incorporated herein by reference: “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Director Compensation.”
|ITEM 12.||SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.|
The following information included in the Proxy Statement is incorporated herein by reference: “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized For Issuance Under Equity Compensation Plans.”
|ITEM 13.||CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.|
The following information included in the Proxy Statement is incorporated herein by reference: “Transactions with Related Persons” and “Board of Directors Independence.”
|ITEM 14.||PRINCIPAL ACCOUNTING FEES AND SERVICES.|
The following information included in the Proxy Statement is incorporated herein by reference: “Independent Registered Public Accounting Firm Fees and Services.”
|ITEM 15.||EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.|
Reference is made to our consolidated financial statements and accompanying notes included in Item 8 of Part II hereof.
|(a)(2)||Financial Statement Schedules|
Consolidated financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in the consolidated financial statements or notes thereto.
|*||Management contract or compensatory plan or arrangement.|
|**||Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.|
|ITEM 16.||FORM 10-K SUMMARY.|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 11, 2021.
|WESTERN NEW ENGLAND BANCORP, INC.|
|By:||/s/ James C. Hagan|
|James C. Hagan|
|Chief Executive Officer and President|
|(Principal Executive Officer)|
|By:||/s/ Guida R. Sajdak|
|Guida R. Sajdak|
|Chief Financial Officer and Executive Vice President|
(Principal Financial Officer and Principal Accounting Officer)
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints James C. Hagan and Guida R. Sajdak, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 11, 2021.
|/s/ James C. Hagan||Chief Executive Officer, President and Director|
(Principal Executive Officer)
|James C. Hagan|
|/s/ Guida R. Sajdak|
Chief Financial Officer and Executive Vice President
(Principal Financial Officer and Principal Accounting Officer)
|Guida R. Sajdak|
|/s/ Lisa G. McMahon||Chairperson of the Board|
|Lisa G. McMahon|
|/s/ Laura Benoit||Director|
|/s/ Donna J. Damon||Director|
Donna J. Damon
|/s/ Gary G. Fitzgerald||Director|
Gary G. Fitzgerald
/s/ William D. Masse
William D. Masse
/s/ Gregg F. Orlen
|Gregg F. Orlen|
|/s/ Paul C. Picknelly||Director|
|Paul C. Picknelly|
|/s/ Steven G. Richter||Director|
|Steven G. Richter|
|/s/ Philip R. Smith||Director|
|Philip R. Smith|
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Western New England Bancorp, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying Consolidated Balance Sheets of Western New England Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related Consolidated Statements of Net Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 11, 2021 expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Company’s Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Critical Audit Matter Description
As described in Notes 1 and 3 to the financial statements, the Company has recorded an allowance for loan losses in the amount of $21.2 million as of December 31, 2020, representing management’s estimate of the probable losses inherent in the loan portfolio as of that date. The allowance is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.
The determination of the allowance for loan losses requires significant judgment by management including the identification of, and estimated reserves on, problem loans and the determination of qualitative adjustments to historical loss experience.
How the Critical Audit Matter was addressed in the Audit
Our principal audit procedures to evaluate management’s estimates of the allowance for loan losses included tests of the following:
|●||Management’s identification of problem loans, including management’s loan review procedures and monitoring of internal loan reports, including delinquency, non-accrual, and watch list, to determine the completeness of impaired loans.|
|●||Management’s determination of specific reserves on impaired loans, including significant assumptions, such as the fair value of collateral for collateral dependent loans.|
|●||Management’s determination of general reserves, including determination of historical loss experience and qualitative adjustments to historical loss experience.|
|●||The accuracy of management’s calculation of the allowance for loan losses, including relevant internal controls.|
We have served as the Company’s auditor since 2004.
/s/ Wolf & Company, P.C.
March 11, 2021
|WESTERN NEW ENGLAND BANCORP, INC., AND SUBSIDIARIES|
|CONSOLIDATED BALANCE SHEETS|
|(Dollars in thousands, except share data)|
|December 31,||December 31,|
|Cash and due from banks||$||17,399||$||16,640|
|Federal funds sold||2,987||1,635|
|Interest-bearing deposits and other short-term investments||67,058||6,466|
|Cash and cash equivalents||87,444||24,741|
|Securities available-for-sale, at fair value||201,880||227,708|
|Marketable equity securities, at fair value||11,968||6,737|
|Federal Home Loan Bank stock and other restricted stock, at cost||5,160||14,477|
|Loans, net of allowance for loan losses of $21,157 and $14,102 at December 31, 2020 and 2019, respectively||1,906,226||1,761,932|
|Premises and equipment, net||25,103||23,763|
|Accrued interest receivable||8,477||5,313|
|Bank-owned life insurance||72,860||71,051|
|Deferred tax asset, net||12,588||9,161|
|Core deposit intangible||2,937||3,312|
|LIABILITIES AND SHAREHOLDERS’ EQUITY|
|Securities pending settlement||160||—|
|COMMITMENTS AND CONTINGENCIES (see Note 16)|
|Preferred stock - $par value, shares authorized, outstanding at December 31, 2020 and December 31, 2019||—||—|
|Common stock - $par value, shares authorized, shares issued and outstanding at December 31, 2020; shares issued and outstanding at December 31, 2019||253||266|
|Additional paid-in capital||154,549||164,248|
|Unearned compensation - ESOP||(3,997||)||(4,574||)|
|Unearned compensation - Equity Incentive Plan||(1,240||)||(1,124||)|
|Accumulated other comprehensive loss||(11,279||)||(8,968||)|
|TOTAL SHAREHOLDERS’ EQUITY||226,640||232,024|
|TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY||$||2,365,886||$||2,181,476|
See accompanying notes to consolidated financial statements.
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF NET INCOME|
|(Dollars in thousands, except per share data)|
|Years Ended December 31,|
|Interest and dividend income:|
|Residential and commercial real estate loans||$||62,115||$||62,240||$||57,647|
|Commercial and industrial loans||15,409||12,254||12,801|
|Debt securities, taxable||4,163||5,981||6,920|
|Debt securities, tax-exempt||56||72||85|
|Total interest and dividend income||82,875||82,116||78,990|
|Total interest expense||18,445||24,137||18,978|
|Net interest and dividend income||64,430||57,979||60,012|
|Provision for loan losses||7,775||2,675||1,900|
|Net interest and dividend income after provision for loan losses||56,655||55,304||58,112|
|Non-interest income (loss):|
|Service charges and fees||7,067||7,364||6,937|
|Income from BOLI||1,809||1,799||1,825|
|Gain on bank-owned life insurance death benefit||—||—||715|
|Gain (loss) on available-for-sale securities, net||1,965||(97||)||(281||)|
|Gain on sale of OREO||—||—||48|
|Unrealized gains (losses) on marketable equity securities, net||109||165||(142||)|
|Loss on interest rate swap termination||(2,353||)||—||—|
|Total non-interest income||9,251||9,705||9,233|
|Salaries and employees benefits||29,349||27,654||25,982|
|Furniture and equipment||1,537||1,673||1,561|
|FDIC insurance assessment||1,032||430||603|
|Loss on prepayment of borrowings||987||—||—|
|Total non-interest expense||51,750||47,808||46,237|
|Income before income taxes||14,156||17,201||21,108|
|Income tax provision||2,941||3,852||4,700|
|Earnings per common share:|
|Basic earnings per share||$||0.45||$||0.51||$||0.57|
|Weighted average shares outstanding||25,047,195||26,185,336||28,886,904|
|Diluted earnings per share||$||0.45||$||0.51||$||0.57|
|Weighted average diluted shares outstanding||25,062,476||26,303,140||29,029,394|
See accompanying notes to consolidated financial statements.
|WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES|
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME|
|(Dollars in thousands)|
Years Ended December 31,
|Other comprehensive income (loss):|
|Unrealized gains (losses) on available-for-sale securities:|
|Unrealized holding gains (losses)||3,660||9,394||(4,814||)|
|Reclassification adjustment for net (gains) losses realized in income (1)||(1,965||)||97||281|
|Unrealized gains (losses)||1,695||9,491||(4,533||)|
|Cash flow hedges:|
|Change in fair value of derivatives used for cash flow hedges||1,099||(900||)||442|
|Reclassification adjustment for loss realized in interest expense (2)||674||387||452|
|Reclassification adjustment for termination fee realized in interest expense (3)||842||1,068||1,068|
|Unrealized gains on cash flow hedges||2,615||555||1,962|
|Defined benefit pension plan:|
|(Losses) gains arising during the period||(8,037||)||(4,349||)||1,328|
|Amortization of defined benefit plans actuarial loss(4)||421||137||177|
|Unrecognized actuarial (losses) gains on defined benefit plan||(7,616||)||(4,212||)||1,505|
|Other comprehensive (loss) income||(2,311||)||4,441||(1,101||)|
|(1)||Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income in the consolidated statements of net income. The tax effects associated with the reclassification adjustments were $502,000, $(37,000) and $(79,000) for the years ended December 31, 2020, 2019 and 2018, respectively.|
|(2)||Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $189,000, $109,000 and $127,000 for the years ended December 31, 2020, 2019 and 2018, respectively.|
|(3)||Termination fee realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $237,000, $300,000 and $300,000 for the years ended December 31, 2020, 2019 and 2018, respectively.|
|(4)||Amounts represent the reclassification of defined benefit plan amortization and have been recognized as a component of non-interest expense in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $118,000, $38,000 and $50,000 for the years ended December 31, 2020, 2019 and 2018, respectively.|
|(1)||Realized gains and losses on available-for-sale securities are recognized as a component of non-interest income in the consolidated statements of net income. The tax effects associated with the reclassification adjustments were $502,000, $(37,000) and $(79,000) for the years ended December 31, 2020, 2019 and 2018, respectively.|
|(2)||Loss realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $189,000, $109,000 and $127,000 for the years ended December 31, 2020, 2019 and 2018, respectively.|
|(3)||Termination fee realized in interest expense on derivative instruments is recognized as a component of interest expense on long-term debt in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $237,000, $300,000 and $300,000 for the years ended December 31, 2020, 2019 and 2018, respectively.|
|(4)||Amounts represent the reclassification of defined benefit plan amortization and have been recognized as a component of non-interest expense in the consolidated statements of net income. Income tax effects associated with the reclassification adjustments were $118,000, $38,000 and $50,000 for the years ended December 31, 2020, 2019 and 2018, respectively.|
See accompanying notes to consolidated financial statements.
WESTERN NEW ENGLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(Dollars in thousands, except share data)
|BALANCE AT DECEMBER 31, 2017||30,487,309||$||305||$||203,527||$||(5,786||)||$||(791||)||$||62,578||$||(12,552||)||$||247,281|
|Comprehensive income (loss)||—||—||—||—||—||16,408||(1,101||)||15,307|
|Cumulative-effect adjustment due to change in accounting principle (ASU 2016-01)||—||—||—||—||—||(237||)||237||—|
|Common stock held by ESOP committed to be released ( shares)||—||—||345||615||—||—||—||960|
|Common stock repurchased||(2,198,376||)||(22||)||(22,815||)||—||—||—||—||(22,837||)|
|Share-based compensation - equity incentive plan||—||—||—||—||845||—||—||845|
|Issuance of common stock in connection with stock option exercises||18,975||—||114||—||—||—||—||114|
|Issuance of common stock in connection with equity incentive plan||85,440||1||925||—||(926||)||—||—||—|
|Cash dividends declared and paid on common stock ($ per share)||—||—||—||—||—||(4,641||)||—||(4,641||)|
|BALANCE AT DECEMBER 31, 2018||28,393,348||$||284||$||182,096||$||(5,171||)||$||(872||)||$||74,108||$||(13,416||)||$||237,029|
|Cumulative-effect adjustment due to change in accounting principle (ASU 2017-08)||—||—||—||—||—||(7||)||7||—|
|Common stock held by ESOP committed to be released ( shares)||—||—||237||597||—||—||—||834|
|Common stock repurchased||(1,958,111||)||(19||)||(19,215||)||—||—||—||—||(19,234||)|
|Share-based compensation - equity incentive plan||—||—||(45||)||—||818||—||—||773|
|Issuance of common stock in connection with stock option exercises||19,861||—||106||—||—||—||—||106|
|Issuance of common stock in connection with equity incentive plan||102,883||1||1,069||—||(1,070||)||—||—||—|
|Cash dividends declared and paid on common stock ($ per share)||—||—||—||—||—||(5,274||)||—||(5,274||)|
|BALANCE AT DECEMBER 31, 2019||26,557,981||$||266||$||164,248||$||(4,574||)||$||(1,124||)||$||82,176||$||(8,968||)||$||232,024|
|Comprehensive income (loss)||—||—||—||—||—||11,215||(2,311||)||8,904|
|Common stock held by ESOP committed to be released ( shares)||—||—||(26||)||577||—||—||—||551|
|Forfeited equity incentive plan shares ( shares)||—||—||(319||)||—||319||—||—||—|
|Common stock repurchased||(1,416,362||)||(14||)||(10,665||)|